WAH KOON INVESTMENT CO. LTD. v. THE INCORPORATED OWNERS OF ESTORIL COURT

HCA 12755/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12755 OF 1997

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Assessment of Damages

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1. The Plaintiff in this action is the registered owner of the Premises known as the Club House on the Ground floor, First floor and Second floor of Estoril Court, at No.55 Garden Road, Hong Kong ("the Subject Property").

2. By a Lease dated 8th October 1988, the Plaintiff as the landlord leased the Subject Property to the Defendant as the tenant for a fixed term of eight years commencing on the 26th August, 1988 and expiring on the 25th August 1996. It was a term of the Lease that the Subject Property should not be used for any purpose other than as a Club-House for sporting, social and recreational activities of the residents of the said Estoril Court and their permitted guests only. Upon the expiry of the Lease on 25th August 1996, the Defendant failed to deliver vacant possession of the Subject Property to the Plaintiff.

3. By a Writ of Summons filed on 26th November 1997, the Plaintiff claims against the Defendant for vacant possession of the Subject Property; mesne profits from 26th August 1996 up to the date of the delivery of vacant possession of the Subject Property to the Plaintiff.

4. On 16th February 1998, Interlocutory Judgment was entered for the Plaintiff and the Defendant was ordered to deliver vacant possession of the Subject Property to the Plaintiff and to pay damages to the Plaintiff by way of mesne profits for the period from 26th August 1996 to the date of delivery of vacant possession to be assessed.

5. On 1st March 1998, the Defendant delivered vacant possession of the Subject Property to the Plaintiff.

6. By a Consent Summons filed on 15th July 1998, the Defendant paid to the Plaintiff a sum of $382,254.00 by way of interim payment on account of damages to be assessed. This hearing is for the assessment of mesne profits to be paid by the Defendant to the Plaintiff for the period from 26th August 1996 up to 1st March 1998.

7. At the hearing of the assessment herein, the valuation reports prepared by the surveyors were produced. Miss Lau and Mr. Tam, the respective surveyors of the Plaintiff and the Defendant, were also called to give oral evidence.

The Subject Property

8. Estoril Court is located between Garden Road at its North and Magazine Gap Road at its South, in the Mid-levels, Central of Hong Kong Island. It comprises of three high-rise residential blocks, each of 44-storey with a total of 264 units. There are car-parking spaces on the lower ground floor to fourth floor. The whole development was completed in August 1983.

9. The Subject Property is located within a 4-storey podium in between block 1 and block 2 of Estoril Court. The internal accommodations of the Subject Property consist of the following:-

a) Ground Floor

- Gymnasium room
- 2 rooms
- 2 squash courts
- corridors

b) 1st Floor

- General area
- Billiard room
- Meter room
- Female lavatory (includes a shower area and a sauna room)
- Male lavatory (includes a shower and a sauna room)

c) 2nd Floor

- Beauty Centre
- Staircase accesses to 1st floor and corridors

10. The monthly rental of the Subject Property for the eight-year term is as follows:-

26/8/1988 - 25/8/1990	$26,450.00
26/8/1990 - 25/8/1992	$30,417.50
26/8/1992 - 25/8/1994	$34,980.00
26/8/1994 - 25/8/1996	$40,227.00

11. The above monthly rental was exclusive of rates and management fees. It is common ground that the swimming pool does not form part of the Subject Property.

The valuation reports by experts

12. In the valuation report prepared by Miss Lau, expert witness for the Plaintiff, she assessed that the open market rental value of the Subject Property as $68,000 per month. Although Miss Lau had stated in her oral evidence that when she prepared her valuation report, she had considered several comparables, she had not explained in her report as to how she computed and arrived at such figure of $68,000.

13. In the valuation report by Mr. Tam, expert witness for the Defendant, he used a Club House situated in Floral Tower, No.22 Robinson Road, Mid-levels, Hong Kong Island as a comparable ("the Comparable"). He said that this was the best available comparable that he could find out of the 80 odd comparables he had investigated. According to Mr. Tam, the saleable floor area of this Comparable is about 234.5 square metres (or 2,524 square feet). The monthly rental was $20,000 (excluding the use of swimming-pool). This covered the period from 1st September 1995 to 31st August 1997. Having examined the facilities offered by this Comparable and the terms contained in the Tenancy of the Comparable, Mr. Tam adopted the unit rent of this Comparable as the basis for his assessment of the open market rental value of the Subject Property, i.e. $85.3 per square metre or $7.9 per square foot.

(i.e. $20,000÷234.5 sq metre = $85.3 p.s.m. or $20,000÷2,524 sq feet = $7.9 p.s.f.)

14. Mr. Tam then proceeded to list out the factors he had taken into account in his assessment and the adjustments he had made to reflect the difference between the Subject Property and the Comparable. As the contentions of the parties turned on the factors and adjustments adopted by Mr. Tam, I shall, for the sake of easy reference, set out the factors referred to in Mr. Tam's valuation report and the adjustments he had adopted:-

Factors:-

Adjustments:-

15. In this supplemental report, Mr. Tam modified the "commercial element" factor into 2 separate items namely "accessibility to the premises" and "potential commercial activities in relation to the vicinity" as follows:-

16. Mr. Tam then gave a further discount of 30% from the overall adopted rate of 70% to reflect the restriction imposed on the Subject Property by the outline zoning plan. Taking into account of all these adjustments as set out in his report, Mr. Tam concluded that open market rental value of the Subject Property should be $13,300 per month.

The issues

17. According to the evidence of Miss Lau, she agreed that the Floral Tower Comparable used by Mr. Tam was a valid comparable. She also agreed that the factors set out in his report were relevant factors to be taken into account when making the adjustments. Indeed, Mr. Ng, Counsel for the Plaintiff, did not dispute that the unit rent of $85.3 p.s.m. (or $7.9 p.s.f.) adopted by Mr. Tam be used as a starting point for the assessment of the open market rental value of the Subject Property. Mr. Ng further pointed out, and as confirmed by the evidence of Miss Lau, that if one applied the unit rent of $7.9 p.s.f. to the total saleable floor area of the Subject Property, (which was 8,273 square feet as calculated by Miss Lau) this would give a figure of $65,357, (i.e. $7.9 x 8,273) which was quite close to the valuation of $68,000 per month assessed by Miss Lau in her valuation report. According to Miss Lau, this figure of $65,000 odd was reasonable.

18. What is then in dispute between the parties are the deductions or adjustments made to these factors by the Defendant. These include the age, area, commercial element and the outline zoning plan factors. I shall now turn to these factors. However, before I do that, I think it is important for me to point out two matters. Firstly, both expert witnesses agreed that the general trend in the rental market in 1996 was on the rise especially towards the end of 1996 according to Miss Lau. Secondly, I do not consider it as appropriate just to examine each of these factors in isolation. I think they should also be looked at in context and on a global basis. In the course of my deliberation, I have borne these two matters in mind.

The 'Age' Factor

19. In his valuation report, Mr. Tam gave an adjustment of -15% for this factor. He stated in his supplemental report that given everything being equal and that the state of repairs for both properties were reasonable, a 5-year old building (i.e. the Comparable) should definitely worth more than a building of 15 years old (i.e. the Subject Property).

20. It is not disputed that both the Subject Property and the Comparable are maintained in a reasonable condition. But Miss Lau considered that a downward adjustment of -15% was excessive. She stated in her report and in her evidence that the Subject Property was well-maintained and that renovations had been carried out on a regular basis to maintain the building at a reasonable state. On her inspection, she found the Subject Property was in a very good condition. She considered a -5% adjustment would be reasonable.

21. I agree with Mr. Tam that the age of a property does affect its value. But on the other hand, I note that the Comparable is only ten years 'younger' than the Subject Property. Indeed, Mr. Tam also admitted in his evidence that apart from the wear and tear in the Subject Property, it was in good condition. I also note from the original photographs attached to the expert reports that the Subject Property is reasonably well-maintained. Unfortunately, the Court do not have photographs of the Comparable to make a better assessment or comparison of both properties. Having considered the evidence, I agree with Miss Lau that the - 15% adjustment is excessive. Bearing in mind also that the Subject Property and indeed Estoril Court are located in a well-known prestigious residential area as pointed out in Miss Lau's report, I am of the view that a -5% adjustment for the age factor is reasonable.

The 'Area/Size' Factor

22. In the valuation report of Miss Lau, she calculated that the total saleable floor area of the Subject Property as 8,273 sq feet. In the 1st valuation report of Mr. Tam, he obtained a figure of 717 sq metre or 7,720 sq feet. Because of the difference in both reports, Mr. Tam re-calculated the area in which he arrived at a new figure of 740 sq metre or 7,973.14 sq feet in his supplemental report.

23. Mr. Tam explained that the discrepency in his two reports was caused by the distortion in the photocopy plan that he had relied on when he made his 1st calculation. Therefore when he re-calculated the area again, he referred to the original floor plans attached to the Deed of Mutual Covenants and the Lease.

24. Mr. Tam further pointed out that the figure of 8,273 sq feet obtained by Miss Lau was larger than his figure because the report by Miss Lau might have included the void area of the squash court as indicated by Mr. Tam in the floor plan marked as exhibit D3. He confirmed that his second calculation was the correct figure.

25. In reply, Mr. Ng, Counsel for the Plaintiff, submitted to the Court that Miss Lau had not taken into account of this void area as alleged by Mr. Tam. But on the other hand, Mr. Ng acknowledged that he could not rely on this information if Miss Lau had not gone to the witness box to testify the same. Nevertheless, I note that this matter about the calculation of void area was not put to Miss Lau when she gave her evidence, as such, the Court would not be in a position to assess as to what Mr. Tam had said about the inclusion of the void area by Miss Lau was correct or not. In the circumstances and having considered that the calculations were based on floor plans and that they were only approximate figures, I am prepared, for the present purpose, to accept a median figure of 8,123 sq feet (i.e. 7,973.14 + 8,273/2) to represent the total saleable floor area of the Subject Property.

26. Under this 'Area' factor, Mr. Tam gave a -10% adjustment. However, he had not further elaborated as to why this -10% is warranted as far as the Subject Property is concerned. Mr. Tam only testified that in normal case, a smaller size property would fetch a higher unit rate and that the greater the size, the lower unit rate it would obtain. Having considered the size of the Subject Property in relation to the Estoril Court development that its serves and which comprises of 3 residential blocks, each of 44-storey high; bearing in mind also that the rental market was on the rise in 1996, I am of the view that a -10% downward adjustment is on the high side. I will allow a -5% adjustment.

The 'Accessibility and Commercial Activities Element' Factor

27. Mr. Tam gave a total of -60% adjustment for this factor. This was to reflect the restriction imposed under clause 3(v) of the Lease of the Subject Property which restricted the use of the Subject Property to the residents and their permitted visitors only. For this single item, Mr. Tam gave a -30%. He said in his evidence that this clause 3(v) restriction was in effect the same thing as 'accessibility to the premises' which he used in his supplemental report. He then gave a further -30% adjustment to reflect the non-availability of the commercial activities within the Estoril Court development where the Subject Property was located. Mr. Tam stated that the Comparable did not have such residents' restriction. There was direct entrance to the Comparable from the street and that shops and restaurants were readily available on the street.

28. Needless to say, Miss Lau disagreed with the above. Miss Lau stated that the so called 'residents' restriction was not applicable and should not be taken into account in the assessment of the open market rental value of the Subject Property. She stated that the restriction clause was only a term of the former tenancy between the former landlord and former tenant, it should have no relevance in determining the open market rental of the Subject Property. She said that there was no such restriction in the Crown Lease, the Occupation Permit and the Deed of Mutual Covenants for which the Subject Property was subjected to. Miss Lau thus concluded that a zero adjustment should be allowed for alleged restriction clause. In support of Miss Lau's contention, Mr. Ng, Counsel for the Plaintiff cited the case of Associated Deliveries Ltd v Harrison (1984) 50 P & CR 91, Mr. Ng submitted that after the termination of a lease, the provision of the lease ceased to apply at all. It should have no relevance as far as the determination of the market rent was concerned.

29. In respect of the 'accessibility to the Premises' and 'Commercial activities' elements are concerned, Miss Lau considered that the 'accessibility' element should warrant no deduction as there would be sufficient car-parking space for the user of the Subject Property. However, Miss Lau agreed to allow a -10% adjustment for the 'Commercial activities' element.

30. I have considered the evidence of Miss Lau and the submission by Mr. Ng. I agree that once a tenancy has been determined, the provisions therein contained should cease to apply as in the case of Associated Deliveries Ltd v Harrison cited by Mr. Ng. But this does not necessarily mean that the terms of the expired tenancy would have no relevance or bearing in the assessment of the mesne profits of the premises concerned. In Halsbury's Law of England, Vol 27(1) Para 258, it states that:-

'... ... the landlord may recover as mesne profits the value of the premises to the defendant for the period of the defendant's wrongful occupation. In most cases the rent paid under any expired tenancy is strong evidence as to the open market value. Mesne profit, being a type of damages for trespass, may be recovered in respect of the defendant's continued occupation only after the expiry of his legal right to occupy the premises.' --- emphasis added.

As for the present case is concerned, the Court will have to look at the rent paid under the expired Lease of the Subject Property. Apparently the rent paid for the Subject Property was to use it as a Club-house for the residents (and their permitted visitors) of Estoril Court only. Thus, I do think that this restriction clause for 'residents only' is a material factor to be taken into account in assessing the mesne profits of the Subject Property.

31. In the case of Swordheath Properties v Tabet [1979] 1 W.L.R. 285, it was decided that when a Plaintiff had established that the Defendant had remained on as a trespasser in a residential property, it would be the ordinary letting value of the property that would determine the amount of the damages.

32. In the case of Camsilk Co Ltd v High Fashion Corner Ltd [1990] 1 HKC 499, the suit premises had been used on a commercial basis despite that it was certified by the Government and stated in the condition of the lease to be for 'Industrial' use only. It was submitted on behalf of the defendant that mesne profits should be assessed on the basis of the legal 'industrial' use. However, Master Jennings adopted the 'ordinary letting value' principle and assessed mesne profits on the 'commercial' use basis despite the Government restriction and the possible, though unlikely, repossession risk.

33. What then is the 'ordinary letting value' of the Subject Property? On the evidence, the Subject Property had been used, at least from August 1988 up to 25th August 1996 (i.e. the expiry of the Lease in question) as a Club-house for the residents of Estoril Court only. There is no evidence from the Plaintiff that the Subject Property had been and would be opened for use by the general public. Indeed, in the valuation report by Miss Lau, she had stated, under the heading 'Market Analysis', that the user of the Subject Property is physically limited to the residents of the development. I am therefore of the view that the 'ordinary letting value' of the Subject Property should be assessed on the basis that Subject Property was and is to be used as a Club-house for the residents and their permitted visitors only. As such, I agree that adjustment should be made to take into account of such restriction of use by the residents and visitors only. In this respect, Mr. Tam had in his first valuation report suggested a -60% adjustment as he found that the commercial part took up most of the area of the Comparable. Mr. Tam had not further elaborated what he meant by this. However, in his supplemental report, he modified the 'commercial element' into 'accessibility' and 'commercial activities' and gave an adjustment of -30% each. Again, there is no evidence from Mr. Tam to explain on what basis and reasoning he assigned -30% for 'accessibility' and the other -30% for 'commercial activities' especially bearing in mind that originally Mr. Tam assigned the whole -60% just for this single factor of 'restriction for residents only'. In the circumstances and having regard the upward trend in the rental market at the time in question and that a separate adjustment would be made for 'commercial activities', I will allow -15% adjustment for this factor which is half of -30% adjustment subsequently adopted by Mr. Tam.

34. As for the 'commercial activities' element, although the Subject Property is located within the Estoril Court development, shops and restaurants are available in the Coda Plaza which is within a few minutes' walk from Estoril Court. Comprehensive shopping facilities are also available in the Central District which is also within a few minutes' drive from Estoril Court. I accept that a -10% adjustment for this 'commercial activities' element is reasonable.

The 'Outline Zoning Plan' Factor

35. In the supplemental report of Mr. Tam, he argued for a further deduction of 30% because the Subject Property was subjected to a zoning restriction. It was zoned as 'Residential Group B' under the relevant outline zoning plan. This would mean no commercial element would be allowed unless permission was obtained from the Town Planning Board. Mr. Tam supported his contention by attaching the relevant extract of the Outling Zoning Plan No S/H11/7 dated 1st June, 1995 and the explanatory note S/H4/4. H4/4 means the 4th version of the Outline Zoning Plan for area H4, which is the Central District.

36. Miss Lau disagreed with Mr. Tam and pointed out that since the Subject Property was built in 1983, she had to check whether the Subject Property was zoned back in 1983 and not just by relying on the plan for 1995 as produced by Mr. Tam. Miss Lau further pointed out that if the Subject Property was not zoned back in 1983, then the Building (i.e. the Subject Property and Estoril Court) would have its existing use right and would not be subjected to any outline zoning restriction.

37. At the adjourned hearing on 4th November 1998, the Plaintiff produced the 1st version of the outline zoning plan which is dated 14th February 1986. This means the Subject Property is not subjected to the Outline Zoning Plan and that it has an existing use right. Mr. Tam conceded on this point.

38. On the evidence, I accept that the outline zoning plan restriction is not applicable to the Subject Property. Mr. Tam however testified that outline zoning plan though would not affect any existing usage prior to the announcement of the zoning plan, it would affect any change of user after the announcement. On this point, Mr. Ng submitted and for which I accept, that the Subject Property has been used as a Club-house all along. Such use was and is permitted under the Occupation Permit and the Deed of Mutual Covenants of the Estoril Court development and is also consistent with the permitted uses under the 'Residential Group B' of the relevant zoning plan.

39. In the above circumstances, I do not consider a further deduction of 30% is justified under this factor.

Conclusion

40. On the evidence, I am satisfied that the Floral Tower comparable is a good comparable. I am prepared to adopt the unit rent of $7.9 sq feet as a starting point for the assessment of the open market rental value of the Subject Property. Having considered the adjustments made as set out above including the undisputed adjustments for the 'Time' factor at +10% and the 'Equipment cost' factor at +5%, I assess the mesne profits as follows:-

	Factors	Adjustments (%)
a)	Locality	0
b)	Age	- 5
c)	Area	- 5
d)	Time	+ 10
e)	- Restriction of use to residents/accessibility	- 15
	- Commercial activities in the vicinity	- 10
f)	Equipment costs	+ 5
		- 20%	(or 80%)

Assessed unit rent:-
$7.9 sq feet x 80% = $6.32

Assessed monthly rent:-
$6.32 x 8,123 sq feet = $51,337.36

The assessed mesne profits from 26th August 1996 up to 1st March 1998 would be:-

$51,337.36 x 18 4/30 months =	$930,917.46
Less interim payment received =	-382,254.00
	$548,663.46

I award interest on the sum of $548,663.46 at the judgment rate from date of Writ up to payment.

41. As the Plaintiff has succeeded in recovering substantial damages from the Defendant, I consider that the Defendant should bear the costs of the Plaintiff for the assessment. I therefore make an order nisi that the Defendant pays the Plaintiff the costs of the assessment of damages to be taxed if not agreed with Certificate for Counsel. The order to be made absolute upon the expiration of 14 days from the handing down of this decision.