Andor Hampala v. Nice Holdings Ltd.

LDNT73/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 73 of 2000

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JUDGMENT

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Background

1. The applicant is the tenant and the respondent the landlord of the subject premises known as Second Floor together with portion of Roof and Car Parking Space No.1 of 94A Pokfulam Road, Hong Kong. The existing tenancy was a tenancy for a term of 18 months commencing from 1 September 1995 at a monthly rent of $43,000 exclusive of rates and management fee. It was made between the former landlord, Tecopa Limited and the tenant. This tenancy was extended on monthly basis at the same rent upon its expiration. The subject premises changed hands a few times and the present landlord became the owner in March 1999 and the said monthly tenancy has since continued on the same terms.

2. In response to a Form CR103 dated 6 September 1999 served by the applicant on the respondent to request for a new tenancy commencing on 10 March 2000, the respondent served a Form CR105 dated 28 February 200 on the applicant requiring him to make an application to the Lands Tribunal for a new tenancy. The applicant served a Form 22 to the Lands Tribunal on 1 March 2000 for the present application.

3. The applicant and the respondent have agreed that the rent for the new tenancy shall be exclusive of rates and management charges and the term of the new tenancy shall be 18 months commencing from 10 March 2000. The only dispute is on the level of the prevailing market rent. In the respondent's written final submission, the respondent also applied to amend some of the clauses in the previous tenancy agreement which shall form the basis of the new tenancy agreement for the new tenancy.

4. It is common ground that the subject premises has a saleable area of approximately 189.4 sq.m., based on the quoted area shown in the rental schedule prepared by Rating and Valuation Department. The same schedule also shows that the subject premises has a roof portion of about 111.6 sq.m. The applicant accepted this as to be the area of the roof of the subject premises. The respondent's surveyor, Mr. Thomas Poon, estimated, by scaling off from a floor plan, the saleable area of that portion of the roof to be about 122.5 sq.m. The respondent submitted that Mr. Poon erred in his estimate. In the absence of better information, the area stated by the Rating and Valuation Department is preferred and accepted.

5. The expert surveyors from both parties agreed to take the value of the roof portion as to be equal to one tenth of that of the subject flat below. Therefore, the equivalent area of the subject premises, the flat plus the roof above equals to 200.56 sq.m. This will be used in the present valuation.

6. The subject premises is the second floor and the portion of roof of a 4-storey residential apartment building located off the eastern side of Pokfulam Road close to the junction with Mount Davis Road in Pokfulam District of Hong Kong. The building, completed in 1950, comprises three flats, one on each floor, roof and carports on the ground level. The building is served by a central staircase leading up from the ground floor and an emergency staircase to the rear. The subject premises includes a carport (Car Parking Space No. 1) on the ground floor which is spacious for accommodating one car but insufficient for two cars.

Evidence by Mr. Simon Lynch, the surveyor called by the applicant

7. Both experts for the parties used the same direct comparison method of valuation. Mr. Simon Lynch, the Chartered Surveyor giving evidence for the applicant analysed all the six comparables provided to him by the Rating and Valuation Department. They were numbered as Comparable 1 to 6 in Appendix 6 of his report (Exhibit A-1). In addition, he also analysed a rental transaction in January 1999 of third floor of 94A Pokfulam Road, the flat immediately above the subject flat. This was numbered as Comparable 7 in his report. Throughout this judgment, the rental comparables of both parties will follow the numbering in Exhibit A-1, unless otherwise stated. In his report, Mr. Lynch considered and made suitable adjustments to all the comparables for various factors. These factors were: time, age/external condition, internal condition, environment/noise, floor height, size, view, landlord's provisions, management. At the end, he found a range of after-adjusted unit rental values of between $127 per sq.m. and $186 per sq.m. Applying these unit rates to the equivalent area of the subject premises translate to equivalent rents of between $24,700 and $37,400. The majority of the comparable evidence falls within a narrower range of $25,000 and $30,000 per month.

8. Mr. Lynch considered the best evidence to be his (i) Comparable 1 and 2 for their being located similar to the subject premises, (ii) Comparable 5 for having similar external condition as the subject premises and, (iii) Comparable 7 as being within the same block as the subject premises.

Mr. Lynch had some reservations with Comparable 2 as it had the highest value of all the comparabes even though it was not considered to be the best quality flat. Also, this comparable was a renewal and included some chattels. He at the end disregarded this comparable entirely.

9. The remaining Comparables 1, 5 and 7 gave equivalent rents of $28,000, $24,500 and $24,700 respectively. Mr. Lynch further opined that "of my preferred comparables undoubtedly the best evidence is that within the subject building since it reflects all of the factors affecting the building and requires the least adjustments." In the final analysis, Mr. Lynch valued the prevailing market rent of the subject premises as to be $25,000 on the basis of an adopted unit rate of $123 per sq. m.

Evidence by Mr. Thomas Poon, the surveyor called by the respondent

10. Mr. Thomas Poon, Chartered Surveyor, gave evidence for the respondent. He produced a valuation report (Exhibit R-1) in which he analysed the same six comparables obtained from the Rating and Valuation Department. Their particulars were detailed in Page 12 to Page 17 of Exhibit R-1 while a summary of the analyses and adjustments was compiled as Appendix 7 of Exhibit R-1. During the hearing on 1 June 2000, Mr. Poon produced a revised rental schedule and adjustment table (Exhibit R-2). Mr. Poon considered the rental transaction of third floor of the subject development ( i.e. Mr Lynch's comparable 7) but decided to discard this comparable. Mr. Poon reasoned that the former owner of the subject development was about to sell the whole development at the end of 1998. The former owner did not wish to sign a new two years lease with any tenant as that might affect the time for recovering possession of the subject development and hence its sale price. Therefore, the former owner, in response to the third floor tenant's request for a fixed term of two years at a reduced rent of $25,000 per month, agreed to accept the rent but on condition that the tenancy was only on a monthly term. As a matter of fact, the whole subject development was sold to the respondent through a confirmor in early 1999.

11. In the valuation report, Mr. Poon made various adjustments to all the six comparables. These factors were time, location, privacy, age, external condition, internal condition, size, orientation and view, and chattels. Mr. Poon found that the adjusted unit rates of the comparables ranged from $154.1 per sq.m. to $208.8 per sq.m. In the final analysis, Mr. Poon adopted a unit rate of $190 per sq.m. and applied that to his estimated equivalent area of 201.65 sq.m. He arrived at an estimated prevailing market rental value of $38,800 per month.

12. In the revised adjustment schedule, Mr. Poon estimated the adjusted unit rates of the comparables to be between $167.9 per sq.m. and $218.9 per sq.m.

Choice of comparable and adjustments by the Tribunal

13. The Tribunal decides to firstly analyse all the comparables provided by the Rating and Valuation Department as well as the rental transaction of the third floor of the subject development (Mr. Lynch's Comparable 7). The results of the analysis and adjusments are as follows:

14. In adopting the adjustments for various factors, the Tribunal has taken into account, where appropriate, the percentages proposed by the two experts. On the whole, the adjustment figures are much similar to those adopted by Mr. Lynch, with the exception of the quantum of adjustments for the following factors: age and external condition, internal condition, landlord's provisions, break clause and air-conditioning.

Adjustment of the rents passing of the comparables to a net basis

15. Both expert surveyors sought to reduce the rents passing of the comparables to a net basis, exclusive of rates and management fees. In case where there is a difference in the provision of car parking space, each surveyor also made necessary adjustments. However, their amounts of adjustments differed.

16. During the hearing, the parties debated on the car park adjustments. Mr. Poon considered the car parking space of the subject premises to be a spacious garage. He valued this at $3,500 per month, as distinguished from the rents for a normal covered or open car parking space in Pokfulam area, valued at $2,500 and $2,000 per month respectively.

17. On the other hand, the respondent submitted that the car parking space of the subject premises was of similar value to that of a covered car parking space. In particular, the advantage of having the spacious car parking space was offset by the facts that it did not have a door or shutter, could not be closed, and did not offer security. Also, it was agreed that the car parking space provided access to a storage area used by the landlord and his agents. Besides, it was established that the car parking space had a regular building wall only on one side, open and unsecured to the street at the front, open to a storage area of the landlord on one side and abutted a slope-retaining wall at the rear end. In light of the above, the Tribunal accepts the respondent's submission that the subject premises' car parking space is similar to a normal covered car parking space in terms of value.

18. Mr. Lynch valued a covered car parking space at $2,000 a month. This is preferred to Mr. Poon's estimate of $2,500. The respondent's submission regarding the car parking space of Comparable 2 and 5 are also accepted.

Time adjustment

19. In arriving at the adjustments for time, Mr. Lynch had had regard to the Jones Lang LaSalle rental index for luxury properties. This is preferred to Mr. Poon's reference to the Rating and Valuation Department's rental index. The latter index was compiled by taking the average reported rents from a particular quarter, and averaging them. On the other hand, Jones Lang LaSalle Luxury Index was a time-weighted index. The Tribunal therefore decides to follow Mr. Lynch's time adjustments.

therefore decides to follow Mr. Lynch's time adjustments.

Age and external condition

20. Mr. Lynch combined these two factors into one while Mr. Poon gave separate figures for these factors. Mr. Lynch gave evidence that the comparables are in newer buildings built between 1960 and 1966 and these buildings have not aged to the same extent as the subject. Mr. Lynch considered that "an allowance of 1% per annum is fair and reasonable" to reflect both the age and external condition of the subject development. For Comparable 5, Mr. Lynch did not consider that an adjustment was required as the building of that comparable was also in a dilapidated state despite of its being completed more recently than the subject development.

21. On the other hand, Mr. Poon opined that in the leasing market, a tenant's enjoyment of a flat depends on its condition rather than age. However, to recognise the age difference of the subject development and the comparable developments, Mr. Poon adopted a downward adjustment of 0.3% per year difference for each of the comparables. Mr. Poon further conceded that the external condition of the subject development was not "as good as the comparables, lacking a coat of paint." He considered it appropriate to make downward adjustment of 5% to reflect this appearance disadvantage. Similarly, for Comparable 5 which had a poorer external condition than all the other comparables, Mr. Poon made a smaller downward adjustment of 2%.

22. The respondent gave a lengthy written submission on this factor of adjustment and concluded that "the adjustment of 1% per annum made for age and external condition by Mr. Lynch is considered fair and reasonable." On the other hand, Mr. Poon also maintained that his adjustments should be fair and adequate.

23. The Tribunal considers that although deciding the quantum of adjustments for conditions are within the ambits of this Tribunal, the quantum should best based on the opinion of the valuation surveyors giving expert opinion to the Tribunal. Since they have inspected the subject premises and the comparables, and since they both have the expertise in valuation, their opinion will be given more weight than the evidence or submission by the parties. In the absence of a consensus of opinion as to the quantum of adjustments for age and external condition, the Tribunal determines the following adjustments to be appropriate: firstly a downward adjustment of -0.5 % per year for the difference in the age of the subject development and the comparable building and secondly, as suggested by Mr. Poon, another downward adjustment of 5% for the inferior external condition of the subject development (with the exception that for Comparable 5, a smaller downward adjustment of 2% be made).

Internal condition

24. Mr. Lynch made a downward adjustment of 5% for all new lettings (all comparables except Comparable 2 and Comparable 7) on the ground that for new lettings, the flats were likely to have been renovated prior to the lettings. On top of that, Mr. Lynch considered an additional downward adjustment of 3% to reflect the poor condition of the metal casement window in the subject premises and its associated water ingress and higher electricity charges problems.

25. Mr. Poon in his original adjustment schedule only allowed a downward adjustment of 2% to reflect the poorer internal condition of the subject premises. During the hearing, Mr. Poon submitted his revised adjustment schedule which show that apart from Comparable 2, he had changed the downward adjustment figure to 5%. As for the additional downward adjustment of 3% for the metal windows, Mr. Poon considered this to be not justified. He was of the view that any minor defects should have been adequately covered by the 5% allowance already given.

26. The Tribunal on the basis of the evidence concurred with Mr. Lynch regarding this adjustment factor.

Environment / Noise, Location and Privacy factors

27. The parties spent a long time in presenting the evidence regarding the location, environment/noise and privacy factors of the subject premises and the comparables. The respondent also gave a lengthy final written submission on these aspects.

28. Altogether, the applicant suggested that there were three factors that contributed to the noise impacts on the subject premises. The subject development is situated just off Pokfulam Road which is a busy four-lane highway. At night, the spur road outside the property is used by public light buses as parking area. Also, the subject premises is affected by the proximity of sets of traffic lights at Pokfulam Road intersections causing vehicles to accelerate and decelerate in sequence. As a result, the applicant considered that an adjustment of -3% was reasonable for the comparables on Pokfulam Road and -5% for those on Bisney Road.

29. The applicant's adjustments were totally not accepted by Mr. Poon. He considered that the subject premises was "well set back from Pokfulam Road by a buffer zone of trees and playground". He also stated that "when compared with comparables 1 and 2, the subject flat has an advantage in easy access. This advantage adequately off-sets environmental disadvantages, if any at all. No downward adjustment is justified." However, during the hearing, Mr. Poon conceded that for the problem caused by the parking of vans near the area at night, "1% to 2% (say 1.5%) downward adjustment is adequate". In addition, Mr. Poon considered that "Bisney Road area is inferior to Pokfulam Road area where the subject flat is situated. To reflect the difference in location, an upward adjustment of 3% has been made to the Bisney Road comparables by Mr. Poon. In addition, Mr. Poon considered that since Comparable 2 directly abutted a lane at the rear which affected its privacy, an upward adjustment of 3% was warranted. Similarly, for Comparable 5, Mr. Poon suggested an upward adjustment of 5% to reflect its being on the ground floor of a 3-storey building.

30. After taking into account the evidence and the reasons given by the parties, the Tribunal decides to adopt the adjustments suggested by Mr. Lynch for these items of adjustments.

Floor height

31. Mr. Lynch made adjustments of 0.5% per floor to reflect the floor level factor on the ground that as the floor height increases, the value of a premises increases due to reduced noise and more privacy. Mr. Poon did not make any adjustment for this factor. Mr. Lynch's adjustment is considered to be reasonable and adopted by the Tribunal.

Size

32. It is also generally accepted that as the floor area decreases, the value per unit area increases. Both surveyors agreed this principle. The subject premises has an area of 189.4 sq. m. whereas the comparables' floor area range between 140.5 sq. m. and 200.2 sq. m. Mr. Lynch made adjustments based on 1% per 10 sq. m. Mr. Poon however only made adjustments for two comparables. He considered the difference in area between the subject premises and the other comparables to be too small to justify any adjustment. The approach by Mr. Lynch is preferred.

Orientation / View

33. Both parties made allowances for this factor and their adjustments are similar. Mr. Lynch's adjustments are adopted.

Landlord's provisions and chattels

34. It was agreed that the property was leased without the benefit of air-conditioning or domestic appliances and those in the property were installed by the tenant. Mr. Lynch made an allowance of -5% to reflect the lack of air-conditioning units. In addition, Mr. Lynch made an additional allowance of -3% to reflect the benefit of leases with chattels. Mr. Poon also made allowance for the chattels where appropriate. As for the lack of air-conditioning, Mr. Poon suggested to deduct a lump sum at the end of the valuation reflecting the amortised cost of installing air-conditioners. Also, in the final submission, the respondent stated that "it is reasonable to renew air-conditioners at the end of their useful life which is normally 4 to 5 years. To spread the cost over 4 years (2 x 2 year term) is reasonable." Mr. Poon therefore deducted a sum of $363 to compensate for the non-provision of air-conditioners in the subject premises.

35. The Tribunal finds that in respect of this factor, Mr. Poon's methodology and estimates are reasonable and are preferred.

Management

36. It has been agreed that the landlord does not provide on-site caretaker / watchman service. Mr. Lynch gave evidence that the cleaning and garbage disposal services are now undertaken jointly by the tenants at a cost of $1,800 per month to be shared equally by the three tenants. Mr. Lynch therefore made an adjustment of 2% to reflect this factor. On the other hand, Mr. Poon stated that the situation in the subject development "is no different from all the comparables which are all without on-site caretaker / watchman services." Therefore, Mr. Poon suggested that no downward adjustment for management is justified. In the final analysis, the Tribunal accepts Mr. Lynch's evidence and adjustments.

Break Clause

37. The respondent in the final written submission suggested that an upward adjustment of 3% is justified in the light of the presence of the unusual brake clause to the advantage of the tenant. The respondent acknowledged that there was a landlord' redevelopment clause in the tenancy agreement but this, being common in older properties, has little effect on the rent. The respondent's adjustment is accepted in this valuation.

Valuation

From the analysis above, the comparables give the following unit rates (per sq.m.):

Comparable 1	$158
Comparable 2	$207
Comparable 3	$171
Comparable 4	$169
Comparable 5	$127
Comparable 6	$167
Comparable 7	$123

38. The above unit rates average $160. If one discards the highest and the lowest figures which are further from the median (respectively Comparable 2 and Comparable 5 & 7 - Comparable 2, which was also discarded by Mr. Lynch, and Comparable 5 & 7 which was rejected by Mr. Poon in his valuation), the remaining comparables give an average unit rate of $166 per sq.m.

39. The Tribunal therefore determines that the comparables analysed by the parties justify the adoption of a unit rate of $166 per sq. m. for the valuation of the subject premises at the relevant date. Applying this to the adopted equivalent area of the subject premises gives the following result:

	Equivalent area:	200.56 sq.m.
X	Adopted unit rate:	$166
	Estimated rent	$33,293
Deduct	air-conditioning costs	$363
	Estimated prevailing market rent	$32,930
	Rounded to	$33,000 per month

Amendment of clauses in the current tenancy agreement

The respondent applied to amend the following clauses in the current tenancy, which shall form the basis of the new tenancy agreement:

(1) Page 3, clause4 (c), line 2 - delete "water",

(2) Page 5, clause 4 (m) - insert the following after the words "and fittings" in line 2: "which are exposed and exclusively serving the Premises and the exposed; and delete "within the Premises",

(3) Page 6, clause 4 (p) - insert "exposed" before "pipes",

(4) Page 6, clause 4 (g) - delete "windows",

(5) Page 6, clause 4 (j) - line 2, delete "flooring and" and line 6, insert "exposed" before "wiring".

40. In the final written submission, the applicant requested the Tribunal to amend the above clauses of the original tenancy agreement to reflect changed circumstances and in order to clarify a potentially mis-leading repair covenant. The respondent submitted that the Tribunal has the discretion to amend clauses to reflect the practice in the market. The respondent suggested that the leases in the market often include wording as proposed by the applicant.

41. Having regard to all the circumstances surrounding this application, the Tribunal declined to make an order requiring the amendments as suggested by the applicant. This is a renewal of a tenancy and the Tribunal does not find it appropriate to exercise its discretion to amend the clauses as requested by the applicant.

Orders

1. New Tenancy for 18 months from 10 March 2000;

2. New rent $33,000 per month (exclusive of rates and management charges); leave to respondent to pay applicant over-payment of rent (if any) within 1 month;

3. Deposit to be adjusted pro rata in accordance with the new rent; leave to respondent to pay applicant any adjustment within 1 month;

4. Other terms of new tenancy same as in current tenancy agreement.

5. No order as to costs.