Concept Asia Ltd. v. Yuen Kit Man Florence

LDNT147/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 147 of 2000

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JUDGMENT

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1. Background

The Applicant is the tenant and the Respondent the landlord of the subject premises known as Flat E2, 1/F., (also known as Flat E on 1st Floor) of No. 12 Broadwood Road, Happy Valley, Hong Kong ("the Premises"). The parties agreed that the Tribunal should grant a new tenancy for a term of two years commencing from 1st April 2001. The only outstanding issue was the amount of the Prevailing Market Rent ("PMR") as at the relevant valuation date of 31st March 2001. The Applicant estimated the PMR to be $21,000 per month, on the basis of exclusive of rates and management fee whilst the Respondent relied on her expert's opinion of the PMR, in the sum of $25,800 per month, on the same basis.

2. Evidence from the Applicant

Mr. Poole, Charles Geoffrey, a director of the Applicant gave evidence that he used the Applicant, Concept Asia Ltd., for the leasing of the Premises for his occupation. The first tenancy commenced in April 1997 at a rent of $33,000 and the second tenancy, in April 1999. Under the second tenancy, the rent for the first year and second year were reserved at $25,000 and $26,000 respectively, all on exclusive of rates and management fee basis. Mr. Poole opined that the rents had considerably fallen during the term of the second tenancy. He also considered the development at No. 12 Broadwood Road to be quite unusual because many flats there were left vacant. He was not aware of other comparable development in the vicinity of the subject development. He understood from his neighbour that there was recently a determination of the PMR of Flat E3 by the Lands Tribunal. He therefore produced various exhibits, including the Judgement of Flat E3, copies of tenancy agreements of Comparables Flat E4 and Flat B4, both of which were considered in the hearing for Flat E3.

3. Mr. Poole acknowledged that the landlord was a good landlord and the Premises a nice flat. However, he also informed the Tribunal that in the course of his tenancies, he had undertaken to install two new bathrooms and carried out considerable improvements. At this juncture, the Tribunal advised him that the definition of the PMR under the Ordinance requires the Tribunal to consider the rental value of the Premises as at the relevant date. The Tribunal would not distinguish between the parties who had made the improvements to the Premises, if any, in the past and made relevant adjustment. After hearing this, Mr. Poole agreed not to give evidence further on the aspect of his improving the Premises in the past.

4. Mr. Poole submitted that for the reason stated in the Tribunal's Judgment for Flat E3, the Rateable Value of the Premises should not be used as the basis for the determination of the PMR.

3. 5. In Exhibit A6, Mr. Poole summed up his analysis of his comparables. He adjusted the rents of Flat E4 and Flat B4 for the management fee, rates, car parking and the value of the roof, and arrived at after adjustment net rents of $19,152 and $18,914 respectively. As for Flat E3, the Tribunal its PMR in the sum of $20,600. Also, Mr. Poole produced a copy of a letter (Exhibit A7) from the agent for the landlord of Flat B2 that show that the tenant was offered a rent of $20,952 in June 2001. Therefore, Mr. Poole estimated that the PMR for the Premises to be $21,000 per month, on net basis.

6. Evidence from the Respondent

The Respondent, Ms. Yuen Kit Man Florence gave evidence in person. She also agreed that Mr. Poole had been paying the monthly rent punctually and they had got along very well. Indeed, in 1999, when the tenancy was due for renewal, she agreed to reduce the rent without asking for any surveyor's report or referring the case to the Tribunal. She disagreed with the Applicant's estimate because she thought that each flat was different. In particular, she as a landlord found that Flat E4 and Flat E3 was inferior to the Premises. She produced Exhibit R8 which contained many photographs showing the differences between the Premises and the comparable flats, E4 and E3. She also gave evidence that with permission from the landlord of flat E4, she was able to inspect the inside of that flat, which had been left vacant for some time after the tenant had moved out. On the other hand, she admitted that she had not been able to inside of the Flat E3. However, according to her knowledge, there was water seepage inside Flat E3. She further knew that there was no master bedroom in Flat E3, whilst there was such a master bedroom in the Premises.

7. Ms. Yuen also produced a page of SCMP dated 9th May 2001 (Exhibit R7) that show the transaction prices and rents of luxury residential flats in Hong Kong. For Happy Valley area, the unit rental rate was quoted to be $25 per sq. ft. Therefore, based on the saleable area of some 1,200 sq. ft. for the Premises, Ms. Yuen said that the market rent should be about $30,000 a month. Nevertheless, Ms. Yuen submitted that she was not seeking $30,000 as the PMR but would ask the Tribunal to accept her expert witness's evidence.

8. Evidence from the expert surveyor

Ms. Yuen called for the evidence of Mr. Ringo C.C. Lam, Chartered Surveyor. Mr. Lam produced a valuation report (Exhibit R9), which show that he valued the Premises at the rent of $25,800 per month, on the basis of exclusive of rates and management fee. In arriving at his valuation, Mr. Lam had analysed six rental comparables provided to him by the Rating & Valuation Department. After adjustments, the six comparables show adjusted unit rates of between $181 and $274 per sq. m. Mr. Lam calculated that the average of the six adjusted unit rates was $231 per sq. m. Applying this to the saleable area of the Premises quoted by the Rating & Valuation Department, or 111. 7 sq. m., he arrived at a figure of $25,757, which he rounded to $25,800.

9. Choice of the best comparables for the Premises

The Tribunal agrees with the Applicant that the Rateable Value of the Premises should not be used as the basis for the determination of the PMR for the Premises. The Tribunal decided in the case of Flat E3 that the Rateable Value should not replace the direct rental market evidence in any exercise of assessing the prevailing market rent ( ).

10. Also, in the case of determination of PMR for Flat E3, the Tribunal decided that "it is inappropriate to compare the asking rents of flats in some other much newer developments in the Happy Valley area with the Premises." This basic principle applies to the present case as well. Therefore, it is inappropriate to adopt the figure of average rent of flats in Happy Valley area as quoted in the SCMP and produced by the Respondent during the hearing.

11. The Tribunal finds that the six comparables provided by the Rating & Valuation Department were all aged developments, all built in the mid to late 1950s and 1960, similar to the subject development. However, the Tribunal notes that Mr. Lam had considered it appropriate to adjust his comparable no. 2 and no. 4 by as much as 34% and $40.5% respectively! In addition, the adjusted unit rate of his comparable no. 1 and no. 4 are about 50% higher than the adjusted unit rate of his comparable no. 5, one of the two comparables in the subject development. Therefore, Mr. Lam's comparable no. 1, 2 and 4 are very poor comparable, by any measure. As to his remaining comparable, comparable 6, Mr. Lam decided that he had to adjust it by as much as 19% upwards. Therefore, all his adjustments for comparable 1, 2, 4 and 6 are much higher than his adjustments, of 11% and 13% respectively, for his comparable no. 3 and no. 5, the two flats in the subject development,

12. In the course of the hearing, the Respondent produced a copy of tenancy agreement of Flat C3 (Exhibit R3). The Tribunal could not understand why in the light of this new evidence, Mr. Lam did not choose to analyse and include this comparable, which must be much more relevant than 4 of his chosen 6 comparables in Exhibit R9. The Tribunal wishes to state that in any valuation submitted to the Tribunal, the parties and especially their experts should pay, in the first instance, special attention to the relevance of the comparables, notwithstanding that the comparables were provided by an independent Government department. This is an essential step in any valuation by direct comparison method, one step that should not be ignored by any surveyor.

13. The Applicant submitted that the Tribunal should value his premises based on the comparables of Flat E4 and Flat E3. However, the Tribunal finds that as there are now some other more recent comparables, the comparable transaction of Flat E4, with the tenancy commencing from 8 February 2000, should be abandoned as it is too far away from the valuation date for the Premises. Similarly, although the PMR of Flat E3 was determined by this Tribunal in December 2000 and again, revised upon review in March 2001, the new tenancy for that flat actually commenced from 1st October 2000. By contrast, the tenancy for the Premises was agreed to commence from 1st April 2001. There is a difference in time of 6 months. More importantly, since it was only a determination by this Tribunal, and in the presence of more recent actual market transactions, the Tribunal decides that the Tribunal's determined rent for Flat E3 should not be relied on in the present valuation as well.

14. In general, the Tribunal decides that where there is sufficient rental evidence in the same development, the Tribunal should only consider those comparables in the same development, particularly when the subject development is unique in terms of age and condition. Under the circumstances, the Tribunal decides that from the evidence available in the present application, the best comparables for the Premises should be drawn from the actual rental transactions that took place in No. 12 Broadwood Road in recent months. These are the rents for Flats A1, B4 and C3. The details of these tenancies including the adjustments to arrive at the PMR of the Premises, on the basis of exclusive of rates and management, and exclusive of the value of the roof (assumed equal to 1/10 of the value of the area below) and the car park (assumed to worth $1,000 per month), are tabulated below:

Table 1- Details of comparable rents

15. Analysis and adjustments of the comparables

Mr. Lam for the Respondent considered that for the comparables in the subject development, adjustments should be made in respect of the factors of floor level, view and chattels. In theory, the Tribunal agrees with him that these are relevant factors for which adjustments might be warranted.

16. As for floor level, the Tribunal considers that +3% is warranted for Flat A1 which is situated on the ground level. For the upper floor flats, Flat B4 and Flat C3, the Tribunal is of the view that the disadvantages of having to walk up the stairs is compensated by the benefits of occupying a higher floor. Nil adjustment is required.

17. Regarding the factor of view, the Tribunal agrees with the Respondent and the expert surveyor that the view from the Premises is better; hence, +5% adjustments for Flat A1 and B4 and +7.5% adjustment for Flat C3, which is facing neighbouring buildings, are considered to be appropriate.

18. Finally, the Tribunal disagrees with Mr. Lam that +5% adjustment for chattels should be made to the comparables to reflect the type of landlord's chattels in the Premises.

19. Estimation of the PMR by the Tribunal

The above adjustments adopted by the Tribunal are summarised below. At the end, the PMR for the Premises is estimated by multiplying the saleable area of the Premises with the after adjustment unit rate for each comparable.

Table 2 - Adjustments of comparables and estimation of PMR

20. Based on the above estimates, the Tribunal determines that the prevailing market rent of the Premises, on the basis of exclusive of rates and management fee, is $22,000 per month.

21. Orders

1. By consent, new tenancy for 2 years commencing from 1st April 2001;

2. New rent at $22,000 per month (exclusive of rates and management fee); leave to the Respondent to pay the Applicant the over-payment of rent, if any, within 1 month from today;

3. The deposit for the new tenancy shall be adjusted pro-rata in accordance with the new rent; leave to the Respondent to pay the Applicant the adjusted amount within 1 month from today;

4. By consent, the other terms of the new tenancy shall be the same as in the previous tenancy agreement;

5. There be no order as to costs.