Jan G W Blaaum v. Maxwell Industrial Building Management Co. Ltd.

LDNT123/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 123 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 C3 Riviera Apartments, 4 South Bay Road, Repulse Bay, Hong Kong and one covered car parking space. The existing tenancy was a renewed tenancy for a term of two years commencing from 10 April 1998 at a rent of $41,700 per month, including the rent for one covered car park but exclusive of rates and management fee.

2. The Applicant on 8 April 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 agreed that the new tenancy to be granted would be a two years year tenancy commencing from 10 April 2000 at a rent to be determined by the Tribunal. Otherwise, the new tenancy would be subject to the same terms as before, except that the deposit would be adjusted pro rata with the new rent. Therefore, the outstanding issue is in the amount of prevailing market rent ("PMR"). The Applicant in the final submission proposed that the new rent should be $34,000 per month, close to the valuation of the Applicant's expert. On the other hand, the Respondent submitted that the rent should be determined at $53,800 per month, the same as that appraised by the Respondent's expert.

3. The subject premises is a residential unit on the second floor of Blocks B and C of Riviera Apartments, a small residential development comprising 2 blocks of 3-storey apartment buildings with 2 units per floor in each block. Riviera Apartments is located on the south-east side of South Bay Road near its junction with Repulse Bay Road. It was completed around 1958 and is ripe for redevelopment. It was agreed by both parties that the subject premises enjoyed seaview.

Applicant's valuation

4. The Applicant gave evidence in himself. He said he had been residing in the premises for about 8 years and was very familiar with the premises and the development. His evidence was mainly on the condition of the subject premises, the state of the development including its facilities (common lawn), the history of maintenance and leasing of the subject premises as well as the quality of management of the building. In particular, the Applicant opined that the management style of the Respondent was paternalistic and oppressive. Also, the subject premises suffered from disrepair. There was no decoration by the Respondent since 1994 whereas for the other units, decoration had been done.

5. Mr. R. Gareth Williams, Chartered Surveyor gave evidence on behalf of the Applicant. He produced a valuation report (Exh. A5). He adopted a broad approach in his valuation. He first looked at the general movement of rents over the period from April 1998 to April 200. He had had regard to both the Jones Lang LaSalle and the Vigers indices for the period. He then compiled the rents of units in the development according to their floor level. For the first group of ground floor units, he compiled 4 comparables with rents ranging from $32,000 to $42,000, and with the commencement dates of the tenancies from July 1999 to 30 June 2000. He adjusted the rents for various factors of furniture, size, carpark and time to arrive at his so-called "base rent". The range of "base rent" was between $31,000 and $36,000. He carried out similar exercise to the rents of the other group of second floor units. These rents ranged from $36,000 to $50,000 for tenancies commencing from August 1999 to 31 July 2000. After making similar adjustments for various factors, he arrived at the "base rent" for this second group of units. These ranged between $35,500 and $45,200. Mr. Williams opined that the "base rents" for these second floor flats was suspect. He therefore estimated the rent of the subject premises by firstly using the base rent of the ground floor as a starting point, as follows:

6. Next Mr. Williams discounted the rent by 10% or $3,700 to reflect "both in recurrence of the damp and the time taken to get any action to rectify the problem" and "the lack of decoration compared with a new letting". He finally arrived at a rent of $33,500 per month as to be the prevailing market rent for the subject premises.

7. During the hearing, Mr. Williams also used an offered rent for Unit A1 (details of which are in Exh. R11, an offer letter made by an estate agent to the Respondent) as the basis and arrived at the PMR for the subject premises, as follows:

8. Mr. Williams commented on the rents of other units in the same development that were subject to one year tenancy, which had been endorsed by the Rating & Valuation Department with the purpose of excluding the tenancies from application of Part IV of the Landlord and Tenant (Consolidation) Ordinance ("the Ordinance"). He gave evidence that there was no evidence to support any differential in rents between one year and two year leases.

9. The Applicant in the final submission produced a hand-written working sheet of the above calculation. The Applicant submitted that based on the recently offered rent for Unit A1 (in January 2001), the PMR of the subject premises at April 2000 was estimated at $34,000. This was very close to and supported Mr. William's valuation of $33,500 in his report (Exh. A5). The Applicant also submitted that the rents in the building were widely fluctuating. All in all, the Applicant stated that as the rents in general had dropped a lot since 1998, there was no reason that the rent for the new tenancy should be higher than the previous rent agreed at renewal in 1998.

Respondent's valuation

10. The Respondent was represented by Mr. Lo Kwan Shing who gave evidence. He denied that the Respondent was an oppressive landlord. He explained that as the development consisted of 12 units, it would be necessary for the Respondent to ensure, for example, the proper use of the common lawn and other common parts of the development. He revealed that of the 12 units, two were vacant and two were owner occupied while the rest were tenanted. However, with the exception of the subject premises and one other unit, all the tenancies in the development were on the terms of one year short term tenancy. Also, the short term tenancies were endorsed by the Commissioner of Rating & Valuation such that they were excluded from the provisions of the Ordinance. During the hearing, Mr. Lo produced a number of Exhibits, including Exh. R11 and R12, which were offer letters made by agents for prospective tenants in respect of two vacant units, Unit A1 on the ground floor and Unit C2 on the first floor respectively. Mr. Lo admitted that if the Applicant agreed to sign with the Respondent a similar short term tenancy, the Respondent would be prepared to reduce the rent.

11. Mr. Brian W K Li, Chartered Surveyor, gave evidence for the Respondent. He produced a valuation report (Exh. R13) in which he estimated the PMR for the subject premise at $53,800 per month. He adopted a unit rate of $297 per sq.m. in his valuation. He analysed the rents of three units in the subject development as well as the rents for four other residential flats elsewhere (based on the rent schedule provided by the Rating & Valuation Department). However, he primarily relied on the adjusted unit rates for Unit A3 and Unit B3 in deciding to use the adopted rate of $297 per sq.m. In his valuation, he made adjustments to these two rents for the difference in car parking (open as against covered car park) and tenancy nature only. He reckoned that a substantial 15% upward allowance was appropriate to reflect the short-term nature of these two comparables as against the standard two years term.

Tribunal's determination of the PMR

12. The Tribunal decides that the valuation of Mr. Williams in Exh. A5 was based on too many assumptions. Mr. Williams decided to discard entirely the rents of the second floor units and submitted that the base rent obtained by the analysis of the ground floor units should be used. However, the Tribunal notes that two out of four ground floor units were transacted in July 1999, some 9 months away from the relevant valuation date of April 2000.

13. Mr. Li has used the comparable rents from other properties in the same district in addition to rents in the subject development. The Tribunal decides that in view of the age and uniqueness of the development, we should concentrate on the rents from the subject development.

14. Regarding the management style of the Respondent and the condition and common facilities in the development, the Tribunal is of the view that so long as the comparables are exclusively from the subject development, all the factors pertaining to the development should have been reflected by the rents passing.

15. As to the differences between the standard 2 year tenancy and the one year tenancy signed by the Respondent with most tenants in the development, the Tribunal agrees with Mr. Williams and the Applicant that there is no evidence to support any difference.

16. The Tribunal decides that we should use the actual transacted rents as the comparables. The asking rents (though accepted by one side) should not form the basis of valuation unless there is a complete dearth of other rental evidence. Hence, the Tribunal summarizes below the rents in the development that are close to the relevant date of valuation:

17. In order to put these comparables to the same basis of including the rent or fee of one car parking space, the rents of the above comparables are adjusted by $3,000 each to arrive at the gross rent including the facility of one open car park. They are then analyzed on the basis of their respective saleable floor area. The resulting unit rates are adjusted. The results of the analysis are as follows:

18. The adjusted unit rates range from $201.20 per sq.m. to $249.35 per sq.m. with an average of $227.68 per sq.m. Applying this rate to the saleable area of the subject premises at 181,2 sq.m. gives a rent of $41,255.

Bearing in mind that the subject premises includes the provision of one covered parking space, this rent should be adjusted upward by say $500 to account for the difference between a covered space and an open space. This results in a rent of $41,755 which is rounded to $41,750.

19. Thus, I determine that the prevailing market rent of the Premises, on the basis of exclusive of rates and exclusive of management fee, shall be $41,750 per month.

Orders

1. By consent, new Tenancy for 2 years commencing from 10th April 2000;

2. New rent at $41,750 per month (exclusive of rates and management fee); leave to the Applicant to pay to the Respondent the arrears of rent, if any, within 1 month;

3. Deposit to be increased pro rata in accordance with the rent; leave to the Applicant to pay the increase to the Respondent within one month;

4. Other terms of the new tenancy same as in the expired tenancy agreement;

5. No order as to costs.