Following the implementation of the Land (Compulsory Sale For Redevelopment) (Specification of Lower Percentage) Notice (Cap. 545A), as from 1^st April 2010 the application threshold for compulsory sale is lowered from 90% to 80% for the following three classes of lot :-

1.            a lot with units each of which accounts for more than 10% of the undivided shares in the lot;

2.            a lot with each of the buildings erected thereon aged 50 years or more before the date of the application; and

3.            a lot that is not located within an industrial zone and each of the buildings erected thereon is an industrial building aged 30 years or more before the date of the application.

It is expected that the new compulsory sale rule will facilitate redevelopment of private dilapidated buildings by preventing a minority owner from seeking a wholly unreasonable price for the interest in question.  In this article, we will briefly discuss the four distinct phases of a compulsory sale.

Phase 1 – Application to Lands Tribunal

Under section 3(1) of the Land (Compulsory Sale For Redevelopment) Ordinance (Cap. 545) (the “Ordinance”), a person or persons who owns or own, otherwise than as a mortgagee, not less than 90% (or 80% in cases where the new compulsory sale rule applies) of the undivided shares in a lot (the “Majority Owner”) may make an application to the Lands Tribunal (the “Tribunal”) for an order to sell all the undivided shares in the lot for the purposes of redevelopment.  Under the Ordinance, a Majority Owner may make an application in respect of more than one lot if the conditions set out in the Ordinance are satisfied.  In calculating the percentage of undivided shares owned by a person or persons in a lot, any undivided shares assigned solely to the common parts of the lot shall be disregarded.  

The application must be accompanied by a valuation report, which must be prepared not earlier than three months before the date of the application, setting out the assessed market value of each property on the lot, on a vacant possession basis, ignoring the possibility of being made the subject of a compulsory order and the redevelopment potential of the property or the lot.  It does not address the value of the projected redevelopment.  The purpose of the valuation report is to provide the basis of apportionment of sale proceeds between the Majority Owner and any other person or persons who owns or own shares in the lot (the “Minority Owner”).

After the making of the application, the Majority Owner shall (1) serve a copy of the application on each Minority Owner, unless the Tribunal directs otherwise; (2) cause a copy of the application to be registered against the lot in the Land Registry; (3) cause a bilingual notice to be affixed upon a conspicuous part of the building on the lot (or upon a conspicuous part of the lot if there is no building on the lot); and (4) cause a notice to be published in not less than one Chinese language newspaper and in not less than one English language newspaper circulating generally in Hong Kong.

Phase 2 – Determination of Application

Upon receipt of an application for compulsory sale, the Tribunal shall first hear and determine any dispute over the value of any property as assessed in the valuation report and in cases where the Minority Owner cannot be found, shall satisfy itself that the value of the property of the Minority Owner as assessed in the valuation report is fair and reasonable (including when compared with that of the Majority Owner).  The Tribunal may make such adjustments as is necessary in the valuation report in the light of the evidence available.

Then, the Tribunal will decide whether or not a compulsory order for sale should be made.  The Ordinance provides that the Tribunal shall not make an order unless, after hearing the objections of the Minority Owner, it is satisfied that :-

1.            the redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot; and

2.            the Majority Owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in cases where a Minority Owner whose whereabouts is known, negotiating for the purchase of the shares owned by the Minority Owner on terms that are fair and reasonable).

It was held in the Court of Final Appeal case of Capital Well Limited v Bond Star Development Limited that in assessing the reasonableness of an offer, the Tribunal is not required to take into account factors such as the “strategic position” of the lot (due to the fact that the lot is in the middle of the row of lots intended to be redeveloped) and the “marriage value” of redeveloping the entire row of lots (as opposed to embarking upon two smaller redevelopments separated by an undeveloped lot) which may make it disproportionately valuable.  It merely needs to be satisfied that, on the evidence available, the offer falls within a range of a fair and reasonable compensation for the interest in question.

If the Tribunal makes an order for sale, it will appoint sale trustees to conduct the sale and authorize the trustees to charge such remuneration for their services as the Tribunal thinks fit.  The Tribunal may also order that compensation be paid to existing tenants whose leases were entered into before the date on which the order for sale was made and give such other directions as it thinks fit.

Upon the grant of the order for sale, the Majority Owner shall cause:-

1.            a copy of the order to be served on each Minority Owner, unless the Tribunal directs otherwise;

2.            a copy of the order to be served on the Director of Lands; and

3.            a notice to be published in not less than one Chinese language newspaper and in not less than one English language newspaper circulating generally in Hong Kong stating :-

(1)          sufficient particulars of the lot for identification;

(2)          that the Tribunal has made an order for sale of all the undivided shares in the lot for the purpose of redevelopment; and

(3)          that the lot will be sold by auction or other means.

Phase 3 – The Sale

Unless all the parties agree in writing to some other means of sale approved by the Tribunal, the lot must be sold by public auction.  The Tribunal is empowered to give directions relating to the sale.  The general public shall be given notice of the auction by way of an advertisement published in not less than one Chinese language newspaper and in not less than one English language newspaper circulating generally in Hong Kong at least 3 weeks immediately preceding the date of the auction stating, among other things, the date, time and place of the auction.

It is required by law that the lot shall be sold to the highest bidder (who could be the Majority Owner or Minority Owner) subject to a reserved price approved by the Tribunal which takes into account the redevelopment potential of the lot.  If the lot is not sold within 3 months immediately following the date on which the order is made or within such further period of 3 months as the Tribunal may specify in directions, the order shall be deemed to be of no effect as if it had been cancelled by the Tribunal.  The costs of the auction shall be borne by the Majority Owner solely.

The Majority Owner and the Minority Owner may, at any time before there is a purchaser, agree in writing that they do not want the lot to be sold.  In such cases, the order for sale shall be deemed to be of no effect as if it had been cancelled by the Tribunal.

Phase 4 – Apportionment of Proceeds of Sale and Expenses

The proceeds of sale as well as the expenses of the auction (or other means of sale) shall be apportioned between the Majority Owner and Minority Owner on a pro rata basis in accordance with the values of the respective properties of each Majority Owner and each Minority Owner as assessed in the valuation report subject to any adjustments that may have been made by the Tribunal.

The apportioned proceeds will then be distributed by the trustee to the respective Majority Owner and Minority Owner after (1) deducting the expenses of the auction (or other means of sale) and legal costs on assignment of the lot; (2) discharging any liability due to the Government and incumbrance affecting the lot; and (3) paying off any compensation due to existing tenants (if so ordered by the Tribunal).

The existing tenants are required to deliver up vacant possession of the property within 6 months immediately following the date on which the purchaser becomes the owner of the lot.  Prior to delivery of vacant possession to the purchaser, the existing tenants are only entitled to half of the compensation payable by the Majority Owner or Minority Owner concerned.

Conclusion

This article is intended to be a general outline of the law and procedures on the compulsory sale for redevelopment scheme and is meant for general reference only.  If you intend to make an application for a compulsory sale order or if you suspect that your property might be affected by the compulsory sale for redevelopment scheme, it is highly recommended that you should instruct and seek legal advice from experienced conveyancing lawyers.