KAN LAI BING v. FINE CONNECTION LTD

LDNT 155/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 155 of 2003

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J U D G M E N T

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1. This is an application for the grant of a new tenancy submitted pursuant to Section 117 of the Landlord and Tenant (Consolidation) Ordinance, Cap.7. The tenant, the Applicant of the captioned lawsuit, initiated the application. The premises involved are located at 9 Broom Road, 3rd floor, Flat D, Happy Valley (hereinafter known as the Subject Premises)

The Applicant has been occupying the Subject Premises since 30 years ago. The rent payable for the tenancy just expired was $27,800 per month exclusive of rates and management fee. The two parties reached consensus on the basic terms of the new tenancy. The rent payable is the only outstanding issue requiring the adjudication of the Lands Tribunal.

2. Methodology

(1) Adjustment versus Averaging

The Applicant criticized the method of assessment adopted by the Respondent's expert witness as subjective. The statistics obtained from the Rating and Valuation Department or elsewhere in her view might be tailored to arrive at any rental value to suit one's need. She suggested that for simplicity, the unit rent of all comparable properties be averaged and applied to the saleable area to obtain the rental of the Subject Premises. The Respondent's expert witness gave no in depth defence for her method or response towards the Applicant's criticism. She nonetheless dismissed the need for a change to the Applicant's proposal.

The Tribunal does share with the Applicant that the expert witness's approach (also in use commonly by other expert witnesses) could be subjective. Whilst the factors for adjustment are not normally in dispute, the quantum of adjustment (made to the rent passing of the comparable properties) is always under serious controversy. The Tribunal always confronted with extreme views from two different expert witnesses in this regard in past applications. By averaging the unit rent as suggested, it gives the advantage of minimizing the adverse effect (towards the assessment) arising from over or under paid rental statistics but this is not the fashion of how the rent of a property is assessed by the landlords and tenants in reality. In the real world, they do take into account the various factors such as floor level, aspect of facing, external and internal condition, facilities etc and etc. The expert witness is supposed to have acquired the knowledge as to how these landlords and tenants generally view and put weight on these factors. If the expert witness makes adjustment (to the rent passing) without the knowledge of the views of these landlords and tenants, the valuation is indeed subjective, but if she does make adjustment on the basis of such knowledge, the valuation cannot be regarded as subjective (but reflects the views of landlords and tenants in the market). The Tribunal cannot presume that the Respondent's expert witness has not been doing the assessment in the proper manner. The role of the Tribunal in the circumstances is to try the best to ascertain whether the quantum of adjustment departs from the recognition of the market.

(2) Ascribing of Weight

The Applicant held the view that having adjusted the rent passing of the comparable properties to reflect the differences between the comparable properties and the Subject Premises, the giving of weight re-defines their hierarchy of importance in the valuation and magnifies or contracts the quantum of adjustment made. Again, the Respondent's expert witness had not had much clear elaboration on her approach. She seemed to suggest that it reflected by how much the comparable properties collectively resembled the Subject Premises, particularly and mainly the remoteness in time from the valuation date of the Subject Premises.

3. The Tribunal notes that the approach of the Respondent's expert witness has also been the practice of some other expert witnesses in the same profession. This approach is not justified and there has not been convincing rationale given to back this approach up hitherto. The purpose of the various adjustments given is supposed to reflect the differences. The giving of weight, as the Tribunal sees it, is an alternative of adjusting for the differences between the comparable properties and the Subject Premises albeit being collectively instead of individually. Even though it were to reflect mainly the remoteness in time from the valuation date of the Subject Premises, it indeed would mean a duplication since adjustment had already been made having regard to the Rental Indices from the Rating and valuation Department. The Tribunal dismisses the need for such approach.

4. Choice of Comparable Properties

The rental information obtained from the Rating and Valuation Department is the valuation basis of the subject application. A list of six properties with basic particulars was provided to the court. The Respondent's expert witness, however, discarded Property No.1 on the ground of the tenancy commencement date being one year earlier than that of the Subject Premises. On the other hand, she suggested two properties which commencement dates were respectively 21st Jan. 2004 and 15th January 2004. The Applicant rejected these two properties on the ground that these were tenancies entered into after the tenancy commencement date of the Subject Premises.

5. The Tribunal accepts that Property No. 1 of a tenancy commencement date one year earlier, be discarded. On a similar ground, the Applicant's proposed additional comparable property at No. 9D Broom road, 1/F, Happy Valley should also be rejected The giving up of Property No.1 does not pose serious valuation problem since there remain five properties for reference. As to the two additional properties provided by the Respondent's expert witness, their dates of commencement are within one month from that of the Subject Premises. There does not seem to be any reason that they should not be included. The fact that the tenancy took effect after the tenancy commencement date of the Subject Premises is not a ground to reject.

6. Valuation Factors

The Respondent's expert witness considered that the location, traffic flow, time, orientation, view, floor level, privacy, size, age/condition of building, availability of chattel/domestic appliances and whether it is a new or renewed tenancy were relevant factors. The Applicant held the view that orientation, view and floor level could in one way or another duplicated as lower floor tended not to have open view and some orientation might enable certain units with unobstructed view but some did not.

7. The Tribunal agrees that the factors quoted by the expert witness are relevant for valuation purpose. As to the issue of duplication, the expert witness confined the orientation just to the aspect of facing. Only the advantage or disadvantage associated with the aspect of facing in her view would be counted but no others (for example, facing the south was regarded as an advantage and facing the north, a disadvantage). Likewise, for floor level, the advantage of unobstructed view due to the unit being on high floor was not counted but other advantage/disadvantage associated with the floor level. Given the definition as such, the Tribunal accepts that there is not a case of duplication as alleged by the Applicant.

8. Quantum of Adjustment

(1) Traffic Flow

The Respondent's expert witness gave no account as to why Property No.4 abuts on the same major road (i.e. Blue Pool Road) as Properties Nos. 3 and 5 should not warrant the same adjustment of +3%. The Tribunal agrees that other comparable properties, as similar to the Subject Premises, are less affected by traffic noise.

(2) Time

The Tribunal does not see any reason why the Rental Indices should not be followed albeit the index for November 2003 being provisional. The likelihood that the expert witness would get it wrong based on her own inference is in no way smaller than the provisional figure which may or may not need correction later. There is also no evidence that the rise for December 2003 should be exceptionally higher having regard to the fact that the rise since September 2003 up to November 2003 is 1% per month. The Tribunal notes that September had a drop from August 2003 by -2.5%

(3) Orientation

The Tribunal does not find that the expert witness's adjustments were consistent though there is no strong view of giving the best and the worst 2% and -2% respectively. The Subject Premises, Properties Nos.6 and 8 face the north. Properties Nos. 3 and 4 face the west, subject to the solar heat in the afternoon of summer days and is considered the most undesirable facing aspect. Properties Nos. 2 and 7 face mainly the south, which is normally regarded as the best aspect. Property No.5 face the east, which is considered the second best among the properties involved. The adjustment should, in the Tribunal's view, follow this line.

(4) View

The Tribunal also does not find that Properties Nos. 3, 4, 5 and 8 are in a much better position than the Subject Premises. They are all in buildings set back from the carriageway by a few metres with buildings on the other side of the road. They should all with more or less the same quality in view. The only difference is that the distance from the opposite building could be a few metres longer in some case. Properties Nos. 2, 6 and 7 are different from the others. They are not bordering on a public road. They face the backyard of other developments and Properties Nos. 2 and 7, in addition to the backyard, the retaining wall of their own building site. The Tribunal, whilst accepts that this may mean inferior to properties with the view of a public road, has doubt that a 12% adjustment is justified.

(5) Floor Level

The Applicant cast doubt on the need to make adjustment for difference in floor level since all properties involved are on low floor. These properties are by either one or two floors above or below the Subject Premises. This indeed is the view of the Tribunal. The Tribunal observed from past valuations submitted to the Tribunal, the difference in sale price for one floor above or below was in the range of o.33% to 0.65% only.

(6) Privacy

The Respondent expert witness did not consider this factor applicable to other comparable properties but Property No. 2, which borders at grade with an elevated driveway. This drive-way, if not elevated, would to a much minor extent affect the tranquillity of a normal 1st floor unit which usually about 3 meters above the ground. The Tribunal considers that this adjustment is justified.

(7) Size

The Tribunal considers that a lower unit price for bulk purchase is justified because there is saving in the cost of production and over-heads. Where the difference in quantum is not substantial, there is grave doubt that the saving exists as units of production/overheads may be of a fixed size and cannot be broken down into smaller production units. A less risky approach is to apply the rule of the Respondent's expert witness only to Properties Nos. 5 and 6.

(8)Age/Condition

The Tribunal considers the age of building is irrelevant but the condition. Based on the photographs produced, the Tribunal agrees with the view of the Respondent's expert witness.

(9) Domestic Appliances

In the absence of details provided, the Tribunal accepts that the inference of the Respondent's expert witness is prudent.

(10) Renewal versus New Letting

The Tribunal is not convinced that upon commencement of tenancy, the internal condition must be better in the case of new letting than renewal. The obligations of tenants and landlords under the tenancy agreement to up-keep the property is another element that complicates the issue. The internal condition of all comparable properties should be indicated and compared to that of the Subject Premises. Failing to put before the Tribunal such comparison, the Tribunal dismisses the adjustments made by the Respondent's expert witness.

(11) Car Parking Space Rental

Unless the Respondent's expert witness could produce evidence to prove the otherwise, the Tribunal's previous decision stands.

(12) Rent Free Period

The Tribunal agrees with the Applicant that the rent passing of Properties Nos. 2 and 7 be adjusted for the rent-free period. The Tribunal notes that its effect on the rent is minimal.

(13) Building Defects

The Tribunal does not consider that the building defects result in the long-term enjoyment being expropriated. These defects should be dealt with in accordance with the provisions in the tenancy agreement and be made good in accordance with the time set out in the tenancy agreement or, otherwise, within a reasonable time.

9. Valuation

Following on from the above, the Tribunal's calculation is as appended in the table hereunder: -

Applying the average unit rate to the saleable area of 138.2 sq. m., the monthly rent is $22,609.52 (say $22,600) exclusive of rates, management fee and car parking space rental.

10. Orders

(A) The Tribunal hereby orders that a new tenancy be granted; -

(1) for a fixed term of two years;

(2) commencing on 1.1.2004;

(3) at the monthly rent of $22,600 exclusive of rates, management fee and car parking space; and

(4) subject to payment to the landlord, of a deposit in amount equivalent to the sum of two months rental (any excess above the amount of deposit already paid be refunded to the tenant at the time of execution of the new tenancy agreement), the signing/execution of a new tenancy agreement within one week from the date hereof, and other conditions of the previous tenancy to remain.

(B) There is no order as to the costs of this application.