GRAHAM MILLER (HONG KONG) LTD v. HEESING CO LTD

Landlord and Tenant - Part N application for a new tenancy - the development in which the subject premises is located has been extensively refurbished - about half of the flats have been renovated, but not the subject premises which is still in its original state - best evidence that of new lettings of renovated flats - allowance for renovation based on evidence of the difference in rents for renovated and unrenovated flats in similar older developments -prevailing market rent is that rent which a hypothetical tenant might be expected to agree with a hypothetical landlord as at the relevant date on the basis that the premises is vacant and to let - both parties are assumed to be dally conversant with all the factors which may influence the rental value - new tenants could not be expected to be completely conversant with the extent of the disruption associated with the renovation work: a - Rent fixed at $28,000.00 per month - sections 115 and 117, Landlord and Tenant (Consolidation) Ordinance, Cap.7.

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Tribunal Application No. 1822/88

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D E C I S I O N

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1. This is an application for a new tenancy under section 117(1) of Part IV of Landlord and Tenant (Consolidation) Ordinance, Cap.7; for Flat 9B, "The 23 Rozlyn, 23 Repulse Bay Road. The previous tenancy was terminated on the 16th June 1988 by the serving of a notice under section 119(1) dated the 5th January 1988. Therefore as the respondent has no objection to the granting of a new tenancy, it should commence on 17th June 1988. It is agreed that the tenancy is to be for 2 years and, other than the rent is to be on the same terms and conditions as the previous tenancy agreement So only the rent is in dispute.

2. The Rozlyn was purchased by the respondent in November 1986, and since then a complete renovation of the premises has been undertaken. The exterior as well as the common areas and foyer have been extensively refurbished When flats become vacant they are being renovated As the subject premises has been continuously occupied by the applicant it has not been renovated and is in it's original state but in good condition.

3. The renovation which has now been completed for about half of the flats, includes the installation of false ceilings in the main living area. The balcony rails have been replaced. A larger modern kitchen with a built-in cooker and refrigrator has been created by taking out walls and marring use of the space which was originally two amahs' rooms and an adjoining utility area. The new utility area is now much smaller and only one amah's room is provided directly adjoining the 1citchen. Also the throe bathrooms have been renovated. The effect has been to considerably modernise those largo but formerly outdated flats.

4. The building was originally completed in 1963. There are twelve floors with two flats A and B, on each floor The A flats face back towards Repulse Bay Road and do not have as good a view as the B flats which have an excellent view over Deep Water Bar and beyond. The subject flat is a B flat on the 9th floor

5. Mr. Stirling who appeared for the applicant, submitted that the Prevailing Market Rent of this unrenovated flat as at 16th June 1988 was $26,000.00 per month. Miss Savage a chartered surveyor and a partner in the firm of Vigers, Hong Kong compiled a report and gave evidence in support of this figure She considered that the Provailing Harket Rent, if the premises were not affected by the renovation works going on within the building, would be $28,000.00 per month This figure was based on evidence of comparable lettings within the subject property together with lettings of similar premises elsewhere on Hong Kong Island. She considered that the assessment within the definition of Prevailing Market Rent under section 115 of the Ordinance should additionally take account of the likely continuation of the noise and disturbance associated with the renovation work which, as she said could reasonably be expected to continue for at least another twelve months To allow for this she reduced her valuation by $2,000.00 to $26,000.00 per month

6. Mr. Gail, the occupant of the subject flat gave evidence of the extent of the disruption experienced due to the renovation worn since it commenced in about May 1987 A letter from the former agent, Chi We Properties Limited dated 10th February 1988 was tendered in evidence. In this letter the agent asked to be released from it's management contract due to the numerous disputes with the tenants arising out of the renovation work. It was also stated in the letter that it did not wish to continue as agent on the expiry of the contract with the owner. Miss Lo, the marketing officer of the respondent company confirmed that Chi Wo was no longer the agent and that a new agency firm had been engaged. She also confirmed that there had been a considerable number of complaints from sitting tenants due to the construction work.

7. The respondent relied on the evidence of Mr. Jack Ng who is the Senior Valuation Officer in the firm of First Pacific Davis Properties Limited. He is not a qualified surveyor but has been associated with property singe 1981 working previously with Chi We Properties Ltd, Jones Lang Wootton and Knight, Frank Kan & Beillieu He holds a higher certificate from the Hong Kong Polytechnic in Property Management and Valuation. He assessed the rental value of the suit promises as at the relative date at $34,000.00. He later revised this figure to $32,000.00 saying that he had made the adjustment to allow for the anticipated noise disturbance which he had previously ignored. He felt that the evidence concerning the work being carried out at present, together with that anticipated for those flats not yet renovated would result in further disruption to the tenants. He conceeded that this could be expected to have an effect on the rents likely to be agreed. But Mr. Lam, counsel for the respondent, argued that the effect of the noise and the general disturbance associated with the renovation work would already be reflected in the recently agreed rents and no further deduction should be necessary However Mr. Lam was prepared to submit, to the Tribunal, a rent of $32,000.00 as a reasonable figure, "taking into account all the factors"

8. Miss Savage went to considerable trouble to support her valuation. She referred to three lettings in an older development Repulse Bay 'Mansions. These were each at $30,000.00 per month, and were for tenancies commencing in September 1987 January 1988 and March 1988 respectively Repulse Bay Mansions is a 1955 building in the Repulse Bay area. It has sea views but is next door to the construction of an extensive development on the old Repulse Bay Hotel site This development work has boon going on over some years The external and common areas of Repulse Bay Mansions have been renovated, but the interiors of the flats have not.

9. This comparison is interesting as it illustrates Miss Savage's contention that there was virtually no movement in the rents for the older flats on the south side of Hong Kong Island during the first half of 1988 These Repulse Bay Mansions rents also showed the rental level to be expected for similar older flats which have not had the benefit of recent renovation. She considered the Repulse Bar Mansions flats, which are only a little smaller that those in The Rozlyn, to be slightly superior. Mr. Lam in his cross-examination suggested to Miss Savage that Repulse Bay Mansions was inferior due to the numbers of people either living or visiting the area, but she did not agree. I am familiar with the Repulse Bay Mansions flats I consider them to be not only a reasonable comparison, but also I would agree with Miss Savage that they are slightly superior to The Rozlyn. However it must be concoeedod that the view from the A flats in The Rozlyn must be one of the best on the south side of the island. As Miss Savage pointed out, the lawns in front of Repulse Bay Mansions make it more attractive than The Rozlyn which has no such facilities The Rozlyn ground floor area is really nothing more than a carpark The comparison with Repulse Bay Mansions is also useful as it is affected by the extensive construction being carried on next door. This, of course, although disruptive is unlikely to be as severe as that at The Rozlyn where flats within the same block are being extensively reconstructed.

10. The comparable lettings in The Rozlyn itself are mostly for renovated flats. Mr. Ng relied on the rents for renovated flats only. He allowed a 10% reduction for the subject flat not being refurbished. He gave no basis for such an allowance which would appear to me to be somewhat inadequate 10% is usually considered as a reasonable margin of error in most valuation exercises So by applying 10% all he has really done is place his figure at the lower end of a range, rather than mace any significant allowance for any difference in the value.

11. The refurbished flats let at between $34,000.00 and $38,000.00 per month from February 1988 to August 1988 It was pointed out that the rent of $38,000.00 for B7 was actually agreed on 14th June 1988 for a, tenancy duo to commence on 15th August 1988 Hr Ng said that he based his valuation mostly on this transaction and decided that $37,000.00 was an appropriate rent for the subject flat, B9 if it were a renovated flat as at 16th June 1988, which is the relevant date It was from this figure he made his 10% deduction to arrive of $34,000.00 for the flat as it is. While 90% of $37,000.00 equals $33,300.00, 1r. Ng explained that he had merely rounded up to arrive at $34,000.00. He agreed with the applicant's counsel, Mr. Sitrling that it might have been more appropriate to have rounded off to the nearest $1,000.00. This would have given $33,000.00.

12. The only evidence of the letting of an unrenovated flat in The Rozlyn, was that of Flat All at $28,000.00 in August 1987. This is an A. flat with an outlook to the rear. The view from the A flats is good but not nearly as spectacular as that from the B flats. However Miss Lo confirmed Piss Savage's suspicions that this renewal agreement was actually part of an overall arrangement for the tenant of A11 to shift to Flat B10 when renovation of this B flat was completed The rent for B10 was agreed at $33,000.00 for a lease commencing in April 1988, but the, agreement was reached sometime before the August 1987 renewal date for A11. In spite of the suggestion by Mr. Lam that this all comparable should be regarded as good evidence of what an unrenovated flat might fetch, I intend to disregard it due to the related agreement for Flat B10 The date of this arrangement is also too far removed from the relevant date or the date of the commencement of the B10 lease, for either of these commencement to be very helpful.

13. The evidence of the comparable lettings to incoming tenants shows that a refurbished flat, as at June 1988, could expect to realise somewhere in the region of $37,000.00 as suggested by Mr. Ng Also these lettings could be expected, to some extent, to take account of the continuing renovation work on the other flats in the block However, these agreements, being to new tenants, could not be expected to have been made with the benefit of the same first-hand knowledge of the extent of the disturbance already experienced by a sitting tenant such as Mr. Gail.

14. In Cathay Pacific Air s Ltd. v. Wharf Properties Ltd. (1985) HKDCLP 39 (L.T.45 to 51 of 1985) which was a case in this Tribunal dealing with a number of applications for new tenancies under Part IV of the Ordinance, reference was made to various defects which were evident in the flats The Tribunal noted that, "Usually lettings to now tenants are the best evidence of value, being more in keeping with the definition of "Prevailing Market Rent" in section 115 of the Ordinance The rent at which the premises "might reasonably be expected to let" assumes the situation of a flat being offered for rent by a hypothetical landlord to a hypothetical incoming tenant with both willing to reach an agreement while being fully cognisant of any and all the factors which may influence the figure at which  they might be erected to agree. In this instance I cannot easily dismiss the renewed tenancies for here, although there may be something of the element of value associated with a sitting tenant's reluctance to relocate himself, there is also the almost full knowledge of the unusual problems associated with the original state of finish of this phase of the development". This development had been subject to a large number of unusual defects from the time the flats were originally let. The landlord had been attempting to rectify these defects but it had been a ongoing problem which had affected the rental values of the property The more informed knowledge of these defects by the sitting tenants was regarded as a relevant factor in the assessment of the Prevailing "Market Rent.

15. I, therefore, am prepared to accept Miss Savage's proposal that the extent of the disturbance may not be adequately reflected in the agreements of the leases to new tenants who could not be expected to be completely conversant with the degree of the disruption, particularly the noise levels created by suck renovations. Although the letting of Flat B10 is to the existing resident of Flat A11, for reasons previously stated I have disregarded both these comparables

16. Miss Savage also submitted evidence in support of her contention that over the first 6 months of 1988, the market, in that locality, had been rising only slightly in respect of similar but more modern flats with additional facilities Examples of lettings in "Royal Garden" at No 27 Repulse Bay Road showed increases of about 0.8% and 3.6% from January 1988 to June 1988, but as shown by the Repulse Bay Mansions comparables, there appeared to be no movement at all for older flats Mr. Ng did not disagree with this, opinion By comparison with an older development at "Kellet Grove" on the Peak and also at "Bowon Hill" on Peak Road, Miss Savage was able to show a difference between the rents for flats in older developments compared to refurbished flats within the same blocks. This evidence was useful but, of course, as Mr. Lam pointed out, subject, perhaps, to more scrutiny than Miss Savage was able to give The extent of the refurbishment and the location of the flats are additional factors which might well influence the result Nonetheless the evidence was consistent and her deduction that a difference of about, or a little over 20% on the higher of the compared figures, was the best evidence available to the Tribunal as to what the difference in value between a refurbished flat and one in it's original condition might be.

17. The most reliable evidence of lettings within The Rozlyn was that of the renovated flats. If I were to have regard to this evidence, paying particular attention to when the agreements were reached together with the proposed dates of commencement, I believe a renovated flat B9 could be expected to realise about $35,000.00 per month as at the relevant date in mid June 1988. This accords with Mr. Ng's opinion since he agreed with Miss Savage that the first-hand knowledge of the disruption associated with the renovation work should result in a deduction of $2,000.00 per month. That is, if it were not for this special knowledge, a renovated Flat B9 would be expected to realise about $37,000.00 per month.

18. The new letting for flat B7 which was agreed in June 1988 for a lease commencing in August 1988 at $38,000.00 supports this conclusion The agreement for B7 was made without the benefit of any first-hand knowledge of the extent of the disturbance likely to be incurred. Also Flat B3, a renovated lower floor flat, lot in July 1988 at $37,000.00 per month.

19. Although this is not the method adopted by Miss Savage, as she deducted $2,000.00 as an end deduction, it seems to me to be more in keeping with the evidence of the new lettings which were made without the perfect knowledge of the disruption likely to be incurred. Based on Hiss Savage's analysis of the difference between renovated and unrenovated flats, it would seem to be reasonable to expect the unrenovated Flat B9 to let at about 20% less than it would if it were renovated. Such a deduction gives $28,000.00 Additionally, if I were to compare this figure of $28,000.00 with the $30,000.00 obtained for the Repulse Bay Mansions flats, it seems to be in line Although perhaps not as significant as the other evidence, some support of this figure is also gained from the partly renovated Flat B4 in The Rozlyn being let in January 1988 at the same rent as the those obtained for the Repulse Bay Mansions unrenovated but slightly superior flats over the period from September 1987 to March 1988 At the request of the sitting tenant, the B4 kitchen area had been renovated but not the bathrooms I am therefore disposed to fixing; the rent for these premises at $28,000.00 per month exclusive of rates and I so order

20. A new tenancy shall be granted for 2 rears from 17th June 1988 at a rent of $28,000.00 per month exclusive of rates. The new tenancy is to be otherwise on the same terms and conditions as the previous tenancy save for the deposit clause which shall be altered to reflect the new rent.

21. There is no order as to costs.

DATD this 23rd September 1988.