Karl Storz Endoscopy China Ltd. v. Leung Sai Kwan

LDNT 326 OF 2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 326 OF 2001

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J U D G M E N T

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1. By a tenancy in writing dated 6th November 1999 ("the current tenancy agreement") made between Golden Smart Industrial Limited ("the previous landlord") and the Applicant, the previous landlord agreed to let and the Applicant agreed to take House 27, 26th Street, Hong Lok Yuen, Tai Po, N. T. ("the Premises") for 2 years, namely, from 12th October 1999 to 11th October 2001. By this application, the Applicant applies for the grant of a new tenancy of the Premises, pursuant to section 117(1) of the Landlord And Tenant (Consolidation) Ordinance ("the Ordinance").

2. In the notice of application, the Applicant stated that "the Residential Premises was charged by the Previous Landlord to the Union Bank of Hong Kong Limited (now known as Industrial and Commercial Bank of China (Asia) Limited)("ICBC"), ICBC issued proceedings under Order 88 of the Rules of the High Court against the Previous Landlord (HCMP No. 6832/1999). ICBC took possession of the Residential Premises and sold the Residential Premises to the Landlord by an agreement dated 28th June 2001 ("the Agreement"). The Agreement provided that the Residential Premises are sold subject to and with the benefit of the Tenancy agreement."

3. The Respondent, by Form CR101 dated 15th August 2001, notified the Applicant that the tenancy of the Premises would be terminated on 11th March 2002 and further informed the Applicant that he would not oppose an application by the Applicant to the Lands Tribunal for the grant of a new tenancy.

4. The parties reached agreement on the following matters: -

"(a) The Respondent will let the Residential Premises to the Applicant for a term of 3 years commencing from 12 Oct., 2001 at a monthly rent to be determined by the Tribunal (exclusive of rates, management fees and monthly maintenance fees of the swimming pool but inclusive of government rent) with an option to renew the tenancy (terms of option to be agreed between the Applicant and the Respondent);

(b) Subject to the above, refund of the excess to the Applicant by the Respondent for the months of October, November, December 2001 and January, February and March 2002;

(c) Other terms of the tenancy, save for those disputed and clause 7 of the Tenancy Agreement, to be based on the current Tenancy Agreement."

5. The matters disputed are the return of deposit and the undertaking of the duty to repair by the Respondent.

5.1 Deposit

The Applicant seeks a declaration that the deposit of HK$114,000 paid under the current tenancy agreement to the previous landlord is recoverable by the Applicant against the Respondent as expressly provided in clause 5(2)(c) of the current tenancy agreement and as expressly provided in clause 5(a) of the Agreement made between ICBC and the Respondent.

5.2 Clause 5(2)(a)(c) and (d) of the current tenancy agreement provides as follows: -

"(2)(a) The Tenant will on the signing of this Agreement pay to and thereafter maintain with the Landlord the Deposit by way of security for the due performance and observance of the agreements and obligations on the part of the Tenant herein contained. Landlord shall have the right ...... to deduct from the Deposit the amount of any loss or damage suffered by the Landlord ...... and subject thereto the Deposit, ...... shall be returned to the Tenant within 14 days of the expiration or sooner determination of the Term, delivery of vacant possession of the Premises or settlement of the Landlords last outstanding claim ......

(b) ......................

(c) In the event of the Landlord disposing of its interest in the Premises, the Landlord will transfer the Deposit and the benefits and burdens of this Clause 5(2) to its successor in title (to which transfer the Tenancy hereby consents) to the intent that the Landlord's obligation to repay the Deposit to the Tenant shall be an obligation which runs with the land and that the Landlords' successor in title for the time being in possession of the reversionary interest immediate expectant hereon shall be obliged to repay the Deposit to the Tenant in accordance with the terms of this Agreement.

(d) Following any transfer of the Deposit in accordance with clause 5(2)(c) the Landlord shall be absolutely discharged from its obligations herein contained to refund the Deposit or any part thereof to the Tenant."

5.3 Clause 5(a) and (b) of the Agreement read as follows: -

"5(a) The Property is sold subject to and with the benefit of a Tenancy Agreement dated the 6th day of November 1999 ("the Tenancy Agreement") for a term of two years commencing from and including the 12th day of October 1999. No warranty or representation has been, or is given by the Vendor or on behalf of the Vendor as to the accuracy or correctioness or validity of the details of the Tenancy Agreement and the Purchaser is strongly advised to make its own investigation and inquiry thereof. Copy of the Tenancy Agreement is annexed hereto.

(b) The Vendor hereby declares that the Vendor has not received any rental deposit under the Tenancy Agreement."

5.4 The Applicant submits that under section 119J of the Ordinance, the Tribunal has jurisdiction to entertain the Applicant's application for this item and that there is no question of the Applicant requesting enforcement of the tenancy by the Tribunal. The Applicant is simply asking the Tribunal to give effect to a term within the original tenancy, a term which the Respondent has agreed to be bound by.

5.5 Under s. 119J, the Tribunal is only empowered to determine the terms of the new tenancy. Section 119J provides: -

"The terms of a tenancy granted by order of the Tribunal under this Part (other than terms as to the duration thereof and as to the rent payable thereunder) shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the Tribunal; and in determining those terms the Tribunal shall have regard to the terms of the current tenancy and all relevant circumstances"

Clearly the Applicant is asking the Tribunal to determine the liability of the Respondent under Clause 5(2)(c) of the current tenancy agreement and clause 5(a) of the Agreement and give effect to them by making a declaration as sought by the Applicant. What the Applicant asked the Tribunal to do is not to determine a term for the new tenancy. What it seeks to do is solely related to the current tenancy agreement and to give effect to it, namely, to ask the Respondent to perform an obligation under it. This is outside the ambit of the power of the Tribunal under s. 119J.

5.6 Assuming that the declaration sought is a term of the new tenancy agreement, when clearly it is not, its application must fail for the reason hereinafter mentioned. The burden of establishing such a term is on the party proposing it: O'May City of London Real Property [1982] 1 All ER Clause 5(2)(c) of the current tenancy agreement refers to "In the event of the Landlord disposing of its interest in the Premises." This clause only applies when such an event happens. But this is not the situation here, because according to Para. 2 of the Notice of Application, the Premises was charged by the Previous Landlord to ICBC. ICBC issued proceedings under Order 88 of the Rules of the High Court against the Previous Landlord and ICBC took possession of the Premises and sold it to the Respondent. There is therefore no disposal of the premises by the Previous Landlord of the Premises.

5.7 Further, for clause 5(2)(c) to apply, the Previous Landlord will have to transfer the Deposit to its successor in title. So if the Previous Landlord did not transfer the Deposit the obligation to repay the Deposit will not be transferred to his successor in title and the latter is under no obligation to repay the Deposit to the Tenant. This is consistent with clause 5(2)(d), which provides that following the transfer of the Deposit in accordance with clause 5(2)(c), he will be absolutely discharged from its obligations to refund the Deposit to the Tenant. It follows that if the Previous Landlord did not transfer the Deposit in accordance with clause 5(2)(c), the obligation to refund the Deposit to the Tenant still rests with him and not his successor in title. In clause 5(b) of the Agreement, ICBC declared that it had not received any rental deposit under the Tenancy Agreement. From the nature of the Order 88 proceedings which are proceedings relating to mortgage action, this must be true. In the premises, the Applicant has failed to prove that there was a disposal of the Premises by the Previous Landlord. It has also failed to prove that the Previous Landlord transferred the deposit to its successor in title. This Tribunal cannot see any ground upon which the Applicant can invoke clause 5(2)(c) of the current tenancy agreement. Its application for the said declaration must fail.

6. Repairs

The Applicant applies for an order that, to the reasonable satisfaction of the Applicant, the Respondent will undertake to do the repair works set out in the Schedule, namely: -

1. repair and repaint all areas affected by water damage in the Residential Premises (which will be identified by the Applicant);

2. replace or repair the cabinets situated in the garage;

3. replace the skimming filter and replace the defective light of the swimming pool and take all other necessary measures to ensure that the swimming pool is in a clean and useable condition;

4. replace or repair all split/damaged timber parquet flooring in the Residential Premises (to be identified by the Applicant);

5. replace or repair the outside lock to the door leading to the amma quarters;

6. repair the peeling paint on the balcony railings of the Residential Premises.

6.1 The Applicant submitted that the items of repair listed in the schedule are a mixture of defects of an inherent or latent nature and/or fair wear and tear (Clause 3(3)(a) of the current tenancy agreement). Under clause 17 of the Agreement, the Respondent agreed to take the Residential Premises and the swimming pool on an "as is condition". Having agreed to take the Premises subject to the obligations under the current tenancy agreement, the Respondent cannot now argue that she is under no obligation to repair.

6.2 Under clause 3(3)(a) of the current tenancy agreement the Applicant (the Tenant) agreed: -

"(a) At all times during the Term to keep the Premises and the Equipment therein (save and except any Equipment within the Premises not exclusively serving the Premises) in good clean and substantial repair and condition save and except defects of a structural, inherent or latent nature and to deliver up the same to the Landlord at the expiration or sooner determination of the Term in like condition ...................."

6.3 Clause 4(4) of the current tenancy agreement provides that the Landlord agrees "to maintain, repair or replace (if appropriate) the structure of the Premises and any latent or inherent defects in all the electrical or mechanical installations in the Premises at the Landlord's costs and expenses. Provided that the Landlord's obligations shall not arise unless and until written notice of wants of repair shall have been served on the Landlord."

6.4 Under the current tenancy agreement, the duty to repair on the parts of the Tenant and the Landlord are respectively set out under clauses 3(3)(a) and 4(4). The Tribunal's power under s. 119J of the Ordinance is to determine the terms of the new tenancy. It has no power to order the Respondent to give an undertaking of repair under the current tenancy agreement.

6.5 The Applicant submitted that the items of repairs in the schedule are a mixture of defects of an inherent or latent nature and/or fair wear and tear. Assuming that the Tribunal has jurisdiction to order the Respondent to give the said undertaking, there has never been finding of fact by the Tribunal as to whether the items of repair set out in the Schedule are defects of an inherent nature and/or fair wear and tear, because there was no trial in this aspect.

6.6 Under clause 4(4) of the current tenancy agreement the Landlord's obligations to repair only arise after a written notice of wants of repair has been served on the Landlord. There is no evidence of such service.

6.7 The Applicant is in effect asking the Tribunal to determine that the items of repairs fall within the exceptions to clause 3(3)(a) of the current tenancy agreement, and that the Respondent's obligations to repair these items have arisen. Without such determinations the Tribunal cannot order the Respondent to undertake to repair the same.

6.8 Under s. 119 of the Ordinance, the Tribunal has no power to give effect to the terms of the current tenancy agreement. Its power is only limited to the determination of the terms of the new tenancy. What the applicant asked for is not to determine the terms of the new tenancy, but to give effect to the current tenancy agreement. Even if the Tribunal has the power to do so, the Applicant's application must fail, for the reasons hereinbefore mentioned. I therefore dismiss its application.

7. The amount of rent payable under the new tenancy

In reaching the prevailing market rent of the subject premises, both parties used the following adjustment factors: -

Applicant's expert ("AW")	Respondent's expert ("RW")
(1) location	(1) location and tranquillity
(2) quantum	(2) aspect and view
(3) garden	(3) time
(4) swimming pool	(4) swimming pool
(5) chattels	(5) chattels/furniture
(6) condition	(6) condition and age

I would consider the adjustment factors not used in common by both parties, and then proceed to consider the adjustment factors used in common by both parties.

7.1 Garden

The Applicant's expert ("AW") remarked in her report that "the gardens in Hong Lok Yuen are very generous for the most part and I do not consider that minor difference in size warrant an adjustment in rent. However, comparables 2 and 5 have considerably larger garden areas than the subject and I would make downward adjustments of between -2.5% and -1.5% to reflect the poorer garden provision of the subject house." The subject premises has a garden of 221.4m2, whereas AC2 (Applicant's second comparable) has a garden of 425m2 and AC5 has a garden of 350.3m2. The Respondent made no challenge to the adjustments. I accept the adjustments as being correct adjustments.

8. Quantum

AW opined that "as the floor area of a property decreases, the unit rate will increase. Comparables 1, 3 and 4 are smaller than the subject premises and I have made a downward adjustment of 1% for every 10 square metres difference in size to account for this factor." RW commented that only when the difference in area is more than 100m2 then adjustment is justified.

8.1 People who are going to rent a house in Hong Lok Yuen would expect to rent a place having a big area. One would expect that a landlord would only reduce the unit rate of rental when the area of the house is substantially bigger than other houses in order to attract potential tenants. It depends on the circumstances of each case as to how the house is substantially bigger than other houses. In my judgment for Hong Lok Yuen a house can only be regarded as substantially bigger than another house if it is at least 50m2 bigger in area than the other house. AC1 has an area of 194m2, whereas the area of the subject premises is 239.6m2. A difference in area between the 2 properties is only 45.6m2. In my judgment the adjustment factor of quantum is not applicable.

9. Aspect and View

AW did not make any adjustment on this factor as she opined that the view from all the property is the estate is similar. RW made the upward adjustments ranging from 4% to 10% to his comparables because the subject premises is situated at a corner site between 26th Street and 28th street. 26th street has a width of 8.8m. While 28th street is 4.8m wide. RW opined that the subject premises was built on a higher ground commanding open views on 2 sides. The Respondent's counsel quoted a statement from "The appraisal of Real Estate" namely, "A hill may mean little in a mountainous area, but in a predominantly flat area, and elevated and wooded section can enhance property values." A photo contained in RW's report shows the view from the rear garden. The view of the mountain is partially blocked by building. The photographs contained in AW's report (p. 21 and P. 22) show that the view from the subject premises is not completely open.

9.1 The open views as alleged by the Respondent are only partially open. It is not appropriate to give as weighty as 10% upward adjustments to 5 of the comparables used by the Respondent, and 4% to the 4 of his comparables. I would reduce each of these adjustment percentage by half, after considering all the relevant evidence under this adjustment factor.

9.2 Since AC7 is in the vicinity of RC6, I would give it an upward adjustment of 2%.

10. Time

AW made no adjustment to the time factor. RW initially used 26th January 2002 as the relevant date for the assessment of the PMR for the new tenancy. However, since both parties agreed to rise 12th October 2001 as the commencement date, RW submitted a revised table to reflect that no adjustment was made on the factor of time. Thus the adjustment factor of "time" is no longer is an issue.

11. Having considered the adjustment factors which are not used in common by both parties, I proceed to consider those used as common adjustment factors.

11.1 Location/Location and tranquillity

AW made downward adjustments on the "location" factor because of the following matters: -

1. higher crime rate;

2. the Residential Premises is the furthest point from the commercial and recreational facilities; and

3. considerable noise from the slope maintenance projects to the rear to the premises.

RW agreed that due to the existence of the hill at the rear of the subject premises there may be higher crime rate. AW did not state how the crime is related to the hill slope at the rear. If she intended to adduce evidence to support her contention that the existence of the hill would tend to increase crime, she should have obtained some information in this regard from the management of Hong Lok Yuen, or from the relevant department of the Government. The Premises has been built for more than 10 years. It is not be difficult to show whether the existence of the slope at its rear tends to increase the crime rate. But no such evidence was adduced in the trial. I therefore dismiss this piece of evidence.

11.2 The slope maintenance work was carried out from October 2001 to the 3rd week of January 2002, lasting for about 31/2 months. But the residents of the Premises have not been asked to give evidence to show the impact of the noises on them. For the short period of 31/2 months against a tenancy of 3 years, the -5% adjustment is out of proportion to the extent of disturbance or nuisance that should be given. I would only allow an adjustment of -2% to all the comparables.

11.3 The Respondent contended that most comparables are quite apart from the recreational and commercial facilities and therefore driving is required. But AC1 is very close to the such facilities. No driving is required. AC2, AC6 and AC7 are within short driving distances from the facilities. AC3, AC4 and AC5 are further away from the facilities. The subject premises is at the futherest point from the facilities. It is justified to give adjustments for this factor.

11.4 As regard proximity to the recreational facilities, I would give a -4% to AC1, because it is very close to such facilities. AC2, AC6, AC7 and RC6 (Respondent's sixth comparable) are further away from the facilities, I would give each of them an adjustment of -3%. AC3, AC4, AC5 and RC1 are further away, and I would give them an adjustment of -2%.

11.5 RW gave a 3% adjustment to RC6 and RC7 because they are suffering from heavy noises for fronting the main roads of Hong Lok Road West and the Hong Lok Road East respectively. I accept his opinion.

11.6 The Respondent contended that membership fee is required for the admission of the club house. The Tribunal is not informed the amount of the fee required, or whether the fee is a reasonable fee. I attach no weight to this piece of evidence.

11.7 RW was of the view that according to its expert, the people living in Hong Lok Yuen prefer tranquillity to accessibility to the commercial facilities. There is no evidence to support such opinion. Tranquillity and accessibility to the commercial facilities are not conflicting elements. A person goes to commercial facilities for the purpose of having meals, doing exercise or buying things. How could such activities carried on destroy tranquillity? AC1 is closest to the commercial facilities. How could the activities carried on there affect the tranquillity of AC1? The Respondent's contentions have no merits.

12. Condition/Condition and Age

Having looked at the photographs of both parties, I accept that the comments made in AW's report are more reasonable. The photographs in AW's report show closer view of the comparables than those shown in RW's report, so that I could judge the conditions of the comparables and the Premises more clearly.

12.1 AW had the opportunity of viewing inside of AC7. I accept her evidence and proposed adjustments relating to this comparable.

12.2 RW gave RC2 (AC1) and RC3 the same adjustment (-2%). So RC2 and RC3 should be in the same conditions. AW gave AC1 0% adjustment; therefore RC3 should also be given 0% adjustment. RW gave RC4 (AC2) and RC6 the same adjustment, namely -3%. AW gave AC2 an adjustment of -2.5%. So the adjustment for RC6 should be -2.5%.

13. Chattels/Furniture

RW agreed to the Applicant's adjustments under this head.

14. Swimming Pool

AW made a 3% upward adjustment for premises with a swimming pool, whereas RW only allows 2%. In my judgment a swimming pool is an important asset in the premises. It is more appropriate to give 3% adjustment as proposed by AW.

15. In arriving at the unit rate of each comparable, I use the effective area adopted by RW. The rent charged for each comparable covers not only the building but also the garden area. It is reasonable to assess the unit rental covering the garden to be 1/10 of the unit rental covering the building. Therefore the effective area of each comparable should be the area of building +1/10 (area of garden). I also adopt the formulation proposed by RW for dealing with the rent-free period as the formulation is reasonable.

16. The average unit rate of the comparables is $207.95 per sq. m. ($2,079.5÷10). Therefore the monthly rental for an effective area of 261.74 m2 is $54,428. This is rounded up to $54,400.

17. I impose the following orders: -

1. The Respondent shall let the suit premises to the Applicant for a term of 3 years commencing from 12th October 2001, at a monthly rent of $54,400 (exclusive of rates, management fees and monthly maintenance fees of the swimming pool but inclusive of government rent) with an option to renew the tenancy (terms of option to be agreed between the Applicant and the Respondent);

2. Subject to the above, refund of excess payment of rent be given to the Applicant by the Respondent for the months of October to December 2001 and January to March 2002;

3. The disputed terms are all dismissed;

4. The Applicant has to place a deposit of an amount which is equal to 2 months of rent, namely $108,800 ($54,400 x 2) within 1 month's time;

5. Other terms of the new tenancy, save and except clause 7 of the current tenancy agreement, are to be the same as those terms contained in the current tenancy agreement;

6. No order as to costs.