CHEUNG MAN YEE v. COMMISSIONER OF RATING & VALUATION

Rating - The value of an illegal extension is to be included in the assessment of rateable value - the added value of such an extension is to be based on the assumed full knowledge of the hypothetical landlord and tenant and reflect the calculated risks incurred in agreeing to a rent - supporting comparables should be listed as well as those on which the valuation principally relies - Sections 7, 7A and 21 Rating Ordinance, Cap.116.

IN THE LANDS TRIBUNAL OF HONG KONG

(Appellate Jurisdiction)

Rating Appeal No. 41 of 1984

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REVIEW DECISION

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1. This is a review of a decision by this Tribunal to dismiss an appeal against the assessment of the Commissioner of Rating and Valuation of the rating value of a tenement at North Point, Hong Kong.

2. The appellant is the owner of premises at 852 King's Road, 1st floor, Hong Kong. It is a first floor flat in a 16 storey building, built in 1960. A number of grounds for this appeal, against the Commissioner's rating assessment were cited, but most had little or no bearing on the matter. The appellant put most reliance on the actual rent being paid at the time of the revaluation. This was restricted by the provisions for rent control under Part II of the Landlord and Tenant (Consolidation) Ordinance, and, by virtue of the definition of 'rateable value' in Section 7(2) of the Rating Ordinance, it must be disregarded. What is to be assessed is the amount equal to the rent at which the tenement might reasonably be expected to let from year to year with the tenant paying the rates and the landlord paying for repairs and maintenance. The relevant date for such an assessment is 1st July 1983.

3. Her other grounds of appeal, regarding age and obsolescence, were factors which can reasonably be considered relative to the comparable rents of properties listed in the Commissioner's valuation report and submitted under Rule 18 of the Lands Tribunal Ordinance. The subject premises faces the busy King's Road, and is therefore effected by excessive traffic noise, but then this is also common to the comparable on which the Commissioner's valuation principally relies.

4. The appellant's argument that the assessed rent of $4,250 per month was unattainable may have been wholly based on the belief that the rent control restriction should have been taken into account. Counsel for the respondent was of the opinion that this was the case. However, it seemed to me that the force of the argument was simply that the assessment figure, in the appellant's opinion, was too high. The appellant had stated in her evidence and submission that she believed this to be so. She was of the opinion that the appropriate rent, at the relevant date should have been $3,200 per month.

5. The letting in the same building which is listed as comparable 1 in the respondent's Rule 18 document, is the most useful, for, apart from being only one floor above the subject flat, it is the same size and is also a corner flat, but at the opposite end of the building. It is affected to the same extent as the subject premises with respect to the proximity to the traffic noise on King's Road, and was let in October 1983 which is close to the relevant date of 1st July 1983. The rent for this comparable was $4,300 per month inclusive of rates, which is the equivalent of $4,168 per month exclusive of rates, or a unit rate of $44.50 per square metre.

6. This comparable is supported by a second which is in a multi-storey building next door. This second comparable flat, on the 3rd floor, has a similar floor area and is within a building of about the same age. It was let at $4,500 per month exclusive of rates on the relevant valuation date of 1.7.83. The unit rate is $45.50 per square metre. Unlike the subject building this second comparable has the advantage of having a lift.

7. Both the comparables are superior to the subject flat. It is a pity that rents for similar flats which are inferior to the subject cannot be found as indicated by Mr. S.K. Chan, A.R.I.C.S., a Rating and Valuation Surveyor who gave evidence for the respondent. Perhaps Mr. Chan restricted himself unduly in his choice of comparables. These two are so close to the relevant date, so close in location and so similar in area as to suggest that there might have been others that were not so nearly identical to the subject promises but would be useful in lending support to the assessment. I would have preferred more evidence, if only to add support to such very good comparables as the two listed here. Obviously any assessment is best supported by comparable transactions of properties, which are both inferior as well as superior. Comparable 1 being so similar, is only better than the subject premises by reason of it having new aluminium frame windows estimated to cost in the region of $30,000. This in my view should equate to an additional rent of about $200 per month.

8. The subject premises also differs from comparable 1 in that by its being on the first floor, there is a flat roof area adjoining it. The flat roof is part of the premises and as such adds value. The analysis submitted by Mr. Chan showed a similar flat roof letting at a net rate of appropriately 50% of the flat proper. This flat roof also had been converted to accommodate an illegal structure.

9. I am obliged to Mr. Chan for such an analysis as it minimises speculation as to the amount of additional value the flat roof might have. However only one example was given. I have been assured by Mr. Chan there are other similar examples in his office. If that is so, they should be listed as no one example can ever be conclusive evidence of value. The subject flat roof has been covered with a structure which is used as a kitchen. The former kitchen area is being used as an extra bedroom. The structure is obviously unauthorised, and in breach of the Building Ordinance. The appellant knew nothing of its construction, which appears to have been the work of her tenant.

10. The definition of "rateable value" makes no reference to the legality or illegality of the tenement. It merely states that the rateable value of a tenement shall be the amount equal to the rent at which the tenement might reasonably be expected to let from year to year. The definition of "tenement" is wide and includes any structure held or occupied as a distinct separate tenancy or holding or under any licence.

11. Obviously the suit premises are held under the provisions of a Crown lease, which requires a building approved by the Building Authority to be erected thereon. The use specified under the Crown lease trill usually be simply non-industrial, whilst the occupation permit will specify the extent of the domestic and non domestic portions of the building. Therefore this structure is in contravention of the specified floor area of the building and does not have the required approval. The authorities have tended over the years, as a matter of policy, to ignore such structures unless they constitute some danger to the public or the occupants.: In this knowledge such structures tend to remain and be occupied. Also, as demonstrated by the analysis presented by Mr. Chan, they contribute added value to the premises, in that a market exists for such, additions.

12. This Tribunal considered a similar situation with respect to a rent determination under the provisions of Part IV of the Landlord and Tenant (Consolidation) Ordinance.

13. The definition of prevailing market rent under this ordinance is for the purposes of this assessment the same, in that a hypothetical tenancy is to be assumed as being agreed at an appropriate date. In Hong Kong Telephone Company Ltd. v. The Hong Kong Land Company Ltd. L.T. 5 of 1982, the Tribunal considered the market rent for promises which had an illegal addition in the form of an enclosed void at ground level which had been converted into a playroom. This conversion created a fourth storey, when the Crown lease limited the building to three stories. The Tribunal held that while the enclosed foundation area used as a playroom did not form part of the legal gross floor area, it was part of the suit premises and must for valuation purposes be taken into account as ancillary to the residential area, in the same way as the garden and car park areas were likewise ancillary. The Tribunal was satisfied that its existence could reasonably be expected to attract a slightly higher rent than if it did not exist, in the same way as other ancillary features add value to premises. The possibility that the landlord may at sometime have to remove the glass doors enclosing the area could not be discounted, nor could the probability that it may be allowed for the time being.

14. So too in respect of the subject assessment, the market must take cognizance of the fact that the policy regarding these structures may well alter and removal could be required at any time. There is no doubt that the flat roof forms part of the tenement and it may be let by the landlord in respect of the domestic use to which to tenement may be put. The extension is illegal, in that it contravenes the provisions of the Building Ordinance. The Building Authority could have it removed, but due to policy, does not usually take action provided the structure is not known to be in a dangerous condition. The flat and the extension over the flat roof are occupied by the tenant. The flat and the extension are owned by the landlord who has elected to be responsible for the payment of the rates under Section 21(1). The owner or the occupier of a tenement are both liable for the payment of rates but the same should be deemed to be an occupier's rate. The United Kingdom General Rate Act, 1967 by Section 16, requires only the occupier to be liable for the, payment of rates. However, in Hong Kong landlords say undertake to pay the rates or, in certain circumstances, be required by a rating authority to pay the rates, but the Hong Kong act in stating that the rates, "shall be deemed to be an occupier's rate", falls into line with the U.K. act. While the owner did not erect the extension it is occupied by the tenant and is therefore within the scope of being rateable.

15. The rental evidence therefore suggested that a rate of about $42.50 per square metre as applied by Mr. Chan was appropriate. Considering only the flat itself, and not the flat roof, the rent should be about $200 per month less than that for comparable 1. That rent is $4,968. Mr. Chan's assessment was $3,974 exclusive of rates. Mr. Chan applied a rate of $19 per square metre to the flat roof structure. That is 45% of the unit rate of the flat proper compared with the 50% analysed from his comparable illegal structure. This added $274 for the illegal structure giving a total of $4,248 which he rounded up to $4,250 per month, and an assessed rateable value therefor of $51,000. On the original hearing, I therefore dismissed the appeal but made no order as to costs.

16. Under Section 11A of the Lands Tribunal Ordinance, the Tribunal on its own motion decided to review its decision and invited further argument on the question of the inclusion or otherwise of the value of the illegal structure. The case was adjourned to allow for an inspection and as well as the preparation of submissions on the value of the illegal structure.

17. Counsel for the respondent submitted that the definition in the ordinance of "tenement" was wide and made no reference to whether occupation was legal or otherwise. He also drew an analogy between taxation and rating, in that as tax is payable on illegal trade without condoning the illegality, so to should rates, as a form of taxation, be payable on any the value of any illegal occupation.

18. He referred me to the Full Court decision In Re A Compensation Board Ex-parte the Attorney General (1971) H.K.L.R. 338 which considered whether the acceptance of rates was a waiver of a breach of condition by the Crown. It ruled that it was not dissimilar to taxation and the Commissioner of Rating and Valuation would have been failing in his duty "not to charge rates" on structures built in contravention of the Crown lease conditions.

19. In the recent Court of Appeal decision of Lai Kit Lau Mutual Aid Committee v. Commissioner of Rating and Valuation 1984 No. 160 (Civil) and Tsuen Wing Lau Mutual Aid Committee v. Commissioner of Rating and Valuation 1984 No. 161 (Civil) Kempster J.A. said, with reference to making rating assessments "In carrying out this exercise statutory restrictions which affect the occupation of the premises must be taken into account as must possibilities of waiver by the Crown or of the willingness of potential occupiers to incur the risk of breaking the law.".

20. I am therefore satisfied that it was correct to include the added value of the illegal structure in the rating assessment for the suit premises on the basis that the statutory provisions are not ignored, but nor is the potential for the continued illegal use of the structure. It's added value must be based on the assumed full knowledge of the hypothetical landlord and the hypothetical tenant and reflect the calculated risks incurred in their coming to an agreement which includes the renting of the illegal structure.

21. The review did allow an opportunity for an inspection, including, as stated previously, the illegal extension to the premises which was the basis of the analysis showing this structure to be let at an additional 50% of the unit rate for main portion of the flat.

22. This structure, which included a tiled bathroom, was found to be substantially superior to the subject structure which only partly encloses the area it occupies. The 45% allowance (or rate of $19 per square metre) appears to be too great. I would prefer to base the valuation on comparable 1, which equates to about $4,150 per month exclusive of rates less $200 to allow for the aluminium windows giving a rental value of $3,950 per month for the flat proper. The additional value of the illegal structure on the flat roof should, subsequent to my inspection, add no more than about $50 per month to the overall value. This would give a rent of $4,000 per month. I therefore determine the rateable value of the appellant's premises at $48,000.

23. Accordingly the Collector of Rates is directed to amend the Valuation List to record the rateable value of $48,000 effective from 1st April 1984 and issue an amended notification for any decreased rates payable as a consequence of the rateable value being decreased, and make any refund of rates as may be appropriate.

24. There will be no order as to costs.

25. Dated this 12th day of July, 1985.