Foreign Dimension Ltd. v. Nam Mui (Kin Kee) Co. Ltd.

LDNT63/2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 63 of 2001

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JUDGMENT

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Background

1. The Applicant is the tenant and the Respondent the landlord of the subject premises known as 4th Floor and Car Parking Space No. 1 on the Ground Floor of No. 64 Conduit Road, Hong Kong ("the subject premises"). The subject premises is held under a tenancy for a term of 2 years commencing from 11 February 1999 and expiring on 10 February 2001 at a monthly rent of $33,000 exclusive of rates and management fee.

2. The parties mutually agreed the granting of a new tenancy for a term of two years commencing from 11 February 2001 on the same terms as in the previous tenancy agreement with the exception of the rent, the deposit and the commencement date. The parties could not agree on the amount of prevailing market rent (PMR) under the new tenancy. The Applicant estimated the PMR on exclusive basis to be $32,000 per month while the Respondent estimated it to be $36,000 per month.

3. The subject building is a 5-storey apartment building completed in 1961. It was served by staircase only, with car parking facilities on the ground level. The domestic floors in the building can be accessed from the car park or from the pavement of Conduit Road which is near the 2nd floor level. There are automatic gates at both entrances. The owner of the subject premises owns the entire building. Garbage disposal and cleansing services to the common parts are provided by an amah employed by the owner. The tenants have to pay a monthly management fee. Other than that, there is no 24-hour security and caretaker's services.

Applicant's case

4. Mr. Schvartzman, Frederic, the representative of the Applicant gave evidence himself. He produced a schedule of reported rents (Exhibit A1) from the Rating & Valuation Department, various photographs showing the interior and exterior of the subject premises as well as the various side views from the subject premises (Exhibits A2 to A12) and two copies of the classified advertisements of the South China Morning Post dated January 15, 2001 (Exhibit A13).

5. Of the 6 comparable rents shown in Exhibit A1, he said the relevant comparables were those from the flats in the same building. They are summarised below:-

6. He gave evidence that in addition to the above comparables, he was aware that the tenancy for the first floor flat of the subject building was at a monthly rent of $34,000 on inclusive basis. However, that tenancy commenced about 16 to 18 months ago. Therefore, that transaction would not be of any assistance to the present case.

7. He further gave more detailed description of the internal condition of the subject premises. At the time of his leasing the flat in July 1997, the premises had been re-painted. The premises was supplied with two old, rusty air-conditioners. Otherwise, unlike the other comparable flats on the G/F., 2/F and 3/F., no other domestic appliances were supplied by the landlord. In the living room, there was cracking of paints while in the master bedroom, there was water marks at the ceiling. Moulds were found at various places of the ceiling of the flat. One of the rooms (the children's room) was too wet and could not be used. He suspected that the dampness was caused by the water tank on the top roof above the premises.

8. He gave evidence that as the subject building was surrounded by adjacent buildings, it appeared to him that the view from all the floors were the same.

9. Upon cross examination by the Respondent, Mr. Schvartzman acknowledged that under the tenancy agreement, he was responsible for repairing the interior. However, he opined that since the leaking from the ceiling was not normal wear and tear, it fell outside the responsibility of the Applicant. He also admitted that he was paying management fee at $900 per month for garbage collection and disposal and cleaning up of staircase. There was one single car park for each flat of the building. The car park was situated on the ground level,

10. He submitted that the best comparable should be the most recent letting evidence of the 3/F flat. He opined that the subject premises and the 3/F flat was almost identical in size and layout. However, he submitted that an allowance should be made to reflect the provision by the landlord of the domestic appliances for 3/F flat. He estimated that the domestic appliances (including 5 air-conditioners, 1 fridge, 2 fans and a dryer) would cost about $22,000 to $25,000. Thus, he reckoned that an allowance of $600 per month would be appropriate. Since the 3/F flat was rented out at $32,598.75 per month, on exclusive basis, from 14 February 2001, he estimated the PMR for the subject premises to be about $32,000 per month, on exclusive basis.

The Respondent's case

11. Mr. Chan, Kai Yen, the Respondent's representative gave evidence. He was a director of the the Respondent and was responsible for the letting, management and daily operation of the subject building. He commented on the three comparables in the building. He gave evidence that the 3/F was let out at $35,000 per month on inclusive basis because the marketing time was close to the Chinese New year. The Respondent therefore agreed to reduce the rent substantially because the company was afraid that the flat would be left vacant for several months. For the G/F comparable, he stated that since the market had recovered at the time of leasing, the rent was agreed at $36,000 per month, on exclusive basis. He agreed that the tenant of the G/F flat had the benefit of the use of a garden area but was required to clean up and maintain the garden. Regarding the renewal of the 2/F flat, he advised the Tribunal that the sitting tenant was a lawyer who had very good relationship with the Respondent. Therefore, the Respondent agreed to renew the tenancy at a rent of $35,000 per month, on inclusive basis. That was about a 10% increase from the previous rent of $32,000 per month, on the same basis.

12. Mr. Chan commented that the defects revealed by the Applicant during the hearing was mostly unknown to him. He added that the Respondent had strong reasons to believe that the leakages complained by the Applicant had been remedied. The Respondent had also advised the Applicant that the Respondent would be prepared to go inside the premises and remedy the defects. However, as at the date of hearing, the Respondent was still awaiting the Applicant's reply.

13. The Respondent submitted that the subject premises was situated on the highest floor of a walk-up building. It commanded better view than the flats below and should consequently fetch a higher rent. In addition, under the terms of the previous and the proposed new tenancy, there would be two special clauses that served the interests of the Applicant. Firstly, there would be the break clause exercisable at the option of the Applicant only. Secondly, the Applicant was entitled to sub-let the car park which formed part of the subject matter of the tenancy between the parties. Summing up and having regard to the above, the Respondent submitted that the PMR for the subject premises at the relevant valuation date of 10 February 2001 should be $36,000 per month, on exclusive basis.

Determination of the PMR by the Tribunal

14. I agree with the parties that the relevant comparables are from the recent lettings of three flats in the subject building. In particular, since the tenancy for the 3/F commenced from 14 February 2001, only about 4 days away from the relevant valuation date for the subject premises, it was the best comparable as far as timing is concerned. This comparable is only one level below the subject premises and any effect on floor level difference will be the least, so far as the comparables are concerned. Also, it was a new tenancy and thus was not affected by the relationship that might exited between the landlord and the tenant, as suggested by the Respondent (in the renewal of the 2/F flat). Therefore, the Tribunal agrees to accept the 3/F comparable as the best comparable, as suggested by the Applicant.

15. I agree with the Respondent that no downward adjustment should be made to reflect the present interior condition of the subject premises. There was no evidence that the interior condition could not be remedied. As such, it should be covered by the covenants in the tenancy agreement. The parties have redress under the agreement. No allowance should be made in this regard.

16. The Applicant submitted that an allowance should be made to reflect the existence of some domestic appliances in the comparables, including the 3/F flat. He estimated the monthly equivalent of this benefit to the tenant of this comparable to be about $600. After making this adjustment, the Applicant submitted that the PMR of the subject premises should be $32,000 per month, on exclusive basis. The Respondent did not give any evidence or submission to dispute this figure. I consider this estimate to be reasonsable and allow this adjustment,

17. Next is the issue of whether an allowance should be made to reflect the timing of letting of the 3/F comparable. The Respondent contended that the letting of that comparable was around the Chinese New Year. For this reason, the Respondent agreed to reduce the rent in order to avoid a long vacant period of a few months. However, I note that the relevant valuation date of the subject premises is very close to the commencement date of the tenancy for the 3/F comparable. Even assuming that the Respondent's argument was correct, the Tribunal should have to give the same allowance for the subject premises. If it was as alleged by the Respondent that the rent for a new tenancy around the Chinese New Year had to be reduced since there was a shortage of prospective tenants, surely this should affect the assessment of the PMR for the subject premises. In the circumstances, I decide that no allowance should be made for this factor.

18. Next, there was a dispute on whether an allowance should be made for the difference in floor level. Generally speaking, for a domestic building, the rent of a higher floor unit is higher than that of a lower floor unit. In the present case, the Applicant submitted that there should not be any difference as the subject building is surrounded on all sides by other buildings. On the other hand, the Respondent submitted that an allowance should be made for the level difference but did not give any evidence or suggest any adjustment figure in this regard. On balance, I determine a modest upward allowance of $1,000 is warranted to reflect the fact that the subject premises is one level above the best comparable, the 3/F flat in the same building

19. Lastly, I consider the issue of whether adjustments should be made for the provisions in the tenancy agreement for the proposed new tenancy which contains a break clause for the tenant and a clause permitting the tenant to sub-let the car parking space that formed part of the subject matter of the tenancy. I consider that the break clause for the tenant is fairly common for this type of premises in Hong Kong. Thus, no allowance is given. Similarly, there is not much benefit to the tenant for having the option of sub-letting the car parking space. It gives the Applicant a flexibility that in the event they choose not to own a car or park their car in that particular car parking space, they could let it out. However, given the low rental value of a car parking space when compared with the rent for the subject premises, any such benefit of flexibility is likely to be very modest in absolute term. The Respondent also failed to give evidence as to how much allowance should be given for this factor. Therefore, in the final analysis, I decide not to award any allowance for this factor submitted by the Respondent.

20. In the circumstances, I determine that the PMR of the subject premises should be based on the best comparable of the 3/F flat in the same building. After adjusting for the existence of domestic appliances in the 3/F flat and the floor level difference, the PMR of the subject premises under the new tenancy commencing from 11 February 2001, on the basis of exclusive of rates, and management fee was estimated to be $33,000 per month. By consent, the deposit shall be two months rent, or $66,000, which is the same amount in the former tenancy agreement. Otherwise, the other terms of the new tenancy remain the same as in the former tenancy agreement. These include the permission to sub-let the car parking space by the Applicant, and the break clause exercisable by the Applicant.

Orders

1. By consent, new Tenancy for two years commencing from 11 February 2001;

2. New rent at $33,000 per month (exclusive of rates and management fees); leave to the Applicant to pay the Respondent any arrears of rent, if any, within 28 days from today;

3. Deposit to be the same as in the former tenancy agreement, at the sum of $66,000;

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

5. No order as to costs.