CHEN, JEFFERY HUI v. HUMPHREYS ESTATE (DOUGLAS) HOLDINGS LTD

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECICAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO.LDNT 352/2001

_______________________

Reasons for Judgment

_______________________

1. The applicant applied for a new tenancy. At the hearing parties could not agree on the rent of the new tenancy but managed to have all other disputes resolved between themselves.

2. The experts called by the parties used the usual approach to assess the prevailing market rent. They selected certain comparables and worked out the unit rate making allowances and adjustments for the differences between the comparables and the subject flat. There were certain minor disputes about these allowances and adjustments. The main dispute was the choice of comparables.

3. The subject flat was one situated in Tower 4 of a high rise estate consisting of four tower blocks. The comparables used by Ms Sat were all in Tower 4. In terms of time and location her choice was appropriate. There was no dispute about this. However Mr. Cattermoul, the expert called by the applicant, used only four comparables in Tower 4 and two in Tower one. The reason for his choice of comparables was that Tower 4 was in effect under single ownership and the monopoly element was present in Tower 4 letting.

4. The concept of monopoly is very elusive. On the one hand every owner is a monopolist of his own flat if he could make his flat unique. On the other hand a monopolist does not necessarily have to price his flats higher than the market rent. One motivation to keep the price close to market rent or even lower than the market rent was to keep off potential competitors.

5. Therefore the mere fact that Tower 4 was under a single ownership cannot support the conclusion that the respondents were the monopolist in Tower 4 market. Nor it was a proper approach to divide the letting market in the same estate into two, one for Tower 4 and one for the other three Tower Blocks.

6. The vacancy rate for Tower 4 at any one time accordingly to Ms Sat was about 5%. There was no evidence as to the vacancy rate for other three blocks. It is common knowledge that certain vacancy rate exists at any time in the letting market for whatever type of flats. It is not within the competency of valuation expert to judge what the vacancy rate would be in the monopolistic market.

7. Mr. Cattermoul made certain analysis about the general rental levels in these four tower blocks. I accept his conclusion that the rental level of Tower 4 was higher than the other three tower blocks. As he did not allow for the fact that Tower 4 was run as serviced apartments, the higher rental alone cannot support his conclusion that there must be a monopoly element in Tower 4 letting. It is common sense that in order to be monopolist in the market the respondents have to make the their flats substantially different from others. The respondent in fact had made letting of their flats substantially different from those in other blocks. They let out their flats as serviced apartments providing a range of paid service and an in-house maintenance team. That being the case the higher rental level cannot be solely attributed to the monopolistic element as alleged or at all.

8. These two factors, vacancy rate of 5% and higher rental level in Tower do not either alone or taken together in the circumstances of the case establish that the respondents were the monopolist.

9. In fact there is no rule that a monopolist should be penalised for his effort in making his flat in greater demand and more desirable than the others. Furthermore this Tribunal should not make the assessment of market rent by assuming what the market rent would be if all his vacant flats would have been let out.

10. The real issue involved in the present case is what is the prevailing market rent of the subject flat at the relevant date and not where the nature of the market lies, in the pure economics sense, between a perfectly competitive market at the one end and a monopoly market in the other. There is no need to consider the wider concept whether the respondent was a monopolist or not. To take an extreme example, if there had been genuine numerous bids for the subject flat at the rent suggested by Ms. Sat, there would be the best evidence of the prevailing market rent. In such a case, there would not be proper for the Tribunal to consider whether the landlord was in control of the market as a monopolist or otherwise.

11. Normally vacancy rate in the market would serve no useful purpose in assessing the market rent of the subject flat. One reason is that it is usually not known why the owners of vacant flats preferred to leave their flats vacant. For one reason or the other these flat are not even put on the letting market as the owners had no intention to rent it out. In any event it would difficult if not impossible to assess quantitatively the effect of the vacancy rate on the market rent. Facing this difficulty the common practice is to ignore it and to assess rent by choosing comparables and making necessary adjustment.

12. In the present case the vacancy rate of Tower 4 was about 5% which amounts to about 10 flats. It can be safely assumed that the respondents would have let out at least one if not more of it at the rental level suggested by Ms Sat. This the respondent was not able to do within a reasonable time of the relevant date. If the subject flat were to be put on the market it is doubtful that there would be a willing tenant paying the rent at a level suggested by Ms Sat. I am therefore of the view that the market rent has not been shown to be at such level. It must be at a lower level.

13. In Cruden's Land Compensation and Valuation Law in Hong Kong (2nd edition) at page 268, the term of monopoly element was used to describe the situation in which the landlord is in a position to let out his flat at a rent higher than market rent. The term " monopoly " might be a misnomer. The principle is clear. When there is a evidence to show the landlord can let out his flats in the same block at higher than market rent, it would be safer to check by looking at comparables elsewhere. By analogy, in the instant case when the market rent arrived at using only comparables in Tower 4 as Ms. Sat had done, did not reflect the true market rent, there was a need to look elsewhere. It is not for Tribunal to start from scratches on the valuation. Neither expert has put an adjustment on the fact that the Tower 4 was run as serviced apartments. Ms Sat simply maintained that the higher rental level was all due to the better quality of the lettings in Tower 4. This I have rejected for reasons already given. In the particular circumstances of this case, the choice of comparables by Mr. Cattermoul would be more reliable and appropriate. He chose four in Tower 4 and two in other Towers. After allowing for slips in calculation the unit rate per square metre works out to be $439.5(exclusive of rates)

14. Mr. Cattermoul suggested a further reduction allowing for landlord's monopoly. He did not give any reasons for the amount of reduction. The assessment exercise is never an exact science. This I can understand. However, he did not take into consideration the fact that Tower 4 was run as serviced apartments. By using comparables in other tower blocks which comparables would not have been appropriate but for the need to guard against "monopoly element", the effect of "monopoly element" on the prevailing market rent would have already been reflected in his assessment. A further reduction on that account would have the same effect double-counted.

15. There are some other minor disputes about the adjustment made by Mr. Cattermoul in respect of the comparables. As I have said the assessment is not an exact science, it is not right for me to determine the rent by piecing together the bits of valuation evidence of the experts. The overall estimate of the expert has to be looked at. Even though I have no doubt that Ms Sat was honest in her view about those adjustments, I find that it is only natural for expert to be different on those items. It is not unreasonable for Mr. Cattermoul to make those adjustments as he did. Likewise I cannot think it right to allow Mr. Cattermoul to seize the opportunity to revise downwards for his estimate by 2% alleging that Ms. Sat made such allowance for reasons that the present case is one for renewal of tenancy. Mr. Cattermoul made his overall estimate in his report. He was aware of the condition of the subject flat. To maintain the integrity of his estimate, no revision should be allowed.

16. To sum up I accept the estimate of Mr. Cattermoul except that no separate allowance should be made for "monopoly element". The unit rate should be $439.5 and rent should be $45000(exclusive of rates).

Dated 8th February 2002

Dated 8th February 2002