SUNBEAM INVESTMENTS LTD v. PEEPELS, STEPHEN

LDPD 3137 OF 2005

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application LDPD No. 3137 of 2005

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D E C I S I O N

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Background

1. The Applicant, the landlord of Unit 1003 & Car Park No. 15, May Tower I, 7 May Road, Hong Kong (“the Premises”) filed an application against 2 respondents for (i) recovering possession of the Premises on the ground that the tenancy had been terminated upon the expiry of a transitional termination notice and (ii) claiming for the arrears of rent/mesne profits from 1^st November 2005.  The Respondents did not file any notice of opposition to the Application.  During the hearing held on 20^th April 2006, it transpired that both parties raised no objection that the Applicant shall recover vacant possession of the Premises from the Respondents and that the Respondents shall pay the Applicant mesne profits from 1^st September 2005 assessed at the then prevailing market rent level, to be fixed by the Tribunal in the absence of agreement between the parties.  Both parties were desirous of continuing their landlord and tenant relationship in principle although they could not agree on the level of market level at the date of expiry of the then existing tenancy (as determined by the date stated in the Transitional Notice of Termination) as laid down by the provisions of the amendment to the Landlord & Tenant (Consolidation) Ordinance made in July 2004.  On 3^rd August 2006, leave was granted to the Applicant to amend its application by deleting the 2^nd Respondent.

2. Therefore, the matter was fixed for hearing after the parties exchanged valuation reports prepared by their appointed expert valuation surveyors.  The Applicant filed the valuation report on time and called its expert surveyor, Mr Kong Chee-cheung who gave evidence on 3^rd August 2006.  The 1^st Respondent (hereinafter referred to as the Respondent) was granted leave for extension of time to file to the Tribunal and to serve to the Applicant expert report.  The Respondent called his expert surveyor Mr Paul Varty to give evidence on 9^th October 2006.

3. This Decision summarises the valuations prepared by the 2 experts and sets down the Tribunal’s valuation as well as the reasons for the decisions after taking into consideration the evidence of the 2 experts as well as those of the Applicant’s representative and the Respondent. 

Summary of the 2 expert surveyors’ valuations

4. Both expert surveyors agreed with the principle commonly applied by the Lands Tribunal, which was stated in Mr Kong’s report (Exhibit A-6), that lettings within the same development provide the best basis to determine the prevailing market rent of the Premises.  Moreover, Mr Varty agreed with Mr Kong that out of the 7 recent comparable lettings of other apartment units in the same development, Comparables (1) and (3) provide the best comparable data against which the prevailing market rent of the Premises should be determined.  This reduces the differences of the 2 expert surveyors to the type and level of adjustments that should be applied to these 2 comparables.

5. Mr Varty has summarised Mr Kong and his valuation at page 10 of his valuation report (Exhibit R-1).  In summary, Mr Kong valued the prevailing market rent of the Premises at the sum of $90,000 per month on the agreed inclusive basis, based on the terms of the expired tenancy entered into in 2002.  On the other hand, Mr Varty valued the Premises at the sum of $72,000 per month on the same basis. 

Tribunal’s adjustments of the comparables

6. Mr Varty’s summary of the 2 surveyors’ valuations is reproduced below, with an additional column giving the Tribunal’s adopted adjustments to these 2 common comparables.  The various adjustments adopted are detailed below: -  

Time adjustment

Both surveyors used the Rating & Valuation Department’s Domestic Average Rents Table for “Type E” class properties in Hong Kong as the basis for their time adjustments.  However, Mr Varty suggested that as the actual dates of commencement of the 2 comparable lettings were not known and the Rating & Valuation Department’s figures are based upon tenancies that could commence anytime within the respective months, it would be appropriate to consider the rental index figures as to be representative of the figures at the mid-point of each month.  Upon interpolation of the index figures based on this assumption, Mr Varty estimated time adjustment percentages for Comparables (1) & (2) that were slightly different from those of Mr Kong.  I accept Mr Varty’s reasoning and preferred to use his figures.

Orientation 

Mr Kong made an upward adjustment of 3% to Comparable (1) on the ground that when compared with Flat 03, all flats of Flat 01 including Comparable (1) were partly blocked by the adjacent building, May Tower II.  Mr Varty opined that he did not find the difference in orientation between Comparable (1) and the Premises justify any adjustment.  I accept Mr Kong’s opinion and allow a upward adjustment of 2%.  As for Comparable (2), which has 2 upper level bedrooms having a southerly green mountain view, which is different from that of the Premises, Mr Kong made a substantial upward adjustment of 15%.  Mr Varty disagreed with this adjustment, suggesting that some might prefer a peaceful green view for the 2 upper level bedrooms which would “normally be used as children’s bedrooms or perhaps a study or storeroom”.  In my view, the market in Hong Kong place much difference on whether any room in an apartment has a sea view, whether or not it’s the living room or a bedroom although the difference will be much greater in the case of the former situation.  Therefore, I will allow an upward adjustment of 5% to allow for this factor.

Condition of Premises

Mr Kong has made no adjustment for this factor even though in his report, he stated that there is “one sign of dampness found around the air-conditioning outlet at the ceiling of the kitchen” and “there is plaster damage on the upper part of the wall adjacent to the window and the walk-in closet in the bedroom currently used a den”.  Mr Varty noticed the defects at the time of his inspection.  In his opinion, the cost of rectifying the defects could be considerable and that any tenant leasing the Premises “will either take on the obligation of repairs (and factor the costs into a reduced rent) or will expect a significant discount by way of compensation…”.  Consequently, he opined that a discount of about 10% would be appropriate.  In my opinion, this factor warrants a downward adjustment of 5%.  

Floor Level

Mr Kong has made no adjustment for this factor.  Mr Chow, the representative for the Applicant even submitted that according to him, the lower floor apartments in the development fetched higher rents in the past. On the other hand, Mr Varty adopted the standard practice that the higher the floor level, the higher the rental value, other things being equal.  He adopted an allowance of 0.75% per floor for this building to arrive as his adjustments for the 2 comparables.  On balance, I agree with Mr Varty.

Quiet Enjoyment

Mr Kong has made also no adjustment for this factor.  Mr Varty reported in his valuation report that the Respondent had advised him that, “during a nine month period including the month of September 2005 flat 1002 directly adjacent to flat 1003 was undergoing very extensive reconstruction and renovation”.  Based on this, Mr Varty opined that some allowance should be made for this factor, which he had assessed at 6%.  The Respondent gave evidence confirming that the said disruption lasted for about 9 months.  However, Mr Chow for the Applicant disputed this allegation.  I do not find this to be a factor that one would take into account when assessing the prevailing market rent of the Premises at the relevant date.  Whilst an extensive renovation of a building as a whole for a substantive period of time may have an effect on the market value of apartment units in the building, I do not think that any tenant or landlord coming to agree the rent of any particular apartment will take into account the possible noise caused by the renovation of a neighbouring unit alone.  Moreover, from the evidence of the Respondent, the noise due to the neighbouring unit is almost history at the time of determining the prevailing market rent in the present case.  Therefore, I do not find it right to warrant any adjustment for this factor. 

Valuation

7. It was agreed that the Premises and the 2 comparables are of the same saleable areas.  Therefore, it would be suffice to directly adopt the average adjusted rents of the 2 comparables as to be the prevailing monthly rent of the Premises.  From the above table, the average of the adjusted monthly rents of the 2 comparables is found to be ($68,294 + $71,284) / 2, or $69,789.  Adding this to the agreed sum of rates, management fees and air-conditioning charges at $11,500 gives the figure of $81,289, rounded to $81,300 as to be Tribunal’s estimated prevailing market rent for the period from 1^st September 2005.  This rental figure was assessed on the assumptions of a 2-year tenancy term commencing from 1^st September 2005, and on the basis of the same terms (other than the rent and the commencement date) as in the previous tenancy of the Premises.

Conclusion

8. I therefore make the following orders: -

1.    The prevailing market rent of the Premises for the period from 1^st September 2005 is determined at $81,300 per month, on the basis of inclusive of rates, management fees and air-conditioning charges;

2.    No order as to costs.