Brecon Ltd. v. Perm Finance Co. Ltd.

LDNT 421/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Tribunal Application No. LDNT 421 of 1999

_______________

_____________

Judgment

_____________

1. Under a tenancy agreement ("Tenancy Agreement") dated 30.12.1997, the Applicant became the tenant of the premises known as House B4, Villa Cecil, 200 Victoria Road, Hong Kong (the Premises), together with 2 car parking spaces, for a period of 2 years (1.1.1998 - 31.12.1999), at a monthly rental of $120,000.

Agreement between the parties

2. The following matters have been agreed between the parties :-

1. The term of the new tenancy is for 2 years, namely, from 1.1.2000 to 31.12.2001.

2. As the Applicant no longer requires any car parking spaces from the Respondent, the monthly rental of the premises let without the car parks should be $61,500.

Other terms of the new tenancy

Clause 9, 10 and 11 of the tenancy agreement

3. In its amended Notice of Opposition, the Respondent asked for the exclusion of Clauses 9, 10 and 11 from the terms of the new tenancy. These 3 clauses provide as follows :-

"(9) The Landlord shall at its own cost and expenses carry out and complete the following works before commencement of the term of tenancy granted hereunder (save and except item (f) which shall be completed before 1st February 1997) :-

(a) To repair the premises throughout.

(b) To sand and polyurethane all parquet flooring.

(c) To repair all defects.

(d) To ensure that all electrical wiring and sockets, plumbing and gas points are in good working order.

(e) To clean the said premises throughout and hand over in a tenantable condition.

(f) To erect a Perspex safety screen around roof terrace, on the balconies and on 2 of the bedrooms, to a height sufficient to stop children climbing over; filling in the gaps on the roof terrace wall with wire to stop young children climbing through and falling to their death.

(g) To carpet all internal stairs, room on top floor and 2 bedrooms on the 2nd floor (light cream colour).

(h) To install gates at top of external stairways and metal safety gates at the roof terrace to make child safe.

(i) The servant's quarters (in particular the servant's bathroom) will be made good.

(j) The pipes on the roof terrace will be boxed to prevent tripping people over.

(k) To make sure typhoon shutters work properly.

10. The said premises shall consist of two covered car parking spaces, i.e. those directly outside House B3 of Villa Cecil.

11. The Landlord shall at its own cost and expense rectify and make good any defects in the works referred to in clause 9 hereof."

(Underlines provided)

4. Clause 9 provides for the completion of various items of work referred thereto before the commencement of the term of tenancy on 1.1.1998. Item (e) specifically refers to the hand-over of the premises in a tenantable condition. This item is simply inapplicable in the new tenancy because the premises were handed over very shortly before 1.1.1998. Therefore this term should not be included in the terms of the new tenancy. The wording in Clause 9 clearly shows that the parties to the Tenancy Agreement intended that that Clause was only applicable to the period before the commencement of the term of tenancy granted on 30.12.1997,and not to any other period. Therefore Clause 9 is not applicable in the new tenancy.

5. Since Clause 11 is connected with Clause 9, these 2 clauses are not to be included in the terms of the new tenancy to be granted.

6. The car parking spaces no longer form an issue between the parties. Therefore Clause 10 and any reference to car parking spaces in the Tenancy Agreement should not be included in the new tenancy.

The application for the execution of repair work

7. In its Notice of Application, the Applicant also applied for an order that the Respondent shall carry out the works as referred to in a letter deter 19 November 1999 from the occupants of the said premises to the Respondent.

8. Section 8(8) of the Lands Tribunal Ordinance provides that in an application for a new tenancy under Part IV of that Ordinance, whether or not it grants any such application, the Tribunal shall have jurisdiction to make orders for the payment of rent, mesne profits, including interim payments of rent and mesne profits, and for the payment of any other money which is due under the tenancy or sub-tenancy. Therefore the Tribunal has no jurisdiction to entertain the Applicant's application in respect of the carrying out of repair works. In any event the Applicant did not pursue the matter. Therefore this application is refused.

Dispute on the level of PMR by the parties

9. The parties have agreed that the term of the new tenancy is for 2 years commencing from 1 January 2001 and that the monthly rent of the premises without the car parks should be $61,500. However, they cannot agree on the basis upon which the prevailing market rent (PMR) is to be assessed. The Applicant in the final submission stated that "using the agreed figure of HK$61,500 as a starting point, the remaining issue to be resolved is the matter of defects at the Property. Specifically, this is a question of by how much the agreed PMR of HK$61,500 should be reduced to take into account the state of disrepair of the Property." Similarly, the Respondent agreed with the Applicant on this point and submitted that "there has been a dispute as to whether the surveyors' assessment has already taken into account the defects allegedly found at the Property."

10. The Applicant submitted that in the estimation of PMR by both experts, Mr. Paul L. Brown called by the Applicant and Mr. James K. T. Cheung called by the Respondent, they had not taken into account entirely or sufficiently the state of disrepair of the said Premises. On the contrary, the Respondent submitted that both surveyors were fully aware of the defects in the Premises and should have made allowance for the defects in arriving at their estimates of the PMR for the Premises.

11. In the light of the above differences by the parties, we decide that despite their submission that the parties had agreed on "the monthly rental of the premises let without the car parks", there was in effect no agreement between the parties regarding the PMR as defined by Section 115 of the Landlord and Tenant (Consolidation) Ordinance. The Tribunal has to determine the PMR for the Premises at the relevant valuation date of 31 December 1999.

Valuation by Mr. Brown, the expert surveyor called by the Applicant

12. Both expert surveyors used the same direct comparison method of valuation. Altogether a total of 7 comparables were considered. Between them, they had 5 common comparables. The details of the rents of the comparables and analysis were set out in their reports (Mr. Brown's report as Exhibit A-1 and Mr. Cheung as Exhibit R-1).

13. Mr. Brown considered his Comparable 1, House B3 in the same estate, Villa Cecil to be the best comparable. It is so similar to the Premises that he had treated it separately from the other comparables. He commented in the section on "Comparable Comments (page 6 of Exhibit A-1) that for House B3, "like the subject, it has no pool and in very similar condition. It suffers from the (Villa Cecil) renovations and construction traffic at the front of the house, but does not have the construction site to the side of the property or the problem of the septic sewage tank under it. It is by far the best comparable." He calculated the unit rate of the comparable House B3 to be $244 per sq.m. and that the average pattern of the remaining comparables, with the exception of Comparable 6 which was dissimilar to the Premises, was remarkably similar to that of House B3.

14. Mr. Brown sought to make two allowances to House B3, i.e., a downward adjustment of 5% each for the adverse effects of the septic tank and the adjacent construction site on the Premises before arriving at his estimated PMR of the Premises. This was estimated at $67,500 per month, on the basis of exclusive of rates, management fees and air conditioning charges but inclusive of 2 car parks.

Valuation by Mr. Cheung, the expert surveyor called by the Respondent

15. On the other hand, Mr. Cheung made various adjustments, where appropriate, to all his comparables, including the adjustments for condition, seaview, environment, type of building, age and facilities and adopted the average of the adjusted unit rates of all 6 comparables, at $237.67 per sq.m. for the assessment of the PMR. This Mr. Cheung estimated to be $77,000 per month, on the similar basis as Mr. Brown.

16. Mr. Cheung did not have the benefit of knowledge of Mr. Brown's best comparable, House B3. As a result, Mr. Cheung had not used and analysed House B3. He had made various adjustments to his comparables in order to put them to the same condition as the Premises. These adjustments were warranted in order to "compare like with like". They included a flat downward adjustment of 10% to reflect, "the problem of water penetration" suffered by the Premises.

17. Therefore, although Mr. Cheung stated in page 7 of his report that "in the course of valuation, we have assumed that the internal condition of all comparable properties are reasonable and similar to that of the subject", the statement is contradictory to Mr. Cheung's opinion for the need to adjust downwards the rents of all comparables by 10% in order to reflect the internal condition of the Premises. We believe what Mr. Cheung had assumed in the valuation of the Premises was that "the internal condition of all comparable properties are reasonable", as most valuation surveyors do if they do not have the rare opportunity of inspecting the interior and exterior of all the comparables of any valuation exercise. However, Mr. Cheung accepted that the internal condition of the Premises was not reasonable or similar to all comparables because the Premises was suffering from the problem of water penetration. Mr. Cheung indeed estimated that after making a downward adjustment of 10% to each of the comparables, the rents of all comparbles would then be on a similar basis as that of the subject property, as far as internal condition of the properties are concerned.

18. There is therefore no doubt that Mr. Cheung had reflected the state of the internal condition of the Premises in his valuation, in terms of the problem of water penetration. Whether the 10% downward adjustment is appropriate and sufficient is another matter. Also, whether other defects or problems (for example, structural problem as alleged by the Applicant) exist and apparent to a prospective tenant and whether, in the assessment of the PMR as defined in the Ordinance, further downward adjustments are warranted to reflect the existence of these other problems is another matter.

Determination of the PMR by the Tribunal

19. It is common ground that the Premises suffered from the problem of unusual water penetration and the associated problems caused by the water penetration.

20. The parties have quoted a number of previous cases on the determination of PMR in their submissions. However, the Tribunal decides that the outstanding issues in the present application are largely a matter of facts and valuation. The issues should best be dealt with on the evidence adduced in the present application.

21. The Tribunal is satisfied that the best opinion of value was that given by Mr. Brown in his report dated 15th May 2000 (Exhibit A-1). He had relied on the best comparable House B3, a similar house next door to the Premises, being on the same front row of houses in the same estate of Villa Cecil. He had found that the unit rate of this comparable was supported by the other comparables after making necessary adjustments to those comparables. Finally, he had only made two adjustments to the best comparable House B3 before arriving at his estimate of the PMR. Therefore, we find that Mr. Brown's valuation is more reliable as it is less susceptible to subjective adjustments than Mr. Cheung's. Although subjective adjustments cannot usually be avoided in any valuation, it is generally true that the closer the comparbles, the more weight should be attached to the resulting valuation and that the lesser the number of adjustments, the more reliable the valuation. Hence, we accept Mr. Brown's valuation of $67,500 per month, which after deducting the agreed rental charge of $6,000 payable by the Applicant to the owner of the two car parks, gives a figure of $61,500 per month. This, incidentally, is also the "agreed rent" of the parties as stated in the final submission.

22. We find that Mr. Brown had not, in his assessment of the PMR, taken any account of the defects or dilapidation of the Premises. As shown in the extract of transcript obtained by the Applicant of the June Hearing and reproduced by the Applicant in paragraph 20 of the Applicant's submission, Mr. Brown in his evidence stated that "My analysis is on my expectation of findings which I generally expect to find in any of the houses in this development. However, I am aware and I have seen that the subject property has various defects over and above those normal defects which I would expect to find but as in my understanding of the application of the Ordinance, I have assumed that at the date of the valuation, the premises are in a full and tenantable condition. Therefore I have not taken into account those additional defects... " (underline added) We find the above statements to be compatible with the rest of Mr. Brown's report and his other evidence given in the hearing.

23. Therefore, in the present case, we accept Mr. Brown's statements that he had not had the opportunity of inspecting the interior of the comparables and comparing those with the Premises and made adjustments to reflect the differences in the internal condition of the Premises and the comparables. This is because Mr. Brown had made the inherent assumption (albeit an incorrect one) that in accordance with the normal application of the Ordinance, the Premises is in a good and tenantable condition. In this respect, we agree with the Respondent that there is nothing in Section 115 of the Ordinance which requires the Lands Tribunal to assume that the premises are in tenantable condition while determining the level of the prevailing market rent.

24. In the circumstances, we agree with the Applicant that from Mr. Brown's estimate of $61,500, deductions should be made to reflect the defects or dilapidation of the Premises and the compensation to the tenant for the inconvenience caused by the carrying out of necessary repairing works.

25. As to the quantum of the allowance for the defects or dilapidation of the Premises over and above the normal defects of the comparables, we accept that one method is to base on the estimated cost of carrying out the repairing work and amortising the cost over the period of tenancy. We had had the benefits of receiving evidence from two experts (a structural engineer and a building surveyor) as to the repairing works required and the estimated costs of carrying those works made by their contractors. We decide to adopt a figure somewhat in between the two estimates. This gives a figure of about $240,000. We disagree with the Applicant that such a sum should be amortised for a period of two years, the duration of the proposed new tenancy agreed by the parties. We decide that upon completion of the repairing works, it is reasonable to assume that these could have an effect for the duration of 4 years. Thus, we divide the sum of $240,000 by 48 months which gives a figure of $5,000. Deducting this from the net rent of $61,500 gives a figure of $56,500. In addition, a discount to reflect the inconvenience caused to the Applicant is considered to be reasonable. Having regard to the scale of works involved, a period of one month's rent is adopted. This we estimate to be $2,260 ($56,500 x 24/25). Hence, the PMR of the Premises, after making these two adjustments, is in the sum of $54,240 which we will round to $54,200.

26. Thus, we determine the PMR of the Premises, for the new tenancy commencing from 1 January 2000, on the basis of exclusive of rates, management fees and air conditioning charges and exclusive of car parking spaces to be $54,200 per month. The other terms of the new tenancy remain the same as in the former tenancy agreement (apart from Clauses 9, 10 and 11 which are to be deleted).

Orders

1. By consent, new Tenancy for two years commencing from 1st January 2000;

2. New rent at $54,200 per month (exclusive of rates, management fees and air conditioning charges and exclusive of car parking spaces); leave to the Respondent to pay to the Applicant rebate of the interim rent already paid by the Respondent within 14 days from today;

3. Deposit to be adjusted pro-rata with the new rent; leave to the Respondent to pay to the Applicant the adjusted amount within 14 days from today;

4. Clauses 9, 10 and 11 in the former tenancy agreement are not to be included in the terms of the new tenancy to be granted;

5. Other terms of the new tenancy to be the same as in the former tenancy agreement;

6. No order as to costs.