何永鴻 v. 偉福置業有限公司

LDNT 166/2003(Review)

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 166 of 2003 (Review)

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JUDGMENT

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Background

1. I heard the present new tenancy application on 20 February 2004 and gave judgment on 27 February 2004, with the following orders:

1. New Tenancy for two years commencing from 20 February 2004;

2. New rent at $16,200 per month (exclusive of rates and management fee); leave to the Respondent to pay back the Applicant over-payment of rent, if any, within one month;

3. Deposit, in the sum of 2 month's rent of $32,400, to be paid by the Applicant to the Respondent; leave to the Respondent to pay the Applicant the adjustment, if any;

4. Other terms of the new tenancy shall be the same as in the previous tenancy agreement;

5. There shall be no order as to costs.

2. The Applicant filed an application on 19 March 2004 under Section 11A of the Lands Tribunal Ordinance (Cap. 17) seeking a review of the decision/order I made on 27 February 2004. I decided on the same date to review my decision/order as sought and would exercise my power of review on 2 April 2004.

3. The Applicant provided in his affirmation on 19 March 2004 certain clarification on the actual terms of the previous tenancy of the suit premises ("the Premises") and sought leave of the Tribunal to file supplementary surveyor's report.

Applicant's grounds of review

4. Mr. Patrick Lai gave evidence during the review hearing. He produced a supplementary report (Exhibit A5), which set out in details the grounds of review.

5. Mr. Lai show in his report a copy of the previous undated tenancy agreement entered into between the Applicant as the landlord and the Respondent as the tenant. It provided, inter alia, that "the government rates and rent, property and management fees in respect of the premises should be paid by the Landlord and the water and electricity charges and other miscellaneous charges should be paid by the Tenant". Therefore, Mr. Lai said that the term of the new tenancy should be the same as in the previous tenancy agreement, i.e., inclusive of Government rates and management fee. In his supplementary report, Mr. Lai continued to analyze his comparables on the basis of exclusive of rates and management fee. This is the same approach he adopted in his previous valuation as shown in his original valuation report at Exhibit A1.

6. However, Mr. Lai said that whilst he did not dispute with the Tribunal on the adoption of the suitable Comparables as well as on the adjustments for the factors of Time, Location and Floor Level, he adopted in his supplementary report different adjustments for the factors of Age/Condition, Building Entrance and Quantum. In support of his revised levels of adjustments for the factors of Age/Condition and Quantum, he quoted two unreported new tenancy application cases (LDNT73/2000 and LDNTG68/2001), both decided by me in year 2000 and 2002 respectively.

7. I summarize below the various adjustments as suggested by Mr. Lai in his original and supplementary reports and decided by me in my Judgment of 27 February 2004:

8. Based on the revised adjustments, Mr. Lai computed the average of the adjusted unit rates for the adopted 5 comparables at $73.59 per sq. m. Applying this to the saleable area of the Premises, he estimated that the market net rental for the Premises should therefore be $13,371 per month. However, Mr. Lai argued that this net rental amount was assessed on the basis that a prospective tenant would in addition to paying this net rent, have to pay Government rates, and management fee the latter of which would normally be in the region of say 9% of the net rental.

9. Based on the information provided by the Respondent, Mr. Lai computed that the ratio of management fee to the previous monthly rent passing of the Premises (on exclusive basis) was about 29%. This was in contrast to the much lower ratios of management fee to the exclusive rents of the comparable premises, in the region of between 7% and 10%. Mr. Lai concluded that the ratio of management fee to the exclusive rents payable for the comparable premises were far below that for the Premises. He said that in the open market, a prospective tenant of any premises would take into consideration "the total occupational costs" comprising the exclusive rental, management fee and Government rates. Therefore, the relatively high ratio of management fee charged by the Respondent for the Premises would have a reducing effect on the net rental value (on the basis of exclusive of management fee and Government rates) for the Premises.

10. In order to adjust for the exceptionally high level of management fee charged by the Respondent as the landlord, Mr. Lai considered that his estimated open market net rental of the Premises, at $13,371, should be reduced by 20% so that the total monthly occupational costs payable by the Applicant would be in line with the market level, as follows: $13,371 x (1-20%), or $10,697.

11. The Applicant agreed with the Tribunal's previous decision that the term for the new tenancy should be on the basis of inclusive of management fee and Government rates. Therefore, the rent and management fee of the Premises under the new tenancy would be the sum of the estimated open net market rental of $10,697 and the current management fee of $4,140 charged by the Respondent, or $14,837. In addition, the Respondent would have to pay the Government rates applicable to the Premises during the duration of the new tenancy.

Respondent's response

12. Mr. Ho, Chi Ming continued to represent the Respondent in the hearing. He raised no objection to the Applicant's evidence as to the correct basis of the previous tenancy. He mainly queried Mr. Lai's methodology in adjusting for the higher level of management fee charged by the Respondent. He said that what Mr. Lai had failed to consider was that while there might be differences in the ratio of management fee to rent for the comparables and the subject Premises, there were also differences in the quality of management services for different properties. In addition, Mr. Ho submitted that Mr. Lai had omitted to adjust for the factor of quality of management, in his analysis of comparables and valuation of the Premises.

13. Mr. Ho confirmed that the Government rates for the period from 1 October 2003 to 31 December 2004 was $733 per month. At the end, Mr. Ho submitted that there was no need for the Tribunal to make any change to the Orders previously made on 27 February 2004.

Tribunal's decision

14. In support of his proposed levels of adjustments, Mr. Lai quoted 2 separate new tenancy cases previously decided by me. He suggested that the levels of adjustments adopted in the quoted cases should be applied in the present case. However, I would like to point out that valuation, including choice of comparables, choice of adjustment factors, as well as levels of adjustments invariably require subjective judgments of the valuation surveyors employed for the provision of valuation service to the parties and/or giving evidence in any court, including the Lands Tribunal, as well as the member of the court who has to make a determination. This is particularly so in the matter of levels of adjustments. Generally speaking, the levels of adjustments adopted for a particular valuation exercise would apply only to that particular exercise. Although some valuation surveyors, and the court which had heard such evidence and had given a determination at the end, sought to use a certain formula or ratio in attempting to rationalize the levels of adjustments applicable to different comparables in a particular case, the said formula or ratio must be treated with great caution. More often than not, the said formula or ratio might not and should not be applied to other properties in another valuation exercise as if they were agreed by the valuation profession or the Lands Tribunal. In short, for any valuation exercise, it depends on the experience and skill of the person who performed the valuation and in turn on the same qualities of the judicial officer who has to make a determination under the provisions of the law. Therefore, I disagree with Mr. Lai that similar ratios as adopted for his cited cases should necessarily be applied to the factors of adjustments of Age/Condition as well as Quantum in the present cases. In the present case, I have reviewed my previous decision and decide to make no change in the adjustments for the said 2 factors.

15. As to the factor of Building Entrance, the evidence adduced by Mr. Lai was nothing new. I have heard the same evidence from him in the original hearing. Before reaching my previous decision, I have considered the factors stated by Mr. Lai and the Respondent but decided that a more modest allowance of 5% would be adequate to reflect this factor. I maintain my opinion and, therefore, do not make any change in the adjustments for this factor.

16. Summing up, regarding Mr. Lai's proposed changes in the Tribunal's adjustments for all the factors of adjustments, I decide after re-consideration of all the evidence that no change is necessary. Therefore, my estimate of the exclusive rental of the Premises will be the same as my previously computed figure of $16,200 per month, as detailed in the Judgment of 27 February 2004.

17. Regarding the argument put forward by Mr. Lai on the exceptionally high level of management fee charged by the Respondent and hence, his computed adjustment that was based on the concept of total occupational cost to a prospective tenant, I have considered the views put forward by both Mr. Lai and the Respondent. I accept Mr. Lai's reasoning and decide that it would be appropriate to make certain appropriate adjustment to reflect the high level of management fee of the Premises. In reaching this decision, I also bear in mind that the management fee was charged by the Respondent or her wholly subsidiary company that was in charge of the management of the building. Adopting Mr. Lai's approach, my estimate of the monthly net rental value of the Premises is as follows: estimated exclusive rent of $16,200 x (1-20%), or $12,960.

18. Both parties agreed that the rent of the Premises determined under the new tenancy should be on inclusive basis. It follows that such rent on inclusive basis, or the gross rent of the Premises payable by the Applicant under the new tenancy will be the sum of the estimated exclusive rent of $12,960 and the management fee of $4,140, plus the applicable Government rates for the periods under the new tenancy. This equates to the sum of $17,100 plus the applicable Government rates for the periods under the new tenancy.

Deposit under the new tenancy

19. Although the Respondent did not make a cross review application in writing, she submitted during the hearing that the deposit for the new tenancy should be 3 months' rent determined for the new tenancy, on the same basis as in the previous tenancy agreement entered into between the Applicant and the Respondent in 2002. The Respondent submitted that all along, the Respondent has required the payment of 3 months' rents as deposit from the Applicant as the tenant. The Applicant objected to this proposed term, pointing that the Tribunal's previous order of requiring the payment by the Applicant of the sum of 2 months' rent, as deposit was both reasonable and adequate, having regard to the rental market of similar premises in general.

20. I have considered the matter and decide not to change the previous order for the term of the deposit. I note that in the course of valuation for the Premises the comparable lettings normally required a deposit in the sum of 2 months' rents (and rates) in each case. Therefore, I decide that a similar amount of deposit should be adopted for the new tenancy of the Premises.

Costs

21. Neither side sought costs of this review. In the circumstances, I make an order that there shall be no order as to costs for this Review.

Orders

1. The Orders Nos. 2 and 3 of the Tribunal's Orders made on 27 February 2004 be replaced by the following:

(i) New rent at $17,100 (inclusive of management fee), plus applicable Government rates for the quarter periods during the duration of the New Tenancy in respect of the Premises; leave to the Respondent to pay the Applicant over-payment of rent, if any, within one month from today;

(ii) Deposit, in the sum of (a) 2 months' rents of $34,200, and (b) 2 months' Government Rates of $1,466 (based on the Government Rates payable for the quarter from 1 January 2004 to 31 March 2004), to be paid by the Applicant to the Respondent; leave to the Respondent to pay the Applicant the adjustment, if any, within one month from today;

2. The other Orders of the Tribunal's Orders made on 27 February 2004 remain unchanged;

3. There shall be no order as to costs for this review.