A. N. Forsyth v. Banbury Investments Ltd.

LDNT306/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 306 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 described as Flat E3 (also known as Flat E on 2nd Floor) of No. 12 Broadwood Road, Happy Wanchai, Hong Kong ("the Premises"). for some years.

2. The Applicant has been residing in the Premises as a sub-tenant for 21 years. He has been paying a rent of $24,000 per month. Since the principal tenant did not wish to continue renting the Premises with the Respondent, the Applicant on 31st August 2000 applied to the Lands Tribunal for the granting of a new tenancy. The Respondent did not oppose the application. At the hearing, the parties confirmed that the new tenancy would be a one year tenancy commencing from 1st October 2000. The outstanding issue is in the amount of prevailing market rent. The Applicant in the opening suggested that the rent should be $21,132 per month, on the basis of inclusive of rates and exclusive of management charges. He arrived at this figure by multiplying the area of the Premises, 1,174 sq.ft. by his estimated unit rate of $18 per sq.ft. On the other hand, the Respondent asked that the rent should be, based on the current Rateable Value of the Premises, in the sum of $27,000 per month, exclusive of rates and management charges.

3. The Applicant gave evidence in person. He produced a tenancy agreement (Exhibit A-2) of the flat upstairs, described as Flat E4 in the subject development (i.e. Flat E on 3rd Floor and Roof, together with one car park space). He obtained the copy of agreement from the tenant's husband, a Mr. Bruce Baron. He had no relationship with the tenant (Ms. Chao Pui Han) or Mr. Baron but only met and knew them after they moved into the upstairs flat from their former home in the Mid-levels. The tenancy agreement of Flat E4 show that the rent passing was $23,500 per month, inclusive of rates and use of one covered car park space at the basement and portion of roof.

4. The Applicant gave evidence that he had viewed the interior of Flat E4 before the moving in by the Barons family. He found that it had been completely refurbished. That was in January 2000, before the signing of the tenancy agreement of Flat E4. He was advised that some additional works had been carried out after the signing. The Applicant then produced photos showing the exterior of the Premises, the open parking area, driveway and the common staircase of the subject development (Exhibit A-3). He also produced photos showing the interior condition of the Premises (Exhibit A-4) and photos showing the much newer and superior condition of a high-rise building ("The Broadville", No. 4 Broadwood Road) nearby (Exhibit A-5). In Exhibit A-5, he also included a copy of an extract of a classified advertisement in the South China Morning Post. That show two asking rents in the buildings nearby:

(1) The Broadville- 1,527 sq.ft. asking $32,000 (at unit rate of $20.9 per sq.ft.);

Beverly Hills- 1,972 sq.ft. asking $42,000 (at unit rate of $21.2 per sq.ft.).

5. From the above, the Applicant argued that his estimate of a unit rate of $18 per sq.ft. for the Premises should be reasonable.

6. The Applicant suggested that the recent letting of Flat E4 should provide the basis for estimating the prevailing market rent of the Premises. He opined that in view of the differences between the Premises and Flat E4 in the use and enjoyment of roof area, a covered car park in the basement and the liability for payment of rates, the rent passing of Flat E4 should be adjusted as follows:

7. In the cross examination, the Applicant accepted that the area of 1,164 sq.ft. for the Premises should be the net area. He further agreed that the Rateable Value of the Premises in the years 1998-2000 and 2000/2001 were respectively $379,800 and $323,700.

8. When questioned by the Respondent if there was any relationship between the landlord and tenant of Flat E4, the Applicant replied that he had been advised by Mr. Baron that the tenant of Flat E4 did not have any relationship with the landlord and did not know the landlord prior to the introduction by the agent.

9. Ms. Choi Yin Mei Posinea, the representative of the Respondent gave evidence. Following the notice from the former principal tenant of the Premises to deliver back the Premises to the Respondent, the Respondent made an offer of a new tenancy to the Applicant at the rent of $27,000 per month, exclusive of rates after being advised by the Applicant that he had been residing in the Premises for a long time. The Respondent submitted that the condition of the Premises was just a matter of decoration which should not affect the assessment of the rent. The Respondent also gave the view that the rent for the Flat E4 was lower because it was situated on the top floor, thus suffering from the solar heating of the roof and the disadvantage of locating on a higher floor level than the Premises, in a building without lift service. This was supported by the lower Rateable Value of the Flat E4 as compared with the Premises. Also, from the rental indices published the Rating & Valuation Department and Jones Lang LaSalle (Exhibits R-2 and R-3 respectively), there have been a slight increase in rental values of about 1 to 2%, from 1st quarter of 2000 to 2nd quarter of 2000 (Rating & Valuation Department's figures), or a similar increase from April 2000 to October 2000 (Jones Lang LaSalle's figures).

10. In the final submission, the Applicant submitted that out of 24 units in the subject development, the Respondent and its parent group of company, Hopewell Holdings, owned about half of which most were vacant. It has been Hopewell's policy of not renewing any tenancy nor to find any new tenant for any of the vacant flats. As for the remaining flats owned by the other owners, there has been no new letting except the letting of Flat E4. In the circumstances, the Applicant queried the availability of sufficient source of direct rental evidence to the Rating & Valuation Department for their purpose of assessing the Rateable Values for the Premises and other flats in the development. Therefore, the Applicant submitted that the Tribunal should not have regard to the Rateable Value but should rely on the transaction evidence of Flat E4 in its determination of prevailing market rent for the Premises. The Respondent clarified that the Hopewell group actually owned about 11 flats. Apart from the Premises which was tenanted, another flat was tenanted by an employee. As for the rest, they were all vacant at the date of valuation.

11. Tribunal's determination of the Prevailing Market Rent

Under Section 115 of Part IV of the Landlord & Tenant (Consolidation) Ordinance, Cap. 7, "prevailing market rent" means-

"the rent, exclusive of rates at which the premises the subject matter of a tenancy to which this Part applies might reasonably be expected to be let, at the date on which the current tenancy would, apart from section 119N, have come to an end under section 119(1) or section 119A(5), on the terms of the new tenancy granted under this Part, but disregarding the effect of this Ordinance." (underline added)

12. Under section 7 (2)of the Rating Ordinance, Cap. 116, "Rateable Value" of a tenement shall be-

"An amount equal to the rent at which the tenement might reasonably be expected to let, from year to year, if - (a) the tenant undertook to pay all usual tenant's rates and taxes; and (b) the landlord undertook to pay the Government rent, the costs of repairs and insurance and any other expenses necessary to maintain the tenement in a state to command that rent". (underline added)

13. There is a similarity in the definition of the prevailing market rent and the Rateable Value. However, since the Rateable Value was an estimate of a notional rent assessed by the Commissioner of Rating & Valuation for the purpose of collecting rates, it should not replace the direct rental market evidence in any exercise of assessing the prevailing market rent under the Landlord and Tenant (Consolidation) Ordinance. Also, it is inappropriate to compare the asking rents of flats in some other much newer developments in the Happy Valley area with the Premises.

14. In the present application, although the parties had before them only one actual rental transaction, it nevertheless should be analysed and relied upon in the assessment of the prevailing market rent for the Premises. I accept that for valuation by direct comparison method, this is not the ideal situation. However, the Premises is located in a development which is towards the end of their economic life and has been apparently in the course of awaiting merging of ownership and redevelopment. As such, I agree with the Applicant that under these circumstances, there is very little, if any, actual rental market evidence in the subject development.

15. Based on the rent passing for Flat E4, I decide that the following adjustments are warranted in assessing the rent for the Premises:

16. In the light of the evidence produced by the parties, I decide that the above adjustments and their quantum to be fair and reasonable in the present application. They are in line with the usual adjustments applied for similar premises by the landlords and tenants in the market. I allow a downward adjustment of $1,000 as suggested by the Applicant to reflect the benefit of a covered car park in the basement for Flat E4. For the assessment of the value of a portion of the roof to the tenant of Flat E4, I accept the Applicant's suggestion of assuming that the value of the roof portion to be equal to about 10% of the value of the flat below. Since the value of the flat after allowing for the value of the covered car park is $22,500, the value of the roof is arrived at by the following formula: $22,500 divided by 110% and multiplied by 10%. This gives a figure of $2,045.

17. I agree with Ms. Choi that for a walk-up building, a lower floor normally should fetch a higher rent because of the benefit of easier access from the ground. Similarly, the adverse effects of solar heating on the roof and possible water seepage problem from the roof normally bring down the rent of the top floor flat in most walk-up buildings. As such, some downward adjustments to reflect these factors are warranted. In the absence of evidence, I have made appropriate estimates under the circumstances for the Premises. Finally, I decide that in the absence of other better evidence, time adjustment based on Jones Lang LaSalle should be made. For the period from Jan 2000 to October 2000, the index shows an upward increase of about 2.5%. Hence, a similar time adjustment is made in this case.

18. Thus, I determine that the prevailing market rent of the Premises, on the basis of exclusive of rates, shall be $20,400 per month.

Orders

1. By consent, new tenancy for 1 year commencing from 1st October 2000;

2. New rent at $20,400 per month (exclusive of rates); leave to the Applicant to pay the Respondent the arrears of rent, if any, or leave to the Respondent to pay back over-payment of rent to the Applicant, if any, within 1 month;

3. With liberty to apply by either party regarding the other terms of the new tenancy;

4. No order as to costs.