ANDOR HAMPALA v. NICE HOLDINGS LTD.

LDNT 255/2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 255 of 2001

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J U D G M E N T

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Background

1. The Applicant is the tenant of the premises known as the Second Floor together with Portion of Roof and Car Parking space No. 1 of No. 94A Pokfulam Road, Hong Kong ("the Premises"). The Respondent is the landlord of the Premises. The Applicant's application is for a new tenancy pursuant to Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7.

2. Both parties agree that there can be a new tenancy for a period of 2 years commencing on 10 September 2001 but request this tribunal to determine the amount of the new rent. Thus, the only issue in this matter is the amount of the prevailing market rent for the new tenancy.

The Applicant's case

3. The Applicant has given evidence himself and called an expert, Mr. Alnwick Chan, to give evidence on his behalf. Mr. Chan's expert report is produced and marked as exhibit "A3". In his report, Mr. Chan made reference to 8 comparables, which were provided by the Rating and Valuation Department, as follows:-

(1) 2 Mount Davis Rd., G/F., Flat A1 ("Comparable 1");

(2) 126 Pokfulam Rd., 3/F., Flat 3A ("Comparable 2");

(3) 37 Bisney Rd., G/F., ("Comparable 3");

(4) 33 Consort Rise, House 6, 2/F., Flat A ("Comparable 4");

(5) 92 Pokfulam Rd., Flat 1-C ("Comparable 5");

(6) 138 Pokfulam Rd., 2/F., ("Comparable 6");

(7) 86B Pokfulam Rd., G/F., ("Comparable 7"); and

(8) 88A Pokfulam Rd., 1/F., ("Comparable 8").

4. Mr. Chan made various adjustments to the said comparables and summarized the adjustments in Appendix 10 of his report. Mr. Chan concluded that the adjustment table in Appendix 10 of his report did not provide a very consistent result as the lower bracket indicated a net unit rent in the region of $105/sq.m., while the highest adjusted unit rate was $185/sq.m. If he applied the unit rate of $185/sq.m., the rental of the Premises would be $37,000, some 12% increase from the last renewal rent of $33,000 effective from March 2000 as determined by the Lands Tribunal in LDNT No. 73/2000. Mr. Chan opined that this sum was abnormally high and did not correspond with the market trend since March 2000 especially when the subject property was deteriorating rapidly on the exterior. Conversely, if he were to adopt a unit rent of $105/sq.m., the assessed rental would be $21,000 per month, which was obviously unreasonable and would not be recommended to the tribunal.

5. Mr. Chan was therefore of the opinion that the monthly rental exclusive of rates and management fees should be calculated as follows:

Equivalent area	200.56	sq.m.
Recommended unit rate	x $140
Estimated Rent	$28,078
Deduct air-conditioning cost	$363
Estimated Prevailing Market Rent	$27,715
Say	$27,700	per month

6. Mr. Chan also concluded that Comparable 8 was most similar in its exterior condition and its adjusted unit rent was $139.70/sq.m. He therefore adopted $140/sq.m. as the estimated unit rent for the Premises. He recognized that the reduction in rental as compared with the March 2000 renewal rent was approximately 17%, and it was not in line with the JLL index, but bearing in mind the unique poor condition of the Premises, he would still recommend a monthly rental of $27,700 to the tribunal.

The Respondent's case

7. The Respondent has called 3 witnesses to give evidence, including an expert, Mr. Thomas Poon. Mr. Poon's expert report is produced and marked as exhibit "R1". In his report, Mr. Poon made reference to 9 comparables, 8 of which are the same as the Applicant's comparables, i,e. Comparables 1 to 8. The additional one is 94A Pokfulam Road, 3/F., ("Comparable 9"), which is also owned by the Respondent.

8. Mr. Poon made various adjustments to the 9 comparables and summarized the same in Appendix 8 of his report. However, Mr. Poon opined that Comparables 1, 3 and 4 (i.e. Comparable Nos. 3, 6 and 7 in Mr. Poons' report) were located in areas of different character and hence they were not reliable. Also, Comparables 2 and 6 (i.e. Comparable Nos. 4 and 9 in Mr. Poon's report) were not considered by Mr. Poon to be reliable because they were far away from the Premises and situated right at the side of Pokfulam Road where traffic was very heavy and produced an annoying high level of noise. The locality was different in character from the Premises as the Premises was well set back from Pokfulam Road. Comparable 5 (i.e. Comparable No. 8 in Mr. Poon's report) was also different from the Premises in that it was a flat in a multi-storey residential development with lift service, whereas the Premises was a flat in a low-rise development with a small number of units served by staircase only.

9. Thus, Mr. Poon was of the view that it was more relevant to consider Comparables 7, 8 and 9 (i.e. Comparable Nos. 2, 5 and 1 in Mr. Poon's report). The adjusted unit rates of these 3 comparables ranged from $164/sq.m. to $239/sq.m. on exclusive basis and the average unit rent was $204/sq.m. Mr. Poon also opined that Comparable 9 was the most reliable comparable, because it was in the same development as the Premises, it had a portion of the roof and the tenants had similar complaints about the internal condition of their premises as the Applicant. He therefore opined that it was reasonable to adopt the adjusted unit rate of Comparable 9, i.e. $208/sq.m., to assess the prevailing market rent.

10. Thus, Mr. Poon assessed the prevailing market rent as follows:-

2/F and Garage
189.4m2	x	$208	=$39,395
Top Roof
122.5m2	x	$208 x 1/10	=$2,548
		Total	=$41,943
		Say	=$42,000

11. Mr. Poon also cross checked his valuation by reference to the new rateable value of $407,100 as at 1 October 2001, and came to the conclusion that the prevailing market rent of the Premises is $38,000 as per his calculation in exhibit "R20".

Choice of Comparables

12. Mr. Chan has criticized the adoption of Comparable 9, because it is very unusual to have a tenancy agreement signed by 2 individuals, and their obligations are less onerous as compared with the Applicant's agreement with the Respondent. Mr. Chan's understanding is that the Respondent has promised the tenants of Comparable 9 that the exterior of the building would be repaired, and it is therefore not unreasonable to presume the tenants were persuaded to pay a much higher rent than the prevailing market rent. He also questioned the reliability of this Comparable as it was created under the Respondent's monopoly.

13. The Respondent's witness, Ms. Leung Yee-wan, has given evidence to rebut all these allegations. She explained how the tenants had contacted her for the renting of Comparable 9 and how the deal was completed at arm's length, without any favouritism or monopoly. I accept her evidence in this respect. On the other hand, the Applicant or Mr. Chan did not come up with any evidence that the deal for Comparable 9 was not at arm's length. I also do not find the fact that the tenancy agreement was signed by 2 individuals has any effect on the rental achieved. There is absolutely no evidence that these 2 tenants agreed to pay a higher rent so that they could obtain the lease from the Respondent.

14. In the circumstances, I find that Comparable 9 is a reliable comparable and I can consider it in assessing the prevailing market rent.

15. I agree with Mr. Poon that Comparables 1, 3 and 4 as well as Comparables 2 and 6 are not suitable comparables as they are located in different areas from the Premises, where the surrounding circumstances and traffic conditions are different. Since there are other comparables within the same locality as the Premises, I do not find it necessary to refer to these 5 comparables. In fact, the adoption of these 5 comparables may actually distort the market rent for the Premises, because more adjustments would have to be made for these 5 comparables. It is always better to use comparables requiring lesser adjustments.

16. As to Comparable 5, I also agree with Mr. Poon that it is not a good comparable as it is in a high-rise building with lift service, whereas the Premises is in a low-rise building without lift. I would not be comparing like to like if Comparable 5 is adopted.

17. I am therefore of the view that only Comparables 7, 8 and 9 are suitable comparables and I shall use them to assess the prevailing market rent. I will not, however, solely rely on Comparable 9 as suggested by Mr. Poon, because it is always undesirable to rely on one single transaction to determine the prevailing market rent.

Unit Rates for Comparables 7, 8 and 9

18. I have calculated the unit rates for Comparables 7, 8 and 9 as follows:-

	Comparable 7	Comparable 8	Comparable 9
Year Built	1960	1960	1950
Lift Service	No	No	No
Saleable Area (sq.m.)	176	148.6	189.4
Ancillary Accommodation	1 Car Park (Garage)	1 Open Car Park	1 Open Car Park and Roof (49.7 sq.m.)
Term (months)	24	12	24
Commencement Date of Lease	1.11.01	5.8.01	1.1.02
Rent Passing($pm)	40,000	29,000	38,000
Incl./Excl. Rates ($pm)	Excl.	Incl. 1,255.50	Excl.
Car Parking Effect	$0	$1,000	$800
Effective Rent ($pm)	39,300	28,145	38,800
Unit Rate/sq.m.(Saleable Including Roof)	$223	$189	$200

19. In making the above calculation, I have adopted the information of Comparable 9 provided by Mr. Poon and the Respondent. In particular, I accept that the area of the roof belonged to Comparable 9 is 49.7 sq.m., and the management fee for Comparable 8 is $600 per month, I also accept that the rental values of open car parking, covered car parking space and garage are $1,000, $1,500 and $2,000 per month respectively, and the car parking effect as assessed by Mr. Poon. The Schedule of Rental Information from Rating and Valuation Department (P.64 of Appendix 7 of Mr. Poon's report) also provides the other information.

20. I note that Mr. Chan has in fact made a mistake in the lease term of Comparable 8 in that the lease is for 12 months rather than 24 months. I do not find it material as I do not think that the rent for a lease of 12 months would be significantly different from that of a lease of 24 months. I do not accept Mr. Chan's calculation in page 15 of his report in that he has calculated the effective rent for Comparable 9 by reference to 14 months being the shortest term for the lease including the 2 months' notice and the rent-free period of 1/2 month. There is no reason to assume that the lease would end after 14 months. The lease for Comparable 9 (exhibit "A30" also does not state that it has any rent-free period.

Adjustments for Comparables 7, 8 and 9

21. I have made the following adjustments for the unit rates of Comparables 7, 8 and 8:-

Adjustments	Comparable 7	Comparable 8	Comparable 9
Building Age	-5%	-5%	0%
Time	2.2%	-0.5%	6.9%
Access	0%	0%	0%
External condition/ Appearance	-5%	-5%	-3%
Interior condition	-3%	-3%	-3%
Environment/ Noise	-3%	-3%	0%
Floor Level	0.5%%	0.5%	-1%
View	-1%	-5%	-3%
Size	-2.5%	-5.2%	0%
Domestic appliance/chattels	-3%	0%	0%
Privacy	0%	0%	0%
Management	0%	0%	0%
Building Order	0%	0%	0%
Break Clause	0%	0%	0%
Total Adjustment	-19.8%	-26.2%	-3.1%
Adjusted Unit Rate(/sq.m.)	$179	$139	$194

Building Age

22. For building age, I accept Mr. Chan's adjustment of -5% as being more appropriate than Mr. Poon's adjustment of -3% for Comparables 7 and 8. It is also in line with the previous adjustment in Case No. LDNT 73/2000.

Time

23. Although Mr. Chan and Mr. Poon both rely on JLL's index, their assessments for time adjustment are different from each other. I find Mr. Chan's assessment being more accurate and supported with reasons. I will therefore adopt his assessment, i.e. 2.2%, -0.5% and 6.9% for Comparables 7 to 9 respectively.

Access

24. I do not find that there is any significant difference between the entrance of the comparables and that of the Premises. I therefore do not give any adjustment on access.

External Condition/Appearance

25. I agree with Mr Chan that the external condition of the Premises is worse than Comparables 7 and 8, and hence I apply an adjustment of -5% to each of Comparables 7 and 8. For Comparable 9, it has a newly painted common area, hence a -3% adjustment is made.

Interior Condition

26. I accept the evidence of the Applicant and Mr. Chan and find that the internal condition of the Premises is not as good as Comparables 7 and 8, in particular the metal casement window is in poor state. I therefore give a -3% adjustment to Comparables 7 and 8.

27. As to Comparable 9, I accept the finding of Mr. Chan in page 16 of his report. I agree that the internal condition of Comparable 9 is better than the Premises. I therefore give a -3% adjustment for the internal condition of Comparable 9.

Environment/Noise

28. For environment/noise, I fully accept the Applicant and Mr. Chan's account of the same. The Applicant has lived in the Premises for quite some time. He is fully aware of his living environment and I have no doubt that his evidence is credible. Mr. Poon, on the other hand, only visited the Premises on a few occasions. I do not think that he would be more familiar with the environment than the Applicant. I therefore prefer the Applicant's account than Mr. Poon's. I give the same adjustment as the Applicant's expert did, i.e. -3% for Comparables 7 and 8, but 0% for Comparable 9.

Floor Level

29. I think an adjustment of 0.5% for each floor higher up is appropriate to reflect the factors of reduced noise and more privacy. For Comparable 7, it is in fact a 1st floor flat because of the carport, and hence the adjustment is just 0.5%. For the Premises, it has lights shining from the cars coming down slope, so Comparable 9 is even better than the Premises in this aspect. Thus, I will apply adjustments of 1%, 0.5% and -1% for Comparables 7 to 9 respectively.

View

30. I accept the findings made by the Mr. Chan in respect of the views of the Premises and the comparables. Comparable 7 has a view that is blocked trees, but is more open than the Premises. Thus, a -1% is appropriate. Comparable 8 commands good sea view and hence a -5% adjustment is appropriate. Comparable 9 also has a seaview but is not as good as Comparable 8, so an adjustment of -3% is made.

Size

31. I agree that there should be a quantum discount based on 1% per 10 sq.m. Thus, there should be adjustment of -2.5% and -5.2% for Comparables 7 and 8 respectively, but no adjustment is necessary for Comparable 9 as it is the same as the Premises.

Domestic Appliance/Chattels

32. Comparable 7 has provided domestic appliances and 1 fitted wardrobe in bedroom, whereas the Premises has no air-conditioner provided. Thus, a -3% adjustment is necessary to reflect the provision in Comparable 7.

Privacy

33. I have already considered privacy in terms of floor levels, so no further adjustment is made for privacy.

Management

34. No adjustment is necessary because the Premises and the comparables are provided with similar management services.

Building Order

35. I do not accept that there should be adjustment for the building orders. I do not think that potential tenants would bother to check whether there are such orders before they rent a place. It is after all the landlord's liability. Thus, I do not think that the building orders would affect the market rent as suggested by Mr. Poon. So no adjustment is made.

Break Clause

36. I do not think that the Applicant will enjoy any particular benefit from the break clause. Thus, no adjustment is made for that.

Total Adjustment

37. The total adjustments for Comparables 7 to 9 are therefore -19.8%, -26.2% and -3.1% respectively, and the adjusted unit rates are accordingly $179/sq.m., $139/sq.m. and $194/sq.m. This gives an average adjusted unit rate of $171/sq.m.

Floor area of the Premises

38. It is common ground that the saleable area of the Premises is 189.4 sq.m. However, like the case in LDNT73/2000, there is a difference in the measurement of the roof area. In the absence of better information, I would adopt the figure used in Case No. LDNT73/2000, i.e. 111.6 sq.m., which gives an effective area of 200.56 sq.m.

Air-conditioning cost

39. I also adopt the approach used in Case No. LDNT73/2000 in deducting the air-conditioning cost of $363 from the estimated rent.

Conclusion

40. Thus, my assessment of the prevailing market rent is as follows:-

Equivalent area	200.56	sq.m.
Averaged adjusted unit rate	x $171
	---------------
Estimated rent	$34,295.76
Deduct air-conditioning cost	$363
	---------------
Estimated PMR	$33,932.76
Say	$33,900.00	p.m.

41. I therefore assess the prevailing market rent of the Premises to be at $33,900.00 per month, exclusive of rates and management charges.

Orders

42. Accordingly, I grant the following orders:-

(1) New tenancy for 2 years from 10 September 2001;

(2) New rent at $33,900.00 per month, exclusive of rates and management fees; leave to the Applicant to pay the arrears of rent within 1 month;

(3) Deposit to be adjusted pro rata in accordance with the new rent; leave to the Applicant to pay the additional deposit within 1 month;

(4) Other terms of the new tenancy to be the same as the current tenancy; and

(5) No order as to costs.