Revamping the Compulsory Sale Regime in Hong Kong - Land (Compulsory Sale for Redevelopment) (Amendment) Ordinance 2024

To accelerate redevelopment of aged and dilapidated buildings in Hong Kong, the Government enacted the Land (Compulsory Sale for Redevelopment) (Amendment) Ordinance 2024 on 25 July 2024.

Designed to encourage urban redevelopment by the private sector, the Amendment Ordinance is expected to take effect at the earliest in December this year.

We published an article in late 2022 that summarised the Government's then proposed amendments to Hong Kong's compulsory sale regime¹ (2022 Proposal).

This Legal Update charts major legislative amendments featured in the new Amendment Ordinance, highlighting refinements to the 2022 Proposal.

1. Lowering the Compulsory Sale Application Threshold

In line with the 2022 Proposal, the Amendment Ordinance lowers the compulsory sale application threshold in the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (LCSRO) for buildings aged 50 or above and industrial buildings aged 30 or above not located within industrial zones.

However, the Amendment Ordinance introduces two major changes to the 2022 Proposal, namely (i) introducing "designated areas", and (ii) raising the lowest possible compulsory sale application threshold from 60% (as suggested in the 2022 Proposal) to 65%.

1.1. Introduction of "Designated Areas"

The Government has identified seven "designated areas" in Hong Kong that have most pressing redevelopment need.

These areas are designated based on the number of (i) aged buildings in the area, and (ii) buildings issued with notices under the Mandatory Building Inspection Scheme².

Compulsory sale application thresholds for buildings in these designated areas will be lower than for buildings of the same age but not located in designated areas.

The seven designated areas are:

1. Sai Ying Pun and Sheung Wan;
2. Wan Chai;
3. Yau Ma Tei;
4. Mong Kok;
5. Cheung Sha Wan;
6. Ma Tau Kok; and
7. Tsuen Wan.

The Government may review this list of designated areas as well as the selection criteria regularly – and may subsequently specify new lists of designated areas in subsidiary legislation.

Our table under paragraph 1.3 below details respective thresholds for different types of buildings.

1.2. Lowest Compulsory Sale Application Threshold at 65%

In the 2022 Proposal, the Government proposed a significant reduction in the compulsory sale application threshold for buildings aged 70 or above, i.e. from 80% to 60%.

Such proposal is not implemented in the Amendment Ordinance, due to Government concerns that a 60%-threshold would be even lower than the lowest threshold set in Mainland China and other Southeast Asian regions, which might jeopardise the interests of minority owners.³

Hence, the lowest threshold proposed by the Amendment Ordinance is now set at 65%. 

1.3. Summary of the New Compulsory Sale Application Threshold

Below is a summary of the changes applicable to compulsory sale application thresholds for different types of building:

2. Greater Flexibility Applying for Multiple Adjoining Lots

2.1. Easier Application 

The Amendment Ordinance shares the same sentiment with the 2022 Proposal on incentivising larger-scale redevelopment.

Thus, all previously proposed measures facilitating applications in the 2022 Proposal for multiple adjoining lots are retained in the Amendment Ordinance, including:

1. Allowing an applicant to use the "averaging arrangement" (i.e. taking the average percentage of acquired undivided shares in the lots) for two or more adjoining lots, even if the buildings concerned are not connected by common staircases; and
2. Allowing the inclusion of lots wholly-owned by an applicant in a multiple adjoining lots application.

As already raised in the 2022 Proposal, to prevent abuse, the expanded scope of application of the "averaging arrangement" should go hand in hand with numerous conditions to be imposed on an applicant taking advantage of such arrangement.

Below is a summary of such conditions included in the Amendment Ordinance:

1. In calculating the average percentage of acquired undivided shares in adjoining lots (Averaging Percentage), the size of the individual lot will be taken into account to obtain a weighted average (Weighted Average), with the Averaging Percentage not less than the Weighted Average.
2. For classes of lots specified in section 4 of Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (Cap. 545A) -- as newly amended by the Amendment Ordinance -- which include buildings aged 50 years or more and industrial buildings not located within industrial zones aged 30 years or more (Specified Lots), the applicant should own a minimum of 65% of undivided shares in each individual lot, which is a departure from the 60%-threshold suggested by the 2022 Proposal. As for non-Specified Lots, the applicant is required to own not less than 90% of the undivided shares in each lot.
3. Only Specified Lots can be included in the calculation of the weighted average, as newly stipulated in the Amendment Ordinance.
4. All adjoining lots should then be redeveloped as a whole.

2.2. New Arrangement for Setting Reserve Price and Apportionment of Sale Proceeds

Under the current LCSRO, the Lands Tribunal (Tribunal) sets the reserve price of the lot to be auctioned by considering the redevelopment potential of the lot on its own, even where an order for sale covers two or more lots.

The Amendment Ordinance provides that the Tribunal shall determine the reserve price for multiple adjoining lots by considering the joint redevelopment potential of the lots.

As for the apportionment of proceeds from the sale of the lot, the current practice is to apportion sale proceeds among the majority and minority owners on a pro-rata basis according to the existing use value of their respective properties.

Under the new Amendment Ordinance, sale proceeds in a multiple adjoining lots application should first be apportioned between the lots on a pro rata basis according to the individual redevelopment value of each lot.

Proceeds allocated to each lot are then apportioned to individual units in the lot on a pro-rata basis according to their existing use value.

3. Streamlining the Process of Compulsory Sale Application for Aged Buildings with no Minority Owners' Opposition

Similar to the 2022 Proposal, the Amendment Ordinance dispenses with the requirement for the applicant to justify redevelopment on grounds of age or state of repair of the building, if the following conditions are satisfied:-

1. The building concerned is over 50 years of age; and
2. Each minority owner files a notice with the Tribunal indicating he/she has no objection that the Tribunal is not required to consider whether redevelopment is justified on grounds of age or state of repair of the existing building(s).

The Government has retreated from the more aggressive approach put forward in the 2022 Proposal, namely the provision of an exhaustive list of tests the Tribunal could apply to determine the age and state of repair of a building.

According to the Legislative Council Brief of the Amendment Ordinance prepared by the Development Bureau (LegCo Brief)⁴, it transpires that stakeholders have strong preference for preserving the longstanding practice of referring to case law in determining the age and state of repair of a building.

The Government conceded that abolishing case law and solely relying on an exhaustive list of tests may further complicate the process and so aborted such proposal.

4. Striking a Balance between Redevelopment and Minority Owners' Interests

4.1. Allowing a Minority Owner-occupier to Stay in His/her Property Following Sale of the Lot

Following the 2022 Proposal, the Amendment Ordinance may allow a minority owner residing in his/her property to stay there for up to six months following sale of the lot, provided the owner pays rent (by reference to its rateable value or market rent) to the purchaser of the lot.

Under the current LCSRO, this allowance to stay in the property is granted to existing tenant(s) only – but not minority owner(s).

4.2. Further Administrative Measures to Assist Minority Owners

Also consistent with the 2022 Proposal, the Government proposed in the LegCo Brief a number of administrative measures with a view to assisting minority owners affected by a compulsory sale application, namely:

1. Setting-up a dedicated office providing assistance to minority owners at different stages of a compulsory sale application; and
2. Setting-up a loan scheme to help eligible minority owners finance compulsory sale litigations. 

Below is a summary of proposed assistance to be made available to the minority owners throughout a compulsory sale application:

 5. Conclusion

As a densely populated city with an ever-increasing number of aged buildings falling into disrepair, redevelopment of old and ill-maintained buildings is one of the keys to safeguarding the safety and quality of life of Hong Kong people.

It is envisaged that revamping the compulsory sale regime under the Amendment Ordinance will give momentum to urban redevelopment by the private sector – directing resources to areas with more urgent need of redevelopment.

¹ Please refer to the following website for our article discussing the 2022 Proposal: Unleashing Redevelopment Potential of Hong Kong's Old Buildings: Proposal to Relax Requirements for Compulsory Sale Regime. 

² Under the Mandatory Building Inspection Scheme, owners of buildings aged 30 or above (other than domestic buildings not exceeding 3 storeys) must carry out prescribed inspection or repair works upon receipt of statutory notices from the Buildings Department.

³ Please refer to the Secretary for Development's speech on 26 October 2023: 发展局局长在《行政长官2023年施政报告》有关土地和房屋措施记者会开场发言（只有中文）（附图／短片） (info.gov.hk).

⁴ Please refer to the following website for the LegCo Brief dated 19 December 2023: devbplur70418515_20231219-e.pdf (legco.gov.hk).