Personal Electronics Ltd. v. Pantai Investments Ltd.

LDNT93/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 93 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 House 6, Golden Time Villas, 33 Shatin Heights Road, Shatin, N.T. The existing tenancy was at a rent $29,500 per month, on an exclusive basis, for a term of two years commencing from 1 May 1998 expiring on 30 April 1998.

2. The applicant applied for a new tenancy under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. Both parties agreed that a new tenancy should be granted by the respondent to the applicant for a term of two years commencing from 1 May 2000. There was disagreement between the parties as to the level of the prevailing market rent at the relevant date of 30 April 2000. In the original hearing dated 16 June 2000, the applicant asked for a rent of $25,000 per month on the basis of inclusive of rates and management fees (or equivalent to a rent of $21,122 on the basis of exclusive of rates and management fees) while the respondent demanded a rent of $33,000 per month, on a similar exclusive basis.

3. It was agreed by the parties that the Rateable Value of the subject premises as at the relevant date was 306,600, equivalent to an estimated rent for rating purpose of $25,550 per month, or rates liability of about $1,278 per month. Also, it was agreed that the management fee of the subject premises at the relevant date was $2,600 per month.

4. An oral judgment was delivered on the same date of the original hearing. The following orders were made:

1. New tenancy for 2 years from 1st day of May 2000;

2. New rent at $21,122 per month (exclusive of rates and management charges); leave to the Respondent to pay to the Applicant over-payment of rent within one month;

3. Deposit to be decreased pro rata in accordance with the new rent; leave to the Respondent to pay to the Applicant the adjusted amount within one month;

4. No order as to costs.

5. On 26 June 2000, the respondent applied to review the Orders made on 16 June 2000. The review hearing was fixed on 5 July 2000 during which the parties gave further evidence and submission regarding the assessment of the prevailing market rent for the new tenancy of the subject premises.

6. The subject premises is House 6, one of 17 three-storeyed houses of the estate known as Golden Time Villas located at 33 Shatin Heights Road, Shatin. The estate, completed in 1979, comprises several clusters of terrace houses, each with a small garden area at the back. The houses share a common main entrance and a drive-way area which divides the clusters of houses. According to the information provided by the Rating and Valuation Department, the subject premises includes two car parks Nos. 8 and 9, and has a total saleable floor area of about 181.6 sq.m., plus a terrace area of about 10.4 sq.m., a garden area of about 27.4 sq.m. and an open top roof area of about 24.4 sq.m. In the original hearing, the applicant produced a calculation sheet (Exh. A-11) which estimated the total saleable area of the subject premises to be about 137 sq.m. However, the respondent remarked that the applicant's area was probably arrived at after deducting the areas of the staircases. The respondent further submitted that the area quoted by the Rating and Valuation Department should be correct. In the absence of other better evidence, the Tribunal decided to adopt the area quoted by the Rating and Valuation Department as to be the saleable area for the subject premises.

7. Neither party has called any expert witness in both dates of hearing. Mr. James Middleton, a director of the applicant and the existing occupier of the subject premises gave evidence and submission on behalf of the applicant in both the original and the review hearing. Similarly, Miss Lam, Ying Lai Susan, the representative of the respondent gave evidence and submission in both instances. Although both parties used the same direct comparison method as the method of valuation, neither party has given the exact estimated areas of other comparable houses in the estate, apart from that shown in the Rating and Valuation Department's schedule of reported rents. In the absence of other information, the Tribunal assumed that the area of the subject premises was similar to that of the comparable premises in the same estate.

Evidence and submission in the original hearing

8. In the original hearing, the applicant produced evidence of two rental comparables, one being the asking rental of House 13 in the same estate ("House 13") and the other being the actual rent passing of House 17 in the same estate ("House 17"). The applicant gave evidence regarding how he investigated the rental market in the estate. He also produced several photographs showing the subject premises, House 10 and House 17. The various documents produced by the applicant are marked as Exhibits A-1 to A-11. The applicant also asked the Tribunal to disregard the rental transaction of House 12 in the same estate ("House 12"), as shown in the schedule of reported rents from Rating and Valuation Department dated 12 May 2000 produced by the respondent, on the ground that the transaction of $50,000 per month for House 12 was made between related parties. Mr. Middleton gave evidence that he personally knew a Mr. Kan, the occupier of House 12 who advised him of the related nature of the parties concerned. In light of his evidence, the applicant proposed to estimate the prevailing market rent of the subject premises on the basis of his two comparables, the actual rent passing for House 17 and the asking rent of House 13, both of which show the same figure of $25,000 per month, on an inclusive basis.

9. On the other hand, the respondent in giving evidence in the original hearing produced a schedule of reported rents provided by the Rating and Valuation Department on 12 May 2000 and six pages of invoices of renovation work for the subject premises in 1996 amounting to some $1,400,000 (Exhibit R-1). The respondent further added that in view of the documented invoices, the subject premises was renovated on a large scale and as such, the premises was now in a much better state than the comparable houses quoted by the applicant. The respondent finally referred the Tribunal to the said schedule of reported rentals and asserted that an estimated rental of $33,000 for the subject premises was reasonable. There was no further elaboration or valuation whatsoever.

10. In the final submission, the applicant suggested that although the respondent gave evidence that the respondent had spent a lot of money in renovating the subject premises in 1996, these outlays were indeed required expenditure for a property of about 20 years old. Also, in comparison to the subject premises, the applicant stated that House 17 had been totally redecorated with new marble floors whilst for House 13 which was vacant and available for letting, it was in the process of redecoration by the landlord. The respondent did not give any final submission.

Reasons for the original judgment

11. The reasons for the original judgment were delivered orally on 16 June 2000. In essence, the Tribunal agreed to adopt the rental evidence given by the Applicant in this valuation exercise. The Tribunal accepted the applicant's submission that the transaction of House 12 should be disregarded as it was one between related parties. In any event, the reported rent for House 12 was so much above the existing rent of the subject premises, the tenancy of which commenced in May 1998, as well as the suggested rents for the subject premises by both parties, that it would be obvious to be out of line with the market rental level for the subject premises. As to the remaining comparble rents quoted in the Rating and Valuation Department's schedule dated 12 May 2000, they were in respect of other houses of varying sizes, different ages in different locations. As neither party had given any evidence regarding these comparables nor made any adjustment to the unit rate of these comparable rents with reference to the subject premises and the comparables, it would not be appropriate and, in fact, almost impossible for the Tribunal to take into account the other comparable rents in this valuation.

12. As the transaction date of House 17 was recent, in February 2000 and in the light of little movement in rental values in recent months, no time adjustment was warranted. However, the monthly rent passing of House 17 was on the basis of inclusive of rates and inclusive of management fees, the following adjustments were required in order to arrive at the prevailing market rent for the subject premises, on an exclusive basis, as follows:

Rent on inclusive basis	$25,000
Less rates	$1,278
Management fees          $2,600	3,878
Rent on exclusive basis	$21,122

Evidence and submission in the review hearing

13. In the review hearing, the applicant introduced further evidence, in particular, the tenancy details of House 3, another comparable house in the same estate ("House 3"), a copy of tenancy agreement for House 17 as well as a copy of a previous tenancy agreement of the subject premises between the respondent and the former tenant, Carlsberg Brewery Hong Kong Limited.

14. The respondent produced a copy of a tenancy agreement of House 17 (page 6 and 7 of Exhibit R-2) which show that the rent passing of the tenancy was in fact on the basis of inclusive of rates but exclusive of management fees.

15. The respondent also produce a copy of a tenancy agreement for House 3 (Exhibit R-2, pages 8 to 12) which show that the house was leased for a term of two years commencing from 12 December 1999 at a rent of $38,000 per month. The respondent added that the tenancy of House 3 was not a furnished letting.

16. Furthermore, the respondent emphasised that House 5 and 13 had been left vacant for more than 6 months prior to the hearing. They were also in a much inferior state of repair and finishes than the subject premises.

17. There was attached to the review application a bundle of document (Exhibit R-2). The respondent also produced a large number of exhibits, mainly consisting of photographs of various comparable houses in the estate. They were marked as Exhibits R-3 to R-7.

18. The respondent gave evidence that the estate could be divided into two portions, house numbers 1 to 9 on one side and house numbers 10 to 17 are on the other side. The respondent stated that according to the land search records, House 1 to House 9, including the subject house, fetched a higher price in general in the past because each of them enjoyed views. This was in contrast to House 10 to 17 which all faced towards retaining walls.

19. In the final analysis, the respondent stated that the subject premises was formerly leased to a tenant at a rent of $66,000 per month (see page 25 to 40 of Exhibit R2). The respondent admitted that the property values had dropped since 1997. As a result, the respondent suggested that the previous rent of $66,000 had already been reduced by half when the respondent estimated the prevailing market rent for the subject at $33,000 per month. Hence, the Tribunal was urged to review its original orders and decide accordingly.

20. The applicant gave further evidence in the review hearing. The applicant had received further feedback from Centaline Property Agency Limited, the estate agent for House 5 and House 13 that the asking rents for these two houses were respectively $26,000 and $23,000, both on an inclusive basis (see Exhibit A-23). Furthermore, the applicant produced photographs and document from CB Richard Ellis, the agent of Garden Villa, showing a new low-rise development in Tai Po Road, near the subject premises. The documents show that House No. 6 of Garden Villa, which was similar to the subject premises and had an area of about 1,975 sq.ft. , was available for letting at a monthly rent of $26,000 per month (see Exhibit A-24).

21. The applicant also produced a large number of documents relating to the investigation of the tenancy of House 3, the applicant's investigation of the invoices for the renovation of the subject premised previously produced by the respondent, the title and related matters of some houses in the subject estate and further photographs showing the state of repair of the subject premises. They were marked as Exhibits A-12 to A-25.

22. The applicant submitted that the Tribunal should not put weight on the rent passing of House 3 as it was not a reliable letting. The occupier had informed the applicant and the applicant's friend that as the rent was paid by the occupier's employer to the landlord, the occupier was not concerned with the rental amount. In the light of the large differences between the rent passing of House 3 and the current asking rents of House 5 and House 13, the applicant submitted that it was apparent that the rent passing for House 3 was out of line with the market rental level.

23. In the final analysis, the applicant submitted that following the original hearing and the orders, the market had further adjusted downwards. This was evidenced by the falling asking rents for House 13. Based on the evidence of the trend of the asking rents for House 13 (reduced from $25,000 to $23,000 recently), the prevailing market rent for the subject premises should be reduced further by $2,000, to $19,122 per month, on an exclusive basis. This was supported by other listings of similar premises in the vicinity of the subject premises.

Reasons for this review judgment

24. The relevant valuation date should be 30 April 2000. Therefore, the arguments by the applicant that the market had fallen since the original orders was not relevant. Even if there was a fall in market rents after 16 June 2000 (the date of original hearing), it would not affect the original valuation and the orders decided by the Tribunal.

25. Besides, the Tribunal stressed that more weight should be put on the best comparable, House 17, an actual transaction evidenced by the signing of the tenancy agreement on 15 February 2000.

26. The respondent in the review application had made references to historic purchase prices of various houses in the estate. This is irrelevant. The Tribunal is only concerned with the level of prevailing market rent at the relevant date. Prices may bear relationship with rents but generally, it would not be proper to consider rents with reference to prices.

27. In the review hearing, the applicant introduced a new comparable, House 3 in the estate. After comparing the rent passing for House 3 with that for House 17, as well as the recent rental history of the subject premises, the Tribunal agreed with the respondent that this comparable, House 3, was out of level with the prevailing market rental level for houses in the estate at the relevant date. The subject premises was leased to the applicant in May 1998 at a rent of $29,500 per month. In the opinion of the Tribunal, the market rental level has dropped instead of risen since 1998. So, the Tribunal cannot accept that the rent of House 3, at $38,000 per month, was truly representative of the market level of similar houses in December 1999.

28. All along, the Tribunal has assumed that comparable houses in the same estate are similar to that of the subject premises in all respects, in the absence of other better information. Both the applicant and the respondent have produced a large number of photographs showing various houses in the same estate as the subject premises. Unfortunately, the Tribunal cannot determine from the photographs the large differences between some of the comparables and the subject premises, as advocated by the respondent, but disputed by the applicant.

29. Despite the respondent's claims that the subject premises is so much superior than the comparables House 17, House 13 and House 5 and so on, the Tribunal finds that this cannot be substantiated by the evidence produced.

30. In the circumstances, the Tribunal decides to value the subject premises on the basis of the best comparable, House 17, which was also supported by the listing rents for House 13 and others. The Tribunal finds and agrees with the applicant that the comparable House 3 should be given much less weight in light of its being so much out of line with the best comparable, House 17. However, from the new evidence produced by the applicant, the rent passing for House 17 was inclusive of rates but exclusive of management fees. Therefore, a minor adjustment should be made. The valuation of the subject premises is revised as follows:

Rent passing (based on House 17)	$25,000
Less rates	$1,287
Rent, exclusive of rates and management fees	$23,713

Orders

1. Upon review, Order No. 2 of the Orders dated 16 June 2000 is amended as follows:

New rent $23,713 per month (exclusive of rates and management charges); leave to respondent to pay applicant over-payment of rent (if any) within 1 month;

2. The other Orders dated 16 June 2000 remain unchanged.

3. No order as to costs for this review.