KINGSLEY SHIH AND ANOTHER v. WAH YING CHEONG CO LTD.

Landlord and Tenant - Part IV - applications for now tenancies - duration and rent disputed - building in advanced state of dilapidation due to lack of maintenance - owner contemplating redevelopment has applied for a modification of the crown lease conditions - in the absence of any statutory order, likelihood of redevelopment to be based on economic reasons rather than the owner's expressed intention - cost of renovation out of proportion with the expected return - any astute owner, in such circumstances, was most likely to opt for redevelopment - only those repairs which are absolutely necessary or ordered by Government, could be expected to be carried out - duration of tenancies to be reasonable in all the circumstances - owner's estimate on timing for commencement of redevelopment too vague - Prevailing Market Rent is that reasonably expected to be agreed by hypothetical parties fully conversant with the market and any other factors which may affect the rental value - personal considerations such as sitting tenant's improvements which cannot be recovered on termination, should not be deducted - value's comparison with comparables gave insufficient weight to-differences in design and standards of maintenance. Held : (1) New Tenancies granted for 2 years from 1st January 1933. (2) Rents fixed at : No. 2 G/F - $7,500.00 per month; No. 4 G/F - $8,000.00 per month. Both rents to be inclusive of rates and caretaker's services - Sections 115, 117, 119(1) and 119(1), Landlord and Tenant (Consolidation) Ordinance, Cap.7.

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Tribunal Application Hos.3898/87 & 3728/87

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D E C I S I O N

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1. These applications for new tenancies under Section 117(1) of Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7, relate to adjacent ground floor flats in premises known as "Vista do Vale" situated at Numbers 2 and 4 Sha Tin Heights Road, Sha Tin in the New Territories. The subject premises are located immediately above the Tai Po Road where it overlooks the Sha Tin New Town.

2. The two storey premises comprising four flats were erected in 1956, and over the intervening the years, have fallen into a state of dilapidation, leading to the two flats on the upper floor having been left vacant since 1983 in one case, and sometime before 1977 in the other. The design is not unattractive, but is somewhat outdated featuring windowless kitchens which are associated more with the servant's quarters than the main areas of the flats. The present case concerns only the ground floor flats which are both habitable, and have suffered to a lesser extent than the first floor from the landlord's reluctance to carry out any regular maintenance. Evidence suggested that, apart from certain works prompted by the tenant's solicitor, any maintenance on the property has largely been due to the two tenants Mr. Shih and Mr. Wong who are the applicants in this matter. In particular, Mr. Wong, who is a keen gardener, has been responsible for the planting and care of most of the trees and other plants in the garden. He also replaced some windows and repainted the exterior of his ground floor flat at No. 4. There is no permanent water supply, and water is provided from a well which is not always reliable. Although the water pump has recently been replaced by the landlord, there have still been shortages from time to time. An elderly, live-in, caretaker is employed by the landlord but it would appear that his prescribed duties and performance are minimal.

3. I have inspected the property and also heard evidence from a Mr. Daniel Lo Cho Ki, a Building Surveyor assigned to the Dangerous Building Section of the Building and Lands Department. Mr. Lo was called by the applicant Mr. Kingsley Shih, the tenant of No. 2 Ground Floor, to advise the Tribunal of the inspections made by officers of his department following representation from Mr. Shih after plaster fell from the kitchen ceiling. On 4th December 1987, a Mr. Au, a Surveyor in another section of the same office as Mr. Lo, inspected the prem ses and reported that it was in an advanced state of dilapidation. Ho referred the case to the Dangerous Building Section leading to a Mr Ma carrying out a further inspection. Mr. Ma's report stated that the ground floor, with which this case is concerned, was generally well maintained, except for minor concrete spalling on the ceiling of the kitchen of Mr. Shih's flat. Reference was made to tile first floor ceiling of No. 2 being covered with tarpaulins and boarding as well as the ceiling being subjected to severe spalling loading to the steel reinforcing bars being exposed. Also some cracked beams were noted as well as a badly rusted down-pipe. It was reported that the roof showed patches of dampness and improper water proofing. Because his Section is mainly concerned with buildings becoming dangerous he reported that no immediate danger of collapse was evident.

4. My own inspection of the premises together with the parties confirmed the observations of the Government surveyors. I also noted that the wood block floor immediately inside the entrance to the building was lifting due to dampness, presumably due to the leaking roof. The common areas were extremely run down and well overdue for minor repairs and repainting. The first floor flats had a number of broken windows, some of which had been boarded up. Most of the window frames of the subject ground floor flats were severely rusted and few were capable of being opened and closed. Mr. Wong had actually replaced some of the windows of his flat at his own expense. The general appearance of the premises was that of neglect. What could have been an extremely attractive building in a desirable setting has been reduced to a very shabby and run down property.

5. Mr. Lo explained that, as a result of his department's recent action, the owners have been advised by the Building Authority to carry out repairs to the first floor ceiling and the common staircases, as well as deal with the leaking roof as soon as possible, in order to prevent further deterioration. Apparently this letter has gone to the landlord's old address so that "Mr. Chan Kwok Ping, the Manager of the landlord company, in his evidence, was unable to confirm if and when any further repairs might be carried out. In fact Mr. Chan explained the respondent's position as that of having applied, as recently as two months age, for a modification of the crown lease conditions to allow for redevelopment of the property. Even if no suitable modification could be agreed with the Crown, he explained that it would still be his company's intention, if need be, to redevelop according to the existing lease conditions. Accordingly the respondont sought to grant new tenancies in respect of the two subject premises for one year only, as Mr. Chan expected to be in a position to demolish the existing structure in about a yerar's time. The Government has asked the respondent to submit a concept of redevelopment which is now being prepared.

6. Mr. Shih sought a new tenancy for 2 years from 1st January 1988 for No. 2 Ground Floor and Mr. Wong sought a new tenancy from the same date for a 3 Year term. Both the tenancies, which had previously been subject to the rent control provisions of Part II of the Ordinance, were terminated on the 31st December 1987 by the serving of notices under the Part IV provisions of section 119(1).

7. During the hearing I ruled that each of the new tenancies should be for a duration of 2 years. I explained then that under the provisions of section 119(1), I was obliged to consider what duration would be "reasonable in all the circumstances" of this case. Mr. Chan's redevelopment proposals have been initiated only recently, and it was too soon to know how long it might take for his application for modification of the lease conditions to be processed. Mr. Chan admitted it might take more than one year. His statement that he would still redevelop even if a modification was not granted may have assured his intention, but it did not help to resolve the vagueness of the time which could be expected to have elapsed before he would require possession. Most leases of domestic promises in Hong Kong are granted for 2 years and the comparables cited by the respondont's valuer Mr. Chiu Kam Kuen were each for 2 year periods. I have therefore taken the view that, in all the circumstances of this case, any duration of less than 2 years would be unreasonable, but the 3 years sought by Mr. Wong would be excessive. Therefore both the new tenancies will be for 2 years from 1st January 1988.

8. Although these two flats differ slightly in layout they are much the same size being 2,350 sq. ft, for No. 2 and 2,200 sq. ft, for No. 4. They are also very similar in most other respects. Mr. Chiu Kam Kuen, a chartered surveyor, who was called by the respondent to give evidence concerning his reports and valuations of the two premises, valued each of them at $11,500.00 per month inclusive of rates and the caretaker's service.

9. I was informed that the latest Ratable Value assessments for each of the flats were $93,000.00 for No. 2 Ground Floor and $97,200.00 for No. 4 Ground Floor. These assessments are based on the annual rental value of the premises as at 1st October 1986 and equate to $7,750.00 per month exclusive of rates in respect of No. 2 and $8,100.00 per month exclusive of rates for No. 4. The definition of Ratable Value is similar in concept to that of Prevailing Market Rent, but, beyond that I have no evidence of the correctness or otherwise of the basis or approach adopted by the Rating Surveyor responsible for these assessments. I am not prepared to speculate as to what that basis or approach might have been. In any event the relevant date of these assessments is too remote, being over a year prior to the 31st December 1987.

10. Mr. Kingsley Shih originally proposed a rent of $4,000.00 per month (inclusive), but after giving evidence he amended this to something in the region of $5,000.00 per month. Mr. Andrew Wong thought the Prevailing Market Rent should be determined at $8,500.00 per month (inclusive). He had instructed a firm of surveyors to make a valuation which he submitted to the tribunal, but he did not call the surveyor as he did not agree with his valuation of $9,000.00 per month. All of the above rents are on the basis that the landlord pays the rates and provides the services of the caretaker.

11. Mr. Shih produced a comparable letting of Flat No. 4 on the first floor of what is known as The Pink House which is located nearby in Sha Tin Heights Road. This flat was let from 23th March 1986 for 2 years at a rent of $6,200.00 per month exclusive of rates. The tenancy included a covered carparking space.

12. Based on this rent and the estimated costs quoted by a contractor, at the end of 1985, to put his premises into what he considered an acceptable condition, Mr. Shih concluded that a rent of about $5,000.00 per month should be the right figure.

The relevant date for determining the prevailing market rents under section 115 is the date of the termination of the current tenancies, which in this case is 31st December 1987. Therefore this particular tenancy agreement cited by Mr. Shih is almost 2 years out of date.

13. Mr.Wong who has rented No.4 Ground Floor since 1978 explained how there had been no garden to speak of before he moved in. The garden which is evident now, is due almost entirely to his efforts. He pointed out that, although the grounds are larger than those of the properties used as comparables by the respondent's surveyor, the area is unfenced and liable to periodic intrusions by people who apparently do not appreciate that it is private property. He said that over the last four years he has engaged a part-time gardener as the caretaker's efforts had been inefficient. For instance his watering in the middle of the day was more likely to harm than benefit the plants.

14. Mr. Wong may have produced this garden made improvements to the flat, and also paid for numorous repairs, but I must follow the definition of Prevailing Market Ront in Section 115.

    "Prevailing Market Rent means the rent ....., at which premises ....., might reasonably be expected to let at the date on which the current tenancy would ....., have come to a an end under section 119(1) or section 119(A)5 on the terms of the new tenancy granted under this Part, but disregarding the effect of this Ordinance.''

15. Accordingly, I can only consider these premises as being offered for rent to a prospective tenant as at the relevant date. It would be wrong for me to deduct for the value of any personal contributions made at the current tenant's expense, if it cannot be recovered on termination. The Prevailing Market Rent must be that rent which a hypothetical landlord and tenant might be expected to agree, both acting reasonably and being willing to come to an agreement on the relevant date. In short it is the rent that the premises might be expected to command in the market.

16. Mr. Chiu Kam Kuen, a chartered surveyor, called by the respondent explained his valuations of $1,500.00 per month for each of the suit promises based on rents obtained for flats in nearby properties. Mr. Chiu referred to two rents in the development known as The Pink House, but in a separate building to that relied on by Mr. Shih. He also referred to a rent obtained for a ground floor flat in Chase Villa which is also in Sha Tin Heights Road. Both The Pink House and Chase Villa are further along Sha Tin Heights Road and have views over the valley which Vista do Vale, in spite of its name, does not. Any view has been lost due to the growth of the surrounding trees and vegetation over the years. Both of these comparable properties are newer, having been built in the 1960's and both have been substantially better maintained than the subject premises. While Mr. Chiu sought to show that his comparable rents supported a value of $11,500.00 for the subject premises, the surveyor engaged by Mr. Wong but not called to give evidence, concluded from the same evidence, that Mr. Wong's flat should command a rent of $9,000.00 par month. The Pink House rents were $7,200.00 per month (exclusive) for Flat 6 Ground Floor from May 1987, and $6,625.00 per month (exclusive) for Flat 7 Ground Floor from July 1987. The areas of these flats are 1,380 sq. ft. and 1,245 sq. ft. respectively and show analysed unit rates of 0.20 per sq. ft. for Flat 6 and $5.30 par sq. ft. for Flat 7.

17. The Chase Villa flat is a Ground Floor flat with a small private garden and a covered car park. It let at $18,000.00 per month (exclusive) from June 1987. It has an area of 2,750 sq. ft., and is of a split level design on three different levels. Although built in 1954, it is as modern in design as the subject premises is obsolete and old fashioned. The Chase Villa flats also have fireplaces and are extremely well maintained. The development is of a totally different character to the subject premises and the garden flat is immeasurably superior to either of the subject flats.

18. Both The Pink House and the Chase Villa flats included covered carparking spaces although The Pink House carparts were open sided structures. The subject premises has no carparking facilities. Mr. Kong said there had once been carports but they were destroyed during a typhoon some years ago and never rebuilt. There is a concrete slab where the carports used to be.

19. Mr. Chiu applied a unit rate of $4.30 to the subject premises after having made a number of percentage deductions to his comparable rents to reflect the various differences in the premises. These adjustments included such items as, view, size, upkeep, lack of mains water and the provision of carports. He discounted the unit rate, for The Pink House flats by some 20% and the Chase Villa flat by 30%. None of his adjustmonts were based on any analysis and appeared to be quite arbitary. To these calculations he added half of the caretaker's monthly salary to each flat plus the rates payable for each month. For No. 4, an additional $500.00 was added to allow for the provision in the tenancy agreement for Mr. Wong to terminate his tenancy on three months notice should his employer, the University, direct him to occupy university quarters. The difference in the calculated net areas, accounts for each totalling the same $11,500.00.

20. In a recent decision of this Tribunal, Graham Wild v. La Property Management Company Limited L.T. 2885/87, it was mentioned that, "it is a fact of life that rent control brings with it poor performances on behalf of landlords with respect to maintenance. If they cannot obtain a rent which covers their expenses, they will naturally be reluctant to add to their losses by carrying out repairs. The ground floor flats in Vista do Vale only came outside the provisions of Part II rent control recently. These applications are the result of action being taken to put the rents in line with the market through the provisions of Part IV. Vista do Vale is an extreme example of how premises can be allowed to fall into a state of disrepair through being subject to many years of rent control. This property would have been subject to such controls since their inception in 1970 under the Rent Increases (Domestic Properties) Ordinance. This Ordinance was later incorporated into the Landlord and Tenant (Consolidation) Ordinance as part II, in 1973.

21. It is all to obvious why Mr. Chan sees his only option as that of redevelopment, as any renovation of the subject premises would be a major rebuilding exercise. Aredevelopment, preferably according to revised lease conditions allowing more extensive development, would make mere economic sense than the refurbishment of an obsolete and rundown structure.

22. The fact that the landlord has actually stated his intention to redevelop is not really relevant. What is relevant is that redevelopment is the logical alternative to carrying out extensive repairs which, on the face of it, would not appear to give an economic return based on the expense involved.

23. Any landlord, or perhaps better described in this context as "a hypothetical landlord", could be expected to spend as little as possible on repairs. Mr. Chan's company has done just that. This is a situation which has been acknowledged by authorities such as Saunders v. Maltby (Valuation Officer) (1976) Rating Appeal 109 in which the Court of Appeal in England, in a case concerning the determination of Ratable Value, remitted the case back to the Lands Tribunal, "to consider what extent dent of liability to repair it would be economically reasonable to attribute to the hypothetical landlord in the particular circumstances, having regard to the extent and nature of the disrepair and the likelihood of demolition."

and also explained that;

    "If the necessary expenditure was such that it would be out of all sense to do the repairs, the hypothetical landlord would not do them, but would let the house at the lew rent which it would command in its state of disrepair."

and further;

    "In determining whether and to what extent it was economic for a hypothetical landlord to do all the extensive repairs that were necessary, regard should be had to the probability that the area would be cleared in the near future."

24. The structural repairing covenant, as is the case in most tenancy agreements, is assumed to be a landlord's responsibility under the Ratable Value definition in both the English and Hong Kong statutes, and, as such, is for all practical purposes very similar, if not the same as what must be considered with respect to the section 115 definition of Prevailing Market Rent.

25. Generally, as pointed out by this tribunal in Union Carbide Asia Limited v. Hong Kong Land Company Limited (1982) H.K.D.C.L.R. 75 which was one of the first applications under Part IV, the obligation to repair depended on the interpretation of the tenancy agreement as to whether it was the landlord or the tenant that was responsible. As far as readily repairable defects are concerned, in either event the valuation should not be affected as each could be assumed to meet its contractual obligations. But in Isacco Aronne Neumann v. Gain Field Limited, Lin Chin Beng and Lim Chin Joo L.T. 105 of 1983, when dealing with a similar application in the same building as the Union Carbide case, it was noted, when comparing the subject premises with others in the same block, that major renovations would be necessary to the kitchen if a landlord were to obtain a rent that the principal rooms of the premises might otherwise be expected to command. An appropriate deduction was made on the basis of the flat being let in the condition observed, as the required renovations were extensive and unlikely to be done under the landlord's repairing covenant.

26. Again in Cathay Pacific Airways Limited v. Wharf Properties Limited (1985) H.K.D.C.L.R. 39 it was held that a large number of defects which were not readily repairable were not to be ignored, but as the comparable letting- were for similarly affected flats in the same development and these defects were reflected in the rents obtained, no deduction was required in this particular case.

27. Mr. Chiu in his evidence pointed out that it should be assumed that, in line with Union Carbide case, each party will honour its contractual obligations under the tenancy agreement. He did make some deduction for what he described as "upkeep". However his statement that, if he had assumed the subject premises to be in the same state as the comparables, he would have adopted $6.53 per sq. ft. instead of $4.30 does not reassure me that he gave sufficient regard to this aspect of his valuation. It can be seen that there are exceptional circumstances such as those presented here, where the state of disrepair has resulted in the cost of renovation being out of all proportion with the economic benefit to be realized by the landlord. It cannot be assumed, realistically, that any repairs other than those which are absolutely necessary or ordered by the Government, will be done. It must be taken that the situation of the more recent past is consistent with what might be expected of any landlord of a premises in a similar state of deterioration as the subject.

28. Having heard evidence and inspected the subject property and the comparables, I think Mr. Chiu has relied too much on the Chase Villa garden flat which, as I have already observed, is too far removed in character to be in anyway capable of giving an indication of the value of the suit premises. The two lettings of the flats in The Pink House at a little over 5.00 per sq. ft. are more useful, and in the absence of any other rents, the best evidence available. They have the advantage of verifying each other and are not so removed in value from Chase Villa as not to have the support of that comparable as well. However The Pink House is still very much superior to either of the subject flats.

29. Apart from the prime difference being that of the far better state or condition of The Pink House, the smaller size of The Pink House flats, the provision of covered carparking and the better view stand out. On a broad comparison one might be led to expect, as submitted by Mr. Shih, the larger subject flats to let for no more, or perhaps a bit less, than either of The Pink House premises. But a more detailed comparison seems to be required. With insufficient evidence to support any percentage deductions it is impossible to be anything but subjective as to just what should be allowed for each of the more obvious differences in the properties. But dealing with each of Mr. Chiu's allowonses in turn, and having regard to all the evidence, a figure of about $3.30 per sq. ft. seems to be something in the region of the appropriate unit rate. Apart from those already mentioned, these allowances, of course, included the larger but unfenced garden of the subject premises and also the lack of mains water supply. There is also the detrimental effect, not previously mentioned, of a grave at the end of the garden. But this has been shielded from view to some extent by some strategic planting by Mr. Wong.

30. An application of $3.30 per sq. ft. would result in a Rent of about $7,755.00 for No. 2 and about $7,260.00 for No. 4 on an exclusive basis.

31. I do not agree with Mr. Chiu that the early termination clause which limits Mr.Wong  to giving 3 months notice to terminate his tenancy only if his University requires him to move to University quarters can have any significant value to him as the tenant. The market appears to be improving and an early termination of the tenancy agreement may well be as much of a benefit to the landlord as the tenant. I propose to make no allowance for this clause.

32. To allow for the caretaker's services, I would not as Mr. Chiu has done, merely attribute half of the caretaker's monthly salary to each flat, but rather I would prefer to compare the value of his services to that provided at The Pink House for which $400.00 per month is charged. Cost does not necessarily equal value, and cost cannot always be recovered if it can be seen that the associated service falls short of the value of similar services elsewhere. The fact that management services charges are usually calculated by reference to their cost is not really relevant. On the evidence an allowance of $300.00 per month for each flat would seem more than adequate for the caretaker's services.

33. The rates payable for each of the premises are in the region of $400.00 per month. On an inclusive of rates and management basis, the rents should then be about $8,500.00 for No. 2 and $8,000.00 for No. 4.

34. The above figures are derived from the mathematical application of a unit rate to the net floor areas given for each of the flats. An overall comparison of No. 2 and No. 4, which after all, are much the same in area and layout, suggests that No. 2 is marginally inferior to No. 4. Mr. Shih has been more affected by the dampness from the vacant flat above and has actually experienced, on more than one occasion, the fall of plaster from the ceiling. As previously mentioned, the improvements made by Mr. Wong to No. 4 in respect to the replaced windows and the addition of glass doors to enclose the rear porch, cannot be discounted from any assessment of the rent for these premises. However the figure of $8,000.00 appears to be about right even when these features are included. I consider that in order to allow for the overall differences between the two flats, a further deduction of about 10% should be made to No. 2. This results in a rent of $7,650.00 which I round down to $7,500.00

35. I therefore fix the rent for No. 2 Ground Floor at $7,500.00 per month and, for No. 4 Ground Floor at $8,000.00 per month, on the basis that those rents include the rates and the caretaker's services which are to be paid for by the landlord. The new tenancies are to be for 2 years from 1st January 1988 and are to be otherwise on the same terms and conditions as the previous tenancy agreements. Any clauses, such as a deposit clause, which may be based on the amount of rent, should be altered to reflect the new rent.

36. There is no order as to costs.