Credit Suisse First Boston (Hong Kong) Ltd. v. Lee Howe Yong and Lau E-Yan Betty

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Tribunal Application No. NT 627 of 1998

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Reasons for Decision

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Background:

The Applicant is the tenant and the Respondent the landlord of the subject premises known as No. 16 Black's Link, Hong Kong. The existing tenancy was for a term of two years commencing from 7 September, 1996 at a monthly rent of $220,000 exclusive of rates and management charges. The applicant applied for a new tenancy under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. Both parties agreed that the new tenancy shall be for a term of two years commencing from 7 October, 1998 but they could not agree on the level of the prevailing market rent.

2. The subject premises are a three-storey split level terraced house built in 1965. It has a pleasant sea view overlooking Deep Water Bay. The subject house is fitted with a central air-conditioning system and includes chattels provided by the landlord. However, the subject development, which comprises six similar terraced houses, has provided no recreational facilities.

Saleable Area and Ancillary Areas of the Subject

3. The expert witnesses called by the Applicant and the Respondent provided the same saleable area of 412.5 m² for the subject but they had very slight differences in the areas of the ancillary accommodation. Mr. Simon Lynch, the expert surveyor relied upon by the Applicant, quoted a front terrace area of about 91.13 m², a rear terrace area of about 27.9 m² and a roof area of about 82.08 m². On the other hand, Mr. Wong Wing Lam, the expert surveyor called by the Respondent, gave the following ancillary accommodation information: a garden area of about 90 m², a terrace area of about 26.7 m² and a flat roof area of about 119 m². The differences are trivial, especially so as the flat roof is considered by both surveyors as not fetching any rent element. The Tribunal decides to adopt the area quoted by Mr. Wong in this valuation exercise.

The Applicant's expert estimated the Prevailing Market Rent at $133,500

4. Mr. Lynch has approached the valuation by "considering the overall value of each premises instead of arriving at a value per square metre". He went on to explain that this method "requires the valuer to place himself in the position of the prospective tenant, consider the qualities of the premises to be valued having weighed up the advantages and disadvantages of the comparables." In support of his choice of valuation method, Mr. Lynch reminded us that his approach was the preferred method in a number of cases: Arthur Anderson & Co. v Tak Hing Lung Company LT2179-86,

William Turnball & Cecilia Turnball v Commisioner of Rating and Valuation RA No. 22 of 1985, and Nordic Asia Ltd. and others v Strawberry Hill Development Ltd. 32-38, 41-45, 52-54 of 1992.

5. Mr. Lynch, after adjusting the values of his 8 Comparables, found that there was a considerably wide range of rents, between $84,800 and $167,160. Even after discarding the lowest, out of line rental fetched by his Comparable (1), (No. 14 Black's Link) and the highest adjusted rent of $167,000 achieved by his Comparable (5) (House 3, No. 26 Shouson Hill Road, considered to be an inferior property), he still found a large range of value, between $104,000 and 159,000.

6. Mr. Lynch went on to suggest that his Comparable (2) (No. 18A Shouson Hill Road), Comparable (3) (No. 70 Black's Link) and Comparable (6) (House 3, No. 26 Shouson Hill Road) provided the greatest guidance as they were of similar age and size and required the least adjustments. The range of his adjusted values fell between $129,000 and $144,000. Bearing this in mind, Mr. Lynch concluded that the value of the subject premises should be $136,500.

7. Next Mr. Lynch suggested that as there were dampness problems in the subject premises, mainly affecting one of the four bedrooms and affecting two further rooms nominally, an allowance of 1% should be made to reflect the disturbance to the tenant when repairs are undertaken. This follows the previous Lands Tribunal decision of Carraway v Leikin Development Ltd, LT No. 1776 of 1993, where an allowance of 2% was justified for the disturbance to the tenant.

8. Thus, Mr. Lynch suggested that the prevailing market rent for the subject at the relevant date should be $133,500 per month.

The Respondent's expert estimated the Prevailing Market Rent at $167,000

9. On the other hand, Mr. Wong adopted the traditional comparison approach. In his evidence, he cited and analysed a total of 10 comparables. These include Comparable (1), a house in Black's Link, Comparables (2) to (5), houses in Shouson Hill Road area, Comparable (6), a house in Deep Water Bay Road and finally, Comparables (7) to (10), houses in the Peak area. In the final analysis, Mr. Wong considereed his Comparable (1) and Comparable (6) to be the best comparables. These comparables, after adjustments were made to reflect the differences between the comparables and the subject, gave unit rates of $350.63 m² and $392.01 m² respectively. Mr. Wong concluded that the subject "should be able to fetch the upper end of the rental range with a marginal upward adjustment (say +3%) to account for its superior quality and spacious ancillary accommodation, i.e. $392/m² x (1+3%)", or $403.76/m² . He then multiplied the saleable area of the subject, 412.5 m² by the adopted unit rate of $403.76/m² to arrive at the figure of $166,551, say $167,000 as to be the prevailing market rent for the subject at the relevant date.

Tribunal's preferred method of valuation

10. Although the approach adopted by Mr. Lynch was the preferred method in a number of cases decided by the Tribunal in the past, this is considered to be not appropriate in the present case. This is mainly because in Mr. Lynch's valuation, he was trying to compare the subject with houses of different sizes and in different locations. In the present case, it is considered by the Tribunal that the more traditional method of assessment in terms of rental value per unit area, as suggested by Mr. Wong, is much more preferred.

Choice of Comparables by the Tribunal

11. First, the Tribunal has to decide which comparable or comparables are the best out of all the comparables quoted by the Applicant and the Respondent. We have considered in details all the 12 different comparables quoted by both experts (8 by Mr. Lynch and 10 by Mr. Wong with 6 of them in common). To summarise again, there are 4 comparable properties in the Peak area and 5 in the Shouson Hill Road area. They are not much relied upon because of their locational and size differences when compared with the subject premises. Mr. Lynch's comparable at 14 Black's Link should be one of the best comparables in view of its close location to the subject. However, its rental rate is far too low and is considered to be out of line with the market rental rates. The remaining comparables are Mr. Wong's Comparable (1), No. 70 Black's Link and Comparable (6), House No. 6 of No. 8 Deep Water Bay Road. The Tribunal agrees with Mr. Wong that these two comparables are indeed the best comparables for the purpose of arriving at an appropriate prevailing market rental unit rate for the subject premises at the relevant date. (For clarity of reference, in the remainder of the Judgment, these two comparables will be simply named as Comparable (1) and Comparable (6).)

Analysis and Adjustments of Comparables

12. On the whole, the adjustments adopted by both expert surveyors, with the exception of the adjustments for time, and the adjustment for the so-called "access and prestige" factor for Comparable (1), are modest. In most instances, we have adopted the percentage adjustments proposed by either surveyor, depending on the reasonableness of each adjustment factor.

13. In both instances, we have agreed to adopt the time adjustments proposed by Mr. Lynch as they were computed by reference to the Jones Lang Wootton (JLW) Index for large and luxury properties. This is preferred to the FPD Savills Index or the RVD Index relied upon by Mr. Wong as the JLW Index is a publicly available index, with the basis generally known and is very often used and quoted by the market participants including appraisers. Moreover, it is considered that the subject premises is more akin to the type of properties covered by the JLW Index than the properties covered by the RVD Index as the latter only classifies the properties according to area range.

14. As for the adjustments for internal condition, we have agreed with Mr. Wong that from the information available to us, the subject premises are superior internally and thus merits an upward adjustment (+3% in both cases).

15. As for the inferior "access and prestige" factor for Comparable (1), we agreed with Mr. Wong that a downward adjustment would be appropriate, even though we considered -5% as appropriate and not to the extent of -10% as suggested by Mr. Wong.

16. Finally, as for the disturbance adjustment suggested by Mr. Lynch, the Tribunal decided that the dampness condition of the subject premises appeared to be very minor. No specific allowance for the disturbance to the tenant is considered to be appropriate.

17. The rental particulars, the equivalent areas calculations and rental analysis, the adjustments proposed by Mr. Lynch and Mr. Wong, and the adjustments finally adopted by the Tribunal are set out below:

Comparable (1) No. 70 Black's Link

Renting at $150,000 per month, 2 years lease from 25 August, 1998

Saleable area of 466.3 m² plus garden area of 543 m²

Assuming garden area rate = 1/16 of house area rate

Equivalent weighted area = 500.2 m²

Unit rental rate = $150,000 / 500.2 m² = $299.9/m²

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable (1)

= $299.9 x 1.04 = $311.9/m²

Comparable (6) House No. 6 of No. 8 Deep Water Bay Road

Renting at $130,000 per month, 2 years lease from 1 April, 1998

Saleable area of 297.3 m² plus terrace area of 28.2 m²

Assuming terrace area rate = 1/8 of garden area rate and

Allowance of $2,500 for an additional car park for the subject

Equivalent weighted area = 300.83 m²

Unit rental rate = ($130,000 + $2,500) / 300.83 m² = $440.4/m²

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable (6)

= $440.4 x 0.82 = $361.1/m²

Valuation

18. The Tribunal disagrees with Mr. Wong that only the upper end of the rental range of the comparables (with marginal upward adjustment as well) should form the basis of the valuation for the subject. The Tribunal considers that the differences should have already been reflected in all the adjustments made to the Comparables. A further adjustment and the choice of the upper end of the rental range would amount to double counting. The Tribunal have decided that it would be appropriate to give equal weight to these two best comparables.

19. In summary, Comparable (1) gives weighted unit rental rate of $311.9/m² while Comparable (6) shows a rate of $361.1/m². The Tribunal considers that these comparables justify a rental rate of $335/m2 for the subject premises.

20. Adopting the areas quoted by Mr. Wong and using the ratios agreed by the experts and used in the analysis of the Comparables above, the prevailing market rent of the subject premises is estimated as follows:

$335/ m² x (Saleable Area of 412.5 m² + Garden 90 m² /8 + Terrace 119 m² /8)

= $145,926 rounded to $146,000.

Order

21. We then gave the following order on 12 February, 1999 : -

1. New Tenancy for 2 years from 7th day of October, 1998;

2. New rent $146,000 per month (exclusive of rates and management charges); leave to respondent to pay refund (if any) within 1 month;

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

4. Other terms of new tenancy same as in current tenancy agreement.

Review

22. The Tribunal subsequently discovered that, in the course of computing the Prevailing Market Rent of the subject premises on 12 February, 1999, the Tribunal have taken the area of the roof of the subject premises as the area of the terrace. There was also an arithmetic error in the computation of the prevailing market rent for the subject.

23. At the same time, the Tribunal have discovered that the comparable, House No. 6 of No. 8 Deep Water Bay Road has a terrace area of 28.2 m² , but without a garden. Both the experts had, in their valuation, made the same upward adjustment of 5% to take into account that the subject premises has a garden. However, as a value for garden area will be given to be the subject premises based on the actual area of the garden, this additional upward adjustment would amount to a double counting. We therefore decided that it would be necessary to revise the analysis of this Comparable and to revalue the subject premises having regard to the result of the revised analysis.

24. For the above two reasons, the Tribunal have decided to review the Judgment Order of this Application which was given on 12 February, 1999. During the review proceedings on 11 March, 1999, neither the Applicant nor the Respondent gave any further evidence or arguments.

Revised Analysis of the best comparables

25. Following the methodology adopted by the Tribunal in the original hearing, two comparables were chosen by the Tribunal to be the best comparables for the purpose of arriving at an appropriate prevailing market rental unit rate for the subject premises at the relevant date. These are Comparable (1), No. 70 Black's Link and Comparalbe (6), House No. 6 of No. 8 Deep Water Bay Road. The rental particulars, the adjustments proposed by Mr. Lynch and Mr. Wong, the two experts representing the Applicant and the Respondent respectively, and the adjustments adopted by the Tribunal were set out below:

Comparable (1) No. 70 Black's Link

Renting at $150,000 per month, 2 years lease from 25 August, 1998

Saleable area of 466.3 m² plus garden area of 543 m²

Assuming garden area rate = 1/16 of house area rate

Equivalent weighted area = 500.2 m²

Unit rental rate = $150,000 / 500.2 m² = $299.9/m²

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable (1)

= $299.9 x 1.04 = $311.9/m²

Comparable (6) House No. 6 of No. 8 Deep Water Bay Road

Renting at $130,000 per month, 2 years lease from 1 April, 1998

Saleable area of 297.3 m² plus terrace area of 28.2 m²

Assuming terrace area rate = 1/8 of garden area rate and

Allowance of $2,500 for an additional car park for the subject

Equivalent weighted area = 300.83 m²

Unit rental rate = ($130,000 + $2,500) / 300.83 m² = $440.4/m²

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable (6)

= $440.4 x 0.77 = $339.1/m²

Revised Valuation

26. The Tribunal agreed to give equal weight to these two best comparables. In summary, Comparable (1) shows an adjusted weighted unit rental rate of $311.9/m² while Comparable (6) gives a rate of $339.1/m². The Tribunal considered that these comparables justified a unit rental rate of $325/m² for the subject premises.

27. Adopting the areas quoted by the Rating & Valuation Department and using the ratios agreed by the experts and used in the analysis of the Comparables above, the equivalent weighted area of the subject premises was calculated as follows:

Saleable area of the subject 412.5 m2 =	412.5 m2
Garden area 90 m2 @ 1/8 of the house area =	11.3 m2
Terrace area 26.7 m2 @ 1/8 of the house area =	3.3 m2
Flat Roof area 119 m2 (deemed to have no extra value) =	--
Equivalent weighted area =	427.1 m2

Applying this equivalent area 427.1 m² to the adopted unit rate of $325/m² gave the prevailing market rent of $138,808 for the subject premises. This we would round to $139,000.

Order

28. We therefore needed to revise the prevailing market rent of the subject premises from $146,000 per month to $139,000 per month and we gave the following order on 11 March, 1999 : -

1. The Tribunal's Order dated 12th February, 1999 be amended by changing the new rent from $146,000 per month to $139,000 per month;

2. No order as to costs.