Hsin Kuang Restaurant (Holdings) Ltd v. Commissioner of Rating & Valuation

Lands Tribunal
Rating Appeal No. 52 of 1997

HEADNOTE

Property Law – rating appeal – a large restaurant of nearly 4,000 square metres in Kwai Chung – Commissioner confirmed his assessment of $13,752,000 and appellant sought reduction to $6,400,000 – disputes on adjustments for location, layout, time, quantum and quality –

Held :

1. Adjustments for location are often subjective and arbitrary and are less reliable, particularly where the comparables are not situated in the immediate neighbourhood of the property to be valued ;
2. An adjustment of 15 % should be made to the rent of a comparable in this case with an irregular layout and numerous unusually large columns ;
3. In the absence of better evidence, adjustments for time with the aid of established rental indices are accepted ;
4. Adjustments of 3% to 15% for quantum (size) proposed by the Respondent's expert for comparables with sizes ranging from 333.8 to 3,074 square metres are accepted ; shop with a much smaller size of 181.4 square metres is not considered to be a suitable comparable ;
5. Adjustments of 3% to 5% for some comparables in newer buildings of better quality are justified ;
6. Appeal allowed ; rateable value fixed at $8,400,000.

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Rating Appeal No. 52 of 1997

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JUDGMENT
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In this matter Hsin Kuang Restaurant (Holdings) Limited ( the Appellant) appeals under s. 42 of the Rating Ordinance, Cap. 116 (the Ordinance) against a decision of the Commissioner of Rating and Valuation (the Respondent) that the rateable value of the premises described as 1 Wo Yi Hop Road, Ground floor, Kwai Chung, Restaurant (the appeal tenement) be confirmed at $13,752,000. The Appellant's main ground of appeal is that the tenement has been valued above its proper rateable value. During the hearing the Appellant's counsel advocated that the rateable value should be reduced to $6,400,000 as assessed by the Applicant's expert witness.

2. Rateable value is defined in s.7(2) of the Ordinance as :

"an amount equal to the rent at which the tenement might reasonably be expected to let, from year to year, if –

(a) the tenant undertook to pay all usual tenant's rates and taxes; and

(b) the landlord undertook to pay the Government rent, the costs of repairs and insurance and any other expenses necessary to maintain the tenement in a state to command that rent."

s.7A(4) of the Rating Ordinance provides that for a tenement in respect of which a proposal to alter the valuation list has been made :

"the rateable value shall be the value which would have been ascribed thereto on the relevant date on the assumption that at that date –

(a) the tenement was in the same state as at 1st April of the year of the making of the proposal ;

(b) any relevant factors affecting the mode or character of occupation were those subsisting at 1st April of the year of the making of the proposal; and

(c) the locality in which the tenement is situated was in the same state, with regard to other premises situated in the locality, the occupation and use of those premises, the transport services and other facilitates available in the locality and other matters affecting the amenities of the locality, as at 1st April of the year of the making of the proposal."

In this appeal, the "relevant date" designated under s.11(1) of the Ordinance is 1st July 1996 and "the year of the making of the proposal" is 1997.

The Appeal Tenement

3. The appeal tenement is described in detail in the valuation reports which contain photographs and plans submitted by the expert witnesses. It is on the ground floor of Kwai Sing Centre, standing on a sloping site at the junction of Wo Yi Hop Road and Castle Peak Road, Kwai Chung, at the fringe of a residential area adjacent to industrial areas. Several public housing estates (Shek Lei Estate, Shek Yam Estate and On Yam Estate) are in the near locality.

4. Kwai Sing Centre is a composite development comprising two 24-storey residential blocks standing on a 5-storey podium. The lowest two floors (Levels 1 and 2) of the podium consist of shops facing arcades and shops facing Castle Peak Road, Kwai Chung. Level 3 comprises the appeal tenement and several shops facing Wo Yi Hop Road and Castle Peak Road, Kwai Chung. Level 4 is a carpark and the highest floor (level 5) of the podium is for commercial use. The appeal tenement, previously occupied as a restaurant, is now vacant. It has three entrances : one from Wo Yi Hop Road, one from Castle Peak Road, Kwai Chung and one from the shopping arcade below.

5. The internal floor area of the tenement, as agreed between the experts of both parties, is 3,964.54 sq.m.

Comparables :

6. The Applicant's expert uses 5 comparables in his valuation : 3 shops in Kwai Sing Centre, 1 restaurant in Metroplaza close to Kwai Fong MTR Station, and 1 restaurant at Belvedere Garden at the fringe of Tsuen Wan. The Respondent's expert's valuation relies on 4 comparables : 2 restaurants in Metroplaza close to Kwai Fong MTR Station and 2 restaurants in Tsuen Wan close to Tsuen Wan MTR Station. It is noted that there is one common comparable used by both experts. During the hearing, apart from showing the Tribunal the analyses of his own comparables, each expert also analysed the comparables produced by the other expert. Their analyses are as follows :

Expert Witnesses' Valuations

7. The Applicant's expert analysed five comparables ( i.e. comparables 1 to 5 in the above table ). He arrives at adjusted unit rates of $178.3, $128.2, $135.6, $126.7 and $144.2 per square metre respectively. He thinks that the first three are more suitable as they relate to comparables in the same shopping centre (Kwai Sing Centre) as the appeal tenement. He also opines that it is difficult to quantify the locational difference of comparables if they are in a very different locality. He finally adopts a unit rate of $135 per square metre of internal floor area producing a valuation of $535,212.9 per month ( i.e. 3,964.54 square metres @ $135 ), or $6,422,554.8 per annum rounded down to $6,400,000.

8. However, the Respondent's expert is of the opinion that the shops in Kwai Sing Centre are too small in size to be good comparables. He also thinks that the restaurant at Belvedere Garden is not a good comparable as it is in a severed off location and virtually only serves the residents of Belvedere Garden with a population of only some 30,000 people.

9. The Respondent's expert based his valuation on four comparables ( i.e. comparables 5 to 8 contained in the table in paragraph 6 above ). His analyses of these comparables produce respectively adjusted unit rates of $292.9, $309, $333 and $287 per square metre. He thinks that comparable 6 with an adjusted unit rate of $309 is the best comparable in terms of size and location. He further considers that comparables 5,7 and 8 are also relevant as they are large commercial premises occupied as restaurants in the same locality as the appeal tenement. At the end he adopts a unit rate of $289 per square metre which is at the lower end of the range. He arrives at a valuation of $1,145,752 per month ( 3,964.54 square metres @ $289 ) rounded up to $1,146,000 per month or $13,752,000 per annum.

10. We note that there is one common comparable used by both experts. It is one of the two restaurants at level 5 of Metroplaza ( comparable 5 contained in the table in paragraph 6 above ).

Inspection

11. On 27^th August 1998, the Tribunal inspected the appeal tenement and all the comparables used by the experts in the presence of both parties.

Adjustments

12. There are wide differences between the two experts as to the amounts of various adjustments. We examine the experts' evidence and determine the amounts of adjustments we think fit as follows : -

Location, access, position & street frontage

All these adjustments relate to whether or not the premises are conveniently positioned to attract customers. The Applicant's expert makes only one single adjustment for location whereas the Respondent's expert, where he thinks fit, breaks this down into a number of adjustments : location, access, position and street frontage. The amounts of adjustments made by the two experts are wide apart. We have inspected the tenement and all the comparables quoted by the experts and feel that we are able to determine a single adjustment to cover all these.

We note that the restaurants at Nam Fung Centre and Luk Yeung Sun Tsuen (comparables 7 and 8) are at locations close to a main MTR station, Tsuen Wan Station, a location much busier than that of the appeal tenement. We consider that a downward adjustment of –30% to reflect the difference is justified. The restaurants at Metroplaza (comparables 5 and 6) are close to Kwai Fong MTR station. Although this location is not as good as the location close to Tsuen Wan MTR Station, it is still substantially better than the location of Kwai Sing Centre where the appeal tenement is. We consider that a downward adjustment of -15% is justified here. With the benefit of site inspection, we are able to observe that the business potential at Belvedere Garden and at Kwai Sing Centre is more or less the same. We therefore make no value adjustment for the restaurant at Belvedere Garden (comparable 4) to reflect the locational difference. At Kwai Sing Centre where the appeal tenement is situated, we do not think it is necessary to make any adjustment to the rent of the shop with road frontage (comparable 1) but we consider that it is reasonable to make an upward adjustment of +30% to the rent of the arcade shop (comparable 3).

Layout

The Respondent's expert makes an upward adjustment of +20% to take into account the irregular layout of comparable 5 and the presence of numerous unusually large columns therein. The Applicant's expert thinks that such an adjustment is not necessary. We consider that an upward adjustment of +15% should in the circumstances be reasonable.

Time

The Applicant's expert makes time adjustments to comparable lettings with various commencement dates to reflect the movement of the rental market. He relies on the Jones Lang Wootton Index and the Rating and Valuation Department Index. Although we accept the Respondent's expert's argument that these indices can only show the general market trend territory wide and may not be applicable to a particular area or to the appeal tenement which is very large in size, we do not accept his suggestion that no adjustment at all for time should therefore be made because of the lack of conclusive evidence as to the market movement. This suggestion cannot be right. In the absence of better evidence, we find it reasonable to accept the Applicant's expert's adjustments for time.

Quantum

The Applicant's expert's adjustments range from –2% to –10% and the Respondent's expert's range is –3% to –20%. The appeal tenement is much larger in size than most of the comparables. We find that the adjustments suggested by the Respondent's expert are more reasonable and should be adopted.

Quality

The Applicant's expert makes downward adjustments to the rents of the restaurants at Belvedere Garden, Metroplaza and Luk Yeung Sun Tsuen to reflect that these restaurants are in newer buildings of better quality. The Respondent's expert does not make any adjustments for this. Whilst we agree that it is reasonable to make such adjustments, we consider that the amounts of adjustments should be smaller than those adopted by the Applicant's expert.

Excessive rent

We do not accept the Applicant's expert's argument that there should be a downward adjustment to the rent of comparable 1 to reflect that the tenant could not afford the rent after tenancy renewal.

Unrealistic rent

The Respondent's expert suggests an upward adjustment of +100% to reflect the unrealistically low rent of comparable 2. The Tenant pays a rent of $25,000 per month or 2% of gross receipts whichever is the higher. For this reason and having regard to the very small size of this shop, we consider that this is not a suitable comparable. We therefore exclude it from our final analyses.

13. The adjustments we adopt in our final analyses of the comparables are as follows :

Conclusion

14. Our analyses in paragraph 13 produced the following estimated rents for the appeal tenement :

The Applicant's expert thinks that as the restaurants at Nam Fung Centre and Luk Yeung Sun Tsuen (comparables 7 and 8) are situated in much busier locations, close to Tsuen Wan MTR station, they are not realistic comparables. The Respondent's expert thinks that the restaurant at Belvedere Garden (comparable 4) is not a good comparable because it is situated in a much quieter location mainly serving residents of Belvedere Garden which is completely severed from the Tsuen Wan town area. We agree that adjustments for location are often subjective and arbitrary and are less reliable, particularly where the comparables are not situated in the immediate neighbourhood of the property to be valued. We also note that the estimated rents produced by analysing comparables 4 and 6 are respectively too low and too high and are out of line. They are also not reliable.

15. The remaining comparables are the shops at Kwai Sing Centre (comparables 1 and 3 within the same building as the appeal tenement) and a restaurant at Metroplaza (comparable 5) which is the only common comparable between the parties. These respectively produce monthly estimated rents of $800,837, $618,468 and $693,795 and reasonably support a rental valuation of $700,000 per month.

16. We have studied the rental history of the appeal tenement. It was originally let for a term of 8 years commencing from 1^st April 1991 to 31^st March 1999 at a rent of $505,308 per month for the period from 1^st April 1991 to 31^st March 1994 ; $631,635 per month for the period from 1^st April 1994 to 31^st March 1997 ; and at market rent for the period from 1^st April 1997 to 31^st March 1999. By a deed of variation dated 24^th November 1994 the rent for the period from 1^st April 1994 to 31^st March 1997 was changed to $581,104.20 per month (1.4.94 – 31.3.95) and $631,635 per month (1.4.95 – 31.3.97). By a second deed of variation dated 19^th July 1996, the rent for the period from 1^st April 1995 to 30^th September 1995 was changed to $581,104.20 per month and the rent for the period from 1^st October 1995 to 31^st March 1997 was changed to $520,000 per month. We were told that the tenant's business closed down in about April 1997.

17. The rent passing as at 1^st July 1996 (the "relevant date") is $520,000 per month. However, we consider that this rent is not reliable for the purpose of assessing the rateable value because it was apparently the result of a final negotiation between the landlord and tenant covering the last period of the tenant's dying business. The landlord and tenant in such circumstances might consider certain special factors which could result in an agreement of a rent hardly representing the market rental level.

18. Recently the appeal tenement has been let at a rent of $570,000 per month for a period of 4 years commencing from 1^st December 1998. The tenant started to occupy the appeal tenement as from 1^st August 1998 and is granted a rent free period of 4 months from 1^st August 1998 to 30^th November 1998 for fitting out / decoration work. The Applicant's expert opines that the fitting out / decoration work would probably take the whole of 4 months. In these circumstances, we consider that the 4 months are in fact granted for preparing the appeal tenement for occupation as a home for the elderly and are not a rent free period which should be taken into account in rental analysis. In relating this rent to the relevant date of 1^st July 1996, the Applicant's expert argues for a 10% drop of rental level from this date to August 1998 whereas the projected Jones Lang Wootton Index suggests a drop of 23.8%. We consider that the 10% drop adopted by the Applicant's expert is on the low side.

19. Whilst we fully appreciate the limitations of rental indices which can only indicate a general value trend of a particular type of property over the territory, we consider that it is useful in this case to carry out a check on our valuation of $700,000 per month by analysing the recent rent of the appeal tenement with the aid of an index. Comparing the valuation of $700,000 per month as at 1^st July 1996, the recent rent of $570,000 per month represents a drop of market rental level of 18.6% from the relevant date. We consider that this is not out of line and supports the assessment of $700,000 per month or $8,400,000 per annum.

20. Accordingly we determine the rateable value of the appeal tenement at $8,400,000.

Orders

21. In accordance with our findings we make the following orders :

1. Appeal is allowed; rateable value is fixed at $8,400,000;

2. The Commissioner of Rating and Valuation is directed to amend the valuation list accordingly with effect from 1^st April 1997 ;

3. The Commissioner of Rating and Valuation shall within 1 month refund to the Appellant any rates overpaid ;

4. Order nisi for costs in favour of the Appellant on the High Court party and party scale with certificate for counsel to be taxed if not agreed ; leave to either party to apply within 14 days after the delivery of this judgment to vary the order nisi otherwise the order shall on the expiration of that period become absolute.

5. Liberty to apply for ancillary and consequential matters.