R B NAYLOR v. KONMILL LTD

LDNT61/2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 61 of 2004

_________________________

_________________________

_________________________

JUDGMENT

_________________________

Background

1. The Applicant is the tenant and the Respondent the landlord of the subject premises known as 3rd Floor of No. 23 Wilson Road (Including Roof A Thereof) and Car Parking Space No. 3 on Ground Floor, Cooper Villa, Nos. 23-29 Wilson Road, Hong Kong ("the Premises"). It was agreed that the Premises was let to the Applicant for a term of 2 years commencing from 1 June 2002 at a rent of $40,000 per month, inclusive of rates and management fee.

2. By an application filed to the Lands Tribunal on 29 April 2004, the Applicant applied for a new tenancy of the Premises and the determination of the Prevailing Market Rent ("PMR") under the new tenancy.

Terms of new tenancy agreed by the parties

3. The Respondent did not oppose the new tenancy application. In the beginning of the hearing, both parties agreed that a new 2-year tenancy commencing from 1 June 2004 be granted by the Respondent to the Applicant at a rent to be determined by the Tribunal and subject to a new break clause given to the Applicant, and otherwise on the same terms as in the previous tenancy agreement of the Premises. The new break clause shall allow the Applicant to have the option of terminating the tenancy by giving a minimum written notice of 3 months, exercisable after 12 months of the tenancy. In other words, the minimum period that the Applicant has to stay in the Premises under the new tenancy shall be 15 months. The only outstanding issue is the determination of the PMR of the Premises.

Evidence of the Applicant

4. The Applicant produced a report (Exhibit A1) and gave evidence himself while the Respondent called for the evidence of an expert surveyor, Ms. Carmen M. K. Chan, one of the two surveyors who jointly prepared the valuation report (Exhibit R1) submitted during the hearing.

5. The Applicant sought to determine the PMR by reference to four sources of rental information available to him. He adopted the saleable area of the Premises as 154.8 sq. m., as shown in the Rental Schedule provided by the Rating & Valuation Department. Firstly, he calculated the average of the unadjusted unit rents of the 6 comparables, at $272.44 per sq. m., as the market unit rent for the Premises. Secondly, based on the rental trend given by the real estate agency, Midland Realty in a report published in the SCMP on 7 July 2004, he estimated that the residential market rents have fallen over the past 2 years by 10.5%. Applying this to the rent passing of the Premises under the previous tenancy ($40,000 per month, or $258 per sq. m. per month), he estimated the PMR of the Premises to be $35,800 per month, or $231 per sq. m. per month. Thirdly, from the same newspaper report of the SCMP dated 7 July 2004, he quoted the Midland Realty's estimate of the average unit rent of properties in Happy Valley / Tai Hang area as $19 per sq. ft. (or $204 per sq. m.). Finally, he presented a range of asking and un-negotiated rents of apartments available to rent in the area of the Premises, taken from another real estate agency, Centaline's website on 8 July 2003. He averaged the areas of the advertised apartment units and the asking rents of the same to arrive an average unit rent of $193 per sq. m.

6. To summarize, based on the unit rents arrived at from the four sources outlined above, he calculated that the monthly PMR of the Premises on the basis of inclusive of rates and management fee should be the average of the above said four rental estimates, as follows:

The Respondent's evidence

7. Ms. Chan who gave evidence for the Respondent submitted that the Tribunal should not adopt the methodology used by the Applicant. For the SCMP's market trend and the broad market rental average, she submitted that they were too broad-brush in nature as to be of any use, particularly when the Tribunal had the benefit of sufficient number of good comparables, i.e. the Rating & Valuation Department's schedule of apartment rents from buildings of similar age in the same neighbourhood as the Premises. Therefore, Ms. Chan concentrated on the rental data provided in the Rating & Valuation Department's schedule.

8. Next, Ms. Chan opined that since Comparables 2 and 4 in the schedule are of a different character, environmentally and physically from the Premises and the other comparables, they should be excluded from further consideration and valuation adjustments. Then, instead of simply using the average of the unadjusted unit rates of the comparable rents in the said schedule, as suggested by the Applicant in one of his approaches, Ms. Chan carried out her analysis of the rents and the valuation of the Premises having regard to the differences between the comparables and the Premises. She at the end estimated the PMR of the Premises to be $49,800 per month, exclusive of rates and management fee.

The Tribunal's findings

9. The Tribunal accepts the evidence of Ms. Chan so far as the methodology of valuation of the PMR of the Premises is concerned. There were many drawbacks in the Applicant's four approaches. Firstly, his approach of using the average of unadjusted unit rents of Rating & Valuation Department's comparables was very crude. It did not take into account the differences between the Premises and the comparables. Although adjustments in the valuation process are bound to be subjective in nature, it does not follow that a valuation with no adjustment to the comparables is a better approach. On the contrary, the Lands Tribunal has not accepted the latter approach in the past. This Tribunal will not accept it too. Next, the average unit rate and the rental trend quoted by Midland Realty in the SCMP were bound to be very broad-based in nature and could not be accepted as the basis for the valuation for the Premises. This is particularly so because there was, as submitted by the Respondent, no evidence that the rent passing of the Premises under the previous tenancy was at market rental level. Finally, it is commonly known that the Tribunal and any Court would not accept the asking rents or prices as to represent the market rents or prices of any property. It will also not be accepted by this Tribunal.

10. The Tribunal noted that Ms. Chan had applied a factor of 1/8 in converting the area of the top roof ancillary to the 3/F apartment in computing the effective area of the Premises, which is equivalent to 172.1 sq. m. The Tribunal agrees with Ms. Chan that this conversion factor has been commonly adopted in the valuation of residential premises in Hong Kong. This is also accepted in the present valuation exercise.

11. As to the analysis of the comparables and the adjustments adopted by Ms. Chan, the tribunal also accepts her figures with 2 exceptions. Firstly, the Tribunal does not agree that the floor level difference between the Premises, which is on 3/F and the comparables, on 1/F or 2/F, should only be 1% per floor. Bearing in mind that this is a building with no lift service and that most tenants nowadays are so accustomed to lift service, the Tribunal considers that the level differences warrant much higher discounts than what were suggested by Ms. Chan. That is, it is appropriate to allow an adjustment of 5% to account for the level difference between 2/F comparables and the Premises, and 7% between 1/F comparables and the Premises.

12. The other area of adjustment that the Tribunal differs in opinion from Ms. Chan is on the issue of "size adjustment". While the Tribunal agrees with Ms. Chan that downward adjustments should be applied to her Comparables 1 & 2, a bigger percentage adjustment of -10% in each case appears to be more appropriate. Other than the above 2 variations, the Tribunal agrees to adopt Ms. Chan's adjustments to her comparables, which are all considered to be fair and reasonable. Hence, adopting the figures used in Table 7.6 of Ms. Chan's report (Exhibit R1) and the above variations, the adjustments of the comparables are as follows:

*Both Unit Effective Rent and Adjusted Unit Rents are on the basis of HK$ per sq. m. per month.

13. Applying the average adjusted unit rate of the best 4 comparables adopted by Ms. Chan, $253.23 per sq. m. to the effective saleable area of the Premises, or 172.1 sq. m., the PMR of the Premises is estimated to be $43,581.

14. It was agreed by the parties that the monthly rates and the monthly management fee of the Premises were $1,327 and $1,000 respectively. Adding these 2 figures to the above estimate of $43,581 gives a figure of $45,908. This is rounded to $45,900, as to be the PMR of the Premises on the basis of inclusive of rates and management fee.

15. Hence, I make the following Orders:

Orders

1. The new tenancy of the Premises shall be for a term of 2 years commencing from 1 June 2004;

2. The rent of the new tenancy shall be $45,900, inclusive of rates and management fee; leave to the Applicant to pay to the Respondent arrears of rent, if any, within one month from today;

3. The deposit of the new tenancy shall be 2 months' rent in the sum of $91,800; leave to the Applicant to pay to the Respondent the adjustment to the previous deposit under the previous tenancy agreement within one month from today;

4. The Applicant shall have the right to terminate the new tenancy at any time between 1 September 2005 to 30 May 2006 by the giving of 3 months' prior written notice to that effect to the Respondent, such notice not to be given earlier than 1 September 2005 and only to expire on the last day of the relevant month;

5. Other terms of the new tenancy, with the exception of the commencement date, the rent, the deposit and the break clause as stated in paragraph 4 above, shall be the same as in the previous tenancy agreement.

6. No order as to costs.