Adrian King and Another v. Double Crown Ltd.

LDNT383/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 383 of 1999

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REASONS FOR DECISION

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Background

1. The first and second applicants (hereinafter referred to as the applicant) are the tenant and the respondent the landlord of the subject premises known as Flat D on first floor of 5 Tung Shan Terrace, Hong Kong. The existing tenancy was a renewed tenancy for a term of two years commencing from 1 December 1997 and expiring on 30 November 1999. In May 1999, the respondent served a Form CR101 onto the applicant terminating the tenancy on 30 November 1999. The applicant responded by the service of a Form CR102 onto the respondent at the end of May 1999.

2. Following the service of Form CR101 and Form CR102, the parties entered into a long series of correspondence and negotiation regarding the renewal of the tenancy. In the document, Exhibit A-1 produced by the applicant, there is a chronology of events for the long period of time, from 12 May 1999, the date of service of CR101 to 28 July 2000, the date of application by the applicant to list for a hearing.

3. The applicant applied for a new tenancy by filing a notice of application (Form 22) on 23 November 1999 under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. There was no opposition from the respondent. Both parties agreed that a new tenancy should be granted by the Tribunal for a term of two years commencing from 1 December 1999 at the rent to be determined by the Tribunal and otherwise subject to the same terms as before, save for the appropriate adjustment for the deposit sum and a minor dispute as to the period of notice to be given in the event of exercising the break clause by the tenant. The main issue was the level of the prevailing market rent on 30 November 1999.

4. The two applicants were represented by the first applicant, who also gave evidence in person. The respondent was represented by Mr. Johnson Chong, Sales & Leasing Manager of Shun Tak Real Estate Limited as agent for the respondent. Neither party called any expert witness to give evidence regarding the determination of the prevailing market rent of the subject premises.

5. The subject premises was one of the four first floor units of 5 Tung Shan Terrace, a 4-storey residential building situated on an elevated position above Stubbs Road. The subject building, completed in 1986, comprised 16 apartment flats. It was wholly owned by Double Crown Limited, a member of the listed Shun Tak group of companies.

6. It was common ground that the respondent had carried out renovation works for some flats in the building as and when they became empty. The refurbishment of these flats commenced in about July 1999. The external renovation work for the whole building had also commenced earlier this year but had not yet been completed as at the date of hearing.

Applicant's case

7. It was the applicant's case that the refurbishment works had caused significant inconvenience, disruption and disturbance to the tenants, including the applicant.

8. Also, the applicant gave evidence that the respondent had not properly maintained the interior of the subject premises, despite of the applicant's repeated requests for maintenance. As a result of this, the interior of the subject premises was in a dilapidated state of repairs.

9. The applicant submitted that based on the comparables, the Tribunal should grant a new tenancy at a monthly rent of $18,000, on exclusive basis.

Respondent's case

10. Mr. Johnson Cheng stated that the saleable floor area of Flat A and Flat B were the same, at 1,438 sq. ft. whilst those of Flat C and Flat D were also the same, at 1,498 sq. ft. However, he agreed that they were effectively similar sized flats. Although they had different layouts, the flats were otherwise similar, with the exception of the state of repair, maintenance and provision of appliances. This conclusion was also accepted by the applicant.

11. In giving evidence, Mr. Cheng denied that the respondent had been using any delaying tactics regarding the negotiation for renewal of tenancy with the applicant. He said that the respondent had agreed to bear the cost of renovation in the region of about $350,000 but could not agree with the applicant regarding the arrangements for the renovation. He reiterated that the respondent had considered that there should not be any renewal with the applicant without undergoing any renovation. Unfortunately, he acknowledged that the parties could not agree on the arrangements for the renovation of the subject premises. As a result of this, the negotiation for renewal with the applicant stalled for a longer time than usual.

12. Mr. Cheng confirmed that of all the flats in the building, four flats (Flat 1A, 1B, 1C and 2C) had been completely renovated since October 1999. The respondent had decided to take Flats 1C and 2C off the market before and hence, these two flats were vacant at the date of hearing. Mr. Cheng said that he had only decided to put these two flats in the market in August 2000. He admitted that for the external renovation work programme for the whole building, there were delays which were due partly to the weather.

13. Mr. Cheng gave evidence that previously each of the renovated flats was asked $28,000 per month, on exclusive basis, in the market. Mr. Cheng stated that the applicant had been offered the renovated flats as a replacement but the proposals were turned down by the applicant.

14. Mr. Cheng agreed that an un-renovated flat such as the subject premises should have a lower rental than that of a renovated flat. He compared the subject premises with Flats 1B and 1C and decided that a slight reduction would be appropriate to retain an existing "good" tenant (i.e. the applicant) for the subject premises. All in all, the respondent asked the Tribunal to determine a monthly rent of $26,000, on exclusive basis, for the new tenancy.

Rental comparables

15. The respondent, being the landlord of all the flats in the building, provided the following occupancy status and the tenancy details:

16. Note: ( R ) = Renewal ( NL ) = New Letting

17. All the above rents are monthly rents, and they include the benefit of one car parking space (for each flat). All the rents are reduced to exclusive basis, with the exception of Flat C on 3/F and roof.

Valuation

18. The Tribunal agrees with the parties that the best evidence of rental value of the subject premises should be the comparable rental transactions of other flats in the subject building. This accords with the well established valuation principle of the direct comparison approach.

19. The subject building has since 1999 undergone renovation, for some flats internally and, for the building as a whole externally. However, any adverse effect of the renovation works on the subject premises should have been reflected as only the comparables in the building were considered in this valuation exercise.

20. The Tribunal is further of the view that the top floor flats are not good comparables because of the need of adjusting the values of the roofs. Since other comparable flats are available in the same building, the top floor flats are given less weight in this valuation.

21. The relevant date of valuation should be 30 November 1999, some 9 months away from the date of judgement. Therefore, the best comparables are those new letting comparables closest to the relevant date of valuation. These are the rental transactions of Flats 1A and 1B. They are two renovated flats which tenancies commenced from 11 April 2000 and 23 March 2000 respectively. Their average rent passing is $26,640. This should be adjusted, reflecting the following factors of adjustments when these two flats are compared with the subject premises:

Base rent per month, exclusive basis		$26,640
Time adjusted based on Jones Lang LaSalle Index for large and luxury properties		about -1%
Base rent per month, exclusive basis after time adjustment		$26,640
Adjustments for-
(i) lack of appliances in the subject premises	-5%
(ii) poor condition of the subject premises due to the lack of decoration and proper maintenance (with the existing tenant residing for about 12 years)	-10%	-15%
Estimated prevailing market rent for the subject premises		$22,418
rounded to		$22,500

As a check, the time-adjusted base rent of the comparables (i.e., the renovated flats of Flats 1A and 1B) could be adjusted by the expected return of estimated renovation costs, as follows:

	Time adjusted base rent (see above)	$26,640
Less	annual expected return of estimated renovation costs for each flat (Cost $350,000 at return of say 12% p.a.)	$3,500
	Estimated rent for the subject premises	$23,140

22. This estimate is very close to the previous valuation estimate. However, this estimate is intended to be a very rough check only. The valuation of the subject premises should be based on the valuation using the comparable rentals and applying suitable adjustments reflecting differences between the comparables and the subject premises. Therefore, the Tribunal determines that the prevailing market rent for the subject premises is $22,500 per month, exclusive of rates and management charges.

23. Next, the applicant requested that the notice to be given by him in the exercise of the break clause in the new tenancy be reduced from 3 months, as stated in the previous tenancy agreement, to the usual 2 months. The respondent suggested that there should not be any change. After taking in consideration the terms of the previous tenancy agreement and the circumstances of the case, including the common practice in the market, the Tribunal agrees that the notice to be given by the applicant be shortened from 3 months to 2 months in the new tenancy for the subject premises.

Orders

1. New Tenancy for 2 years from 1st day of December 1999;

2. New rent at $22,500 per month (exclusive of rates and management charges); leave to the respondent to pay the applicant over-payment of rent (if any) within 1 month;

3. Deposit to be decreased pro rata in accordance with the new rent; leave to respondent to pay the applicant the adjustment within 1 month;

4. The notice to be given by the applicant in the exercise of the break clause in the tenancy shall be reduced from 3 months to 2 months;

5. Other terms of new tenancy same as in current tenancy agreement;

6. No order as to costs.