JOHN ROBERT GORDON CHENEY v. WELLERRY INVESTMENT CO LTD

LDNT84 of 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 84 OF 2004

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JUDGMENT

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Background

1.  The Applicant is the tenant and the Respondent the landlord of the premises known as Flat A on 2^nd Floor and Car Parking Space No. 3 on Ground Floor of Palm Court, 55 Robinson Road, Hong Kong (“the Premises”).  Palm Court is a 13-storey apartment building completed in 1965, comprising one flat on the Penthouse Floor, two flats (Flat A and Flat B) from 1^st Floor to 10^th Floor, entrance lobby on Ground Floor and car parking spaces on Ground Floor and Lower Ground Floor. 

2.  The previous tenancy approved by the Tribunal under case LDNT 70/2002 was for a term of 2 years commencing from 1 July 2002 at a rent of $22,900 per month, on the basis of exclusive of rates and management fee.  Pursuant to the provisions of Part IV of the Landlord and Tenant (Consolidation) Ordinance, the Applicant applied for a new tenancy of the Premises.  The Respondent did not raise any opposition to the application but could not agree with the Applicant on the Prevailing Market Rent (“PMR”) of the Premises.  The Applicant suggested that the PMR should be $18,000 per month, on the basis of exclusive of rates and management fee whilst the Respondent, based on the opinion of their expert witness, suggested that the PMR should be $32,400 per month, on the same basis.

3.  The parties agreed that the new tenancy of the Premises would be for a term of two years commencing from 1 July 2004.  They also agreed that the terms of the new tenancy, other than the rent, should be the same as in the previous tenancy.  Therefore, this Judgment only deals with the determination of the PMR of the Premises.

The Applicant’s case

4.  The Applicant gave evidence himself.  He carried out detailed research of the occupational situation including the tenancy details of all the flats in Palm Court.  He produced a report (marked as Exhibit A1), which summarized his findings, analysis and conclusion.  He submitted that the PMR of the Premises should be between $15,000 and $18,000 per month, on the basis of exclusive of rates and management fee, after taking into account the following factors:

          (1)   comparable rents of 11 flats (3 units of Flat A and 8 units of Flat B) in Palm Court;

          (2)   The factors and adjustments previously adopted by the Lands Tribunal;

          (3)   The published data of the Rating & Valuation Department;

          (4)   The CPI data published by the Hong Kong SAR Government; and

          (5)   the valuation report prepared by Ms. Sat Wei Ling, the surveyor expert called by the Respondent

5.  I set out below the actual monthly rents of the 11 comparable flats in Palm Court, the date of commencement of the tenancies and the Applicant’s adjusted monthly rents: -

Flat Unit	Date of commencement         of  tenancy	Actual Monthly rent, on either inclusive       or exclusive basis (per sq. m.)	Adjusted monthly rent, on      exclusive basis (per sq. m.)
2B	October 2003	$29,000, excl.	$13,295
3A	September 2003	$30,000, incl.	$14,623
3B*	February 2004	$27,000, excl.	$15,970
4B	October 2003	$32,000, incl.	$14,175
5A	July 2003	$43,000, excl.	$26,253
5B	March 2004	$32,000, incl.	$13,643
7B	April 2004	$38,000, incl.	$16,303
8B	November 2003	$33,000, incl.	$12,753
9A	August 2003	$33,000, incl.	$14,750
9B	April 2004	$38,000, excl.	$15,335
10B	January 2003	$37,000,	$12,343

          * Agreed by the parties prior to determination by the Tribunal

6.  The Applicant suggested that the principles and guidelines adopted by the Lands Tribunal in the hearing before the Tribunal on 31 March 1998 (Application No. NT 489/1997) should be adopted again in the present case when making the adjustments to the comparable rents.  The Applicant also reminded the Tribunal that the same principles were adopted and applied by me in my decision of the previous new tenancy application of the Premises (Application No. 70/2002).  In summary, the Applicant submitted that the following guidelines to the adjustments should be adopted in the present case:

          (1)    A downward adjustment of 10% for the tenant providing the air conditioners, heaters, light fixtures, fridge, stove, washer and dryer;

          (2)    A downward adjustment of $500 per floor for the difference in height of the Premises when compared with the comparable unit;

          (3)    An enclosed balcony of approximately 200 sq. ft. has a value of $2,000;

          (4)    The existing rental market trend of deflation during the preceding rental period must be taken into account;

          (5)    Comparables within the same building are the most relevant evidence and are to be preferred over other comparables;

          (6)    Where the registered area is known within the same building and of the same general character should have their rents adjusted pro-rata for their known area; and

          (7)    The rents of the “Flat B” units (being 24% larger than the “Flat A” units including the Premises) must be adjusted downward for their larger area based on the registered area set out by the Rating and Valuation Department.

7.  The Applicant finally submitted that the PMR of the Premises for the new tenancy commencing from 1 July 2004 should be $18,000 per month, exclusive of rates and management fee.

 The Respondent’s case

8.  The Respondent called for the evidence of an expert surveyor, Ms. Sat Wei Ling who produced a valuation report (Exhibit R1).  In the report, Ms. Sat considered and analyzed a total of 9 comparables, including Flat 9B and Flat 7B of Palm Court.  In the hearing of 20 September 2004, she was invited by the Tribunal to consider if any of the rental comparables of other flats in Palm Court cited by the Applicant was a relevant comparable too, and if yes, her adjustments for the new comparable(s).  She subsequently produced a Supplementary Report (Exhibit R3), which set out her reasons for including 2 other comparables in Palm Court (i.e. Flat 3B and Flat 5B) as they were transacted in 2004 but discarding Flat A5 of Palm Court (Comparable 1 in her comparable schedule of Exhibit A1) and some other comparable lettings (such as Flat 2B and Flat 8B in Palm Court) whilst retaining the 5 comparables in other buildings.  She set out in her revised comparable schedule of Exhibit R3 a total of 10 comparables.

9.  For these 10 comparables, she considered that a total of 11 factors of adjustments were relevant.  To each comparable, she applied various percentages of adjustments for these factors before arriving at the total adjustment and the adjusted unit rent.  She averaged out the adjusted unit rent of these 10 comparables, arriving at a figure of $152.8 per sq. m.  She then applied this adjusted unit rent to the saleable area of the Premises of 212 sq. m. arriving at a PMR of $32,400 for the Premises.

Determination by the Tribunal

10.  I agree with the Applicant that “comparables within the same building are the most relevant evidence and are to be preferred over other comparables”.  I also find that when looking at the results of the analysis of Ms. Sat’s 10 comparables at Exhibit R3, the average adjusted rent of the 4 comparables in Palm Court range between $119.0 per sq. m. and $155.8 per sq. m. with an average of $133.2 per sq. m. whilst the average adjusted rent of the 6 comparables in other buildings range between $141.8 per sq. m. and $195.7 per sq. m. with an average of $165.9 per sq. m.  Comparing the average of the 4 comparables in Palm Court and that of the 6 comparables in other buildings, I find that there is a difference of about 25% (i.e. $165.9 / $133.2 = 1.25).  Therefore, I do not follow Ms. Sat’s reasoning in Exhibit R3 and do not agree with her that we should use the comparables in other buildings in the Mid-Levels that appeared in the Schedule of comparable rents provided by the Rating & Valuation Department. 

11.  Also, in view of the fluctuation in the general level of rental values as revealed by the Rating & Valuation Department’s rental indices, especially the renal index for “Class E” properties (i.e. private domestic properties of over 160 sq. m.), I decide that we should concentrate ourselves on the most recent rental transactions of flats in Palm Court, and discard the other earlier transactions hence reducing the inaccuracies due to the differences of time between the dates of transaction of the comparables and the relevant valuation date of the Premises.  Thus, I adopt the following as the best comparables for the direct method of comparison used in this valuation: Flats 3B, 5B, 7B and 9B.

12.  Since the Premises and all the comparables adopted below are flats without balconies, there is no need to decide on the amount of adjustment that may be required to reflect the value of an enclosed balcony.

13.  The Applicant submitted that we should have reference to the Consumer Price Index data published by the Government when considering the time adjustments for the comparables.  However, it is well known that the trend of rental values of domestic properties could be quite different from the trend of the Consumer Price Index, and that the former is much preferred when a reference is required to decide on the level of time adjustments.

14. Although I have decided in the previous new tenancy application referenced LDNT 70/2002 to accept the adjustments made by the Applicant, this was partly because at the hearing, the Applicant’s adjustments were not challenged and the Respondent proposed indeed no other adjustments.  However, in the present case, both the Applicant and Ms. Sat suggested different adjustments for different factors.  In particular, although both agreed that a downward adjustment should be made for the lower floor level of the Premises and another downward adjustment should be allowed to reflect the provision of domestic appliances for the Premises by the Applicant, they could not agree on the levels of adjustments for both factors.  The adjustments to be adopted by the Tribunal for these and other factors will be considered below.

15.  After having considered the adjustments proposed by the Applicant and Ms. Sat, I am of the view that the following adjustments are appropriate:

Flat Unit	3B	5B	7B	9B
Net Rent (excl. basis)	$27,000	27,623	$33,535	$38,000
Saleable area (sq. m.)	212.4	212.4	212.4	212.4
Unit rate (per sq. m.)	$102.9	$105.3	$127.8	$144.8
Adjustments: -
Location	0	0	0	0
Floor	-1%	-3%	-5%	-7%
Size	0	0	0	0
View	0	0	0	0
Irregular Layout	0	0	0	0
Noise	0	0	0	0
Domestic Appliances	-5%	-5%	-5%	-5%
Internal Condition & Natural Lighting	0	-2%	-3%	-3%
New Letting/renovation	-5%	-5%	-5%	-5%
Abnormal rent increase in 3rd year	0	3%	3%	3%
Time	10.3%	5.5%	5.1%	5.1%
Total adjustment	-0.7%	-6.5%	-9.9%	-11.9%
Adjusted unit rate (per sq. m.)	$102.2	$98.5	$115.1	$127.6
Average of adjusted unit rates (per sq. m.)	$110.9

16. Applying the average adjusted unit rent of $110.9 per sq. m. arrived above to the saleable area of the Premises of 212.0 sq. m. gives a figure of $23,511, rounded to $23,500 as to be the PMR of the Premises.

17. The factors of adjustments are considered below:

          Location & view

          I agree with both parties that the Premises and the comparables are the same in terms of these factors hence no adjustment is required.

          Floor level

          After considering the different adjustments proposed by both parties, I decide that an adjustment of -1% per floor is warranted.

          Size, irregular layout and noise

The Applicant opined that there was no need to make adjustment for these factors.  On the other hand, Ms. Sat was of the view that adjustments should be made in respect of these factors.  I agree with the Applicant and consider that the differences between the Premises and the comparables are so small that there is no need to make adjustment for these factors.

          Domestic appliances

The Applicant suggested adopting an adjustment of -10% for this factor whilst Ms. Sat suggested a similar but lesser downward adjustment of -2%.  I adopt an adjustment of -5%.

          Internal condition & natural lighting

          I follow Ms. Sat’s adjustments for this factor.

          New letting/renovation

          I adopt the Applicant’s adjustments of -5% for all the comparables.

          Abnormal increase in rent in 3rd year

Obviously, the abnormal increase in rent in the 3rd year of each of the tenancies of comparables Flat 5B, 7B and 9B was to ensure that the landlord could take back possession of the premises after 2 years.  This was needed at the time of agreement of the tenancies of the said comparable flats because the recent amendment of the Ordinance in July 2004, which took away the tenants’ rights to apply for new tenancies under the former Part IV of the Ordinance, did not come into force yet.  I agree with Ms. Sat that an upward adjustment is warranted for this factor.  But instead of using her suggested adjustment of 5%, I adopt a lesser adjustment of 3%.

          Timing

I also agree with Ms. Sat regarding her time adjustments for the comparables.  I appreciate the limitation of any adjustment, including the time adjustment.  However, there is no better way to account for this factor other than to follow Ms. Sat’s approach, which is also widely used by the valuation profession.  I have decided in the beginning to adopt only the 4 comparables which were closest in terms of time to the relevant valuation date for the Premises so that the uncertainties and the likely errors that could be caused by the time adjustments were already minimized as far as possible.

18. I grant the following Orders for the new tenancy application:

          Orders

(1)	By consent, a new tenancy of the Premises shall be granted for a term of 2 years commencing from 1 July 2004;
(2)	The new rent of the new tenancy is determined by the Tribunal at a sum of $23,500 per month, exclusive of rates and management fee; leave to the Applicant to pay the Respondent the arrears, if any, within 1 month from today;
(3)	The deposit shall be increased pro-rata with the new rent; leave to the Applicant to pay the Respondent the arrears, if any, within 1 month from today;
(4)	All the other provisions of the new tenancy shall be the same as for the previous tenancy;
(5)	No order as to costs.