Geologistics Ltd. v. Sun Wah Marine Products (Holdings) Ltd.

LDNT 283 OF 2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 283 OF 2001

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J U D G M E N T

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1. The Applicant and the Respondent are respectively the tenant and the landlord of the Subject Property known as House B, Seaview Garden, 26 Horizon Drive, Chung Hom Kok, Hong Kong. On 21st September 2001, the Applicant applied to the Lands Tribunal ("the Tribunal") for the granting of a new tenancy. The Respondent raised no objection to the application.

2. At the hearing on 9th November 2001, the parties agreed that the new tenancy would be a 2-years new tenancy which was to commence on 1st October 2001. The only issue for the Lands Tribunal to decide was the amount of the prevailing market rent (PMR) of the Subject Property. For this purpose, both parties presented to this Tribunal valuation reports prepared by them, marked as Exhibits A2 and R1 respectively.

3. The Applicant's case

In its report Exhibit A2, the Applicant expressed the view that the PMR of the Subject Property should be at the same level as the existing Tenancy Agreement dated September 1999, namely, $100,000 per month, because of the following factors: -

"1. Taking the current state of the Hong Kong Economy and the depressed Housing Market into consideration, a 20% increase of the monthly rental amount is not reasonable.

2. One should also not overlook the fact that we are paying above average Electricity, Gas and Management Fees.

3. The deteriorating states of the outside Paint of the House, the common Pool Area, as well as other overdue needed maintenance work.

4. The two pending construction sites immediately next to the House B.

5. The fact that we can find similar accommodations in the immediate neighborhood at the current Tenancy Contract level."

3.1 Factor 1

The Applicant included in its report a portion of a report compiled by FPD Savills (Hong Kong) Limited, which made the following comments on the market situation of the leasing of luxury premises: -

"Even before September 11th, the market was subdued and some corporates had begun downsizing. It is probable that the US was in recession before the terror attacks which, after a 2 to 3 week hiatus, will serve to accelerate rental decline. When vacancies do begin to rise, we expect rents to fall most in the HK$80,000 to HK$130,000 per month band. Landlords are already countering this trend and are making efforts to keep tenants and as a result vacancies are stable for the time being.

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Average luxury rents fell by 5.7 per cent over on Q3/2001, which is the largest decline since Q2/1999. By district, both Pokfulam and the Peak experienced the severest drop of 6.9 per cent, while Happy Valley recorded only a 3.3 per cent decline. Luxury rents overall have fallen by 7.9 per cent year-to date.

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Luxury Rental Movements over Q3/2001 (+/- per cent)

Overall	Mid-Levels	Pokfulam	The Peak	Happy Valley/Jardine's Lookout	Southside/ Shouson Hill
-5.7	-5.7	-8.9	-6.9	-3.3	-5.0

"

3.2 Factor 2

The Applicant has not shown what should be the average fees for electricity, gas and management fees, how much it was paying above the average fees, and how the above-average payments (if any) should affect the PMR. In any event, the payments of electricity, gas and management have no bearing on the issue of ascertainment of the PMR. I attach no weight to this factor.

3.3 Factor 3

The hearing on 9th November 2001 was adjourned to 18th December 2001 so that the Respondent could carry out all the maintenance work. When the hearing resumed on 18th December 2001, the Applicant informed me that the maintenance work had been completed to its satisfaction. Therefore, when ascertaining the PMR, I need not consider this factor.

3.4 Factor 4

There is a big construction site in the immediate vicinity of the Subject Property. 10 months prior to 9th November 2001, no construction work was carried on in this site. But prior to this period, work had been carried out in this site for 1 year. During this period, the construction work produced a lot of dusts and noises. On 18th December 2001, there was still no activity in this site. In my judgment the disturbance, e.g. dusts and noises, created during the 1 year period, took place prior to 1st October 2001. The site has been left dormant for a long time, and it is not known whether construction work will resume in the near future. In the absence of evidence, I do not consider that this factor should cause any adjustment in the ascertainment in the PMR.

3.4.1 The second site is a renovation site which is near the Subject Property. There was total renovation to a building at this site for 7 months prior to 9th November 2001. By 18th December 2001, the renovation work had been completed. During the renovation period, noises were created when construction tools were used. The disturbance period lasted for about 21/2 months, e.g., from 1st October to 18th December, 2001. I would give a 0.5% downward adjustment in the PMR for the short-period disturbance. The period of disturbance during the expired tenancy period (prior to 1st October, 2001) should not be considered for the purpose of ascertaining the PMR of the new tenancy period.

3.5 Factor 5

The fact that the Applicant can find similar accommodations in the neighbour is not a factor which should be taken into consideration when ascertaining the PMR.

4. The Applicant produced evidence showing the "asking prices" of a number of premises. I attach no weight at all to such evidence, as these asking prices are not actual contract prices showing the rentals of properties leased out.

5. The Respondent's position

The Respondent is of the view that the PMR of the Subject Property as at 1st October 2001 was in the sum of HK$123,000. Its report included a schedule (as shown below) on the rental information prepared by the Rating and Valuation Department.

Legend: TERR = Terrace SR = Side roof CSWP = Communal swimming pool YD = Yard TR = Top roof

5.1 No. 28 Horizon Drive is the only neighbour of the Subject Property for comparison purpose. Its orientation, age and view are almost identical to the Subject Property except that it is smaller in size. The Respondent is justified in saying that this is the most suitable comparable for ascertaining PMR.

5.2 In assessing the PMR of the Subject Property, the Respondent in its report stated: -

"We note that the Year 2001 rateable value (effective on April 2001) of the Subject Property is HK$1,561,200. This is equivalent to a monthly rental value of HK$130,100 and a monthly unit rate of HK$376.23 per square metre. On the other hand, the rateable value of the Comparable is HK$1,321,200. This is equivalent to a monthly rental value of HK$110,100 and a monthly unit rate of HK$387.13 per square metre. ...................... The rateable value of the Comparable is approximately 2.9% higher than the property mainly due to its smaller size and larger terrace area ............

The rental value of the Comparable is HK$110,000. This is equivalent to a monthly unit rate of HK$386.78 per square metre."

5.3 The Respondent did not show how a rateable value could be turned into the equivalent a monthly rental value. A rateable value is determined under the provisions Rating Ordinance. It does not serve the purpose of ascertaining the PMR under Part IV of the Landlord and Tenant (Consolidation) Ordinance.

6. Adjustments

The market adjustment is -5%.

6.1 The Comparable is 61.4m2 (345.8 m2 -284.4 m2) smaller in area than the Subject Property. Its unit rental should be higher than that of the Subject Property because the bigger the property to be let out, the bigger amount of rental it would attract, and the landlords are always willing to accept a lesser unit rental in order to let out the property. I would give an adjustment of -2% for this factor.

6.2 The terrace of the comparable is bigger than that of the Subject Property by 36.7 m2 (57.2 m2 - 20.5 m2). I would give an adjustment of -1% for this factor.

6.3 The Comparable is a new letting. Usually the landlord would see that a property is reasonably renovated before it is let out. But this would not apply in a renewed tenancy. The usual practice of the Tribunal is to give an adjustment of -3%. The Subject Property has better internal design, condition and quality of finish than the comparable. I give 2% adjustment for this factor. The resulting adjustment is -1%.

6.4 The reported rent of the Comparable included domestic appliances. The details of such domestic appliances are not known. But for a luxury flat, the amount of money spent in the provision of such domestic appliances should not be a small sum. Although the Applicant was provided with furniture in the Subject Property, the list of furniture attached to the tenancy agreement shows that the furniture provided are mere basic furniture. They are not domestic appliances as such. For this factor, I make an adjustment of -2%.

6.5 For the construction site factor, I make an adjustment of -0.5%.

6.6 The total adjustment is -11.5%. The adjusted unit rental of the Comparable is HK$342.299 per m2 (HK$110,000 x ^88.5/100÷284.4). Hence the PMR of the Subject Property per month will be HK$118,366.99 (HK$342.299 x 345.8), which is rounded up to $118,300.

7. I impose the following orders: -

1. New tenancy for 2 years, commencing from 1st October 2001;

2. New rent at HK$118,300 per month (exclusive of rates and management fees);

3. Deposit to be increased pro-rata in accordance with the new rent within one month;

4. Other terms of new tenancy the same as in the current tenancy;

5. No order as to costs.