GEORGE COLIN MAGNUS & ANOTHER v. LEE CHONG ESTATES LTD.

LDNT 162/2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 162 OF 2001

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JUDGMENT

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1. This is an application for the determination of a prevailing market rent under section 119K of the Landlord & Tenant (Consolidation) Ordinance, Cap. 7. The property is 19th Floor, Block 5 and Car Port Space No. G31, Repulse Bay Garden, Nos. 18-40 Belleview Drive, Hong Kong.

2. I should mention that the application initially was for the determination of a prevailing market rent for a four year tenancy of the property commencing from 1st July, 2001. However, I was informed at the hearing that the parties have agreed that the Tribunal should determine a prevailing market rent for a two year tenancy commencing from 1st July, 2001 and that the valuation reports of their experts were prepared for a two year term commencing 1st July, 2001. The parties have also agreed that the terms of their previous written tenancy dated 15th December, 1999 shall continue to apply in the new tenancy save and except the rental.

3. Repulse Bay Garden is a development comprising 240 flats in 6 blocks each of 20 storeys. The development is constructed on a sloping site overlooking Repulse Bay. It is about 30 years old. Access is by Belleview Drive which branches off from Repulse Bay Road.

The Expert Evidence

4. The Applicant's expert Mr. Poon Sze Ngok valued the rental at $48,000.00 per month for the premises. He considered 7 comparables which were supplied to the parties by the Rating & Valuation Department. The comparables are set out in the table in Appendix 1 hereto. All of them are units in the Repulse Bay Garden development and are of the same saleable area at 190.4 m2. The 2nd to 6th comparables have monthly rentals between $49,500 to $53,000. The 1st and 7th comparables have monthly rentals of $60,000 and $40,000 respectively. Mr. Poon rejected these two comparables on the ground that they were too high and too low and hence out of tune with the rest. He then applied the direct comparison method and made various adjustments to the remaining five comparables.

5. Mr. Lam, expert for the Respondent, valued the rental at $53,000.00 per month. He was not aware of the 7th comparable at 14th floor, No. 22 Belleview Drive until he read the report of Mr. Poon a few days before the hearing. He also used the direct comparison method and made adjustments to the 1st to 6th comparables. He did not think that the rental of the first comparable was too high to be out of tune with the rest. He also confirmed in his evidence that the 7th comparable was not too low and need not be excluded. He agreed that the inclusion of the 7th comparable would bring his valuation down to $50,341 per month. The difference between the parties is thus less than 5%.

Fixture, Fittings and Chattels

6. Mr. Poon had inspected the flat. The fixture, fittings and chattels provided under the tenancy, which were lighting, built-in wardrobe, kitchen cabinets, cooker, air-conditioner, dressing table, a shoes rack and a wine rack as listed under the Third Schedule of the tenancy. They had been in use for some years. He made an estimate of their value and applied a depreciation and then came to an estimate of $1,500.00 per month. He preferred to use a lump sum rather than a percentage of the rental to represent the value of the fittings and chattels.

7. For comparable no. 2, Mr. Poon deducted only $1,000 to reflect the provision of chattels like air-conditioners, wardrobes, sofas, coffee table, ceiling lights, exhaust fans and water heaters.

8. Mr. Lam for the Respondent however regarded that a 5% adjustment should be added to the rental of those premises that are without any fixture, fittings and chattels. He was of the view that the fixture, fittings and chattels in the subject premises are not very old and are complimentary of the premises. Regarding comparable no. 2, he has not inspected it and could not estimate their depreciation. For the same reason, Mr. Lam did not think that he should apply a lump sum for that comparable.

Time

9. The five comparables have different commencement dates. Mr. Poon consulted the index for Class E flats (luxurious flats of saleable area over 160 m2) in the "Rental Indices for Private Domestic Units" published by the Rating and Valuation Department in September, 2001. He then made the following adjustments to the comparables: -

10. Mr. Lam on the other hand was of the view that the rental market for flats within the Repulse Bay Garden was fairly stable and did not think that any adjustment was necessary to reflect the difference in time. Mr. Lam relied more on his market feel than the indices of the Rating & Valuation Department.

Floor Levels

11. Mr. Poon was of the view that Repulse Bay Garden is on a sloping site and not much noise or other nuisance is generated on the ground level. It is also an open development with low lying ground in front and all units enjoy a very good view regardless of floor levels. Therefore the advantage of living in higher floors in this development is not too great. Unlike the case of a building in the hub of Yaumatei or Wanchai which may warrant a bigger adjustment for height, he applied a small adjustment of 0.25% per floor for this development. Since the blocks are constructed on different levels, he made adjustments to the comparables by reference to their actual height from the G/F level of the subject premises and not by reference to their own G/F levels or floor number.

12. He further used the rateable value of the 5th and 6th comparables to check the correctness of his rate of adjustment. These two comparables are in the same block, of the same saleable area but at different floors. The rateable value for the 5th comparable on the 8th floor is $44,730 and the 6th comparable on the 18th floor is $45,830. Mr. Poon then came to a conclusion that the percentage difference per floor for the rateable value is 0.246%. This is very close to his 0.25% and he thought that this confirmed his adjustment.

13. Mr. Lam however applied a 0.75% per floor adjustment and he made adjustments by reference to floor number rather than actual height from the G/F of the subject property. He opined that the rental value between the top and bottom floors in a block in Repulse Garden should have a 15% difference and he has several bases for this view. The first basis was noise and other nuisance generated on the ground. He took the view that such would adversely affect the rental value of the lower floors. The second basis was the view at different floors. Since this development was quite open, he did not think that the difference in height would produce a marked difference in view though he maintained that there would still be some difference. The third basis that Mr. Lam placed some weight was the prestige of living in higher floors. It was a combination of these factors that resulted in his 0.75% adjustment per floor.

14. Mr. Lam did not use the rateable value to check against his adjustment for height as he took the view that the rateable value has a different reference date from the lease commencement dates, rates are subject to review and appeal and there is no material relationship between prevailing market rent and rateable value.

15. Mr. Poon differed from Mr. Lam. He said that applying Lam's adjustment of 0.75% per floor, there would be a 8.5% adjustment for a 11 floors difference. If the monthly rental should be at $48,000 per month, the 8.5% adjustment would produce a rental difference of $4,080 per month and he found this difference unacceptable.

New Lettings

16. Mr. Poon was of the view that for new lettings, the rental should be about 5% higher than renewals. For new lettings, the landlord would usually carry out some renovation before letting out the premises. But such would normally not be done in a renewal. 5% of a monthly rental of $48,000 for a two year term would yield $57,600 or around $300 per m2. Mr. Poon said that such was required for repainting, cleaning of carpet and the like so as to make good the premises for a new letting.

17. Mr. Lam for the Respondent used 3% to adjust the difference between new letting and renewal. He said that the contractors are now prepared to reduce their charges and there is no reason to increase the usual 3% adjustment to a new height of 5% at this time.

18. Mr. Poon differed as he thought that 3% of a two year tenancy at $48,000 per month would only produce $34,560 and would be insufficient for decorating the premises for a new letting. In re-examination, he gave a further reason to support his 5% which was particular to the subject premises. He thought that the fixture and fittings of the subject premises were very old and this further justified his 5% adjustment.

Car Parking Space

19. Both Mr. Poon and Mr. Lam agreed with the Tribunal that since the rental for a covered car parking space throughout Repulse Bay Garden is $2,500 per month, for comparables that has a covered car parking space, there should be a deduction of $2,500 from the rental before other adjustments are applied.

Age of the Building

20. The 1st comparable was constructed in 1970. Mr. Lam made a 2% downward adjustment to it as the subject premises and all other comparables were constructed in 1973.

21. Mr. Poon did not rely on this comparable as he regarded it out of tune, but he also took the view that no adjustment is necessary as it is not a comparison of 1 year with 3 years but a comparison of 28 years with 31 years. Mr. Lam however took the view that a building that has reached 30 years in age is definitely different from a building below 30 years.

Duration of Tenancy

22. The 6th comparable is only for 12 months commencing from 1st February, 2001. Mr. Poon agreed that in a falling market, landlords would not like to grant a short term and would ask for a slightly higher rent in case of a short term. He however did not think that any adjustment need be made for the 6th comparable. He said that most tenancies contain a break clause after the first year and such break clause would cancel out the effect of a short term. There is however no evidence of the presence of any break clause in any of the comparables or in the previous tenancy agreement between the parties.

23. Mr. Lam however gave a 3% downward adjustment for the rental of the 6th comparable to account for its short duration.

Rateable Value for Relativity Purpose

24. Mr. Poon calculated the relativity of the comparables as compared with their respective rateable values and found them to be within the range of 0.96 to 1.04. The relativity for the subject premises on an assumed rent of $48,000 per month would be at 1.01 whilst the relativity for an assumed monthly rent of $53,000 would be at 1.10. He therefore used the relativity with rateable value as additional support for the correctness of his valuation at $48,000.00 per month.

25. Mr. Lam did not refer to the rateable values of the premises at all for reason that the reference date of the rateable value is different from the commencement dates of the comparables. He also said that there would be appeal and review, hence revision to the rateable values.

The Tribunal's Adjustments

26. Since both sides relied on the direct comparison, the Tribunal would also adopt the same method as this is the most appropriate method for this application.

Fixture, Fittings and Chattels

27. The Tribunal accepts Mr. Lam's evidence that the fixture, fittings and chattels are complimentary with the conditions of the subject premises. There is no complaint that they are not and it is reasonable to assume that the tenant would not be satisfied to live with things that do not compliment with the premises. It is however more appropriate to adjust this element by way of a lump sum than a percentage of the rental as value of fixture and fittings should not vary with other factors that affect the rental. The Tribunal therefore fixes a value of $2,000.00 for the fixture, fittings and chattels.

28. For comparable no. 2, since there are fewer pieces of chattels than those in the subject premises, The Tribunal would fix a lump sum of $1,500 assuming that the fixture, fittings and chattels are also complimentary with the premises. The same adjustment is also made to the 7th comparable.

Time

29. The Tribunal agrees that the fluctuation of rental between February to July, 2001 was small with the biggest difference in April, 2001 being at 0.5%. But there is no reason to suppose that the rental of Repulse Garden did not fluctuate with the market in general. Mr. Lam has not given any independent support for his market feel. The Tribunal thus accepts the adjustments for different commencement dates as proposed by Mr. Poon.

Floor Levels

30. The Tribunal agrees with Mr. Poon that a small adjustment of 0.25% is appropriate for Repulse Bay Garden because of its special feature in being an open development on a slope with low lying ground in front so that all units enjoy a good view of the Repulse bay. Since it is an isolated development accessible only via Belleview Drive which branches out from Repulse Bay Road, the problem of noise and other nuisance at the lower level is not as serious as may be found in lower floors in buildings in Yaumatei or Wanchai. But the Tribunal does not agree that people will negotiate the rental by reference to the actual height of the floor from a certain reference point on the ground. The Tribunal thus adjusts the difference in height by reference to the actual floor number.

31. Though the Tribunal agrees that an adjustment of 0.25% per floor is proper, it does not see it appropriate to make comparison with the ratable value as rateable value is determined by reference to factors stipulated in section 7(2) of the Rating Ordinance, Cap. 116 which are not exactly the same as the criteria adopted by the experts and the Tribunal. Furthermore, the rateable value is fixed by reference to a reference date which is not the commencement date of the tenancy under consideration. The Tribunal therefore pays no regard to the evidence of comparison with rateable values.

New Lettings

32. The Tribunal agrees with Mr. Lam that a 3% adjustment is appropriate for new lettings as landlords usually will not spend too much money in renovating the premises before letting it out. For a premises of 190.4m2, a sum of around $35,000.00 should be enough for such purpose. Mr. Poon in re-examination tried to justified his 5% adjustment by referring to the particular conditions in the subject premises. He thought the conditions in the premises were particularly bad and would justify a 5% adjustment when compared a new letting. The two photographs produced by Mr. Lam however show that the conditions in the living room at least are very decent. Apart from his assertion in cross-examination, there is no evidence that the conditions of the premises are worse than what they should be. There is no criticism about such conditions in Mr. Poon's report.

Car Parking Space

33. Both parties agree that a sum of $2,500 should be deducted from the rentals of those units with a car parking space before adjustments are applied to them.

Age of the Building

34. The Tribunal agrees with Mr. Lam that there is a difference of rental value because the difference in age though it is not a big difference. The adjustment of 2% is appropriate.

Duration of Tenancy

35. The Tribunal also agrees with Mr. Lam that there should be a 3% downward adjustment to the 6th comparable because it is only for 12 months commencing from 1st February, 2001. There is no evidence of any break clause in any of the comparables or in the previous tenancy agreement between the parties.

Rateable Value for Relativity Purpose

36. As observed above, the rateable value is determined by reference to factors stipulated in section 7(2) of the Rating Ordinance, Cap. 116. Its reference date is not the commencement date of the tenancy under consideration. There is also no evidence to show how the rateable values of the subject premises and the comparables were arrived. It is thus inappropriate to pay regard to the relativity between rateable value and actual rental.

The Rental for the New Tenancy

37. Applying the above adjustments to the comparables as shown in the table annexed hereto, the adjusted unit rates of the 2nd to 6th comparables range between $219 to $240. The Tribunal is therefore of the view that the 1st and 7th comparables are out of tune with the rest in being too high and too low respectively both before and after the adjustments. These 2 comparables are therefore rejected.

38. The average of the adjusted unit rates of the 2nd to 6th comparables is $233.81. Multiplying this with 190.4m2 gives $44,517.42. The sums of $2,500 for the car parking space and $2,000 for the fixture, fittings and chattels should be added back to this sum and the result is $49,017.42.

39. The parties have also confirmed that there is no special condition in the tenancy agreement dated 15th December, 1999 which would require further adjustment, the Tribunal therefore grants a new tenancy for two years on the same terms as contained in the said tenancy agreement and commencing from 1st July, 2001 at the monthly rental of $49,000.00 exclusive of rates and management fees. The Tribunal further orders that the rental deposit should be adjusted by reference to the rental of $49,000.00 per month. There is no order as to costs.