Burns Gerard James v. Colliers Jardine Properties Ltd.

LDNT296/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 296 of 2000

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JUDGMENT

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Background

1. The Applicant is the tenant and the Respondent the duly authorized agent of the landlord of the subject premises known as Flat No. 3B on 3rd Floor and One Car Parking Space, Villa Cornwall, 12 Cornwall Street, Kowloon ("the Premises"). By a tenancy agreement dated 15 December 1998, the landlord and the Applicant entered into a tenancy for a term of 20 months commencing from 18 January 1999 at a monthly rent of $32,000, exclusive of rates and management fees.

2. The Applicant applied on 25 August 2000 to the Lands Tribunal for the granting of a new tenancy. The Respondent filed a notice of opposition on 6 September 2000 stating that "the applicant and respondent cannot mutually agree the renewal lease term." Thereafter, the parties agreed the granting of a new tenancy for a term of 2 years from 18 September 2000. The only outstanding issue is the amount of the prevailing market rent (PMR) for the new tenancy.

3. There are altogether 6 flats in the building which is three storey above a level of carport. It is common ground that apart from the Premises, all the other 5 flats in the building have been left vacant for sometime.

Applicant's case

4. The Applicant explained that in spite of the existing condition in the subject building, he still applied for a new tenancy because the Premises was located close to his children's school. However, he complained about the problems of security and the lack of company of neighbours. He quoted an incident of a suspected burglary by one of his neighbour a few months ago when the latter was still residing in the building. For these reasons, the Applicant queried the expert surveyor, Ms. Chan's valuation and suggested that some adjustments should be made to reflect these factors. However, the Applicant did not call any expert witness, nor did he carry out any valuation of the PMR of the Premises.

5. Mr. Chung Chi Hung gave evidence in the hearing mainly regarding the vacancies in the building.

6. The Applicant submitted that quite apart from the human factor of loss of enjoying the company of other tenants, the Applicant was asked to pay more for the deteriorating condition of the Premises and the building. The Applicant therefore sought to seek the protection of the Court in this respect. He finally submitted that the best rent he could offer was the same rent as in the previous tenancy agreement.

The Respondent's case

7. Ms. Chan Sze Ming, ARICS, AHKIS gave evidence on the determination of the PMR for the new tenancy. She produced a valuation report (Exhibit R-2) in which she concluded that the PMR of the Premises as at 17 September 2000, on the basis of exclusive of rates and management fees and for a term of 2 years was in the sum of $35,000 per month. Ms. Chan had relied on the schedule of rental comparables provided to her by the Rating & Valuation Department (Appendix 5 of Exhibit R-2). In the course of valuation, she had firstly carried out an elimination process during which the less comparable properties, Comparble 2 and 3 were eliminated and disregarded in the valuation. After this, she made various adjustments to the remaining comparable rents. The details of her adjustments were in Appendix 6 of Exhibit R-2. In the final analysis, Ms. Chan estimated that an adjusted unit rate of $181 per sq.m. was appropriate for the purpose of assessing the PMR of the Premises.

8. Ms. Chan admitted that as there was no comparable rent from the same building, she had considered the comparable rents in other similar buildings. This is a common and acceptable practice in the comparison method of valuation. Ms. Chan said that although the whole of the subject building with the exception of the Premises was vacant at the relevant date of valuation, this should not be a factor that she would take into consideration in the valuation. This was because there was a 24-hour security service at the building. She therefore did not see any problem concerning the security of the Premises arising from the vacancies in the building.

9. Upon cross examination by the Applicant, Ms. Chan confirmed that she had only considered the existing state of the surrounding environment and had not taken into account the possible effects of inconvenience and disturbance caused by the large scale development project close to the subject building. As for the size of the car parking space of the Premises, Ms. Chan had measured the space to be about 14 ft. 2 in. wide and estimated that the space would be sufficiently wide for the parking of two cars. This was refuted by the Applicant who said that he had tried unsuccessfully to park two cars in the parking space due to the difficulty of maneuvering the cars outside his space. He also offered to move to another smaller car park in order to reduce the rent payable.

10. In the final submission, the Respondent submitted that although the Applicant complained about the vacancies in the building, this was of no relevance in the determination of the PMR of the Premises. Also, no allowance should be made for the potential development of neighbouring site because the site was only in the foundation stage of development. The Respondent pointed out that the Applicant could not highlight any particular defect or error in the valuation report produced by the expert surveyor. Therefore, the Respondent submitted that the expert surveyor's report was reasonable in all circumstances and urged the Tribunal to accept Ms. Chan's conclusion of value.

Determination of the PMR by the Tribunal

11. Since Ms. Chan was the only expert witness called by the parties, I decide to accept her evidence in the valuation unless there is other evidence or reason to suggest otherwise. Therefore, I accept her choice of the better comparables for detailed analysis, her factors and levels of adjustments to the comparables, with the exception of her adjustments for car parking space and the lack of adjustments to reflect the surrounding environment and the current vacancy state in the building.

12. The Premises comprises the use of one particular car parking space on the ground floor. The Applicant said that parking of two cars in the parking space allotted for the Premises was not possible whilst Ms. Chan gave evidence that this was feasible. Although she illustrated the space in a photo attached as a appendix to her valuation report. I find that I cannot decide just from the photo if there will be sufficient room outside the space for the maneuvering of two cars. However, I decide that since the previous tenancy agreement stipulates that only one car parking space is provided by the landlord for the use of the tenant, the Tribunal cannot go further than that and assess the value of the space on the basis for the parking of two cars. Therefore, I do not allow the adjustments made by Ms. Chan to adjust by an additional $2,000 to each of the Rating & Valuation Department's Comparables 4, 5 and 6.

13. Mr. Chung Chi Hung, a property staff working in the Respondent confirmed that the other flats in the building have been left vacant since the following dates:

For Flat 1A - since 14 June 2000;

For Flat 1B - since 27 October 2000;

For Flat 2A - since 28 March 2000;

For Flat 2B - since 5 August 2000;

For Flat 3A - since 16 March 2000;

14. The Applicant submitted that the Respondent asked a hefty increase of rent from the former existing tenants in order to drive them out from the building. For example, the Applicant asked an increase of some 25% from the former tenant of Flat 2B, a Mr. Szeto in order to "force" the tenant to look for another flat and move out. The Applicant hence concluded that the Respondent was trying to recover possession of the flats in the building by asking higher than normal rents upon renewals of tenancies of these flats in the last few month. When asked by the Applicant, Mr. Chung confirmed that he did not know the Respondent's intention for these vacant flats.

15. I find as a matter of common sense that most prospective tenants looking for the renting of the Premises will be concerned that all the other flats in the same building have been left vacant for some months and that the landlord's intention for these flats is not clear. The possibility that the landlord may redevelop the building in the near future is an uncertainty that some tenants may dislike and may require certain discount to reflect the uncertainty. More importantly, I consider that most prospective tenants are, as suggested by the Applicant, concerned about the lacking of company of neighbours which may result in a higher security risk despite the presence of a 24-hour caretaker service in the building and the possibility of a hefty increase in management fees. There may be a minority of prospective tenants that do enjoy the secluded situation of being the single tenant in a block of 6 flats. On balance, I decide that the PMR as defined in the Ordinance and to be determined by this Tribunal will be affected by the existing unusual vacancy position in the subject building. This I estimate to be an important factor and a 5% downward adjustment is considered to be not unreasonable.

16. Both parties agreed that a large development site is located close to the subject building. The Applicant submitted that the Premises is being affected and will be adversely affected when the development of some 600 flats takes place in full swing. The Respondent countered that the development site is only at its foundation stage and do not pose adverse environmental effects onto the Premises. Ms. Chan, the expert surveyor also confirmed that she had only taken the existing environment in the consideration and had not estimated the future situation and the effects, if any, of this on the PMR of the Premises. I find that to be not correct. It is obvious that prospective tenants of any flat will consider the existing environment surrounding the said flat, as well as the future environment during the term of the prospective tenancy particularly if the future environment can be easily foreseen by common sense. I do not think that most prospective tenants cannot notice the nearby large development site planned for hundreds of flats. Also, it is difficult to believe that these prospective tenants cannot foresee the effects of such a large development and make the necessary adjustments in assessing the rent notwithstanding the existing site condition. Therefore, when making adjustments to the comparables, I decide that similar adjustments should be made. I also decide that a downward adjustment of 2.5% for this factor is appropriate and reasonable.

17. Based on the Rating & Valuation Department's schedule of rents but disallowing Ms. Chan's adjustment of $2,000 for parking space, the monthly net rents of Comparables 1, 4, 5 and 6 are respectively $43,000, $40,000, $29,475 and $33,724. Their unit rates per sq.m. are calculated to be $181.51, $172.64, $207.42 and $158.55 respectively.

18. The total adjustments to be applied, based on Ms. Chan's estimates and my additional estimates set out above, are as follows:

19. The resulting after adjusted unit rates, per sq.m., for Comparables 1, 4, 5 and 6 are respectively $164.27, $164.01, $172.16 and $140.32.

20. I accept Ms. Chan's conclusion in her reconciliation section of her report that since the result of Comparable is out of tone with the rest, that comparable should be given no weight when adopting the final unit rate for the valuation. I decide to give equal weight to all the remaining three comparables which give an average after adjusted unit rate of $166.81 per sq.m. Applying this to the saleable area of the Premises of 195.7 sq.m. gives a rent of $32,645, to which I round to $32,500.

21. Thus, I determine the PMR of the Premises, for the new tenancy commencing from 18 September 2000, on the basis of exclusive of rates, and management fees to be $32,500 per month. The other terms of the new tenancy remain the same as in the former tenancy agreement.

Orders

1. By consent, new Tenancy for two years commencing from 18th September 2000;

2. New rent at $32,500 per month (exclusive of rates and management fees); leave to the Applicant to pay to the Respondent arrears of rent, if any, within 28 days from today;

3. Deposit to be adjusted pro-rata with the new rent; leave to the Applicant to pay back to the Respondent the adjustment within 28 days from today;

4. Other terms of new tenancy to be the same as in the former tenancy agreement;

5. No order as to costs.