Recent Decisions on Compulsory Sale Applications in Hong Kong in Relation to 100% Owned Lot and Calculation of Ownership Threshold

One of the sources in obtaining land for development in Hong Kong is through acquisition of old buildings. If for any reason the developer is unable to acquire 100% interests in the lot, the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) ("LCSRO") allows a majority owner, upon meeting certain criteria, to apply to the Lands Tribunal (the "Tribunal") for an order for sale of the lot by way of public auction. 

In order to commence compulsory sale application under LCSRO, the majority owner has to own a specified percentage of the undivided shares in the lot(s) (the "ownership threshold"). In an ordinary case, the person who owns not less than 90% of the undivided shares in a lot may make a compulsory sale application as the majority owner. A lower ownership threshold of 80% is applicable for the following three classes of lots:

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 aged at least 50 years; or
3. a lot that is not located within an industrial zone and each building erected on the lot is an industrial building and aged at least 30 years.

For a large-scale redevelopment project, it may involve the acquisition of two or more lots in which case the majority owner may commence the compulsory sale application under either of the following:

1. under Section 3(2)(a) of LCSRO, the majority owner shall own not less than the above specified percentage of the undivided shares in each of the lots; or
2. under Section 3(2)(b) of LCSRO, where (i) one building is connected to another building by a staircase intended for common use by occupiers of the buildings and (ii) the average percentage of the undivided shares owned by the majority owner in all the lots is not less than the above specified percentage.

Questions often being asked are: (A) “can a 100%-owned lot be included in the compulsory sale application?” and (B) “how to calculate the ownership threshold?”. There were some recent applications dismissed by the Tribunal relating to these issues which raise the concern of developer applicants.

100%-owned Lot – Allowed or Not Allowed?

Court of Appeal Decision

The Court of Appeal ruled in Bond Star Development Ltd v Capital Well [2004] 2 HKLRD 855 that the objective of LCSRO is to resolve disputes between the majority owner and minority owner, thus LCSRO is not intended to permit an application where there is no minority owner when the applicant already owns 100% of the lot.

Tribunal's Judgments

There are three recent judgments in the Tribunal which considered the issue as to whether 100%-owned lot can be included under section 3(2)(a) and 3(2)(b) scenarios. There are some contradictory views amongst these judgments with respect to the section 3(2)(b) scenario which are highlighted and summarised below.

In Max Win Development (HK) Limited v Lam Ngor Hing & others (unreported, LDCS 37000/2019, 30 September 2022),

• it involves four buildings:
  • the first building has a common staircase with the second building and the average percentage of the two lots exceeds the specified percentage;
  • the third building also has a common staircase with the fourth building and the average percentage of the lots exceeds the specified percentage;
  • but the first and second buildings are not connected with the third and fourth buildings by any common staircases.
• by the time of the trial, the majority owners (i) purchased all undivided shares in the lot of the first building and (ii) purchased all the undivided shares in the lots of the entire third and fourth buildings.

The Tribunal dismissed the compulsory sale application in Max Win on the following grounds and applied the Court of Appeal's ruling in Bond Star in that:

1. 100%-owned lots could not be made the subject lot of a compulsory sale application even for buildings connected by common staircases under section 3(2)(b). As a result, the ownership threshold for the second building has not been met.
2. the third and fourth buildings must be excluded from the application as it is already wholly owned.

In Apex Intelligence Limited v Trend Progress Limited & others (unreported, LDCS 5000/2019, 19 October 2022), the presiding Member did not follow Max Win and was of the view that the Court of Appeal's ruling in Bond Star is not applicable to buildings connected by common staircases under section 3(2)(b) scenario.

In Winmark Properties Limited & others v Prime Way Investment Co. Ltd. (unreported, LDCS 4000/2020, 21 November 2022), the factual pattern in the Winmark case was similar to that of Max Win. The Tribunal was asked to rule by way of preliminary issue prior to trial as to whether the decision in Max Win should be followed:

• the Judge gave a detailed analysis as to why the Court of Appeal's ruling in Bond Star does not apply to section 3(2)(b) scenario. He then applied a purposive interpretation of section 3(2)(b), and was of the view there was no reason to exclude a 100%-owned lot with buildings connected by a common staircase, instead the ownership should be taken as an average of the two lots.

   

• The Judge concluded that the Court of Appeal's ruling in Bond Star only determine the interpretation of section 3(2)(a) and thus the 100%- owned lots cannot be included in an application under LCSRO. The Judge further ordered that fresh evidence for the redevelopment value of the remaining lot(s) (after excluding the 100%- owned lots) be filed for the trial.

The position of the Tribunal regarding whether 100%-owned lots are allowed for section 3(2) scenario seems clearer now but it remains that they are not binding on each other until this issue is further clarified by the higher court or future amendment to the LCSRO. 

Potential Change to LCSRO

The Development Bureau has submitted a paper to the Legislative Council Panel on Development on LCSRO on 22 November 2022. In order to allow more flexibility for multiple adjoining lots compulsory sale application, the Bureau has proposed allowing a compulsory sale application to cover adjoining lots wholly owned by the majority, regardless of whether the buildings erected thereon are connected by common staircases, for the purpose of calculating the average percentage of the undivided shares.¹

There is not yet an amendment bill to LCSRO so we are yet to see if the above proposal would become law in future.

How to Calculate the Ownership Threshold?

On how to calculate the ownership threshold, for most if not all of the applications under the LCSRO, it was based on the undivided shares of the lot set out in the Deed of Mutual Covenant ("DMC") or land search records. A recent case in Wah Ha Property Development Limited & others v Rosehawk Group Limited & others (unreported, LDCS 25000/2018, 30 April 2021) ("2021 ST Judgment"), gave another view and interpretation of LCSRO.

The application involved a development in the Peak known as Stewart Terrace ("ST"):

• ST is one block of residential units and car parking spaces and other facilities and amenities erected over eight lots (namely, Rural Building Lot Nos. 299 to 306). Each lot has a separate government lease.
• Under the DMC governing ST, all the lots as a whole are notionally subdivided into undivided shares, and allocated to each of the 20 units and the 30 car parking spaces in ST.
• At the time of the application, the applicants owned in total 960/1180 equal undivided shares in the lots, i.e. approximately 81.36%.

Dismissal of Compulsory Sale Application

In the 2021 ST Judgment, the Tribunal dismissed the compulsory sale application on, inter alia, the ground that the ownership threshold was not met for certain lots. It did not accept that the undivided shares allocated under the DMC should be used for the calculation of ownership of the lots as a whole. Instead, it was of the view that it should be based on the undivided shares allotted to each lot, and a lot is defined as any piece or parcel of ground under a government lease²:

• For the part of the building at RBL No. 299, there were only two units with each allotted 50 undivided shares (one unit belonging to an applicant and the other unit to a respondent) and some car parking spaces.
• As there is no staircase inter-connecting the building on RBL No. 299 with the building(s) in the adjourning lot(s), it is section 3(2)(a) that comes into play whilst section 3(2)(b) is not engaged³.
• The Tribunal is of the view that the total number of undivided shares in RBL No. 299 is about 110 to 115 undivided shares among which about 50 to 55 undivided shares (representing about 45% to 48% of the said range) are being held by the respondent. This means the applicants own about 52% to 55% of the undivided shares of RBL No. 299⁴, which therefore failed to meet the ownership threshold of no less than 80% under section 3(2)(a) to commence an application for compulsory sale of the lots at ST.
• Likewise, RBL No. 306 is in the same situation as RBL No. 299 in that the building on RBL No. 306 is not inter-connected with any other building in the adjourning lot(s). Accordingly, section 3(2)(b) cannot be invoked, and the ownership in RBL No. 306 has to be considered independently rather than on average with other lots. Since the applicants did not meet the ownership threshold in RBL No. 306, and thus they could not commence a compulsory sale application of the lots at ST.⁵

Dismissal of Application for Leave to Appeal

The applicants applied to the Tribunal for leave to appeal against the 2021 ST Judgment on, inter alia, that the applicants did not meet the ownership threshold for RBL No. 299. The Tribunal handed down its decision recently (Wah Ha Property Development Limited & others v Rosehawk Group Limited & others (unreported, LDCS 25000/2018, 4 April 2023)) refusing to grant leave to appeal against the 2021 ST Judgment. It maintained its view in its earlier judgment on the calculation of undivided shares for ownership threshold, and ruled that according to LCSRO, it should be based on a lot-based approach rather than a DMC-based approach. In the circumstances, the applicants did not meet the ownership threshold for RBL No. 299 and could not commence compulsory sale application.

Conclusion

This is the first case where the Tribunal dismissed an application on the ground that the ownership threshold was not met under LCSRO for reason of adopting a lot-based approach and not the DMC-based approach in the calculation of undivided shares of the lot. This is quite an unconventional approach and we are yet to see the views of the Court of Appeal if leave is granted by the Court of Appeal should the applicants proceed further with their appeal.

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