BRAD SCHADEWITZ v. HUNG FAT CHEUNG INVESTORS LTD

LDNT 5 & 14/2004
(Condoliated) and
LDNT 8, 9 & 10/2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 5 of 2004

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J U D G M E N T

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1. This judgement is given for the captioned five applications in one go. Out of the five applications, only two were successfully consolidated and heard at the same session. These are LDNT No. 5/2004 and LDNT No. 14/2004. Consolidation for the other three were not successful because of the implication on legal costs. The Applicants of LDNT 5/2004 and 14/2004 were represented by solicitors, whereas those of the other three attended the scheduled hearings in person.

2. The judgement is so issued because the same Respondent is involved in all five applications. Some of the evidence given by the Respondent and its witnesses in one case was applicable to the others. Certain special arrangements on hearing procedures were made and agreed among the five Applicants and Respondent so that the Respondent and its witnesses needed not repeat their testimonies in the other three cases.

The Applications

3. The Respondent's counsel has kindly summarized/set out for the Tribunal the outstanding issues of the five applications that require the Tribunal's adjudication. The five Applicants did not dispute this summary on the outstanding issues. These outstanding issues are as follows: -

LDNT 5/2004
Duration of tenancy and amount of Management Fee.

LDNT 14/2004
Duration of tenancy only.

LDNT 8/2004
Duration of tenancy, amount of rent and Management Fee.

LDNT 9/2004
Duration of tenancy, amount of rent and Management Fee.

LDNT 10/2004
Duration of tenancy, amount of rent and Management Fee.

The Properties

4. The properties involved are all located in the same building at 16-18 Conduit Road. LDNT 5/2004 relates to Unit 26 on 2/F, and LDNT 14/2004, LDNT 8/2004, LDNT 9/2004 and LDNT 10/2004 involve respectively Unit 54 on 5/F, Unit 16 on 1/F, Unit 42 on 4/F and Unit 14 on 1/F. These are the five residential units that remain in occupation and each under a fixed two years tenancy with the exception of LDNT 9/2004, which was held on monthly basis. Two ground floor units are occupied by an estate agency firm each under a two years tenancy expiring respectively on 9th November 2005 and 3rd January 2006 (see Exhibit R1 and R2). The conditions of these two tenancies provide for early determination after the first year term by giving prior notice to the tenant. The earliest date the Respondent can effectively take back the possession of these two ground floor units is July 2005. The Respondent bought the said building in an open auction in 2003.

Duration of Tenancy

5. The last tenancy of LDNT 5/2004 was for 2 years ending on 31st October 2003. In respect of LDNT 14/2004, LDNT 8/2004 and LDNT 10/2004, the term was also 2 years but respectively ending on 14th January 2004, 1st October 2003, and 31st October 2003. LDNT 9/2004 was a month-to-month tenancy. The Respondent is only prepared to grant a term of one year to all the five Applicants with effect from 1st February 2004, i.e. immediately after the termination date (31st January 2004) specified on the CR101 Notice.

6. The reason for a departure from the previous two years term (save in the case of LDNT 9/2004) is that the Respondent intends to demolish the building and re-develop the site. Ms Wong Fung Mui, a staff member of the Respondent at managerial grade (known as "RW1"), gave evidence for the Respondent in Court concerning the re-development project. Mr. T.K. Tsui (known as "RW2") is the Respondent's project engineer, who heads an engineering consultant firm of long-standing and diverse engineering/building expertise. He elaborated in Court for the Respondent on the contents of the re-development project, its programme and progress of design works. No contractor has yet been identified to implement the intended project works. This was not in dispute by the project engineer. In fact, it was revealed through the cross-examinations.

7. Under such circumstances, the Applicants opined that there is nothing absolutely concrete at this stage of the project. There is not any concrete evidence that the re-development project must go ahead. There is therefore the possibility that at the end of the one year term proposed by the Respondent, and particularly when the Legislative Council were to pass the Bill to put an end to the protection (on security of tenure) presently given under the Landlord and Tenant (Consolidation) Ordinance, Cap 7, the Applicants would be required to quit and the building would be sold again with vacant possession to the genuine developer at a profit.

8. Further to this argument (on the Respondent's intention to re-develop), the Applicants cast doubt on the feasibility of the Respondent's re-development programme by pointing out the fact that the ground floor units were each held under a tenancy that can only be effectively determined in July 2005. If the Tribunal were to agree with the Respondent and grant a one year term tenancy, the re-development project would still be pending on 31st January 2005 when their one year term tenancies expire. On the point concerning the effective tenancy termination date of the ground floor units, the Respondent gave no rebuttal to the Applicants findings. Instead, both RW1 and RW2 tried hard to explain the need for a reasonable period of lead-time prior to the commencement of project works.

9. The Tribunal agrees that there is such a possibility as the Applicants had pointed out but there is also the possibility that the re-development works would indeed proceed. The employment of a project engineer, the negotiation with the Town Planning Board, the drawing up of design drawings and the submission of formal building plans to the Building Department for approval cannot all be regarded as a gesture. It is unfair to base on one or two points not of substantial weight to deny the intention to re-develop. There was also no engineering expert's evidence from the Applicants that the Respondent's project programme raised in Court is not feasible from an engineering point of view. On the contrary, the Respondent has indicated its experience in previous re-development schemes elsewhere in Hong Kong. The Tribunal finds it difficult to dismiss the Respondent's intention to re-develop. The Tribunal, however, has grave doubt on the need for the five Applicants to quit earlier than the estate agent firm on the ground floor. Without a good ground from the Respondent, a minimum term of tenancy up to the end of July 2005 is the baseline that the Tribunal can accept.

10. As distinct from the other four applications (the units involved were all on a two years term tenancy), LDNT 9/2004 relates to a monthly tenancy. As contrary to these four applications where the justification for not granting a two years term should be from the Respondent (and it had provided the justification albeit not fully accepted by the Tribunal), the justification for a departure from monthly basis should be given by the Applicant. Notwithstanding this, the Tribunal shares with Mr. M.W Philips's view in his judgement for Banque Paribas v O Kees & Co (HK) Ltd. [1987] 3 HKC 499. In fact, it is not mandatory for the Tribunal to have regard to the duration of previous tenancy under S. 119I of the Landlord and Tenant (Consolidation) Ordinance, Cap.7.

Rent

11. The Applicants unanimously advised the Tribunal of the same difficulties encountered in their negotiation with the Respondent, their dissatisfaction to the Respondent's adamant attitude and frustration to the impasse they had reached with the Respondent. The Applicant of LDNT 9/2004 even further accused the Respondent in one way or another for almost every document it sent her and was sceptical for its motive behind all the steps it had taken. Notwithstanding these criticisms, the Respondent's representative, i.e. RW1, does not appear to be so difficult a woman. On the contrary, the Respondent showed in Court that it did not feel strong about the level of rent it intended to charge. It compromised at an amount of rent to the Applicant's favour at the last moment of the session for LDNT 9/2004. Therefore, the Tribunal is required to decide only for LDNT 8/2004 and LDNT 10/2004.

12. The Rating and Valuation Department rental schedule (size from 86 sq. m. to 128 sq. m.)(See Exhibit A2) was agreed to form the basis from which the rent for LDNT 8/2004 is to be derived. The two Applicants considered that Comparable 4 and 5 on the schedule were suitable for comparison. The Tribunal agrees this but considers that other properties on Conduit Road should be included as well since just Comparable 4 and 5 are too few in number to be able to give a good indication on the prevailing state of market. Other comparables than these have not been taken into account because the Tribunal has not been given the details on the location, access, building condition etc. so that a view on their suitability for assessment can be formed.

13. The Tribunal deducts from the gross rent the amount of car parking space rental (if applicable), the amount of management fee and rates, and the annual equivalent cost of appliances/chattel to arrive at the net rent for all comparables on Conduit Road, and then adjust the net rent to reflect the difference in floor level and transaction date. The final rentals per sq. metre for the four comparables are respectively $147, $139, $122, and $143, i.e. an average of $137.75. This gives a rent of $14,000 per month exclusive of management fee, rates and government rent for LDNT 8/2004.

14. The same method to ascertain the rent for LDNT 10/2004 applies but nevertheless, both parties had no debate about the Rating and Valuation Department rental schedule (size from 53 sq. m. to 66 sq. m.) obtained and filed. Instead, the Applicant argued for his case by invoking the rent passing for another similar size unit above. He simply considered that a reduction in rent by $2,000 is appropriate because the rent for that unit is $9,000 per month inclusive of a car parking space currently let at $2,000 per month. The Respondent disagreed that $9,000 per month is the market rental for that unit. A lower rent was agreed in order to commute for certain concession in the tenancy terms given by the tenant. The Respondent did not disclose the details of the concession. Since the Applicant has the onus of proof, he should produce the full documentary evidence instead of quoting from what he learned from somebody else.

15. Going back to the Rating and Valuation Department rental schedule, the Tribunal is not at all at ease to take into account those comparables not on Conduit Road for assessment. The Tribunal is not certain that location wise, they are similar to the subject unit or to what extent dissimilar. In fact, the Tribunal has observed that those non-Conduit Road comparables all give a much lower but not much deviated unit rental than those not at Conduit Road. Excluding these comparables, the Tribunal is in fact left with two lettings at Conduit Road, the net rent of which are respectively about $184 per sq. m. and $189 per sq. m. after adjusting for difference in floor level and transaction date. Considering the two smaller size units at Conduit Road on the rental schedule for LDNT 8/2004 (the net rent each about $147 per sq. m. and $122 per sq. m. and after adjustment for larger size than the subject unit, become $150 per sq. m. and $124 per sq. m.), the rental for LDNT 10/2004 is $161.75 per sq. m. equating to $10,000 per month exclusive of management fee, rates and government rent.

Management Fee

16. All Applicants dissatisfied with the standard of management service provided by the Building Manager. The time when the dissatisfaction arose could be dated back to the Respondent's take-over of the building. The Building Manager appeared to be a staff member of the Respondent under the supervision of RW1. The dissatisfaction arose from the quality of repair works carried out to common areas, level of lift maintenance, to the standard of cleanliness. RW1 gave no convincing defence to these allegations. The proposal to re-develop was very often taken as the ground for not implementing substantial repair to up-keep the standard. Queries were raised as to the need for any increase in the outlay for the new financial year leading to a substantial increase in the management fee payable.

17. The Tribunal considers that it is inappropriate to bring this issue up for the Tribunal's adjudication. The poor performance, if justified, should be corrected through better monitoring of accounts, appropriation of management funds and according priority to management items. It should not be a justification for disallowing an increase in the budgetary expenditure. A building management budget concerns the future management/maintenance expenditure. An increase or decrease in expenditure may be due to price inflation or deflation or an up-grade or downgrade in the standard of management service and maintenance. This budget is only an estimate and to be debated in a management committee/meeting involving the concerned parties connected with the ownership and right of use of the building. An estimate may not be accurately equal to the actual expenditure at the end of the period it covers. Any surplus/deficit should be taken into account in preparing the budget of the next year and the surplus cannot be taken for use for example in banquets by the Building Manager for entertaining his/her friends. Whether it is appropriate to up-grade or downgrade the standard of management or maintenance are a pure value judgement that should be resolved among the people involved but not by the Tribunal. In fact, the Tribunal has never been empowered under the Lands Tribunal Ordinance, Cap 17 or the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 to decide on the amount of fee.

Orders

18. The following orders are hereby made: -

(a) The term of tenancy in respect of all five applications be up to 31st July 2005 from 1st February 2004;

(b) The rent in respect of LDNT 8/2004 and LDNT 10/2004 be respectively $ 14,000, and $ 10,000 per month exclusive of government rent, management fee and rates;

(c) Other conditions of the previous tenancy remain applicable under the new tenancy; and

(d) The Applicants and Respondent each bear their own costs.