News Stories:

Click-on these handy "jump links" to quickly access the news item
you're looking for.

1.Developers' hands tied by inherited land covenants

2. Developers decry land sale change

3. Luxury site has a height problem

1. Developers' hands tied by inherited land covenants
FOSTER WONG, SCMP 22 June 2005

This five-storey building at 15 Yun Ping Road in Causeway Bay was built in 2001 in accordance with a restrictive covenant from 1953. Picture by Foster Wong

Developers out to build lucrative new projects may find themselves foiled by covenants agreed by previous owners of the land.

Restrictive clauses limiting land use, development or even the colour scheme of buildings still exist for sites across Hong Kong, property experts warn.

These conditions, agreed between previous sellers and buyers of the sites, are inherited by subsequent owners, who ignore them at their peril.

A number of covenants exist for sites in established luxury residential districts and for plots created by subdivisions of land.

A government grant signed in 1983 on 10A Cambridge Road in the low-rise residential district of Kowloon Tong required the new landowner not to build anything higher than 39 metres and always to keep the land neat and clean.

At 5 Shek O Road, site of the Shek O Country Club, a government's indenture signed in 1934 stipulates that the land be used only for a European-style clubhouse and golf club.

Pang Shui-kee, managing director of surveyor SK Pang, said restrictive covenants could become problematic when they clashed with redevelopment plans as they could not be changed easily.

Surveyors said the most common solution was to seek written consent from the original vendor to break the covenant, in which case an administrative fee was often charged for the waiver.

But this may not be as easy as it sounds.

The 1990s case of Lee Hysan Estate, the biggest landlord in Causeway Bay, versus Chinese sauce maker Lee Kum Kee is a case in point.

In 1997, Lee Hysan filed an application for a court order stopping Lee Kum Kee from putting up a 23-storey commercial project on the site of two three-storey buildings at 6 and 8 Kai Chiu Road in Causeway Bay.

Lee Hysan bought land in 1923, before the area was turned into a glitzy shopping district, subdividing and selling in the 1950s. Most of the plots - mainly on Kai Chiu, Lan Fong and Pak Sha roads - were sold with a covenant clause stipulating that landowners could build only European-style low-rise developments.

In its court application, the company claimed Lee Kum Kee's redevelopment would violate the restrictive covenant set out in the original land assignment in 1953.

Lee Kum Kee argued that the covenant had become obsolete because land use of the neighbouring area had changed from residential to commercial. But the Court of Final Appeal ruled in December 1998 that the covenant was still enforceable and Lee Kum Kee would have to comply.

"Our Causeway Bay properties have been held as [a] long-term investment for rental income [purposes] since the court case," a Lee Kum Kee spokesman said. "We have not come up with any new redevelopment proposal given [that] the restrictive covenant is still there."

The judgment in the Lee Kum Kee case has had a significant impact on Causeway Bay, with many new projects low-rise in accordance with the covenant.

They include the five-storey residential project on 15 Yun Ping Road, built in 2001, and the six-storey residential-commercial building on 12 Pak Sha Road developed in 2003.

Restrictive covenants may limit the redevelopment potential for property developers, but experts say they play an important role.

"You can't say [a] restricted covenant is outdated because it is a way to give an original owner some reasonable protection," said Angela Lee, a partner at Baker & McKenzie.

A.G. Wilkinson & Associates associate director Chris Hui Wai-kwok agreed.

"Because of the rule of law, a covenant cannot be changed easily, even if it is a thousand years old. Every deed will become meaningless if it can be changed easily."

2. Developers decry land sale change
CHLOE LAI, SCMP 22 June 2005

Developers cried foul last night after the government responded to their call for more frequent land sales and lower prices by making land auctions easier but sites potentially pricier.

Property developers will only need to bid 80 per cent of the government's reserve price to trigger the auction of a site on the application list. But the government has not bowed to strong calls from some developers for the resumption of regular land auctions or the publication of reserve prices for sites on the list.

Announcing the changes, Director of Lands Patrick Lau Lai-chiu said the adjustment would allow the application list system to operate more smoothly.

If a developer offers at least 80 per cent of the reserve price, the site will be sold five weeks later, after a revaluation by official surveyors.

But a site will not be sold unless bids match or exceed the government's latest estimate of market value.A government source said the estimated value would remain confidential because the government wanted to avoid developers forming a cartel and fixing a price in private.

Lau Chung-kong, a director of Jones Lang LaSalle, said the changes would result in more sites being sold. But Real Estate Developers Association vice-chairman Stewart Leung Chi-kin called the new system unfair. Mr Leung said the measures were acceptable as the first step to reforming the system but he was disappointed that regular auctions were not resumed.

He said a site should not be revalued before auction, saying it would be unfair on the developer that triggered the sale. A revaluation would be likely to raise the reserve price on a site.

Developers have been complaining the government's reserve prices are too high. They called for flexibility so there would be more auctions and the market would have a more accurate indicator of land values.

No residential sites have been put up for auction under the list system since October and five attempts to trigger land sales in the past three months failed because bids did not reach reserve prices.

The government source said: "We don't think we set the price too high. But we don't want the public to have an impression there is a shortage of supply after repeated attempts to trigger a land auction failed."

Mr Lau insisted revaluation of sites in the five weeks between the triggering of a sale and the holding of the auction was necessary to keep up with the market. He said that the "small adjustment" to the list system would mean more auctions but government coffers would not be affected as a result.

3. Luxury site has a height problem
PEGGY SITO, FOSTER WONG and ERNEST KONG, SCMP 22 June 2005

The redevelopment potential of a luxury property in Repulse Bay for sale by tender is uncertain because of a 1950s height restriction clause in the assignment of the property.

The case highlights the uncertainty stemming from covenants agreed between previous buyers and sellers that act as effective planning controls - seemingly out of step in the modern era.

The property under the spotlight is a 34,256 square foot building at 115 Repulse Bay Road, which has six floors on top of a carport level.

Landlord Yue Hing Land, controlled by a Hong Kong-based family named Lo, is selling it through a public tender, which closes on June 29.

The property had been expected to attract a strong response and property surveyors valued it at $900 million - taking into account its redevelopment potential and the value of the adjacent high-rise building, Grosvenor Place, at 117 Repulse Bay.

Units in the 27-storey Grosvenor Place are selling at $18,000 to $19,000 per sq?ft.

The government has allowed the construction of high-rise buildings in Repulse Bay as the city develops. Subject to a lease modification, the 20,000 sq?ft property is zoned for residential purposes with a maximum plot ratio of three times. That means the building is allowed to have a gross floor area of up to 60,000 sq?ft, compared with the existing floor area of 34,256 sq?ft.

However, investors who recently studied the tender said the value could be lower than expected due to the restrictive covenants contained in the assignment.

When Bella Ma and Ng Hon Ping sold the property to Yue Hing for about $1.27 million in 1957, they set a restrictive covenant that limits the building to be constructed to seven storeys.

The property is also not allowed to be turned into a restaurant or hotel business in competition with The Hong Kong and Shanghai Hotels, which owns The Repulse Bay at 109 Repulse Bay Road.

A restrictive covenant is a clause in an agreement signed by an owner and a buyer, usually limiting the use of a property in future. In Hong Kong, restricted covenant clauses are commonly found in traditional luxury districts such as Repulse Bay and The Peak. They were aimed at preserving the quality of view or the environment, agents said.

Investors said they did not know whether the building could be redeveloped under the restrictive covenant.

This would make it unattractive to buyers, who would be faced with trying to have the height restriction removed so that they could build a high-rise tower.

"It is not a clear-cut issue. It has to be legally tested," said a developer who has studied the site's development potential.

He said the site's covenant problem would be well known to most developers.

"I doubt if any professional developer will go in to that kind of situation," he said.

Yue Hing declined to comment on the issue.

Tony Lo, head of investment at Jones Lang LaSalle, the property's sole marketing agent, declined to comment on whether the building could be redeveloped. He said all the information about the property was available at the Land Registry.

But some interested parties might think the restrictive covenant was not enforceable, he said, without elaborating further. Property experts said the covenant was protected by law unless there was something outrageous about it.

"A restricted covenant is certainly a potential risk to the value and redevelopment potential of a site," said Angela Lee, a partner with Baker & McKenzie. "Think about the huge difference it can make when you are allowed to build 10,000 sq?ft instead of 100,000 sq?ft.

"Investors should never overlook a restrictive covenant. A land grant is only one of the many aspects of an investment. Making money out of a property redevelopment project may not be as easy as one thinks."

Property consultants said the issue was a typical example of how a restrictive covenant added risk to a property investment.

To release the land from a restrictive covenant, property experts said the buyer would need to reach a private agreement with the original landlord.

It could also be removed when the lease expires. All property in Hong Kong is owned on leasehold terms.

"Even if the government gives you a green light to go ahead with the blueprint of a development, history tells us that you will definitely face the challenge of the original owner if you don't comply with the restricted covenant," said Pang Shui-kee, the managing director of surveyor SK Pang.