October 2018

A respondent in a recent application for compulsory sale argued that the “marriage value” of several adjoining lots of land should be considered by the Lands Tribunal in fixing the open market value of the subject lot.

The “marriage value” is a recognized concept in valuation where the single merged interest exceeds the total values of the separated interests before the merger.

In First Mate Development Limited v Gee Wing Chung and others [2018] HKCU 866, the Lands Tribunal considered the issue whether the redevelopment potential of adjoining lots on a merged site basis (or the marriage value) should be taken into consideration when determining a compulsory sale application.

The fact of this case is stimulating. The applicant of the compulsory sale application was not only the majority owner of the lot in question, but also owned 100% of some adjoining lots (the first adjoining lots) and at least 80% of some other adjoining lots (the second adjoining lots). The second adjoining lots were the subject of another compulsory sale application by the same applicant. A respondent, being a minority owner, argued that, as the subject lot would be redeveloped together with those adjoining lots, the marriage value of the subject lot together with those adjoining lots must be considered by the Lands Tribunal in fixing the open market value of the subject lot. Hence, the respondent sought leave to adduce supplemental valuation report on the marriage value of the subject lot and the adjoining lots.

A person who owns 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 under section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545). The factors considered by the Lands Tribunal in determining whether an order for sale should be granted in an application for compulsory sale normally include whether the redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot, and whether the majority owner has taken reasonable steps to acquire all the undivided shares in the lot, including negotiating with the minority owner to purchase its share(s) on fair and reasonable terms. When an order for sale is granted, section 5(1) of the Ordinance provides that if the minority owner and majority owner cannot agree on other means of sale, the lot shall be sold by public auction in accordance with the conditions specified in Schedule 2 of the Ordinance, including a reserve price taking into account the redevelopment potential of the lot. In a compulsory sale application, the majority owner often files a valuation report on the lot for the Lands Tribunal to consider for setting the reserve price for auction.

In this case, the Lands Tribunal rejected the respondent’s application, holding that only the subject lot itself should be considered when deciding on its reserve price for auction and the order for sale.

Section 4(1)(b)(i) of the Ordinance provides for the Lands Tribunal to make an order for sale concerning “all the undivided shares in the lot the subject of the application”, while paragraph 2 of Schedule 2 of the Ordinance provides that the subject lot of the auction should be sold subject to a reserve price which takes into account the “redevelopment potential of the lot on its own (or where two or more lots were the subject of the auction, on their own)".

The Lands Tribunal ruled that under the above provisions, a compulsory sale order could only be made against the subject lot. By giving the words “on its own” in paragraph 2 of Schedule 2 its purposive meaning, the Tribunal should only focus on the subject lot of the application when setting its reserve price for auction. One cannot argue that the redevelopment value of other lots not being the subject of the application should also be considered.

In this case, the respondent subsequently applied for leave to appeal against the decision, but in vain, on the ground that, according to the Tribunal, the intended appeal would have no reasonable prospect of success.