FINANCIAL SECRETARY INCORPORATED v. WING ON CHEONG INVESTMENT CO LTD

Landlord and Tenant - new tenancy under Part IV - determination of new rent - selection of comparables within and outside the subject premises - irrelevance of investment method where adequate comparables available for application of comparative method - bulk discounts in relation to lettings of large number of flats to one tenant in lower rental group of premises - Held: 1. Comparative method of valuation applicable; 2. Lesser bulk discount applicable than for bulk lettings in higher rental groups; 3. New total rent for 15 flats $72,000 per month. Sections 117(1) and 119K Landlord and Tenant (Consolidation) Ordinance.

IN THE LANDS TRIBUNAL OF HONG KONG

  Application L. T. No. 540 of 1985

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JUDGMENT

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1. In these proceedings the applicant applies, pursuant to section 117(1) of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 for a new tenancy in respect of 15 domestic premises situate at Universal Towers, 18 - 26 Kin Wah Street, North Point, Hong Kong being Flats A1 on 13th to 20th Floors (inclusive) and Flats A2 14th to 20th Floors (inclusive). We record that the application was brought on 15th May 1985 in the name of the Colonial Treasurer Incorporated but that at the commencement of the hearing the name of the applicant was amended to the Financial Secretary Incorporated in accordance with the change of name provided for in the 'Declaration of Change of Title (Colonial Treasurer Incorporated) Notice 1985' published in No. 26 Volume CXXVII 'The Hong Kong Government Gazette' on 28th June 1985 under L. N. 180 of 1985 which came into effect on 1st July 1985.

2. The parties were agreed that the new tenancy should be for a duration of 2 years commencing on 24th May 1985 and otherwise on the save terms as the prior tenancy agreerment, except that no agreement was reached on rent. The new rent therefore remains to be determined by the Lands Tribunal under Section 119K of the Ordinance. Section 119K directs that failing agreement the new rent is to be the prevailing market runt.

3. The applicant called Mr. S.K. Foo, Chartered Surveyor and a Senior Rating and Valuation Surveyor of the Rating and Valuation Department to give evidence and produce his valuation report. After considering a number of comparables Mr. Foo arrived at a rental value for each flat at $4,200 which produced a total rent of $63,000. In his opinion a letting of the number of flats involved in this application would have resulted in a bulk discount being negotiated in the region of at least 10%. Adopting a factor of 0.9 this resulted in his final valuation of $56,700. Mr. Foo's comparables included two other flats at Universal Towers. Flat A1, 5th Floor had been let for 2 years from 5th December 1984 for $4,700 per month and Flat A2, 5th Floor from 1st January 1985 on a monthly tenancy at $4,000 per month. Mr. Foo considered the two comparables in the subject premises to be both outdated and inconsistent. For those reasons he decided they did not reflect market values as at the relevant date, namely 24th May 1985, Instead of attempting to make an appropriate time adjustment, he elected to go outside the subject premises and searched for comparables elsewhere. He then selected 10 comparables from North Point Terrace, in Ching Wah Street; 2 comparables from Bedford Gardens, Bedford Road, North Point; and 4 comparables from Fortress Gardens, Fortress Hill Road, North Point. In evidence he stated that he considered the best comparables were those at North Point Terrace which generally he considered superior to the subject premises. Rents at North Point Terrace varied from $4,400 to $5,100 with unit rates varying from $57.8 to $67.2 per square metre. Several of the lettings were closer to the relevant date than the 2 Universal Towers comparables, ranging from 16.11.84 to 1.6.85. The comparable unit rate on Mr. Foo's final valuation of the subject premises, before making any bulk discount, was $66 per square metre.

4. Mr. James Wilburn, Chartered Surveyor was the expert witness called by the respondent. On the basis of the comparables he selected, he arrived at a monthly rental of $87,000 which equates to $5,800 per month for each flat. The comparables he used were the two Universal Towers comparables already mentioned; a third Universal Towers comparable being Flat B1, 11th Floor let for 2 years from March 1985 for $4,730 per month; a flat at immediately adjoining premises being 9th Floor, 28 Kin Wah Street let for 2 years from July 1985 at $3,300 per month; and Flat A, 5th Floor, Ming Court, Ming Yuen West Street, North Point let for 1 year from lay 1985 at $3,342 per month. The latter two premises were smaller than the subject promises being 36.97 square metres and 38.65 square metres respectively. The relevant unit rates were $89.26 per square metres and $86.46 per square metres respectively. The respondent also called evidence from Mr. H. L.Ho, the respondent's manager, who explained that a Lower rental was agreed between the parties to the tenancy of Flat A2, 5th Floor, Universal Towers because of the tenant's willingness to depart after a short period and the fact that as a consequence it was merely a monthly tenancy.

5. We accept that the rent charged for Flat A2, 5th Floor was, because of those special circumstances, lower than would otherwise have been charged and must be considered subject to those qualifications.

6. The main difference in approach which separated the two chartered surveyors was that Mr. Foo considered the Universal Towers comparables unreliable and therefore wont outside that block to find other comparables while Mr. Wilburn considered that the Universal Towers comparables were the best comparables. Once Mr. Foo doubted the reliability of the Universal Towers comparables, it was sensible for him to look elsewhere, at least for checking purposes. However, what he did was not merely to use them for checking purposes. In fact he decided that the North Point Terrace flats were not only the best comparables but he disregarded the Universal Towers comparables. This was a wrong approach for the Universal Towers comparables, whatever their weaknesses, remained relevant as being reasonably recent lettings of identical flats in the same block. The decision not to give any weight to the Universal Towers comparables was even less justifiable, once he later became aware of the more recent third Universal Towers comparable referred to in Mr. Wilburn's evidence.

7. Mr. Wilburn while using the Universal Towers comparables an the primary source of his calculation, also relied on the two other comparables he cited with very much smaller floor areas. We accept the criticism that between comparable premises, smaller premises will tend to have a higher unit rate.

8. None of the comparables were ideal and adjustments would be necessary for each. The Universal Tower comparables would require time adjustments. The North Point Terrace and other comparables would require location, environment, time and other adjustments. Not all those adjustments would necessarily be in favour of the subject premises but if a full analysis of these comparables were to be undertaken number of adjustments would be necessary.

9. Neither valuer attempted to make several detailed adjustments in percentage terms. We do not propose at this stage to undertake that exercise. In the absence of comprehensive adjustments, it is necessary to decide the weight which should be given to the comparables which, in turn, depends on their degree of relevance. In broad terms Mr. Foo considered that a number of the North Point Terrace comparables being closer to the relevant date than the Universal Towers comparables were better indicators of market rents as at the relevant date. In fact we recognise that in relation to time, these were the better comparables but being in a different development they require other adjustments for the other factors already mentioned. Mr. Wilburn, having omphasised that his Universal Towers comparables had the advantage of being in the same block as the subject promises, considered that the necessary time adjustment could easily be made after taking into account rental trends from the end of December to the relevant date, namely 24th May 1985.

10. In relation to market rental trends, the applicant submitted that there was no satisfactory evidence of any increase during that period. Mr. Wilburn gave evidence to support a rental increase during that period of 19% and stated that the increase in sales, as distinct from rents, during the same period, was 24%. We accept that evidence of sales is, at most, indicative merely of a trend in property market prices which will probably, to some extent, be reflected in rents. However, we are well satisfied that the rates of increase will rarely be identical and for time lag and other reasons, there may be no close correlation between the two. Sales prices will often indicate general trends but for rental purposes will be of little other relevance. After reviewing the whole of the evidence, we find that there was an increase in rents during the relevant period but less than Mr. Wilburn claimed. Before leaving Mr. Wilburn's evidence we would record that he supported his conclusion arrived at under the comparative method, by an alternative method which he described as a reversed income approach. This was basically an investment method valuation. Where there are satisfactory comparables available, it will rarely be necessary to use the investment method, in an attempt to ascertain prevailing market rents. In this application there were sufficient comparables available for a reasonable valuation to be made by that method. We consider that the reversed income approach was not appropriate in this case and do not need further to consider the calculations made under that approach.

11. We record that in addition to the oral and written evidence, we also yesterday afternoon inspected the subject premises in the presence of representatives of both parties. We also had the opportunity to view the exterior of the comparables cited by both parties.

12. The remaining major issue related to whether onto the prevailing market rent is determined, should there be what has come to be known as a bulk discount. The question of a bulk discount in favour of a tenant renting a large number of flats in the same block, from the same landlord, was considered by the Lands Tribunal in The Colonial Treasurer Inc. v. Cali Enterprises Ltd. L. T. NO 43/83. There was evidence in that case that in other lettings bulk discounts had varied from 5% to 34% and that 18 flats let to 1 tenant showed that a bulk discount of 15% had been obtained. The Tribunal allowed the same 15% discount on the letting of 16 flats by the tenant. The present applicant called evidence which showed that in other recent Repulse Bay lettings with monthly rents per flat of $32,000, $28,500 and $26,000, bulk discounts had been obtained of 11.7%, 26.5% and 19.2% respectively.

13. We are satisfied that in flats in that very much higher rental group, bulk discounts are an established feature of the market. The question is whether bulk discounts are also characteristic of the lower rental group into which the subject promises fall. Mr. Foo considered that it was a characteristic of the market in this area too and allowed a 10% discount. Mr. Wilburn described what he considered were very material differences between flats available for letting in these two rental groups. As a result he was of the opinion that not only were bulk discounts not generally negotiable but that the reverse situation could well exist where a landlord would seek a higher rental on a bulk letting. This converse position was claimed in part to recognise the potential difficulty of a landlord, having to relet, at the same time, a large number of flats in a sector of the market where the demand was for the sale of flats rather than letting. The applicant's submission was that landlords are mere concerned with immediate lettings in current conditions than future renewal possibilities. If there is a bulk discount in this sector of the market we would have expected it to be rather less than that available in the higher rental group of which we had substantial evidence. In cross-examination Mr. Foo agreed that the percentage discount would in any event be lower. In his view such a discount, if for a lesser amount, was a market factor. The evidence in support of this opinion was less strong than for the higher rental group of premises. We find that a bulk discount is a relevant element in letting negotiations for premises in the lower rental group of the subject premises but that it is less than that recognised in oases such as The Colonial Treasurer Inc. v. Cali Enterprises Ltd.

14. Returning to the determination of the prevailing market rent of the subject premises, we consider that the rents which could have been obtained for the upper floor flats in Universal Towers, at the relevant date, would have been in the region of $5,000 to $5,500 per month. In arriving at that conclusion we accept the general principle, that the higher the flat the higher the rent, applies to the subject premises. Taking $5,250 as the mean, the flats, if let individually, could be expected to realise a total rent of $78,750. After making allowance for a moderate bulk discount we determine the prevailing market rent of the subject premises at $72,000 per month. He accordingly order pursuant to Section 119K that the new rent shall be $72,000 per month.

15. We are obliged to both counsel for the very competent and helpful assistance we have received.