Unleashing Redevelopment Potential of Hong Kong's Old Buildings: Proposal to Relax Requirements for Compulsory Sale Regime

Tackling land shortage in Hong Kong has always been a top priority on the government's agenda, with numerous strategies deployed to increase land supply. One of the current initiatives, noted in the Chief Executive's 2022 Policy Address, is to consolidate property interests and expedite urban renewal¹. This Legal Update provides a brief summary of the government's proposed amendments to the compulsory sale regime² -- and its implications for developers.

Current Regime 

Under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (the "LCSRO"), a person (other than as a mortgagee) owning not less than 90% of undivided shares in a lot may apply to the Lands Tribunal for compulsory sale of the whole lot for the purpose of redevelopment³.

In 2010, a reduced threshold from 90% to 80% was introduced for three classes of redevelopment, namely: 

1. a lot with each of the units on it representing more than 10% of all the undivided shares in the lot;
2. the building erected on the lot aged at least 50 years; or
3. a lot not located within an industrial zone; and the building erected on the lot is an industrial building and aged at least 30 years⁴. 

Proposed Amendments

A. Lowering the Thresholds for Compulsory Sale Applications

1. For private buildings aged 50 or above but less than 70: to reduce the application threshold to 70%. According to the relevant Code of Practice⁵, the design working life for general buildings in Hong Kong is 50 years; anything beyond this, without proper maintenance, could lead to safety concerns. Given it becomes increasingly expensive to carry out regular repair works on ageing buildings, redevelopment is a more sustainable and economical option in the long run.
2. For private buildings aged 70 or above: to reduce the application threshold to 60%. The government's reasoning for a lower figure is based on two observations. First, 70% of private buildings aged 70 or above have four units or fewer. Secondly, missing owners or defective title issues are common in aged buildings. For these reasons, failure to acquire even one unit could jeopardise the possibility of redeveloping buildings of this age. Over the last 12 years, only one application was ever submitted to the Lands Tribunal for this category of building. Setting the threshold at 60% would incentivise developers to consider redeveloping them.
3. For industrial buildings aged 30 or above that are not located within industrial zones: to reduce the application threshold to 70%. Compulsory sale applications involving this type of building have soared over ten times since the new threshold came into force in 2010. At present, 75% of industrial buildings are located outside industrial zones and almost 80% of these have exceeded 30 years. The proposal would serve as a strong impetus for redevelopment of such non-industrial zones. 

We summarise below the proposed amendments concerning private and industrial buildings: 

B. Enhancing Flexibility for Multiple Adjoining Lots

At present, in respect of redevelopment of adjoining lots, a number of hurdles are posed by court decisions, as well as the specific wording of the LCSRO. 

The government has therefore also proposed the following amendments to allow for more flexibility with respect to adjoining lots – which would result in higher development value and better utilisation of land: 

1. Removing the requirement for a connecting common staircase to allow the averaging of ownership percentage for all adjoining lots⁶; 
2. Allowing the inclusion of wholly-owned adjoining lots in a compulsory sale application⁷; and
3. (While applying the averaging of ownership percentage) setting a minimum ownership threshold of 60% of undivided shares for each of the adjoining lots.

For compulsory sale applications involving a number of adjoining lots that come in different sizes and fall under different application thresholds, a weighted average approach will be applied (see below illustration²).

C. Abolishing Procedures for Cases with No Dispute as to "Age" and "State of Repair"

To streamline the legal process and save costs, applicants are not required to prove – and the Lands Tribunal not required to consider – the age and state of repair of the properties if (i) all buildings on the lot are 50 years old or above, and (ii) all minority owners affected by the application have been identified and provided written consent to redevelopment.

Protection for Minority Owners 

While urban renewal can ease Hong Kong’s severe housing problem, the impact on minority owners whose property interests are affected must not be neglected.

To provide better assistance to minority owners, it is proposed to establish a dedicated office providing them one-stop support services throughout the entire compulsory sale process:

1. During the preliminary stage, the office will provide advisory services to minority owners in respect of the legal procedures involved and their entitled statutory rights. The office can also arrange independent third-party valuations of the estimated existing and redevelopment value of the property. 
2. In cases where minority owners decide to proceed with litigation, the office will facilitate their access to professional and legal services, and provide bridging loans to eligible minority owners to fund their litigation process.
3. After the Lands Tribunal grants an order for sale, the office will assist in identifying replacement flats and relocation.

In addition to the above support services, the government has also proposed amending the LCSRO to grant minority owners residing in the concerned properties the statutory right to remain for a specified period of time following sale of the lot, so they have more buffer time to relocate. Affected tenants already have such right under the LCSRO.

Conclusion 

It is beyond doubt that lowering the threshold and increasing flexibility for multiple adjoining lots would serve as a necessary incentive for developers to participate in the regime and unleash the redevelopment potential of old buildings in Hong Kong. 

Going forward, we are also likely to see banks more willing to participate in funding redevelopments with a compulsory sale element. This may be in the form of a bridging loan to finance initial acquisition of units to bring the investor client up to the required threshold of ownership. This is usually followed by full-blown project development financing – partly to refinance such bridging loan, and partly to finance construction costs with drawdowns linked to different stages of the compulsory sale process. 

¹ For the Chief Executive's 2022 Policy Address, please refer to the Hong Kong government's website Policy Address | The Chief Executive's 2022 Policy Address accessed on 22 November 2022.

² Discussion paper prepared by the Development Bureau to the Legislative Council for discussion on 22 November 2022 (LC Paper No. CB(1) 776/2022(05)) dev20221122cb1-776-5-e.pdf (legco.gov.hk) accessed on 22 November 2022. 

³ Section 3(1), Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545). 

⁴ The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice Cap. 545A Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (elegislation.gov.hk) accessed on 22 November 2022.