A Brief Overview on Proceedings brought under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap 545)

19/09/2022

According to recent government statistics, the number of private buildings in Hong Kong aged 50 years or above has increased from 3,900 to 8,600 over the past decade. This is expected to lead to an increase in the near future in the number of applications for compulsory sale brought under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap 545) (“LCSRO”). This is especially true considering the increasingly pressing needs for urban renewal and the ever-present issue of a shortage of residential land in Hong Kong.

Relevant requirements to be complied with for obtaining an order for sale

The LCSRO provides for a set of mechanism pursuant to which a lot may be ordered by the Lands Tribunal to be sold by auction for redevelopment. Before commencing such proceedings under the LCSRO, the applicant will need to have acquired at least 90% of the undivided shares in a lot except that for the following classes of lot, a lower threshold of 80% will apply:

1. A lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot;
2. A lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the date application;
3. A lot that is not located within an industrial zone and each of the buildings erected on the lot-
   • (i) is an industrial building; and
   • (ii) was issued with an occupation permit at least 30 years before the date of application.

In order for the Lands Tribunal to grant an order for sale of the lot in question, the applicant will need to demonstrate to the satisfaction of the Tribunal 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 applicant-“majority owner” has taken reasonable steps to acquire all the undivided shares in the lot, including negotiating for the purchase of those shares owned by the respondent-“minority owners” on terms that are fair and reasonable.

Offer to purchase undivided shares from minority owners

In a typical scenario, after the majority owner has acquired up to the stipulated percentage (80% or 90%, as the case may be) of the undivided shares in the lot in question, but before an application for compulsory sale is brought, the majority owner will offer to purchase the units owned by the remaining minority owners with a view to (1) acquire all remaining undivided shares in the lot to avoid a contested application for compulsory sale altogether and/or (2) in the event of a contested application, demonstrate to the Lands Tribunal that negotiations for the purchase of such shares have been on terms that are fair and reasonable.

A common question frequently asked by a minority owner is how to assess if the offer made by the majority owner is “fair and reasonable”?

In determining the offer price for a particular unit, the majority owner will generally take into account the following variables:

(A) The “Redevelopment Value” (“RDV”) of the lot, i.e. the value of the entire lot after taking into account its redevelopment potential;
(B) The “Existing Use Value” (“EUV”) of the particular unit in question, i.e., the current market value of the unit; and
(C) The EUV of all units in the lot combined.

The offer price of a particular unit is usually made with reference to the “apportioned sale proceeds” of the unit, which can be arrived at by using the following formula:

For example, if the RDV of the lot is estimated to be HK$100 million, the EUV of the unit owned by a minority owner is HK$1 million and the EUV of all units in the lot combined is HK$80 million, the “apportioned sale proceeds” of the unit is: HK$100 million x HK$1 million / HK$80 million = HK$1.25 million.

Procedures in LCSRO proceedings

Proceedings under the LCSRO are commenced when the applicant files a Notice of Application with the Lands Tribunal and serves a copy on each respondent. Thereafter, any respondent who wishes to contest the application will have to file and serve a Notice of Opposition.

After the expiry of the time limit for the respondents to file their Notices of Opposition, the applicant will apply to the Tribunal for a call-over hearing, during which directions will be made for further conduct of the proceedings, including the filing of lists of documents, witness statements and expert evidence on different disciplines, before the application is formally set down for trial.

It is worth noting that, as there are usually multiple respondents in a compulsory sale application, in order to save time and costs, the Lands Tribunal will generally exercise its case management power and direct that a joint expert be appointed by all respondents for each discipline. Directions will also be given as to the mechanism for determination of the joint experts in the absence of an agreement between the respondents.

As with other types of civil proceedings, parties in a compulsory sale application should also attempt mediation with a view to resolving their differences out of court.

Costs in LCSRO proceedings

Another noteworthy feature of a compulsory sale application is that a respondent is generally entitled to recover from the applicant his costs incurred for the determination of application even in the event that the application is eventually granted. One of the underlying rationales of this “compensation approach” on costs in compulsory sale proceedings as recognised by the Court of Appeal is that, as a sale ordered by the Tribunal under the LCSRO is the compulsory deprivation of the respondent-minority owners’ private ownership of property, such deprivation without fair and reasonable compensation is an infringement of the constitutional right to private ownership of property of the respondent-minority owners.

Nevertheless, despite the protection on costs, respondent-minority owners will still incur out-of-pocket expenses during the course of the proceedings and can only seek to recover such expenses at the conclusion of the proceedings. Needless to say, the amount of such expenses to be recovered will be subject to taxation such that the receiving party can only recover costs which are reasonable in the circumstances.