PERSONAL ELECTRONICS LTD v. PANTAI INVESTMENTS LTD

LDNT 22/2002

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 22 of 2002

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DECISION

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1. Both the Applicant and the Respondent applied to review my Judgment on 8 July 2002. However, both parties raised no challenge to my Judgment as such, but simply adduced further evidence for my consideration. The Respondent produced a new tenancy agreement dated 11 July 2002, i.e. Exhibit "R3", to show that there was a new lease entered for House 17 for 24 months commencing from 25 August 2002 at the monthly rent of $26,000.00 inclusive of rates, management fee and Government rent. The Applicant, on the other hand, adduced evidence that the rental for House 13 covered 2 car parks, and also produced the latest information concerning the Rental Indices of the Hong Kong Property Review.

House 17

2. The Respondent requested me to consider the new rent of House 17 in assessing the prevailing market rent of the Premises. In this regard, Mr. Poon, Counsel for the Respondent, submitted various calculations in different scenarios for my consideration. The Applicant, however, submitted that the new rent of House 17 should not be considered at all, and its grounds of objection can be summarized as follows:-

(1)	The new lease for House 17 was irrelevant as it was to commence in August 2002, 3 or 4 months after the relevant date on 30 April 2002;
(2)	House 17 had undergone complete renovation and there were many new fittings and equipment provided. The landlord of House 17 even agreed to pay a maximum of $30,000.00 to the tenant to buy some furniture and appliances, and there was a break clause for the tenant. There was also an extension of the house into the garden area. Thus, House 17 was not a like for like comparison.

3. First of all, it is wrong for the Applicant to suggest that I cannot consider House 17 simply because its lease was to commence after the relevant date. In assessing the prevailing market rent, I have to consider those comparables that are close in time to the relevant date, but there is no restriction that those comparables must be before the relevant date and not after. Indeed, as pointed out by Mr. Poon, the Lands Tribunal always considers comparables that are after the relevant date, and an example of which can be found in the case of Bayer China Co. Ltd. v. Mid-Levels Portfolio (Branksome) Ltd., LDPD 2589/1994.

4. When a comparable is not too close in time to the relevant date, and there are no or insufficient comparables that are close enough to the relevant date being available, then that comparable can also be considered by making proper time adjustment. The new lease for House 17 was executed on 11 July 2002, even though it was to commence on 25 August 2002. So the agreement for the new rent of $26,000.00 must have been reached on or before 11 July 2002. Thus, the rental of $26,000.00 should reflect the market situation in July 2002 rather than August 2002. This is just 2 to 3 months after the relevant date and in fact closer in time than the old rent of $25,000.00 in July 2001. It is also closer in time than the rentals of $24,000.00 and $18,000.00 for House 3 and House 13, which were reached on or before 29 October 2001 and 1 September 2001 respectively.

5. As the new rent of House 17 is actually closer in time to the relevant date, it should be more relevant than the old rent and the other comparables. It is not right to ignore this new rent simply because it is after the relevant date. I do not therefore find any merits in the Applicant's first ground of objection.

6. As to the second ground of objection, the Applicant produced many photographs, i.e. Exhibits "A7(1)-(63)" and "A8", to substantiate its contention that House 17 had been completely renovated over a 6 week period at the cost of over $1 million. The renovation included a complete new kitchen with new equipment throughout, 9 split-type air-conditioners for every room and kitchen pantry, a marble living room floor, complete re-carpeting of the house, complete internal renovation and repainting of the house, tasteful furniture in the ground floor and middle floor with mature plants, sun blinds and linen curtains, a tasteful new barbecue cum bar area on the roof from which the water tanks had been relocated, a new rooftop solarium conservatory room, 4 bedrooms, a new Jacuzzi in the bathroom of the en suite master bedroom, 3 upstairs bathrooms/showers/toilets and 2 of which were en suite, as well as wardrobes in all bedrooms.

7. The Applicant submitted that House 17 was in fact a semi-furnished house whereas the Premises was an empty unfurnished house. The Applicant referred to clause 24 of the new tenancy agreement for House 17, in which it was stipulated that the landlord had to pay a maximum of $30,000.00 to the tenant to buy one set of sofa, one bed, one washing machine and one barbecue set etc. The Applicant also referred to clause 22 of the new tenancy agreement in which the tenant was allowed to break the lease after 12 months by giving 2 month's notice. The Applicant further pointed out that there was an extension of the house into the garden area. The Applicant estimated that the additional area created by the extension was about 20 sq.m., and it should enhance the value of House 17.

8. First of all, I do not consider that the break clause in the new lease should have any significant effect on the rental. In Hong Kong, it is very common for landlords to lease out their residential properties for a term of 2 years and very often there is a break clause after one year. I do not think that a tenant would pay more simply because there is such a break clause, or a landlord would accept less because of its absence. Thus, I will ignore the break clause entirely.

9. As to the renovation and extension of the house, as well as the provision of furniture and payment of $30,000.00, I think they should all affect the rental value of House 17 and proper adjustments should be made in respect of these factors. However, I disagree with the Applicant that the new lease should be wholly discarded because of these factors. I think the new lease can still be a good comparable after proper adjustments have been made. After all, House 17 is within the same development as the Premises, there are still many common factors between them, such as location and amenities. In fact, the new rent for House 17 is closer in time to the relevant date than those of House 3 and House 13, and it makes House 17 a better comparable than the other two in this aspect. There is no other suitable comparable being closer in time than the new lease for House 17. It would not make sense to discard this only comparable that is closer in time to the relevant date and just adopt the others which are not so close in time.

10. In the circumstances, I am of the view that House 17 with its new rent and condition can still be a good comparable after proper adjustments have been made and should not be discarded at all.

House 13

11. The Applicant produced a letter from the tenant of House 13 to confirm that the tenancy agreement for House 13 was inclusive of two car parks, i.e. Car Park Nos. 28 and 30. The Respondent did not challenge that. Thus, I accept that the tenancy agreement for House 13 was inclusive of two car parks just like the Premises.

12. With this additional information, I will be able to calculate the effective rent for House 13 and I shall consider it in my assessment of the prevailing market rent.

Reassessing the Prevailing Market Rent

13. There are now 3 comparables available for my consideration, i.e. House 3, House 13 and House 17. For House 17, the extension into the garden area has increased the internal floor area of the house. Whether it was legally or illegally built, it still has a useful value to the tenant. I agree with the Applicant that it should be taken into account as part of the saleable area. In the absence of other evidence, I accept the Applicant's estimate that the extended area is about 20 sq.m. On the other hand, the extension has decreased the garden area to the same extent. Thus, the effective area for House 17 is as follows:-

195.0 sq.m. + 20.0 sq.m. + (14.1 sq.m. + 61.8 sq.m. - 20.0 sq.m. + 42.5 sq.m.) / 10 = 224.84 sq.m.

14. The landlord of House 17 has agreed to pay a maximum of $30,000.00 to the tenant to buy some furniture and appliances as aforesaid. I see no reason why the tenant would not take the advantage of this agreement and use up the maximum amount. It means that the landlord is actually receiving less rent for this lease. The net rent for House 17 should therefore be calculated as follows:-

[($26,000.00 - $1,340.00 - $2,600.00) x 24 - $30,000.00] / 24 = $20,810.00

15. The unit rate for House 17 is therefore $92.55 per sq.m. ($20,810.00 / 224.84 sq.m.).

16. For House 13, the effective area is calculated as follows:-

191.0 sq.m. + (10.9 sq.m. + 21.0 sq.m. + 22.0 sq.m.) / 10 = 196.39 sq.m.

17. The unit rate of House 13 is therefore $72.37 per sq.m. as calculated below:-

($18,000.00 - $1,187.50 - $2,600.00) / 196.39 sq.m. = $72.37 per sq.m.

18. For House 3, the unit rate as calculated previously is $111.63 per sq.m.

19. There should be adjustment for time. The Applicant produced 2 latest Rental Indices, i.e. Exhibits "A9" and "A10", for my consideration. Exhibit "A10" should in theory provide better information than Exhibit "A9" as it contains separate figures for Hong Kong, Kowloon and New Territories. However, there is a note in Exhibit "A10" saying that the figures in bracket are for fewer than 20 transactions. I do not think that such figures, being based on so few transactions, could give good indication for the market trend. I think the figures in Exhibit "A9" in fact give a better picture of the market trend, i.e. a gentle downward trend as agreed by both parties. The Applicant also produced information to clarify that Class E refers to properties having an area of 160 sq.m. or above. The Premises, House 3, House 13 and House 17 are therefore all Class E properties. Hence, I shall use the figures for Class E properties in Exhibit "A9" to make the time adjustment.

20. For House 17, as there is no figure available for July or August 2002, I shall assume that there is no fluctuation from June 2002 to July or August 2002 and adopt the figure for June 2002 accordingly. The figures for April 2002 and June 2002 are 97.1 and 94.2 respectively. The unit rate for House 17 should therefore be adjusted upward by 3.08%.

21. The figures for September 2001 and October 2001 are 105.5 and 105.0 respectively. Thus, for House 13 and House 3, there should be downward adjustments of 7.96% and 7.52% respectively.

22. There should also be adjustment for condition. Normally, where a comparable is a new letting and the subject premises is not, a downward adjustment of 3 % is necessary and appropriate to reflect the newer condition of the comparable. However, this refers to the normal type of renovation a landlord would undertake, such as repainting of the walls and polishing of the floor. This can be applied to House 3 and House 13, but not House 17. House 17 has undergone a complete refurbishment as aforesaid. To reflect the extent of the renovation and the additional items provided in House 17, which are not available in the Premises, a 3% adjustment is clearly insufficient. Judging from the photographs provided and the evidence of the Applicant, I think a downward adjustment of 10% is appropriate to reflect the condition and the additional items in House 17.

23. As to adjustment for view, the Applicant suggested that House 17 had a better view than the Premises, whereas the Respondent suggested the views for House 1 to House 9 were better than the views for House 10 to House 17. However, there was not much evidence on the views of the Premises and the comparables for me to make any sensible comparison. The Applicant in fact mentioned that the view was very much a matter for the eyes of the beholder. The Respondent also did not insist on any adjustment for view. In the circumstances, I will not make any adjustment for view.

24. Thus, for House 3, House 13 and House 17, the total adjustments are -10.52%, -10.96% and -6.92% respectively and their adjusted unit rates are accordingly $99.89 per sq.m., $64.44 per sq.m. and $86.15 per sq.m. The adjusted unit rate for House 13 is very much below the adjusted unit rates for House 3 and House 17. The average of the adjusted unit rate for House 3 and House 17 is $93.02 per sq.m. The adjusted unit rate of House 13 is in fact 30.72% below the average adjusted unit rate of House 3 and House 17. With such a big difference, I am of the view that the adjusted unit rate of House 13 is out of range and should be discarded, as it will otherwise pull down and distort the average adjusted unit rate significantly.

25. I will therefore adopt the average adjusted unit rate of House 3 and House 17, i.e. $93.02 per sq.m. in my reassessment of the prevailing market rent. Applying this average adjusted unit rate to the Premises, which has an effective area of 187.82 sq.m., the monthly rent for the Premises is therefore $17,471.02 or a round figure of $17,500.00.

26. In the circumstances, I reassess the prevailing market rent of the Premises to be at $17,500.00 per month, exclusive of rates and management charges.

Orders

27. I therefore review my orders on 8 July 2002 and substitute them with the following orders:-

(1)	There shall be a new tenancy for 2 years commencing on 1 May 2002 and the new rent shall be at $17,500.00 per month exclusive of rates and management charges.
(2)	Deposit to be decreased pro rata in accordance with the new rent.
(3)	Leave to the Respondent to refund to the Applicant excess payment of rent and deposit, if any, within 1 month from the date hereof.
(4)	No order as to costs.