DAVID WILLIAM SAUNDERS AND ANOTHER v. LEUNG TONG SHUK LAN, SHEILA

LDNT 144/2002

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 144 of 2002

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J U D G M E N T

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1. The 1st and 2nd Applicants are the tenants of the premises known as 10th Floor, Block G, Merry Terrace, Nos. 4A-H, 4J-N & 4P Seymour Road, Mid-Levels, Hong Kong ("the Premises"). The Respondent is the landlord of the Premises. The Applicants' application is for a new tenancy under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. The Respondent does not object to the grant of a new tenancy to the Applicants. Both parties have agreed that the new tenancy can be for a term of 2 years commencing on 10 August 2002. The only issue in this case is the amount of the prevailing market rent for the new tenancy.

The Applicants' case

2. The Applicants did not call any expert to give evidence and relied only on the evidence of the 1st Applicant. The 1st Applicant referred to 2 comparables in the same development as the Premises, i.e. 4F on 4th Floor & Car Parking Space No. 30, Merry Terrace and 4D on 5th Floor & Car Parking Space No. 75, Merry Terrace. The Respondent's expert, Mr. Yiu Tsang Wing, also relied on these 2 comparables and referred them as Comparables 5 and 6 respectively. Likewise, I shall also refer them as Comparables 5 & 6.

3. The 1st Applicant alleged that Comparable 5 was the most recent transaction in the development and a like to like comparison for the Premises. He adopted the adjusted unit rent of $137.9 psm for Comparable 5 as calculated by Mr. Yiu and applied it to the Premises, which had a saleable area of 115.8 sm, to arrive at the rental of $15,968. As the Respondent had at one stage agreed to waive one month's rent of $21,000 in lieu of repair work, the 1st Applicant deducted a sum of $875 ($21,000 / 24) from the said sum of $15,968 and concluded that the prevailing market rent should be at $15,093.

4. Alternatively, the 1st Applicant relied on the average rent of Comparable 5 and Comparable 6 to assess the prevailing market rent of the Premises. Comparable 6, according to the 1st Applicant, was the second most recent like to like comparable in the development. The 1st Applicant did not, however, adopt the adjusted unit rent of $158.7 psm for Comparable 6 as calculated by Mr. Yiu, but made his own calculation of the unit rent for Comparable 6 as follows:-

[$20,000 (original rent on inclusive basis) - $998.5 (rates) - $800 (management fee) - $2,000 (car park rental)] / 113.2 sm (saleable area) = $143 psm

5. By using the adjusted unit rent of $137.9 psm for Comparable 5 as calculated by Mr. Yiu and the aforesaid unit rent of $143 psm for Comparable 6, the 1st Applicant calculated the average unit rent to be at $140.45 psm, i.e. ($137.9 psm + $143 psm) / 2. The 1st Applicant then applied this average unit rent to derive the prevailing market rent at $15,389 as follows:-

$140.45 psm x 115.8 sm - $875 = $15,389

6. The 1st Applicant was therefore of the view that the prevailing market rent of the Premises should be at $15,389 per month exclusive of rates and management fee.

7. Furthermore, the 1st Applicant challenged Mr. Yiu's independence as he was from Memfus Wong Surveyors Limited, the same company managing the Premises on behalf of the Respondent. The 1st Applicant submitted that there were obvious conflict of interest and inherent bias when Mr. Yiu prepared his report for the Respondent, as his company would have financial interest in the matter. The 1st Applicant also submitted that he had in fact requested Mr. Yiu to conduct valuation for him but Mr. Yiu turned down his request and it showed that Mr. Yiu was not really independent.

The Respondent's case

8. The Respondent called two witnesses to give evidence. Mr. Kwok Pik Keung, Ray, the first witness, gave evidence that according to the tenancy agreement, the Respondent was under no obligation to repair the internal of the Premises and it was the duty of the Applicants to keep the Premises in reasonable tenantable repair and conditions. Thus, the Respondent's promise to waive one month's rent in lieu of repair was purely for an amicable settlement with the Applicants. Since the parties could not reach a settlement and the Respondent had withdrawn the offer, the market rent should not be affected by the Respondent's promise.

9. Mr. Kwok also gave evidence that Mr. Yiu was from the Valuation Department of Memfus Wong Surveyors Limited, which was separate from its Property Management Department and as Mr. Yiu was a professional surveyor, there was no question of conflict of interest or being bias or unfair.

10. The second witness was Mr. Yiu, who gave evidence as per his expert report, Exhibit "R3", and the replacement sheet for Appendix 5, Exhibit "R4". Apart from Comparables 5 and 6 as aforesaid, Mr. Yiu also relied on 4 other comparables in the same development as follows:-

(1) 4H on 10th Floor, Merry Terrace ("Comparable 1");

(2) 4D on 9th Floor, Merry Terrace ("Comparable 2");

(3) 4K on 10th Floor, Merry Terrace ("Comparable 3"); and

(4) 4K on 5th Floor, Merry Terrace ("Comparable 4").

11. The particulars of Comparables 1 to 6, as adopted by Mr. Yiu, are as follows:-

12. In deriving the unit rents of Comparables 1 to 6 as above stated, Mr. Yiu had assumed that the rates for Comparables 5 and 6 were $1,000 each, as there were no exact figures available for these two comparables. Mr. Yiu had also assumed that the rental value of a covered car park in the development was $2,000 per month, whereas the rental value of an open car park was $1,000 per month.

13. Mr. Yiu then made various adjustments to the unit rents of Comparables 1 to 6 as follows:-

14. Since Comparables 2 and 3 were on higher floors and commanded similar view with the Premises, Mr. Yiu applied a weighting of 2 to each of Comparables 2 and 3, whereas the other 4 comparables had a weighting of 1 each. The average adjusted and weighed unit rent was therefore $164.6 psm and the prevailing market rent of the Premises, as assessed by Mr. Yiu, was accordingly $19,060.7 or a round figure of $19,100 exclusive of rates and management fee.

Independence of the Respondent's expert

15. It is of course not an ideal situation when Mr. Yiu, who is acting as an expert for the Respondent, is also an employee of the managing agent for the Respondent. On the face of it, there is always a potential risk of bias and conflict of interest. In reality, however, even if a party engages an independent expert from an unrelated company, the party will pay the fees of the expert too. The expert might also have the fear that he would lose his client if his report or evidence were not favourable to the client. So there is a similar risk of bias and conflict of interest in such a situation. If the 1st Applicant's challenge is accepted, it means that no court or tribunal would be able to accept any evidence from any expert who is paid by a party. Moreover, section 10(6) of the Lands Tribunal Ordinance, Cap. 17 empowers the Lands Tribunal to "admit in evidence any statement, document, information or matter, whether or not it would otherwise be admissible in evidence and attach such weight to it as may be appropriate in the circumstances". It is therefore just a matter of how much weight I should place on the evidence of Mr. Yiu.

16. I do not, however, find that Mr. Yiu had demonstrated any bias against the Applicants. Comparables 1 to 4 were not provided by Mr. Yiu but by the Rating and Valuation Department. Mr. Yiu even adopted the two comparables provided by the Applicants, i.e. Comparables 5 and 6, in his assessment of the prevailing market rent. There was nothing wrong for Mr. Yiu to refuse to act for the Applicants when the Respondent had already engaged him. I find that Mr. Yiu was just doing his professional job as a surveyor when he prepared his report and gave evidence for the Respondent. I will not therefore exclude his evidence on the ground of bias, conflict of interest or not being independent. Whether I will agree with his assessment is of course another matter.

Choice of comparables

17. Comparables 1 to 4 were obtained from the Schedule of Rental Information from Rating and Valuation Department, Exhibit "A7", which in fact provided 2 more comparables outside the development of the Premises. Since both parties did not refer to those 2 comparables and there are sufficient comparables within the same development, I will not rely on those 2 comparables either.

18. Comparable 1 is a much smaller flat than the Premises and the other 5 comparables. Potential tenants looking for flats of the size of the Premises will not normally look at flats of the size of Comparable 1. Thus, Comparable 1 is actually for a different market from that of the Premises. Although Mr. Yiu had made an adjustment for size, the adjusted unit rent of Comparable 1 is still much higher than the adjusted unit rents of the other 5 comparables. I am therefore of the view that Comparable 1 should be discarded as it is not a suitable comparable.

19. The lease of Comparable 4 commenced on 7 January 2002, more than 7 months before the relevant date on 9 August 2002. Comparable 4 is by no means close in time to the relevant date, and even with time adjustment, it will not be a desirable comparable. There are also no photographs of Comparable 4 available for comparing its internal condition with that of the Premises. As there are sufficient comparables that are close in time to the relevant date available, I shall discard Comparable 4 to avoid any uncertainty that may arise out of the large time gap and the internal condition.

20. There is however no reason to discard Comparables 2 and 3. The leases of Comparables 2 and 3 commenced on 1 June 2002 and 1 April 2002 respectively. They are close enough to the relevant date. There are photographs available for these 2 comparables. So, with proper adjustments for condition as well as other factors, they are good comparables too. In valuation, it is important to have as many good comparables as possible, so that the effect of any individual hidden factors of these comparables can be reduced and their average value can reflect the market situation to a better extent.

21. In the circumstances, I shall consider Comparables 2, 3, 5 and 6 in my assessment of the prevailing market rent for the Premises.

Assessing the prevailing market rent

22. There is no information available for the rates of Comparables 5 and 6. Mr. Yiu adopted $1,000 as the rates for both Comparables 5 and 6. The 1st Applicant on the other hand adopted $998.5 for Comparable 6. Since Comparables 2 and 6 are of the same saleable area, I presume that the rates of Comparable 6 should be the same as that of Comparable 2, which is $998.5, the same figure adopted by the 1st Applicant. I shall therefore adopt $998.5 as the rates for Comparable 6. As to Comparable 5, the 1st Applicant in fact adopted the adjusted unit rent calculated by Mr. Yiu. I suppose the 1st Applicant should not have any dispute on the use of $1,000 as the rates for Comparable 5. I shall accordingly adopt $1,000 as the rates for Comparable 5.

23. Comparable 5 had a covered car park. Mr. Yiu adopted $2,000 as the rental value for a covered car park. The 1st Applicant in fact produced a Car Park Leasing Agreement dated 21 December 2001, Exhibit No. "A3", to show that the rent for a covered car park was $2,200 per month. However, the 1st Applicant had no objection to adopt Mr. Yiu's figure of $2,000 as he thought that it was reasonable too. I shall therefore adopt $2,000 as the rental for a covered car park.

24. On the other hand, Comparable 6 had an open car park as shown in the plan produced by Mr. Yiu, i.e. Exhibit "R5". Mr. Yiu adopted $1,000 as the rental value for such an open car park. The 1st Applicant did not know that the car park of Comparable 6 was an open car park and hence he adopted the figure of $2,000 for the car park. I accept the evidence of Mr. Yiu and find that the car park of Comparable 6 was an open car park and I shall adopt Mr. Yiu's figure of $1,000 for this car park.

25. The net rents of Comparables 2, 3, 5 and 6 are therefore calculated as follows:-

Comparable 2: $22,300 - $800 - $998.5 = $20,501.5

Comparable 3: $21,000 - $800 - $1,010 = $19,190

Comparable 5: $19,000 - $800 - $1,000 - $2,000 = $15,200

Comparable 6: $20,000 - $800 - $998.5 - $1,000 = $17,201.5

26. Thus, the unit rents of Comparables 2, 3, 5 and 6 should be $181.11 psm, $167.74 psm, $131.26 psm and $151.96 psm respectively.

27. I accept all the adjustments made by Mr. Yiu in respect of time, view, floor level, size, new letting, furniture & fixtures and domestic appliances, as I find them to be very reasonable. However, Mr. Yiu did not make any adjustment for internal condition. In his report, Mr. Yiu stated that he had assumed the defects concerning the peeling off of paints and cracks on wall, floor and ceiling of the Premises as well as the inherent defects of the air-conditioners and heaters having been repaired by the Respondent at the date of valuation. This cannot be right. In assessing the prevailing market rent, one has to look at the condition of the Premises as at the relevant date and cannot assume that the condition would be better than it actually was. Thus, there should be an adjustment for internal condition as well.

28. On the other hand, there is also no reason for the 1st Applicant to deduct the cost of repair promised by the Respondent from the rental. An adjustment for internal condition should be sufficient to reflect the differences between the Premises and the comparables in this aspect.

29. I have considered very carefully the internal condition of the Premises and compared it with those of Comparables 2, 3, 5 and 6 by reference to the photographs produced and the evidence of the parties. I agree with the 1st Applicant that the internal conditions of Comparables 2, 3, 5 and 6 were all better than the Premises, but to different extents. The adjustment of -3% for new letting adopted by Mr. Yiu have already taken care of some of the differences in condition between the Premises and Comparables 2, 5 and 6, but I do not find them to be sufficient. I shall therefore replace the adjustment for new letting by the adjustment for internal condition. My assessment is that there should be downward adjustment of 10% for Comparable 2, 6% for Comparable 3, 3% for Comparable 5 and 4% for Comparable 6.

30. In the lease of Comparable 5, Exhibit "A2", there was a remark "tenant to install new kitchen and fridge". Mr. Yiu suggested that it might be the reason why the rent for Comparable 5 was so low. I find it quite strange that a tenant would undertake to install new kitchen and fridge. It may well be a mistake and the word "tenant" should read "landlord" instead. However, no other evidence was given in this regard and Mr. Yiu did not make any adjustment for this. Thus, I will not make any adjustment in respect of the remark either.

31. I shall summarize the adjustments I made as follows:-

32. The average adjusted unit rent is therefore $152.28 psm. Adopting the saleable area of 115.8 sm, it gives a rental of $17,634.02 or a round figure of $17,600 for the Premises. I do not agree with Mr. Yiu that there should be a weighting of 2 applied to Comparables 2 and 3. The adjustments for floor level and view have already taken care of Mr. Yiu's concerns. Since all the comparables are within the same development, I think they should have the same weighting. Thus, I do not find it necessary to attach different weightings for the comparables.

33. I therefore assess the prevailing market rent of the Premises to be at $17,600 per month exclusive of rates and management fee. Since the rates of the Premises is $1,024 per month and the management fee is $800 per month, the new rent shall be in the sum of $19,424 per month inclusive of rates and management fee.

Orders

34. Accordingly, I order that:-

(1)	The Applicants shall be granted a new tenancy for a term of two years commencing on 10 August 2002;
(2)	The new rent shall be at $19,424 per month, inclusive of rates and management fee;
(3)	The rental deposit shall be reduced in accordance with the new rent;
(4)	The Respondent shall refund any excess payment of rent and deposit to the Applicants within one month from the date hereof;
(5)	Save as aforesaid, the terms of the new tenancy shall be the same as the previous tenancy agreement; and
(6)	No order as to costs.