Land (Compulsory Sale for Redevelopment)
Ordinance: an introduction

The Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (the “Ordinance”) was brought into force in June 1999. Under section 3(1) of the Ordinance, a person owning not less than 90% of the undivided shares in a lot may make an application to the Lands Tribunal for an order to sell all the undivided shares in the lot for the purpose of redevelopment (the “Compulsory Sale Order”). As the name of this Ordinance might suggest, the purpose of this Ordinance is to facilitate the redevelopment of aged buildings by allowing the developers to overcome the common technical problems involving minority owners who demand unreasonably high prices from the developer or whose whereabouts are untraceable.

Application procedures

Pursuant to section 4(2) of the Ordinance, the Lands Tribunal shall only make an order for sale if it is satisfied, among other things, that (i) the redevelopment of the lot is justified (due to the “age” or “state of repair” of the existing development) and (ii) the applicant (who is usually the majority owner) has taken reasonable steps to acquire all the undivided shares in the lot, including negotiating for the purchase of the shares owned by minority owners on terms that are fair and reasonable.

In order to succeed in the application, the majority owner must file the application with the Lands Tribunal, accompanied by a valuation report, which shall be prepared not earlier than three months before the date of application. In case any minority owner disputes the value of any property being assessed in the application, the Lands Tribunal must hear and determine the issue.

The new regime

With effect from 1 April 2010, the compulsory sale application threshold was reduced from 90% to 80%, meaning that a person owning not less than 80% of the undivided shares in a lot may also apply for the Compulsory Sale Order.Such reduced threshold applies to the following 3 classes of redevelopment:

i. a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot; or

ii. a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the date of application; or

iii. a lot that is not located within an industrial zone and each of the buildings erected on the lot -

a. is an industrial building; and

b. was issued with an occupation permit at least 30 years before the date of application.

Costs Order

In the past, the practice of the Lands Tribunal in determining compulsory sale cases was to make an order for costs against the minority owner if he/she opposes the application unsuccessfully. In other words, should the compulsory sale application be made successfully by the applicant, the minority owner would be ordered to pay a proportion, if not the whole, of the costs of the applicant. The proportion which the minority owner is liable to pay would largely depend on the manner in which the minority owner opposed the application. Effectively, this punitive mechanism may work to the great disadvantage of the minority owner, as the amount of legal costs could be substantial (especially for some cases where senior counsel were engaged by the majority owners) and thus any remaining amount which the minority owner gets would be disproportionate to the original compensation to which the minority owner is entitled.Owing to this, the protection of minority interest and the objective of the Ordinance would be defeated if any compensation is swallowed up or materially eroded by the costs which the minority owner has to pay to his own, and the other side’s, lawyers.

Protection for Minority Owners
in Compulsory Sale Cases

In relation to the costs order and the above underlying effects made by the Lands Tribunal, the Court of Final Appeal (the “CFA”) recently expressed its reservation in Sin Ho Yuen the administrator of the Estate of Sin Yat, deceased v. Fineway Properties Limited. The original trial of this case commenced in June 2008 in the Lands Tribunal such that the redevelopment value of the property was agreed by the parties at HK$122 million. The trial was later adjourned by the Tribunal for 6-month, during which there had been a drastic market drop caused by the financial tsunami. The Tribunal subsequently resumed the trial in December 2008 and allowed the applicant’s application for re-opening of the redevelopment value despite the objection by the minority owner. Due to the plunge of the property market, a much lower redevelopment value was accepted by the Tribunal at HK$70.5 million, leading to a drastic reduction in the minority owner’s share of the sale proceeds.The trial lasted for 18 days in total and spread over nine months. The minority owner was ordered by the Lands Tribunal to pay 90% of the applicant’s costs.

On appeal by the minority owner, the Court of Appeal held that although the agreed reserve price should not have been re-opened by the Lands Tribunal, the Court has no jurisdiction to order the minority owner to be compensated by the difference in relation to the re-opening.Owing to this reason, the appeal was dismissed by the Court of Appeal. The minority owner finally brought the case to the CFA.

Although the applicant and the minority owner of the case had achieved a settlement shortly before the hearing of the appeal, the judges of the CFA took the opportunity to express the view that the Lands Tribunal should have the statutory responsibility to ensure that any compulsory sale cases are dealt with efficiently and in a cost effective manner.In addition, the CFA also commented that one of the key objectives of the Ordinance is to ensure that the minority owner could receive fair and reasonable compensation for his/her interests in the redevelopment lot.Such important objective of the Ordinance would be diminished if the minority owner had to bear an inordinate burden of costs incurred in the legal process, which might have deprived him/her of a large proportion of entitlement under the Ordinance, even though the minority owner was perfectly justified in resisting the compulsory sale application.

Conclusion

For the reasons as mentioned above, save for those cases where the minority owner has defended or conducted the case in an unreasonable manner, it is suggested that the Lands Tribunal should not grant any order for costs against any minority owner solely because the minority owner has actively defended the compulsory sale application.