Manchu Hong Kong Ltd. v. Lau E-Yan Betty

LDNT 381 OF 2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 381 OF 2001

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J U D G M E N T

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The Application

1 ． On 15th Nov. 2001, Manchu Hong Kong Limited filed the Form 22 with this Tribunal requesting the grant of a new tenancy of House 39C and Car Parking Space No.2, Ming Villa, Nos. 39B - 39 F Shouson Hill Road (hereinafter known as the subject premises) under Part IV of the Landlord and Tenant (Consolidated) Ordinance. Manchu Hong Kong Limited is the tenant of the subject premises and Ms Lau E-Yan, the landlord.

The Terms Agreed

2 ． Both the landlord (the Respondent of the subject Application) and the tenant (the Applicant) have no disagreement to the term of new tenancy being fixed for two years with the commencement date back-dated to 19th Nov. 2001. Other terms of the expired tenancy are to remain under the new tenancy with the exception of condition 12 of the expired tenancy, which both agreed not to apply under the new tenancy. The outstanding issue yet to be resolved is the rent payable to the landlord.

The Matter in Dispute

3 ． The Applicant has appointed Memfus Wong Surveyors Limited to give an expertise view on the level of rent for the subject premises, whereas the Respondent, for the same purpose, has engaged the service of FPD Savills International Property Consultants. Mr. Memfus Wong from Memfus Wong Surveyors Limited and Mr. Samuel Young from FPD Savills International Property Consultants each produced their respective expert reports and gave evidences in open court. Mr. Memfus Wong initially suggested that the rent for the subject premises be $90,000 per month exclusive of rates, government rent and management fee. This suggestion was later revised and the rent now offered is $96,000 per month. Mr. Samuel Young suggested that on the same basis the appropriate amount be $123,000 per month, but finally submitted in open court that it could be reduced to $120,000. Based on the information provided by the two witnesses, Mr. Memfus Wong is much more experienced in the General Practice field than Mr. Samuel Young though Mr. Young has been working in the same field for 15 years.

Landlord's Evidences

4 ． The landlord appeared in court on 16th September 2002 and gave evidences concerning the conditions of the subject premises and a similar property (i.e. House 39D) she owned within the same development. House 39D has been included in the list of comparable properties for valuation purpose by the Respondent's expert witness. The Applicant's expert witness did analyze the tenancy of House 39D but opposed its being included in the list. According to the landlord, House 39D leased out on 1st August 2002, commanded a rent of $130,000 per month inclusive of rates and management fees. The landlord admitted that House 39D had been put on the market since 18 months ago (she could not remember it well whether it was indeed 18 months ago and agreed that it could be as long as two years) but was not leased until lately. During the marketing period, there were offers from agents and prospective tenants but none were accepted either because the rent offered was too low or the prospective tenants' renovation requirements, in her view, too harsh. She was not particularly keen to find a tenant for House 39D unless the rent offered was attractive enough. The negotiation for leasing the said property at $130,000, nevertheless, took only two weeks to reach agreement. The short time taken to finalize the negotiation had prompted her to think that the rent for the subject premises should be in the region of $130,000.

5 ． The landlord considered that the conditions of the subject premises and House 39D were basically the same. The building defects as depicted in photographs produced by the Applicant's solicitor and in the report of the Applicant's expert witness were in the landlord's view, either caused from improper use and maintenance by the Applicant, or decoration works carried out by the Applicant himself unknown to the landlord before the hearing for the subject Application. As to those which were the landlord's responsibility to repair, the problem was due to the lack of notice for want of repair from the Applicant. In the absence of such notice, she could not perform the required repair even if she was keen to perform.

Expert Witnesses' Evidences

6 ． The two expert witnesses each produced their own respective valuation reports and were cross-examined. They held different view in many places and had very little in agreement, which were limited to the method of valuation (i.e. by comparison to comparable properties and making adjustment to the rent passing by virtue of the aspect which is considered better or worse than the subject property), the very hard fact data concerning the comparable properties (e.g.. the year built, the lease term and rental etc. which are basically provided by the Rating and Valuation Department) and the subject premises, and the over-all down going rental market trend. The wide difference in the expert witnesses' views had caused difficulties in identifying the fair and reasonable value. Their differences are displayed and given my views in the ensuing paragraphs.

(1) Comparable List

6.1 Mr. Samuel Young, expert witnesses for the Respondent, considered that other than the six provided by the Rating and Valuation Department, House 39D appeared to be a quite relevant property much more suitable for comparison than the six from the Rating and valuation Department as House 39D was similar in design, layout and within the same development.

6.2 Mr. Memfus Wong, expert witnesses for the Applicant, strongly opposed the inclusion of Comparable 7 (i.e. House 39D) into the list on the ground that the tenancy was entered into by the parties concerned 9 months after the mutually acknowledged commencement date of new tenancy of the subject premises. He also considered that the landlord took 18 or more months to find a tenant for House 39D was exceptionally long and could not meet the criterion of "leased out within a reasonable period of marketing". In support of Mr. Wong's argument, the Applicant's solicitor cited the Lands Tribunal's decision on Moira James v Childwall Valley Company Limited (7th July 1998).

6.3 I am inclined to accept Mr. Memfus Wong's view. If the property took too long time to lease out, this carries an implication that the tenant eventually identified might be a special tenant who had special preference for the property. The exceptional long period to lease out indicates that the majority of potential tenants were unwilling to take up the property at the rent of $130,000 per month or at its proximity. A further point to support my inclination is the leased out date being 9 months afar, which is beyond the commonly accepted norm of 6 months (the maximum). The rationale of keeping the period (from which transactions are selected for comparison) relatively short is to eliminate as far as possible error which may be induced in the case of transactions over a wide period of time being adopted (the longer the period, the higher the risk of price fluctuation).

6.4 The Applicant's solicitor and Mr. Memfus Wong both tried hard to adduce that House 39D in physical condition and other aspects was not suitable for comparison. Since I have dismissed the suitability of Comparable 7 on the grounds as above stated, I am not prepared to give my comments on the validity of their arguments.

(2) Rent Adjudicated by Lands Tribunal

6.5 Dispute also arose as to whether the rent approved in the last adjudication in Lands Tribunal should be referred to for calculation of the new rent. The Applicant's solicitor held the view that the Lands Tribunal adjudicated the rental for the last expired tenancy in the sum of $117,500 per month. Based on the Rental Indices provided by the Rating and Valuation Department, the rent suggested by the Applicant's expert witness was justified. The Respondent's solicitor, however, held a different view.

6.6 I tend to agree with the Respondent's solicitor that we should be careful in acknowledging the adjudicated rental for calculation of the fair rent in conjunction with the Rental Indices. The adjudicated rental is derived by the Lands Tribunal within the confines of data provided by the two parties concerned. The inability of the Lands Tribunal to look for data elsewhere by itself cannot be ignored. If the data from the two parties do not fully reflect the market situation, the adjudicated rental would be biased.

(3) Management Fees/Government Rent

6.7 The management fees in respect of Comparable 3, 4 and 5 are unknown. Mr. Samuel Young estimated the fees for Comparable 3 and 4 at roughly $10 per s.m. This is in line with that for Comparable 6. Mr. Memfus Wong's estimation is a bit inconsistent and his estimation for Comparable 5 at $5,700 is much above $10 per s.m. He seemed to support Mr. Young who considered the fees payable for Comparable 5 should be above this unit rate. Mr. Young's estimate, however, is even higher, i.e. at $8,400 per month. Both are subjective estimation and to avoid the likelihood of over or under estimation, I tend to adopt for Comparable 5 $7,000.

6.8 Mr. Memfus Wong assumed that Government rent liability generally goes similarly with the liability to pay rates. I am afraid that the assumption is not a practice in reality. If he had bothered to consult the Rating and Valuation Department's publication, he might be able to discover that it is generally the landlord's liability.

(4) Location/Environment

6.9 This is the aspect where the two expert witnesses held the least divergent view. They all agreed that the first five comparable properties are worse than the subject premises with Comparable 3, 4 and 5 being the worst. The only one in dispute is Comparable 6, which amazingly, Mr. Wong considered similar to the subject premises and Mr. Young considered one among the worst.

6.10 Examining the survey sheet and location plan provided, I share Mr. Young's view that Comparable 6 cannot be considered equivalent to the subject premises. If Mr. Wong accepted that Comparable 5, which is on the same side of the road and not far away from Comparable 6, should be subject to 6% adjustment, I would consider that the same percentage be applied to Comparable 6. I have no problem with Mr. Wong's adjustments for other comparable properties.

(5) View

6.11 Again, the two expert witnesses generally agreed that the subject premises had a better view than all comparable properties. The divergence only lies in the percentage of adjustment. In my view, I consider that the subject premises being upper class residential property, tenants normally give substantial weight to good view. Accordingly, I accept Mr. Young's adjustment for the comparable properties.

Design & Layout

6.12 Mr. Memfus Wong considered that the subject premises were worse in design than all the comparable properties. Mr. Samuel Young held a different view. He considered three of the comparable properties were worse than the subject premises and two better. During the cross-examination, Mr. Wong appeared to have done a better research than Mr. Young. The latter was wrong in the evidences given about the design and layout of certain comparable properties. His inadequate knowledge in this aspect affected the reliability of his evidences given. I am inclined to accept that the comparable properties are better in design and layout but having examined the layouts and heard the evidences given in court by Mr. Wong, I consider that a 10% reduction might be too much. A 5% though similarly subjective, may be appropriate.

Management Quality

6.13 Mr. Memfus Wong considered the subject premises were not under proper management citing that the common areas/facilities were not kept in a clean and tidy condition and in two of his visits to the premises, he could find no security guard manning the entrance gate. Non-residents were able to freely enter the development without being tackled before entering. He considered the quality of management in respect of the subject property was inferior in relation to other comparable properties, although he was unable to gain entry into other properties, too for detailed investigations.

6.14 Mr. Samuel Young doubted the accuracy of such assessment by viewing the comparable properties from outside. Whilst I share Mr. Young's view, I also have reservation as to his assertion that the quality of management could be ascertained by the reputation of management companies and by the amount of management fees payable.

6.15 With such limited information, it may not be prudent to accept either expert witness's view in total but it is factual that the subject premises are under the management of a non-professional body with limited professional input towards management. I, therefore, venture to consider that the management quality of the subject premises is to some extent inferior to the 6 comparable properties. I will base on Mr. Wong's suggestion to make adjustment to the comparable properties rental.

Physical Condition

6.16 The photographs produced in open court and contained in reports were unable to lead the Tribunal to form a good conclusion. The photographs taken by the two expert witnesses were obviously and purposely concentrated only on those aspects which are beneficial in justifying their own targeted rent, but had avoided those aspects which are capable of justifying the otherwise. I tend to dismiss that the structural aspect of the subject premises is in severe and bad condition. Nonetheless, I agree that the premises might need some kinds of repair in order to line up in standard with other similar class of properties for leasing in the open market. Some repair, such as the repair for peeling off of paint from wall, should be the responsibility of the tenant to undertake as required under the tenancy agreement, but some (e.g. repair of water seepage through the external wall) should be undertaken by the landlord. The landlord argued that she was never notified by the tenant of the need to repair. This was admitted by the Applicant and might be a very good defence for not undertaking the repair then, but should not be a ground for the landlord not to undertake the repair forever (otherwise, a discount in the deserved rental to reflect the cost of repair should be made now). In this regard, the Applicant's solicitor produced as Exhibit 8, an extract from Malcome Merry's Hong Kong Tenancy Law", which endorses my above view.

Communal Facilities and Swimming Pool

6.17 I disagree to Mr. Young's view that the lack of a swimming pool singly should justify a downward adjustment of 10% from the rent (equivalent to approximately $10,000 a month), which appeared excessive. I also disagree that the availability of other communal facilities should be disregarded in pricing the rental. I would accept Mr. Wong's suggestion, i.e. 3%.

Chattels

6.18 Without having consulted the home appliances suppliers, I do not consider the two expert witnesses have made a fairly accurate estimation on the equivalent amount of adjustment to reflect the availability of such appliances. Based on the evidences given during the cross-examinations, I tend to accept Mr. Wong's suggestion (of 2%) being prudent adjustment for those properties provided with such appliances.

Ancillary Accommodation

6.19 Mr. Memfus Wong converted areas of such ancillary accommodations as garden, terrace, side roof, etc. by way of varying conversion factors (i.e. 1/12 ,1/10, 1/8 and 1/6) and then added the resulting figures into the respective saleable areas for calculation of rent. Mr. Samuel Young did not follow this approach strictly. He considered a single factor of 1/10 was adequate for all.

6.20 It is very difficult to decide which should be the appropriate conversion factor without having conducted a proper opinion survey. Even if there has been such survey, I believe the opinion could be very much diverse making the drawing up of a convincing conclusion impossible. It is nevertheless, my observation that when newly built houses are sold with garden (or terrace) by developer, the area of garden (or terrace) is sometimes ascribed a unit value. When the same properties are later sold in the second hand market, the garden (or terrace) remains a value that would be counted but it is rarely for both the buyer and seller would count on its size to such an extent that a few sq. m. less should be reflected in the price. Therefore, a house with a garden having a size of a few sq. m. more is very often in reality sold at the same price as the one with a garden size at a few sq. m. less. Likewise, in renting premises, the tenants maintain such attitude as far as my observation is concerned. Valuation is said to be an art. Computing the rent for the garden (or terrace) in the way adopted by Mr. Wong turns a valuation exercise into a mathematics subject. I accept that a single conversion factor of 10% should suffice.

Quantum Allowance

6.21 Mr. Samuel Young considered that Comparable 2 of 371.1 s.m. was 40% larger in saleable area than the subject premises. In his view, adjustment due to quantum is necessary. He considered that a 2% upward adjustment was appropriate to reflect the larger saleable area and therefore, a lower unit rent. Likewise, for Comparable 4, which is 16% smaller than the subject premises, a downward adjustment of 2% has been pursued on similar ground. Mr. Memfus Wong held a different view and considered such adjustment unnecessary although no convincing reason was given.

6.22 I do not rule out the cases for such adjustment. In the commodity market, depending on the bulk under transaction, it is normal and common that larger quantity of commodity transacted will fetch lower unit price than smaller quantity. This is reasonable because the cost of overheads is reduced in bulk sales. In the property market, this rule sometimes was seen applied but sometimes, not. Its application to retail or industrial properties is common but not consistent in the case of residential properties. This perhaps, is that in the case of residential properties, the basic unit is not the footage but the dwelling that comprises the desired number of bedrooms (it may not be a fixed number of strictly one, two or three but could be that the tenant's target is three but if only four is available, it is still acceptable) and to a lesser extent, the number of wash-rooms and/or whether there are separate living or dinning rooms. Whether the dwelling should in whole be of 70, 100 or 200 s.m. in saleable area is a separate and individual space requirement in the degree of importance on par with the requirement on the desirable number of bedrooms etc. It happens, therefore that a tenant looking for a dwelling of three bedrooms etc., and whose space requirement is 100 s.m. in whole in saleable area will not rent a three bedrooms dwelling at 200 s.m. saleable area, nor one whose space requirement is 200 s.m. would be interested in a 100s.m. dwelling of similarly three bedrooms. Thus, dwellings of same number of bedrooms etc. but of substantial size difference are not homogenous commodities. They are to cater different tenants. As from the above, I have grave doubt that quantum allowance should be given in the subject case not to mention the question of the appropriate percentage that should apply.

Time

6.23 Mr. Samuel Young adjusted the difference in transaction time between the subject premises and the comparable properties by making use of the Rental Indices provided by the Rating and Valuation Department. The extent of adjustment made to the respective agreed rent of the 6 comparable properties, followed closely to the percentage of rise and fall worked out from the indices for the relevant period.

6.24 Mr. Memfus Wong basically adopted the same method but considered the indices should be modified to reflect the dampening effect on the property market due to the plane crash in US on 11 September 2001. He did so in his rental calculation for 5 out of the 6 comparable properties by adding an extra 7% to the percentage of fall (for October 2001) worked out from the indices. It is noted that no such modification was made to the one that was leased out before 11th September 2001.

6.25 During the cross-examination, Mr. Young's calculation was criticized on a few accounts. Firstly, he was criticized for failing to take account of the effect of the 11th September incident, secondly, for ignoring the effect of deflation that has been sustaining for years in Hong Kong and thirdly, for wrongly assuming that the Class E Rental Indices could truly represent the rental movement in respect of the subject and the like properties as Class E includes all properties at 160 sq.m. and above. The criticism does not appear to be at all justified. There is no reason to assume that the Rental Indices have taken no account of the 11 September incident and deflation. The indices are compiled purely based on rent passing. If the incident and deflation are real affect on rent, the rent passing which was the result of free and unfettered negotiation between the landlord and tenant, should have already reflected both factors adequately. Had there been no plane crash in US on 11th September 2001, the extent of fall if not totally eliminated, would be reduced. The degree of the Indices being truly and fully representing the subject premises and the like properties does worry me, but in the absence of a better instrument or pool of data to establish the trend, Mr. Young is not wrong in approach.

Valuation

6.26 Given the above, Comparable 7 is excluded from the comparable properties list and my adjustments of the comparable properties rental are as follows:

6.27 I am not at all comfortable with the range of rentals worked out as above. The adjusted rent for Comparable 4 being 70% higher than that for Comparable 3 indicates the high risk of error inherent in the approach (i.e. numerous subjective adjustments made to the rent passing). Mr. Wong's suggestion of according weight in the order of the degree of suitability being comparable to the subject premises is not founded on any good rationale (there is the question of double counting since adjustments have been made, which are supposed to eliminate the differences and bring the comparable properties on par with each others). Mr. Young suggested by averaging the various rentals thus achievable. By averaging, this reduces the likelihood of error. I tend to agree with this approach. Accordingly, the rent of the new tenancy is:-

($486+$341+$288+$487+$330+$312)/6 x 279.8 (effective area) = $104,645.20 rounded down to $104,500 per month excluding rates, management fees and government rent.

Orders

I hereby order that:-

(1) A new tenancy be granted to the Applicant for a term of 2 years from 19th Nov. 2001;

(2) New rent at $104,500 per month, exclusive of rates, management fees and government rent;

(3) Rental deposit be adjusted in accordance with the new rent and the excess be refunded to the Applicant within one month from the date hereof;

(4) Other terms (excluding condition 12) of the previous tenancy are to remain under the new tenancy;

(5) No order as to costs.