ROSCO TOYS LTD v. PRIME SUN INVESTMENT CO LTD

LDNT 116/2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 116 of 2004

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JUDGMENT

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Background

1.    The Applicant was the tenant and the Respondent the landlord of the subject premises known as Flat 1C and Car Parking Space No. 96, Carmina Place, 7-9 Deep Water Bay Drive, Island South, Hong Kong (“the Premises”).  Carmina Place comprised 2 blocks of 14-storey apartment buildings erected over a podium containing car parking spaces, clubhouse and recreational facilities.  There were a total of 56 apartment units in the development.

2.    The Premises was subject to a 2-years tenancy expiring on 14 July 2004 at a rent of $55,000 per month on the basis of inclusive of rates and management fees.  According to the Respondent, the Government rates for Flat 1C including that of one car parking space amounted to about $2,002 per month whilst the management fees was $4,175 per month.    The Respondent did not oppose the Applicant’s application.  During the hearing, both parties agreed that the new tenancy of the Premises should be for a term of 2 years commencing from 15 July 2004.  The main dispute was on the amount of the Prevailing Market Rent (“PMR”) of the Premises.  Also, they disagreed on whether an option to determine the tenancy should be given to the Applicant, and the details of the option, if so given.  The Applicant submitted that the PMR of the Premises should be $39,000 per month, inclusive of rates and management fees whilst the Respondent estimated the PMR to be $61,000 per month, also on the same inclusive basis.

3.    Both parties were not legally represented.  Neither did they call for the evidence of any expert witness, nor produce any schedule of rents of comparable properties from the Commissioner of Rating & Valuation.  On the whole, the rental evidence relied upon by both parties were very limited.  This would obviously restrict the capability of this Tribunal to determine the value of the PMR too.  Without the availability of sufficient number of comparables as well the evidence from any expert surveyor who is knowledgeable about the local market, the Tribunal could only consider the scant evidence of both parties and attempted to do the best that was possible under the circumstances

4.    The Applicant was represented by Mr. Clifford Ted Rosenberg, its managing director.  Mr. Rosenberg quoted a new letting of Flat B on the Ground Floor of Glendale, Nos. 8-12 Deep Water Bay Drive, a high-rise apartment development opposite Carmina Place.  The letting of the flat (with a gross floor area of 2,650 sq. ft., or 246.2 sq. m.) was at a rent of $39,000 per month exclusive of management fees and rates, for a term of 2 years commencing from 3 November 2004.  The tenant of this comparable flat was a Mr. Tait, the tenant of Flat 2C and a car parking space in Carmina Place.  

5.    Mr. Rosenberg produced some documents dated 29 April 2004 from the Buildings Department all relating to the matter of a works order for Carmina Place.  He also produced the written evidence for his comparable as well as a large number of photographs attesting to the disrepair condition of the development including its recreational facilities.  He added that he wished to stay in Carmina Place by applying for a new tenancy because the environment was suitable for his young son who was otherwise very sensitive to other locations in the urban areas.  Furthermore, he criticized the Respondent and her property manager that they had been giving the same indefinite answers to him for months when he enquired about the progress of the refurbishment works.

6.    He submitted that given that the comparable flat in Glendale was larger in area than the Premises and that the development did not, like Carmina Place, suffer the same disrepairs (including the cracks and leakages) or the threat of renovation work commencing at any time, it would be fair to conclude that the PMR of the Premises should not be higher than that of Glendale, or $39,000 per month, on inclusive basis.

7.    Finally, he submitted that it would be inappropriate to use the lettings in Carmina Place as comparables for his Premises because firstly the last new lease in the development had been entered into long time ago; secondly, there were only 6 flats under occupation, in a development of 56 units.

The Respondent’s case

8.    Ms. Chan Wai Man, the Respondent’s representative gave evidence herself.  She admitted that out of the total 56 apartment units in Carmina Place, only 6 units were tenanted.  These included the following units: Flat 1A (her comparable), 1C (the Premises), 2C, 2D, 3B and 12A.  She said that the low occupancy rate was due solely to the impending renovation works.  It was only natural that most sitting or new tenants would avoid a development that was about to undergo a very substantial renovation program.  However, there was no attempt by the Respondent to withhold the flats from letting by asking an artificially high rent.  As such, the agreed rent of the limited number of renewed lettings such as that for Flat 1A still fairly reflected the market rental level of flats in Carmina Place at or around the time of renewals. 

9.    Ms. Chan gave evidence that the latest renewal of Flat 1A, for a term of 2 years from 7 March 2004 and at a rent of $56,000 per month on the same inclusive basis as that for the Premises, provided the best evidence of value.  She confirmed that Flat 1A and the Premises were similar flats of the same size (with a gross floor area of 239.3 sq. ft., or 222.3 sq. m.) in the same development.  Hence, they were close comparables to each other.  However, Ms. Chan submitted that because of the rising trend in residential rents in recent months (between March and July 2004), it would be appropriate to add an additional 10% in arriving at the PMR of the Premises.

10.    On the other hand, Ms. Chan dismissed Mr. Rosenberg’s suggestion of using the comparable rent at Glendale on the ground that Glendale, being a Government owned building, was much inferior to Carmina Place.  She added that there was only a very small entrance area but not a proper lobby on the ground floor of Glendale, there was no provision of fixtures and fittings including air-conditioners, fridge, gas stoves, exhaust fans, other electrical appliances and built-in wardrobes, and there was also not the same scale of recreational facilities in Glendale.  All in all, she opined that it was totally inappropriate to compare flats in Glendale with flats in Carmina Place.

Estimation of the PMR of the Premises

11.    I agreed with Mr. Rosenberg that it would be inappropriate to use a single renewed letting in Carmina Place as the best comparable for the Premises.  Bearing in mind the abnormally low rate of occupancy (about 11%) in Carmina Place, it would be improper to say that the rents fetched in the renewals of tenancies of flats in Carmina Place were market rents.  Also, some tenants, like Mr. Rosenberg, who had a high tenant’s inertia to stay in Carmina Place, might agree with the landlord a higher than market rent when renewing the tenancy.  Therefore, I did not agree to accept the renewed rent of Flat 1A as the PMR for the Premises for the present exercise.  I also did not receive any evidence from the Respondent regarding the change in the market between March 2004 (commencing date of the renewed tenancy of Flat 1A) and July 2004 (commencing date of the new tenancy of the Premises) to justify an addition of 10% in rent.

12.    On the other hand, I also agreed with Ms. Chan that there were differences between Carmina Place and Glendale that I could not simply apply the rent of a new letting in Glendale as the PMR for the Premises, as submitted by Mr. Rosenberg.  

13.    First of all, I would analyze the rent of Glendale on the basis of information provided by Mr. Rosenberg.  The unit rate of the rent passing of $39,000 per month, on exclusive basis was $39,000 / 246.2 sq. m., or $158.4 per sq. m.  In the absence of other information, I estimated that the unit rent for Carmina Place would be about 20% higher than that of Glendale, giving the following unit rate: $158.4 per sq. m. x 1.2, or about $190 per sq. m.  Applying this to the gross area of the Premises (222.3 sq. m.), I arrived at an estimated rent of $42,237 per month, on exclusive basis, for the Premises.  Adding this to the monthly Government rates of $2,002 and the monthly management fees of $4,175, I arrived at a rent for the Premises of $48,414, rounded to $48,500 per month, on inclusive of Government rates and management fees.

14.    As a check, based on the amount of Government rates payable for the Premises, I found that the Rateable Value of the Premises was, as at 1 April 2004, about $40,033.  Adding this to the monthly Government rates of $2,002 and the monthly management fees of $4,175 give a rent of $46,210 on inclusive basis.  This was very close to and within 5% of the PMR I estimated in the previous paragraph.

An option to determine the new tenancy before its expiration

15.    In accordance with the provisions of the Landlord & Tenant (Consolidation) Ordinance (Cap. 7) and in the absence of any good reason for change, the other terms of the new tenancy for the Premises should be the same as in the previous tenancy.  The only dispute here is whether an option should be given for the tenant to determine the tenancy before its expiration in 2 years’ time.

16.    Mr. Rosenberg submitted that in the renewed tenancy for Flat 1A (the Respondent’s comparable), there was an option for the tenant to terminate the tenancy at any time of the term created by the giving of two months’ prior written notice to that effect to the landlord or by effecting payment to the landlord of two months’ rent in lieu of notice.  He asked to be treated the same in the new tenancy of the Premises.

17.    On the other hand, Ms. Chan submitted that the Respondent would agree the above option for the Applicant only after the completion of the first 12 months of the 2-year term of the new tenancy.  This option would then be the same as that in the previous tenancy of the Premises.  In addition, Ms. Chan said that the Respondent would also agree another option for the Applicant to terminate the tenancy by giving one month’s notice to the Respondent or one month’s payment of rent in lieu of notice after receiving formal notice from the Respondent regarding the commencement of the renovation works in Carmina Place.

18.    Having regard to the terms of the previous tenancy of the Premises and to all relevant circumstances, in particular the impending major renovation works in Carmina Place, I decided that it would be appropriate to include in the new tenancy of the Premises the following two options: (1) an option similar to the one in the tenancy agreement for Flat 1A (see paragraph 16 above) and (2) an option for the Respondent to terminate the tenancy by giving one month’s notice to the Respondent or one month’s rent in lieu of notice after receiving formal notice from the Respondent regarding the commencement of the renovation works at Carmina Place (see paragraph 17 above).

19.    For the above reasons, I determined the PMR of the Premises to be $48,500 per month, on inclusive of Government rates and management fees basis, and granted the following orders:

Orders

1.    By consent, new tenancy of the Premises for a term of two years commencing from 15 July 2004;

2.    New rent at $48,500 per month (inclusive of Government rates and management fees); leave to the Respondent to pay back the Applicant over-payment of rent, if any, within one month from today;

3.    Deposit, in the sum of 2 month’s rent of $97,000, to be paid by the Applicant to the Respondent; leave to the Respondent to pay the Applicant the adjustment, if any, within one month from today;

4.    An option for the Applicant to determine the tenancy under either one of the following situations: (1) an option for the Applicant to terminate the tenancy at any time of the term created by the giving of two months’ prior written notice to that effect to the Respondent or by effecting payment to the Respondent of two months’ rent in lieu of notice; and (2) an option for the Applicant to terminate the tenancy by giving one month’s notice to the Respondent or one month’s payment of rent in lieu of notice after receiving formal notice from the Respondent regarding the commencement of the renovation works in Carmina Place.

5.    Other terms of the new tenancy shall be the same as in the previous tenancy agreement;

6.    There shall be no order as to costs.