GRAHAM WILD v. LANDWIDE PROPERTY MANAGEMENT CO LTD

    Landlord and tenant - Part IV - application for a new tenancy - duration and rent disputed - premises allowed to deterioate while under rent control - landlord prepared to renovate to condition commensurate with premises offered for rent as implied by definition of prevailing market rent in Section 115 - averaging of rental comparables condemned - each relevant comparable should be compared separately with the subject premises - Held :(1)New tenancy granted for 2 years from 26th August 1987. (2) New rent to be $11,500.00 per month exclusive of rates but inclusive of a car park - Sections 115, 117, 119I landlord and Tenant (Consolidation) Ordinance, Cap. 7.

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Application No. : L.T. 2885/87

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DECISION

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1. This is an application for the grant of a new tenancy under the provisions of Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. The subject premises are Flat 2 at 5 Wang Fung Terrace which is near to Tai Hang Road on Hong Kong Island and overlooks the Government Stadium and the Caroline Hill area.

2. The subject flat is on the first floor of a five storey block with 4 units on each floor. It is a three bedroom flat built approximately 15 years ago and has an area of about 1650 sq. ft. The tenancy includes the provision of a car park on the ground floor. The premises had previously been subject to the rent control provisions of Part II of the Ordinance but, by virtue of amendments to the Ordinance, from August 1986 it was transferred to Part IV.

3. The rent for the new tenancy and also the duration of the new tenancy are disputed. The other terms and conditions included in the original tenancy agreement in 1975 are to remain.

4. While the rents agreed in the particular block in which the subject flat is situated are usually the most relevant comparables, it is still useful to compare rents for similar flats in other blocks in the immediate area. It is unfortunate; in this case that no such comparables have been submitted. In fact the applicant furnished no comparable lettings, but only a report to him, as a client, that his flat was worth $11,000,00 per month as at 15th January 1988. No expert was called to explain how this valuation was compiled; Nor was any account of the basis for the valuation made available to the Tribunal. The applicant did furnish a report from a firm of Consulting Engineers drawing attention to a number of defects in the flat. These defects seem to be generally structural and would normally be the responsibility of the landlord, but Mr. Tsui who is employed by the landlord company and gave evidence on its behalf, confirmed that remedial work will be undertaken in respect of most of the items listed in the report. However he considered that the electrical wiring, because it had been installed by the tenant, need not be replaced. I could not follow this logic.

5. On the evidence it would appear that little if any maintenance was done on the premises while it was subject to rent control under the provisions of part II of the landlord and Tenant (Consolidation) Ordinance, There is no legal reason for the landlord not to maintain and the obligation, if it was contained in the original tenancy agreement, should have been honoured. However it is a fact of life that rent control brings with it poor performances on behalf of landlords with respect to maintenance. If they cannot obtain a rent which covers their expenses they will naturally be reluctant to add to their losses by carrying out repairs.

6. Now the situation is different. Part IV now applies to these premises and a market rent has to be paid even though the tenant still has his security of tenure preserved by its provisions. The landlord has stated that he is prepared to renovate the flat. This renovation should include the replacement of the electrical wiring within the original concealed conduits if this is at all possible. The fact that the tenant was compelled by the indifference of the landlord to replace most of the wiring is not really relevant. The wiring of the premises would not appear to have ever been his responsibility. Mr. Tsui has said that he would check the tenancy agreement and, in his words, "If it's specified in the agreement, then the landlord will put it right." I will therefore consider the new rent on the basis that the premises is in the sort of condition one would expect of a flat presented for rental on the relevant date in accordance with the definition of prevailing market rent under Section 115 of the Ordinance.

7. The relevant date is 25th August 1987 or the date the current tenancy was terminated under the provisions of Part IV. The new tenancy is to commence on 26th August 1987. All of the comparable premises in the list submitted by Mr. Tsui and recorded as Exhibit R2, were let for a duration of 2 years. Mr. Ribeiro for the respondent opposed the applicant's submission through his counsel Mr. Pow for a periodic tenancy from month to month. Mr. Pow argued that this had been the case since the premises came outside the provisions of Part II in August 1986. The original tenancy in 1975 was for 3 years. From then up to August 1986 it has been a monthly tenancy but subject to the rental reviews every two years under Part II. Mr. Ribeiro drew attention to tenancies these days being usually for 2 years, in the same way as 3 years was usual when the 1975 tenancy was agreed. As 2 year tenancies are usually agreed these days it would seem unreasonable by reference to Section 119I which provides for the duration "to be reasonable in all the circumstances" to grant a tenancy such as this for any period other than 2 years Also, it must be remembered that this tenancy came under the Part II provisions of the Ordinance from 1978 to 1986, and has been effectively at rents which, under these provisions, apply for a duration of 2 years. Since 1986 it may have continued until a notice was served by the respondent to allow for a new tenancy to be granted, but it was never strictly on the month to month basis as suggested by Mr. Pow The new tenancy shall therefore be for 2 years from 26th August 1987.

8. The comparables used by Mr. Tsui were analysed to give the equivalent rents exclusive of car parks, management fees and rates. The most relevant, in his view, were those premises which let between August and October of 1987.

9. Mr. Tsui was asked by Mr. Ribeiro to give an average of the rates per sq. ft. shown by the rents for flats 5, 16 and 12. Flats 16 and 12 have areas of 820 sq. ft. and face the opposite direction to the subject flat. The subject flat aces northwest and has a view over the Government Stadium. Flats 16 and 12 have no view and face another building, while Flat 5 has a view similar to that of the subject flat. Flat 5 is also larger than Flats 16 and 12 having an area of 1510 sq. ft. compared to the object flat's area of 1650 sq. ft. On the evidence the most similar flat is Flat 5 which let on 1st August 1987 for 2 years. Flats 16 and 12 both let on 1st October 1987. That is after the relevant date of 25th August 1987and the market was rising during this period.

10. Mr. Tsui was not called as an expert. Mr. Ribeiro pointed out that he was only there to bring evidence before the Tribunal, although he did express an opinion that the prevailing market rent was about $13,500.00 per month based on his application of $7.79 per sq. ft, being the average rate per sq. ft. of his "most relevant" three lettings, plus the car park at $600.00.

11. This Tribunal has repeatedly drawn attention the process of averaging being unacceptable as a means of valuation and has often drawn attention to the leading judicial statement on the subject in McCathie v. The Federal Commissioner of Taxation (1944) 69 CLR 1 where Williams J repeated his objections in Daandine Pastrol Co Ltd v. Commissioner of Land Tax saying, "This method of averaging is to my mind unsound. The prices obtained at comparable sales should not be aggregated and averaged, especially when the prices obtained on sales of small areas are dealt with in this way in order to obtain the value per acre of a large area." (In the present case, we have the value per sq. ft. of small flats applied to a larger flat). "The only safe way is to compare each sale with the subject land separately. For instance, if three sales considered to be comparable of £3, £2.10 and £2 per acre are averaged, the average value would be £2.10 per acre. But if the subject was closer in value to the lands sold at £2 per acre than the other lands, the average would cause the subject land to be seriously overvalued. When such a method is applied, it can lead to grave injustice." Averaging has also been condemned by the High Court of Australia in Commonwealth of Australia v. Milledge (1953) 90 CIR 157.

12. The circumstances of this case fit the criticism of Williams J in that the compared flats are of a smaller size to the subject flat and therefore, together with the time difference in a rising market, over-valuation must result.

13. The rent obtained in respect of Flat 5 is the most comparable. The other rents are for flats in the same block, but they are all for smaller flats. Also the dates of the agreements for flats 16 and 12 are much later than the relevant date. Nevertheless taken together with the other submitted rents in Exhibit R2, they tend to support the rent for Flat 5, which shows $7.28 per sq. ft, Therefore a rate of about $6.75 to $6.50 would seem appropriate for the subject flat given that it has an inferior outlook to Flat 5 as well as being larger in area. This would give a rent of about $11,000.00 for the flat exclusive of rates and-management charges. Car parks let independently at $600 per month. However given that the $11,000.00 estimate is only approximate a total rent of $11,500.00 including the car park would seem appropriate.

14. I therefore fix the prevailing market rent as at 25th August 1987 at $11,500.00 per month exclusive of rates but including a car park. The new tenancy shall commence on 26th August 1987 and be for 2 years on the same terms and conditions as the previous tenancy save for any deposit clause which shall be altered to reflect the new rent.

15. There is no order as to costs for this hearing, but by agreement the costs for the hearing on 3.12.1987 are to be paid by the applicant to the respondent in the sum of $1,000.00.

Dated this 26th January 1988