Happy Fine Development Ltd. v. Wah Ming Investment Co., Ltd.

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Tribunal Application No. LDNT 206 of 1999

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Reasons for Decision

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Background:

1. The applicant is the tenant and the respondent the landlord of the subject premises known as Flat 15A, William Mansion, 16-18 Macdonnell Road, Hong Kong. The existing tenancy was for a term of 24 months commencing from 10 July, 1997 and expiring on 9 July, 1999 at a monthly rent of $64,000 exclusive of rates and management charges. The applicant applied for a new tenancy under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. Both parties agreed that the new tenancy shall be for a term of two years commencing from 10 July, 1999 but they could not agree on the level of the prevailing market rent at the relevant date.

2. The subject premises is a flat in a 22-storey residential building comprising apartment flats and carparks completed in about 1977. There is no club house or other recreational facilities in the building. The subject premises comprises a covered private car parking space on the ground floor of the building.

3. The Applicant filed a valuation report prepared by a Mr. James K. T. Cheung, a surveyor who estimated the open market rental value of the subject premises as at 9 July, 1999 at $38,600 per month, exclusive of rates and management fees. Mr. Cheung did not give evidence in person. The applicant called Mr. Benjamin Chain, the occupier of the premises to give evidence while the respondent's witness is Mr. Hui, Cho Yan Simon, a manager of the respondent's leasing and managing agent for the subject building.

The Applicant's evidence

4. Mr. Chain, the occupier of the subject premises, gave evidence. He produced a valuation report (Exh. A-1) prepared by a surveyor, Mr. James K. T. Cheung. In the report, Mr. Cheung commented that the rental transactions in Estoril Court are suitable for comparison with the subject development, William Mansion. He had gathered and analysed four comparable transactions in Estoril Court, which served as the basis for his valuation. Although Mr. Cheung listed out the various factors such as timing, building age and facilities which, he submitted, had a bearing on the rental value of the subject premises as well as the comparable properties in Estoril Court, he had not actually set out his adjustment calculations, which are essential for any valuation using the direct comparison method. Besides, Mr. Cheung was not called by the applicant to appear as a witness in the hearing, hence, the respondent did not have the opportunity of cross examining him. To conclude, the Tribunal decided to give very little weight to Mr. Cheung's valuation.

5. The witness, Mr. Chain had occupied the premises since 1995. He asked the Tribunal to take into account Mr. Cheung's quoted comparable transactions in Estoril Court. He suggested that the Tribunal should adopt a figure of $65,000 to $66,000 as the mid figure for rentals in Estoril Court. Applying adjustments based on the direct ratio of the floor areas of flats in William Mansion to Estoril Court (he estimated this to be in the ratio of about 5 to 7), he arrived at a rental of $47,000. To this, further adjustments should be made in the light of the following:

(i) Estoril Court was the leading building in the locality and is more prestigious.

(ii) Estoril Court had recreational facilities and central A/C.

(iii) Adjustments for reflecting rent free period given by the landlord to new tenants of flats in the subject building.

6. Mr. Chain commented that as the landlord of the subject premises was the sole owner of the whole building, which were all for letting, they could, to a certain extent, dictated the rent. Therefore, whilst he agreed that the landlord's rentals were relevant, they could not represent market level rentals. He gave an example that the flat adjacent to the subject premises had been vacant for over half a year which, show, to a limited extent, that the landlord was asking above market level rents.

7. Mr. Chain also produced a property listing pamphlet showing that some ex-government quarters were available for renting from about $35,000, for flats at 2-4 Mansfield Road, with a size of about 2,300 sq. ft. He understood that there were locational differences between the subject and these properties but he still considered these to be relevant reference properties.

8. In the final analysis, Mr. Chain suggested a rental value of about $40,000 to be appropriate.

The Respondent's evidence

9. Mr. Hui gave evidence for the respondent, Wai Ming Investment Co. Ltd. He commented on Mr. Cheung's valuation report. In particular, he noted that Mr. Cheung applied an overall downward adjustment of 15% to the Estoril Court comparables in arriving at the rental for the subject premises. He did not know the break-downs of Mr. Cheung's adjustments. On the assumptions that this 15% was to be evenly spread between the three factors identified by Mr. Cheung, the timing of the lettings, building ages and the provision of facilities, Mr. Hui said that he would disagree with Mr. Cheung's adopted levels of adjustments.

10. He quoted a total of 9 recent lettings (new lettings or renewals), the details of which were shown in Exh. R-1. The lettings show a range of rents of $42,000 and $48,000. These comparable premises were let out to various tenants through various estate agents, all at arms length.

11. Upon cross examination by the lawyer for the applicant, Mr. Hui denied that the respondent had adopted a company policy of setting a rent above the market rental level, at the expense of a higher than usual vacancy rate. He admitted that the subject building had a vacancy rate of about 10 to 15%. However, he said that this rate was accepted as it was in line with the market for similar properties. Mr. Hui further explained that his company had been keeping track of vacancy rate in the neighbourhood. Some buildings had a vacancy rate as high as 25%. As there was a lesser number of expatriates coming to Hong Kong, a vacancy rate of 10 to 15% for the subject building was considered to be reasonable under the present market conditions.

12. Mr. Hui admitted that the applicant had at one stage counter offered $45,000 and the respondent had in fact verbally agreed the figure but with one condition - that the applicant had to give post-dated cheques for the monthly payments in advance. The applicant did not agree to this condition as a result of which the parties could not come to an agreement on the terms of the renewal, hence the need for this hearing.

Final submission by the Respondent

13. Mr. Hui for the respondent submitted that the prevailing market rent for the subject premises at the relevant date should be $47,000.

Final submission by the Applicant

14. Mr. Ching for the applicant submitted that the surveyor, Mr. Cheung's report (Exh. A-1) provided good comparables for the subject property. The comparables flats were located in Estoril Court which was situated behind the subject development. In addition, the size of the comparable flats in Estoril Court, at about 2998.5 sq. ft. was close to that of the subject premises, with a size of about 2,087 sq. ft. Using the arithmetic mean of the comparables, or a figure of $66,500 as a basis, Mr. Ching submitted that the Tribunal should apply a ratio of 4 to 6, reflecting respectively the sizes of flats in William Mansion and Estoril Court, and should therefore arrive at a figure of $44,333, rounded to $45,000.

15. Mr. Ching then suggested that from the evidence, the Tribunal should make certain adjustments to reflect the differences between the comparables in Estoril Court and the subject premises. Instead of using a -15% adjustment as suggested by the surveyor Mr. Cheung in his report, Mr. Ching submitted a -10% adjustment to be appropriate. Hence, Mr. Cheung arrived at his final estimate of $40,500 as to be the prevailing market rent.

16. Regarding the respondent's suggested approach of using the rental comparables from the subject development, Mr. Ching submitted that these rentals did not reflect the actual market as the subject development was wholly owned by the applicant. The actual vacancy rate of 10 to 15% confirmed that the asking rents required by the applicant was higher than the market rental level.

Choice of the comparables by the Tribunal

17. In one of the earlier Part IV Tenancy cases decided before this Tribunal, Sentry Holdings (Asia) Ltd. v. Cali Enterprises Ltd. [1983-85] CPR p.140, the Tribunal held that

"where recent comparable lettings in the same property were available in sufficient numbers to enable an reasonable assessment to be made of the prevailing market rent, there was no need to rely on comparisons with premises in other buildings, save to the extent necessary to show that rents in the same property did not diverge sharply from the general market level. Save for this limited purpose, outside comparison would be necessary in such circumstances only if it was suggested that there were special factors which had influenced rents on the subject premises."

18. The above statement in quotation is in line with one of the well established principles in adopting the direct comparison method of valuation. In general, it is more subjective and difficult to adjust for differences between buildings than to adjust for differences between flats in the same building.

19. In the present application, the applicant did suggest that there were special factors - that the subject development was a wholly owned building held for investment and that the vacancy rate was excessively high - both confirming the applicant's inference that the respondent deliberately set a higher than market level rent for flats in the building, including the subject premises.

20. The Tribunal had not been shown any evidence of the normal vacancy rate for buildings similar to the subject development. However, the Tribunal was advised by the respondent landlord that according to their experience and internal research, a vacancy rate of about 10 to 15% was normal. In the absence of any other evidence, the Tribunal accepted the respondent's claim that for this type of apartment buildings, the vacancy rate of the subject development was not unusually high at the relevant date. In arriving at this decision, the Tribunal had taken into account that for every tenancy that was due to expire, the landlord might have to redecorate the premises. Also, there was very likely to be a void period in between the new and old tenants as the commencement date of the new tenancy might not tie in well with expiration date of the previous tenancy as well as the period for redecoration.

21. Therefore, if there was no evidence to substantiate the claim that the landlord had deliberately kept the asking rent high at the expense of the vacancy rate, the Tribunal could not accept the argument that for a wholly owned building, the landlord could enjoy any monopoly in the rental market. In fact, in Hong Kong's very competitive rental market, it is doubtful whether any single landlord (of any building) could rig up the rent (the rent passing, not only the asking rent) even at the expense of a higher than usual vacancy rate. Besides, simple mathematics show that it may not be worthwhile to rig up the rent when the vacancy rate has to go up as well!

22. Thus, the Tribunal decides that for this valuation, we should restrict ourselves to the analysis of the 8 comparable lettings in the same development. The lettings are in sufficient number and are close to the relevant valuation date. Also, the lettings are of similar flats in the same development, with same area, same or symmetrical layout, and same or similar aspects. The only differences are in the floor levels and the commencement dates of the lettings. Therefore, there is no need to consider other lettings elsewhere, including lettings in Estoril Court nearby because otherwise, many more subject adjustments would have to be made to these other lettings.

Valuation

23. According to the evidence given by Mr. Hui, the 8 recent comparable lettings (all being two years term tenancies) in the subject development are summarised below:

24. The comparable new letting of 9/F, Flat B did not include the use of a car parking space. Otherwise, each of all other lettings included the use of a car parking space, same as the subject premises.

25. Next, the Tribunal considers all the suggested possible factors of adjustments for the comparables.

26. The applicant suggested that adjustments for rent free period and the internal conditions had to be made to the comparable lettings in the subject development. The Tribunal had heard evidence from Mr. Hui that the respondent had not given any rent free period to any incoming or renewed tenant. He admitted though that the respondent sometimes agreed an earlier handing over to the incoming tenant but certainly there was no rent free period for renewals. Therefore, the Tribunal decides that no adjustment for rent free period of comparable lettings are required.

27. As to the internal condition of the subject premises and the comparable flats, the respondent gave evidence that they would carry out necessary remedial works for the renewed premises, including the subject premises. Also, the facilities in each flat is the same. In the circumstances, the Tribunal decides that there is no ground for any adjustment on this factor.

28. As to the adjustment for the differences in the dates of commencement of the comparable lettings and the floor level differences, both the applicant and the respondent had not given any evidence or suggested any adjustment figure. The tribunal decides that the rental market during the period before and after the relevant dates were quite steady and that it will be reasonable not to make any adjustment for the timing difference. As to the floor level, the subject premises and the comparables (with the exception of 7/F, Flat A) are all located in the middle level zone of the subject building, it will not be unreasonable if no adjustment for floor level is made.

29. Excluding the comparable letting of 9/F, Flat B (which did not include the use of a car park) and that of 7/F, Flat A, both of which are located in a relatively lower floor level than the subject premises, we have a total of 6 comparables, with commencement dates falling within a 4 month period, in a range of between about 3 months before and one month after the relevant valuation date of 9 July, 1999. These comparable flats and the subject premises have the same floor area and the same or symmetrical layout. They show a range of value of between $46,000 and $48,000, and a mean of $46,500.

30. If we look for comparable flats close to the subject premises, we find that Flat A and Flat B on 14/F were both renewed at a rental of $46,000 per month. The commencement date of the renewed tenancy for Flat A on 14/F was 15 August, 1999 and that for Flat B on 14/F was 15 June, 1999. They were respectively about one month before and after the relevant valuation date. As they are only one storey below the subject premises and have commencement dates so close to the relevant valuation date, the tribunal consider them to be the best comparables for the subject premises.

31. In the circumstances, based on the comparable renewed tenancies on 14/F which require no adjustment in light of their similarities to the subject premises, the tribunal is of the view that the prevailing market rent for the subject premises as at 9 July, 1999 was $46,000 per month, exclusive of rates and management fees. This estimate is supported by other comparable lettings in the same building.

Orders

1. New Tenancy for 2 years from 10th July, 1999;

2. New rent $46,000 per month (exclusive of rates and management charges); leave to respondent to pay applicant over-payment of rent (if any) within 1 month;

3. Deposit to be adjusted pro rata in accordance with the new rent; leave to respondent to pay applicant any adjustment within 1 month;

4. Other terms of new tenancy same as in current tenancy agreement.