何永鴻 v. 偉福置業有限公司

LDNT 166/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 166 of 2003

______________

JUDGMENT

______________

Background

1. The hearing of this new application was conducted in Chinese (Punti) but the valuation report of the only expert witness, Mr. Patrick Lai, called by the Applicant was written in English. At the end of the hearing, the Tribunal enquired with the parties and noted that neither party objected the Judgment to be given in English.

2. The Applicant is the tenant and the Respondent the landlord of the subject premises known as 7th Floor, Oriental House, Nos. 24-26 Argyle Street, Kowloon ("the Premises"), located in the centre of Mongkok, Kowloon. The Premises is a domestic unit on the 7th floor of Oriental House, a 10-storey mixed commercial / residential building with the ground, mezzanine and first floors designated for commercial uses and the upper floors (with 1 domestic unit per floor from the 1/F to the 9/F) served by one lift and two staircases. The whole building is owned by the Respondent who holds the building for investment purposes by letting out the units to various tenants. The Applicant is one of its main tenants, leasing the Premises as well as the 8/F and the 9/F of the building.

3. The Premises was subject to a 2-years tenancy expiring on 19 February 2004, at a rental of $19,000 per month on exclusive of rates and management basis. According to the parties, the current Government rates amounts to $733 per month whilst the current management fees is $4,140 per month. During the hearing, the Applicant said that the Prevailing Market Rent ("PMR") of the Premises should be $12,000 per month, inclusive of rates and management fees whilst the Respondent determined the PMR to be $20,800 per month, exclusive of rates and management fees, or $25,663 on exclusive basis.

4. Both parties were not legally represented. Mr. Ho Wing Hung, the Applicant, called for the evidence of an expert witness, Mr. Patrick Lai, Chartered Surveyor. The Applicant also gave evidence himself. On the other hand, Mr. Ho Chi Ming represented the Respondent. He suggested that the PMR should be assessed on the basis of the average of the unadjusted unit rates of the comparables shown in Mr. Lai's report, with the exclusion of Comparables 2, 6 and 8, the comparables without lift service. Mr. Ho Chi Ming queried the direction and quantum of adjustments given to the comparables by Mr. Lai. However, Mr. Ho Chi Ming, while admitting that he himself was not qualified to give any opinion as to the level of adjustments, did not see fit to make any suggestions at all to the adjustments that should be adopted by the Tribunal. Therefore, the parties adopted the same comparison method of valuation using unit rental value per unit saleable area of the comparables as their basis of valuation. The only difference between the two parties is that the Applicant's witness proposed various adjustments to the comparables whilst the Respondent suggested that the Tribunal should determine the PMR of the Premises by using the average of the unadjusted unit rates of the relevant comparables, Comparables 1, 3, 4, 5 and 7. As rightly pointed out by Mr. Lai, this methodology was plainly wrong as it did not follow the required basic steps of the comparison method of valuation in that the comparables were not adjusted to reflect the differences between the comparables and the Premises. As such, the Tribunal must reject this methodology, as it will lead to a wrong result.

5. Between the parties, a total of 9 comparables (8 shown in Mr. Lai's valuation report, marked as Exhibit A1, and 1 shown in a copy of tenancy agreement produced by the Applicant as Exhibit A3) were considered. The substantial difference in the final assessments of the Premises by the two parties are caused by the following factors:

(a) whether those comparables located in buildings without lift service should be discarded;

(b) whether adjustments in respect of certain factors should be made to the comparables; and if yes, the appropriate levels of adjustments; and

(c) the other terms of the tenancy, including the amount of management fees that should be adopted by the Tribunal whether or not the PMR is to be assessed on the basis of exclusive of rates and management fees.

Choice of relevant comparables

6. Mr. Lai adopted in his valuation report a total of 8 comparables including those provided to him by the Rating & Valuation Department and those provided to him by the Applicant. Out of these 8 comparables, three were located in the buildings without lift service. During the hearing, he gave opinion that an additional comparable introduced by the Applicant should also be adopted as a relevant comparable since it was a unit located in the same building as Comparables 2 and 8. As to the levels of adjustments, Mr. Lai said that it should be the same as for Comparables 2 and 8. On the other hand, Mr. Ho Chi Ming said that all the comparables in buildings without lift service should not be adopted as relevant comparables. The Tribunal agrees with the opinion of Mr. Ho Chi Ming. Generally speaking, comparables in buildings without lift do not provide good comparisons to the Premises, which is a 7/F unit in a building of 10-storeys high and served by lift. This is particularly so in the present case when we have sufficient number of comparables in other comparable buildings. Therefore, Comparables 2, 6 and 8 used by Mr. Lai as well as the additional comparable introduced by the Applicant during the hearing are not used in the analysis below.

Adjustments to the comparables

8. For the sake of simplicity, the numbering of the Comparables in Mr. Lai's report is adopted throughout this Judgment. The Tribunal had the benefit of hearing the opinion of only one expert witness, Mr. Lai. Therefore, unless there are reasons that Mr. Lai's levels of adjustments for various factors are in the opinion of the Tribunal inappropriate, the Tribunal will adopt his proposed adjustments.

Time adjustment

8. The Tribunal agrees with Mr. Lai's adjustments.

Location

9. Mr. Lai allowed an adjustment of -10% for Comparable 1, which enjoyed a quieter environment than the Premises; otherwise, he did not make any adjustments for the other comparables. Although the Tribunal also agrees that a downward adjustment for Comparable 1 is warranted, a lower adjustment of -5% is considered to be more appropriate.

Floor level

10. Mr. Lai allowed an adjustment of +2% for Comparable 3 (situated on the 6/F), and +5% for Comparable 7 (situated on 5/F) whilst he gave an adjustment of -5% for Comparable 5 (situated on 11/F). The Tribunal finds that the differences in the levels between the Premises and Comparables 3 and 7 are too small to merit any adjustment. As for Comparable 5, the Tribunal finds that a lower adjustment of -2% is more appropriate.

Age/Condition

11. The Tribunal disagrees with Mr. Lai that any adjustment should be made for Comparables 1, 3, 4 and 7. The differences in the age of the subject building and those of the buildings containing these comparables are very small. As for Comparable 5, Mr. Lai opined that an adjustment of -10% should be made to reflect the difference in age and the better, renovated condition of Comparable 5. For this comparable, the Tribunal only allows an adjustment of -5% to account for the latter factor.

Building Entrance

12. Mr. Lai opined that the access to the upper floors of Oriental House including the Premises was via a lane, which was however adversely affected by the existence of illegal hawkers, particularly during the night. For this reason, he gave a downward adjustment of -10%. The Applicant challenged the oral evidence of Mr. Lai and suggested that none of the photos produced by Mr. Lai show the existence of the said illegal hawkers. On balance, the Tribunal accepts the evidence of Mr. Lai that it would not be easy to take photos of these hawkers in view of the hostility of the latter towards the cameraman. The Tribunal agrees that given the building entrance factor pertaining to the Premises, a downward adjustment is warranted for all the comparables but the Tribunal finds that an adjustment of -5%, instead of -10%, is more appropriate.

Quantum

13. Apart form Comparable 1, the sizes of all the comparables are considerably smaller than those of the Premises. The Tribunal agrees with Mr. Lai that a downward adjustment is warranted. However, instead of an adjustment of -25% as suggested by Mr. Lai, the Tribunal finds that an adjustment of -10% for each of Comparables 3, 4, 5 and 7 is more appropriate.

14. A summary of the adjustments to the comparables adopted for the valuation of the Premises is set out below:

* Unit Rate and Adj. Unit Rate are expressed in HK$/ sq. m.

Estimation of the PMR of the Premises

15. From the analysis and adjustments of comparables shown in the above table, the Tribunal computes that the adjusted unit rates, per sq. m. of saleable area for Comparables 1, 3, 4, 5 and 7 are in the order of $84.91, $93.25, $85.28, $85.83 and $97.71 respectively. The average of these unit rates is $89.40 per sq. m., which should be used in the estimation of the monthly PMR of the Premises, as follows:

Saleable Area of the Premises	= 181.7 sq. m.
Adopted average unit rate of the comparables	= $89.40 per sq. m.
Estimated PMR of the Premises	= $16,244
Rounded to $16,200 per month

16. The Tribunal notes that in the analysis of the comparable, the basic rents of the comparables had already been adjusted by Mr. Lai, where necessary, to the same basis of exclusive of rates and management fees. Therefore, the PMR of the Premises arrived above must be on the same basis as the comparable rents, i.e. exclusive of rates and management fees.

Other terms of the new tenancy for the Premises

17. The Applicant submitted that the new tenancy for the Premises should be for a term of 2 years on the basis of inclusive of rates and management fees. The Applicant further added that since the Respondent owned the whole building and the management fees for the Premises was paid directly to the Respondent, the level of management fees was in his view excessive. Therefore, the Applicant said that the Tribunal should determine the PMR of the new tenancy for the Premises on the basis of inclusive of rates and management fees, i.e., with the Applicant paying these charges. In the event that the Tribunal decides to determine the PMR on exclusive basis, the Respondent should provide evidence of accounts to demonstrate that the management fees charged for the Premises was not excessive. In reply, the Respondent said that the new tenancy granted should be for a term of 1 year on the basis of either exclusive or inclusive of rates and management fees. Mr. Ho Chi Ming gave evidence that the building was managed by the Respondent directly and that the management fees was calculated based on the actual expenditures spent in the management of the building. The management fees for the Premises was the same as those for each of the other floors. Also, the Respondent did not charge any manager's fee or profits for the management of the building even though the Respondent did incur costs in terms of the salaries of the staffs employed to handle the management of the building.

18. The Tribunal finds that although the unit rate of the management fees for the Premises, at about $2.2 per sq. ft. on saleable area, or $1.88 per sq. ft. on gross floor as stated by the Respondent, may be higher than those of some comparables, this must be viewed in light of the uniqueness of the building in that there is only one unit per floor. As a result, the unit rate of the management fees for the Premises may be higher than those for domestic units in other comparable buildings. Overall, however, the Tribunal does not find the quoted management fees to be exceptional to merit any adjustment in the determination of the PMR.

19. In addition, the Tribunal finds that in accordance with the provisions of the Landlord & Tenant (Consolidation) Ordinance (Cap. 7) and in the absence of any good reason for change, the other terms of the new tenancy for the Premises should be the same as in the previous tenancy. Therefore, the new tenancy for the Premises should be determined on the basis of a 2-year term, commencing from 20 February 2004 and on the basis of exclusive of rates and management fees. However, since Mr. Lai had computed all the unadjusted unit rates of the adopted comparables analyzed above on the basis of exclusive of rates and management fees, there is no need to make any further adjustment for the purpose of determining the PMR of the Premises.

20. For the above reasons, the Tribunal determines the PMR of the Premises to be $16,200 per month, on exclusive basis, and grants the following orders:

Orders

1. New Tenancy for two years commencing from 20 February 2004;

2. New rent at $16,200 per month (exclusive of rates and management fee); leave to the Respondent to pay back the Applicant over-payment of rent, if any, within one month;

3. Deposit, in the sum of 2 month's rent of $32,400, to be paid by the Applicant to the Respondent; leave to the Respondent to pay the Applicant the adjustment, if any;

4. Other terms of the new tenancy shall be the same as in the previous tenancy agreement;

5. There shall be no order as to costs.