All You Need to Know about Compulsory Sales

Redevelopment is part of the urban renewal process.  Contrary to other western cities, older buildings in Hong Kong, especially those over 50 years, tend to be redeveloped instead of preserved.  This is due to the financial incentive available to the real estate developers to redevelop real properties, especially in urban area.

Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (the “Ordinance”) was enacted on 7th June 1999.  Under this Ordinance, anyone who hold over 80% of the undivided shares of a residential building over 50 years old (from the date of the occupation permit) can apply to the Lands Tribunal for an order for sale.

This Q&A answers some of the common questions that individual owners may have when they are faced with such an application.

Q1. I was approached by someone to buy my flat. What should I do?

You should immediately seek legal advice to have your interest protected.

Under the Ordinance, the majority owner must take reasonable steps to acquire all the undivided shares in the lot.  Therefore, it is necessary for the majority shareholder to contact all the owners of a building and make an offer before making an application to the Lands Tribunal for an order for sale.

Q2. How do I know how much I should accept?

Calculating the reasonable value of a property in the compulsory sale context can be complicated.  It is often necessary to engage surveyors with relevant experience to conduct evaluation.

• (a) Existing Use Value (“EUV”) means the existing value of the building. The EUV will take into account the value of each unit in a building based on the existing use of each units, such as residential or commercial.

For example: if there is a building with three shops on the ground floor, 12 floors above with 4 residential units, the EUV of the building will be the total of the individual value of each shop, based on a number of criteria including its size, location, store front area and existing rental value, and the total of the individual value of the 48 residential units upstairs, each of which assessed individually based on its individual factor such as which floor, number of rooms (according to original building plan) and its orientation.

• (b) Redevelopment Value (“RDV”) means the projected value of the building to be built on the site after redevelopment, subject to the existing criteria such as plot ratio, permitted height and manner of redevelopment.

The surveyor will project the way which a building can be built on a site with maximum profits, and forecast the total value of the redeveloped building based on the number of units and their respect price.

• (c) Entitlement of Individual Owner under compulsory sale will be the percentage of the unit in question in EUV multiplied by RDV.

For example: if the EUV of the unit of an individual owner is HK$10m, and the total EUV of the whole building is HK$100M.  Assuming that the RDV of the site is HK$300M, the compensation of the individual owner should be HK$30M.

The above is only a rough example.  In reality there are a number of factors that would affect the calculation of the ultimate compensation.  Therefore it is necessary to engage a valuer who is experienced in this particular area to advise at early stage.

Q3. If I do not accept the offer made by the developer, what would happen?

If the developer has already acquired 80% of the undivided shares of the whole building and it is eligible to apply for a compulsory sale order, it will proceed with making an application to the Lands Tribunal.

The compulsory sale process usually take around 2 years, but the individual owner can still negotiate with the developer for out of court settlement and sale in the process.

It is therefore necessary for individual owners to seek advice in order to protect their interest in the process.

Q4. How can I argue for a higher compensation for my unit?

The only way to seek a higher compensation is to challenge the valuation prepared by the surveyor appointed by the developer (applicant).

It is natural for the surveyor appointed by the developer to prepare a valuation which is favourable to the developer.  For example, if the only outstanding unit is a residential unit, it would be favourable for the developer to resume your unit at a lower price if they inflate the value of the shops on the ground floor and deflate the value of the residential units upstairs, thereby reducing the percentage of your unit in the overall EUV of the building, and contrary applies.

Another common argument in the redevelopment process is the calculation of RDV, such as the number of units of each floor, the floor area of each unit, the orientation, whether to put shops, car parking spaces, residence facilities such as clubhouse, gym, swimming pool etc, and whether to have penthouse units.  Each project is different depending on the location and the existing restriction of a particular plot of land, including plot ratio, maximum height, location, the width of street abutting the site and even whether there is a tunnel underneath!

Q5. In the course of the negotiation, the agent said I would not get a price higher than their offer at the end of the court process. Is it true?

You would not know until you engage your own surveyor to conduct an independent valuation for you.

Q6. What is the risk of litigation if I do not accept the offer of the developer?

In principle, compensation approach applies to compulsory sale proceedings. The minority owner can seek costs against the developer, unless such costs are unreasonably incurred.

It is therefore important for minority owner to be legally represented in the process so that his or her interest will be protected.

Q7. I received an offer from the developer but the unit is under the name of my deceased parents. What should I do?

You need to apply for grant of probate or letters of administration to administer your parents’ estates before you can accept the offer.

Q8. My parents received an offer from the developer but they do not know how to negotiate with the developer. Can I negotiate on their behalf?

Your parents should appoint you as their attorney in order to negotiate for them.  They should also consider signing an Enduring Power of Attorney (instead of a general or specific power of attorney) to empower you to negotiate for them.

Q9. The owner of the unit migrated overseas and he cannot come back to handle this. Can he appoint an attorney in Hong Kong to negotiate for them?

Yes, but it is advisable to appoint a professional attorney to negotiate for them in order to protect their interest.

Q10. I am a tenant and the landlord said the unit has been sold to developer. What should I do?

It depends on the term of the tenancy.  You may be entitled to compensation for early termination of the tenancy.

Q11. The owner is too old to even look after herself/himself, and she/he has no other relative except me. Can I negotiate on her/his behalf?

You would have to first apply for Committee Order if your relative (the owner) has lost mental capacity to deal with her/his own financial affairs before you can negotiate with the developer for her/him.