Repairs Help Protect Value of Units in Ageing Blocks

February 10, 2010 SCMP

The tragic collapse of an old building at 45J Ma Tau Wai Road has reignited worries about the structural safety, repair and maintenance of old buildings in Hong Kong.

The fate of other affected blocks will now hinge on the results of the investigations and decisions to be taken by the Building Authority. If those buildings are found to pose danger, they could be demolished under the Buildings Ordinance.

If a building is demolished, strata title owners will no longer have claims to a flat, but will be left with respective undivided land shares in the relevant land. The value of each interest will then be dictated by the redevelopment value of the land and the title owners’ land share holdings.

Most buildings in Hong Kong are held under strata title ownership and the rights and obligations of the co-owners are governed by the relevant deed of mutual covenants.

Owners of a building typically own certain undivided shares in the lot, and exclusively own a certain portion or unit in the building. They also share the responsibility of repairing and maintaining common areas such as staircases and lifts.

The deed of mutual covenant normally also regulates the redevelopment arrangements of the building.

The collapsed building in Ma Tau Wai Road is owned by a single owner. The adjoining lot 45H, which has a five-storey building, has been divided into five equal and undivided shares. Each fifth of a share of the lot entitles owner to the exclusive possession of one designated floor of the building.

There have been commentaries that the site of the collapsed building and the adjoining lots will attract significant buying interest. Owners of the affected properties need to consider how to deal with their properties, including options of holding and disposal.

The toppled block is likely to be encumbered by claims for loss of life and other damages. The owners of other affected properties should be free to transfer the property title, subject to encumbrances such as building orders.

For properties ripe for redevelopment, owners can get the best price for their interests in a joint sale, more preferably with adjoining lots, as this would help to release the lots’ redevelopment and marriage values and they can share the benefits.

A joint sale can ideally be made by agreement among owners, though buyers can also make individual offers to owners and/or bulk purchase offers to all the affected owners. Where owners in a building cannot agree on a joint sale, the Land (Compulsory Sale for Redevelopment) Ordinance is frequently used to facilitate the sale.

Where a building no longer exists, the Partition Ordinance can assist the owners in selling their interests in the land. The ordinance allows co-owners to apply to the court for approval to sell the land and there has been a precedent in which various adjoining lots were ordered for sale as a whole by a court under the Partition Ordinance.

The value of the combined lots, including their marriage value, was realised in this sale and each of the owners benefited. The sale proceeds were divided among the owners based on the sizes of the lots and their respective shares in each lot.

As such, owners on the lot with no building thereon would then share the sale proceeds of the lot with respect to their undivided land share, unless the deed of mutual covenant provides otherwise.

Investors in valuable ground floor shops in old buildings must be mindful of land share holdings.

In urban areas, many valuable shops are ground floor premises of old tenement blocks five to six storeys high. It is not uncommon for these shops to have the same land share holding as each of the upper floors, say one-fifth or one-sixth of the land, while the values of ground floor units could be many times higher than the upper-floor units.

It makes good economic sense for the ground-floor owners to try to keep the buildings in good condition to safeguard the investment value of their properties. They owner may also seek to boost their influence in the building by increasing their land share holdings by buying more units in the building.

The loss of life and damage caused by the collapse of the building at 45J Ma Tau Wai Road, meanwhile, has raised awareness of the need to repair and maintain buildings and of the physical life span of old blocks, particularly those more than 50 years old.

A lot of old, high-rise and multi-owned buildings in Hong Kong do not warrant redevelopment on economic considerations and are, meanwhile, getting older. It is increasingly important for owners in such buildings to realise they have to act together to carry out proper and regular repairs and maintenance for safety reasons and to extend the physical life of the buildings, which will help preserve the rental and capital values of their properties.

In the interests of the wider community and the security of the physical infrastructure of Hong Kong, buildings should not be allowed to fall into disrepair.

Lau Chun-kong, International Director and Head of Valuation Advisory Services, Jones Lang LaSalle