SUPREME HONOUR DEVELOPMENT LTD v. THE DIRECTOR OF LANDS

LDMT 1/2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MTR Ordinance Application No. 1 of 2001

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J U D G M E N T

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Background

1. The Secretary for Planning, Environment and Lands authorized under Section 10(1)(a) of the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance, Cap. 276 (“the Ordinance”) the closure or substantial alteration of Connaught Road Central or part thereof (“the roadwork”) from 17 December 1994 so as to facilitate the airport railway construction works described in the Government Notification No. 4361 dated 18 November 1994.

2. The Applicant filed an application to the Lands Tribunal (“the Tribunal”) on 1 March 2001 for determination of compensation caused by the above said roadwork in the sum of $14,702,728.30 for various floors/unit of Fung House located at Nos. 19 – 20 Connaught Road Central, Central, Hong Kong.  The affected floors/unit include: Basement, Ground Floor, 1/F – 4/F, 6/F – 10/F, 12/F, Unit 1301 of 13/F, 14/F, 16/F – 18/F, 20/F and 22/F of Fung House (“the Properties”).  That is, there are within this application 2 whole retail floors, 16 whole floors of offices and office Unit 1301 of 13/F in Fung House, which is a 23-storey office building with 2 retail floors and 21 office floors.  The compensation claim was amended to $20,100,000 in the valuation report dated August 2002 prepared by Mr. C.K. Lau (“Mr. Lau”), the Applicant’s expert witness.  That was later further amended to $19,440,000 and $19,160,000 by Mr. Lau, as set out in his valuation reports dated 19 April 2006 and 17 November 2007 respectively.

3. The Respondent filed the Notice of Opposition on 15 March 2001 denying that the Applicant had any right to claim or that the said claim was considered to be excessive. 

4. However, at the beginning of the hearing, there was no longer any dispute that the disturbance due to the roadwork in the present case was over 6 months and that the Applicant as the owner of the Properties was entitled to claim compensation under the Ordinance.  The parties only differed on their assessments of the quantum of the compensation payable by the Respondent to the Applicant.  Therefore, the disputes in the present case involve only the findings of facts and valuation issues.

The Law

5. The basis of compensation to the Applicant is set out, in alia, under item 4 of Part I of First Schedule of the Ordinance, as follow: -

“the amount of any pecuniary loss or damage to any property held under Government Lease:  Provided that, in the case of a temporary closure or temporary substantial alteration, that closure or alteration continues for a period exceeding 6 months.”

Summary of the experts’ valuation

6. During the hearing, the parties’ experts still had substantial differences in their valuation for the compensation sums payable to the Applicant by the Respondent: -

	Applicant's side *		Respondent's side #
Basement	$480,000		$0
Ground Floor	$2,116,008		$0
1/F to 22/F	$16,568,589		$1,404,136
Total	$19,164,597		$1,404,136

*    as detailed see Bundle B1, pages 280 to 282 (Table 34.1 of the Supplementary Report of Mr. Lau)

#  as detailed in Bundle B2, pages 422 and 423 (Supplementary Report of Mr. Pendleton, the Respondent’s expert giving evidence in the hearing)

Issues between the parties

7. The parties have identified the following issues in the present case: -

(1) Whether the Applicant had suffered any loss by way of reduction of the rent at the following times: (i) during the term of the then existing tenancies with the Applicant’s tenants; (ii) at renewals; and (iii) at new lettings; and if yes, the quantum of the loss in respect of each tenancy?

(2) Whether the Applicant had suffered any loss for its vacant floors/unit; and if yes, the quantum of the loss in each case?  In this regard, the related issue is what should be the optimum natural vacancy of Fung House as a whole and the Applicant’s Properties in particular?

(3) Whether or not the actual rents paid by the tenants for the various terms of the Properties were the Full Market Rent (“FMR”) of the various floors/units in a “no scheme world”, i.e. without the roadwork, and if not, what were the FMR?

(4) Whether or not the Applicant had taken sufficient steps (reasonable in the circumstances) to mitigate its loss for the various floors/unit of the Properties?  In particular, whether it was prudent for the Applicant to grant concessions to various tenants during the terms of their then existing tenancies and at renewals?

(5) The period affected by the roadwork (including the canopy reinstatement) for (i) the Ground Floor (“G/F”) and the Basement (“B/F”) and (ii) the floors/unit of the Upper Floors (“U/F”)?

(6) What should be the best valuation approach for valuing the FMR of the U/F offices, the one adopted by Mr. Lau (“the benchmark approach”), Mr. Au Yeung/Mr. Pendleton (“the individual unit comparison approach”) or the third alternative approach (“the rental index approach”)?

Common grounds between the parties

8. The experts of both parties adopted a similar approach in assessing the loss of the Applicant, being the differences between the rents of the various floors/unit actually received by the Applicant and the FMR of the same floors/unit as assessed by the experts.  There was no dispute in principle that there was loss to the Applicant only when the rent received by the Applicant was below the assessed FMR.   However, there were differences between the experts in their assessments of the FMR of the various floors/units at various dates of valuation.  More importantly, there were serious disputes between the experts as to the losses due to the vacancies of the various floors/unit.

9.  Although both experts used the same direct comparison method in the valuations of the B/F and the G/F, they came to different opinions of the FMR for the B/F and the G/F since they had differences in the choice of comparables and the quantum of adjustments.

10. For the office floors/unit, the experts held very different views.  Mr. Lau took a “benchmark approach”, adopting a benchmark floor at 16/F at the benchmark date of 11 December 1995.  He applied the assessed value of his benchmark floor to various other floors/unit of Fung House after making adjustments to reflect the time and the floor difference.  On the other hand, Mr. Pendleton adopted the traditional “unit comparison” valuation approach of Mr. Au Yeung, an estate surveyor of the Lands Department who prepared the original valuation report for the Respondent before Mr. Pendleton was instructed to prepare a supplementary report and act as an expert witness in the hearing for the Respondent.  Therefore, both Mr. Au Yeung and Mr. Pendleton undertook the valuation of each office floor/unit at each individual transaction date.

11. Upon enquiry from this Tribunal, both experts however agreed that, alternatively, the FMR of the office floors/unit could also be assessed by the method of projecting the “pre-roadwork” FMR of the same office floors/unit (or other similar office floors/unit) of Fung House using the Office Rental Index of the Rating & Valuation Department (“RVD”).  However, both experts maintained the view that their own approaches were preferred than the approach of the other side or the third alternative approach.

12. In the valuation of either the retail portions or the office portions, the experts were unable to agree on most of the parameters in their valuations.  They failed to agree on the adoption of the same set of areas for the Properties, the comparables in the valuations and their adjustments.  As pointed out by Counsel for the Applicant, the only assumption they could come to an agreement is that the adjustment for floor level in the valuation of office portions can be taken as 0.4% per floor.

13. In this Judgment, unless otherwise stated, I have used, for various floors/unit in Fung House as well as the comparables, the saleable areas in sq. ft. as quoted by Mr. Lau in his reports.  Also, I have also used the same definitions of effective monthly rent and the unit rates as quoted by Mr. Lau in his reports.  I find that in the parties’ Final Written Submission, counsel for the Respondent was also using the same set of figures.  This removes the need by this Tribunal to make all the computations in converting the parties’ different sets of areas.

Loss in respect of the basement retail space

14. The basement retail space occupied a saleable area of about 3,389 sq. ft., which was let to Satellite Record Company Ltd. (“Satellite Record”) since 1994.  Mr. Lau summed up in Bundle B1, page 74 the details of the tenancies of the basement retail space between 1 July 1991 and 17 November 1998. 

15. Mr. Lau said that although the tenant, Satellite Record had not requested for a rental reduction during the affected period prior to the tenancy renewal, it was apparently clear from the renewal offer letter dated 13 November 1996 from the Applicant to Satellite Record that the Applicant offered “a rental reduction of 28.5%” (as assessed by the Registered Owner) to compensate for the loss of business due to MTR construction in front of the building. 

16. Also, Mr. Lau opined that he has taken the actual rent passing of $135,000 per month of the first 2-year tenancy entered into between the Applicant and Satellite Record in November 1994, for the tenancy between 17 November 1994 and 16 November 1996 as the estimated fmr of the retail premises as at November 1996 because, firstly, the market condition as at November 1994 was similar to that in November 1996 as revealed from the RVD’s property index and secondly, the rental achieved in 1994 was below what had been achieved back with the previous tenant in 1991.

17. Mr. Lau estimated the compensation in respect of the basement retail space as the rental loss suffered by the Applicant during the 2-year period of the renewed tenancy (i.e. between 17 November 1996 and 16 November 1998) with Satellite Record as follows (the date of valuation being 17 November 1996): -

	Effective Unit Rentalper sq. ft. (Net)		Effective Monthly Rental
Full Market Rental without the Road Works	$40		$135,000
Less Actual rental passing	$34		$115,000
Difference	$6		$20,000
X    Nos. of months			24
Estimated rental loss of the Applicant			$480,000

18. Mr. Lau was also of the view that the basement comparables identified by the Respondent were not good comparables.  For the comparable at AIE Building, it was too small in size compared with the subject basement.  Also, at the relevant time, it was affected by the same roadwork as Fung House.  As to the basement comparable at Lok Yuen Building, it shared a common entrance, which was therefore different from that of the subject basement, which had its exclusive ground floor entrance.  In addition, Mr. Lau opined that his chosen comparables at Prosperous Building and Loke Yew Building were better comparables.  Using his comparables, he estimated the adjusted unit rate for assessing the FMR of the basement space as at 17 November 1996 at  $49 per sq. ft., on Reduced Zoning and Net basis (see Bundle B2, page 44).

19. The Respondent’s assessed FMR for the basement retail space was lower than the actual rent passing.  Mr. Pendleton took issue with Mr. Lau on the suitability of the latter’s comparable at Prosperous Building, a transaction involving a ground floor shop and a basement shop.  He said that it was always not easy to adjust such a rental as subjective adjustments were required as a result of which the derived unit rate for the basement space would not be that reliable.  I agree to Mr. Pendleton’s criticism of the analysis of the transaction at Prosperous Building.  Also, Mr. Pendleton pointed out the the transaction date of the comparable at Lok Yuen Building was 16/9/1997, which was not too close but some 10 months away from the date of valuation of the subject basement, i.e. 17/11/1996.  On the other hand, Mr. Pendleton opined that the adjustments made by Mr. Au Yeung for his 2 basement comparables (Bundle B2, page 352) were reasonable and should be accepted by the Tribunal.

20. In the Final Submission, the Applicant submitted that the loss to the Applicant was $480,000, as assessed by Mr. Lau in Bundle B-1, page 74.  The Applicant added that it did not accord with common sense to say that the business and the FMR the basement floor were not affected by the roadwork.

21. The Respondent’s primary case was that the comparables cited by the Respondent’s experts were suitable and adequate.  On that basis and based on their valuation, no compensation would be payable.  As an alternative, the Respondent submitted that if the Tribunal were to adopt a consistent approach of applying the RVD’s Private Retail Rental Index in adjusting the actual rental passing in November 1994, the estimated FMR of the basement space as at November 1996 would be about $38 x 121.9/119.2, or $38.8 per sq. ft. (rounded to $39 per sq. ft.) on saleable area (“SA”) of 3,389 sq. ft., or $132,171.  The Respondent submitted that on this basis, the loss to and therefore the compensation to the Applicant would equal to the difference between the indexed market rent of $132,171 and the actual rent of $115,000, i.e. ($132171 less 115,000, or $17,171) times 24 months, giving a sum of $412,104.

Tribunal’s findings for the basement retail space

22. Having regard to the assessment of the FMR of the basement space as at the relevant valuation date, or the date of commencement of the renewed tenancy of Satellite Record, i.e., 17 November 1996, I have the choice of either accepting the valuation of Mr. Lau or that of Mr. Pendleton.  I find and agree that for various reasons cited by Mr. Lau and Mr. Pendleton, the 4 basement comparables identified by the experts are all not good comparables.

23. However, if I were to accept Mr. Lau’s opinion that since the RVD’s Private Retail Rental Indices for November 1994 and November 1996 were similar, the actual rent passing of the tenancy commencing 17 November 1994 should be accepted as the FMR of the basement space as at 17 November 1996, I would rather adopt the alternative approach as set out in the Final Submission of Counsel for the Respondent that the RVD’s Private Retail Rental Index could be applied to arrive at the FMR of the basement space as at 17 November 1996.  Because of the absence of suitable comparables, I find this to be more reliable than the comparable method used by Mr. Au Yeung in the first instance and accepted by Mr. Pendleton in his report.  Hence, I assess the loss to the Applicant in the sum of $412,104 as set out in paragraph 22 above.

Loss for the ground floor retail space

24. The ground floor retail space had a saleable area of about 2,655 sq. ft. and was let to First Pacific Bank Limited (“FPB”) from 15 August 1994 to 14 August 1997 for a period of 3 years at a monthly rent of $400,000 subject to an option to renew for a further term of 2 years at a pre-agreed rent of $500,000 per month (excluding rates and management fees). The tenancy was renewed from 15 August 1997 to 14 August 2000 for a term of 3 years at $500,000 per month with a 2-month rent-free period.

25. The Applicant claimed loss due to the granting of concession at renewal. The concessionary terms include: (i) the 2 months’ rent-free period; and (ii) the granting an additional 1-year fixed lease term at the same monthly rental of $500,000, instead of the revised rental of $600,000 previously proposed by the Applicant and the option term of 2 years under the previous tenancy.

26. Mr. Lau set out in Bundle B2, page 90 the details of the tenancies of the ground floor retail space.  He estimated the compensation in respect of the ground floor space as the rental loss suffered by the Applicant during the 3-year period of the renewed tenancy (i.e. between 15 August 1997 and 14 August 2000) with FPB as follows (the date of valuation being 15 August 1997): -

27. Mr. Lau identified 2 comparables for the ground floor space and analyzed them in Bundle B2, page 45.  This showed adjusted unit rates of $203 per sq. ft. and $197 per sq. ft., on Net basis, for his Comparable 1 (Shop 32, LG/F of Luk Hoi Tong Building) and Comparable 2 (Shop 4, G/F of Tak Shing House) respectively, giving an average unit rate of $200 per sq. ft., which he had adopted and applied in his valuation (see above).

28. On the other hand, Mr. Pendleton opined that even if the Tribunal considered that the Applicant suffered a loss due to the roadwork, “the admissible claim should commence from the date of tenancy renewal i.e. 15/8/1997 until the expected date of completion of the Road Works i.e. early 1998 and certainly not later than the actual completion of the Road Works i.e. 6/11/1998”. 

29. However, Mr. Pendleton said that there was no evidence of any loss suffered by the Applicant in respect of the ground floor space because the comparables identified by Mr. Lau and his predecessor, if more properly adjusted, show that the adjusted unit market rental rate for the subject ground floor space would be less than the actual rent realized by the Applicant at the date of renewal.  In particular, Mr. Pendleton pointed out that it was unreasonable for Mr. Lau to have excluded the shop comparable at G/F of Queen’s Plaza which was included in the original Claim Report dated 21 August 2002 prepared for the Applicant by Mr. Lau’s predecessor.  Mr. Pendleton opined that this appeared to him to be the most relevant comparable.  He showed in his supplementary report at Bundle B2, page 403 that his adjusted unit rate for this comparable was $127 per sq. ft.  In cross-examination, he further commented on Mr. Lau’s adjustments for this comparables and arrived at his own adjusted rate of $155 per sq. ft.; The Applicant submitted that since Mr. Pendleton had failed to explain the reason for giving the unreasonably low adjusted rate initially, his valuation was confusing and was therefore not reliable.

30. In addition, Mr. Pendleton commented that Mr. Lau had made subjective and unreliable adjustments ranging from 5% to 10% on location, size and frontage for the other 2 shop comparables, one at Luk Hoi Tong Building and the other at Takshing House.  He said that it was obvious that these 2 comparables enjoyed superior location than Fung House and therefore the difference in location alone would warrant an adjustment of over 20%, much more than that adopted by Mr. Lau.

31. During the hearing, Mr. Lau produced Exhibit A6 giving his analysis of his 2 shop comparables as well as the third one not previously adopted in his valuation reports but used in the Applicant’s original Claim Report.  Mr. Lau still maintained that the shop comparable at Queen’s Plaza was not a good comparable because of its L-shaped layout.  His analysis at Exhibit A6 was just an exercise to assist the Tribunal in case it was agreed that this third comparable should be used.  In the analysis, he allowed an upward adjustment of +40% for the layout factor alone suggesting a total adjustment of +52% for this comparable.  The end result of his analysis of all 3 comparables at Exhibit A6 was the same as his earlier analysis of 2 comparables in his valuation report in Bundle B2, page 45.  Both showed an average adjusted unit rate of about $200 per sq. ft. on Net basis.

32. The Applicant submitted that the 2 comparables selected by Mr. Lau were better comparables as they were closer to Fung House and were similar in layout so that no subjective adjustments for the location and the layout factors would be needed.  Also, the valuation by Mr. Lau should be preferred to that of Mr. Pendleton.  Otherwise, if Mr. Pendleton’s valuation was correct (which gave the FMRof about $410,000, way below $500,000), there was no reason that the Bank did actually agree to pay the rent of $500,000 especially when the disruption from the Road Works was still on going.  Besides, the Applicant submitted that there was no evidence whatsoever to suggest that the Applicant was not reasonable to grant the reduction in rent upon renewal and the rent-free concession, which would not be necessary but for the disruption of the Road Works. 

Tribunal’s findings for the ground floor space

33. It is sheer common sense that while a tenant may always wish to have an option to renew at a certain rate, such options may become totally valueless at the date of renewal.  This is because at the date of agreeing the option, the parties did not know the FMR of the leased premises at the renewal date.  Therefore, as pointed out by Mr. Lau in his supplemental report at Bundle B2, page 231, the tenant FPB was not bound by the option to renew.   Since the option in the present case represented a 25% increase in rent when compared with the rent passing under the original term, the tenant would not be too keen to exercise the option if the rental market had not gone up that far.  Thus, that the parties agreed an extra rent-free period and an extra year in the lease term at renewal as “sweeteners” could be because the FMR of the ground floor space, even ignoring the effects of the roadwork, was below that stated in the original option.  Alternatively, it could well be, as submitted by the Applicant, that the FMR of the space was lower because the effects of the roadwork.

34. Therefore, I agree entirely with counsel for the Respondent that whether the Applicant had suffered any loss as a result of FPB’s renewal at new terms should be examined without any reference or regard to the terms of the original option.  I first have to determine the FMRof the ground floor space at the relevant time, i.e. 15 August 1997, ignoring the effects of the roadwork.

35. As summarized above, Mr. Lau valued the FMR of the ground floor space at $531,000 (at $200 per sq. ft. on Net basis) whereas Mr. Pendleton valued at $411,525 (at $155 per sq. ft. on a similar basis).  There was a major dispute between the 2 experts as to the best comparable or comparables for the subject shop. 

36. Of the 2 comparables used by Mr. Lau, I find that the comparable at Takshing House is not a good comparable since there is a time difference of 20 months between its transaction date and the relevant date of valuation; and that the comparable at Luk Hoi Tung Building is also quite different from the subject ground floor shop in terms of size, frontage and location.  Putting aside the suitability of the third comparable at Queen’s Plaza for the time being, I agree with the Respondent that if Mr. Lau had used the RVD’s Private Retail Rental Index to adjust for the time differences of his 2 comparables that are far apart (nearly 2 years) in time, there seemed to be no logical reason why the same approach could not be used to make adjustments for another comparable, i.e. the subject shop’s earlier tenancy dated 15 August 1994 that was 3 years old.  I note that in his Final Written Submission, counsel for the Respondent said, “Although the timing is thus 1/3 longer, the use of the SB (subject building) as comparable has the great advantage of doing away with all other adjustments (location, accessibility, size, age, frontage, etc.)  In fact, the same arguments for abandoning the Benchmark approach in favour of the Rental Index Approach (in respect of the Office Claims) apply here with equal force”.

37. The Private Retail Rental Index during the relevant period showed a movement of +6.1% (August 1994=118.0, August 1997=125.2).  Therefore, if one applies this increase to the 1994 effective rental of $142 per sq. ft. (on Net basis) as computed by Mr. Lau (Bundle B2, page 80), the FMR of the basement at 14 August 1997 should be $151 per sq. ft.

38. Alternatively, counsel for the Respondent submitted, “If one were to say that the time adjustments become unreliable as time increase, then the best comparable must be the comparable at Queen’s Plaza, 74 Queen’s Road Central.”  He has drawn my attention to the huge layout adjustment adopted by Mr. Lau, and contrasted that with the proposed adjustment of +20% to +25% opined by Mr. Pendleton or the similar adjustment of +20% suggested by Mr. Lau’s former colleague. He further submitted that even “if we accept all the adjustments suggested by Mr. Lau (in “A6”) for the Queen’s Plaza comparable, except for layout, for which we substitute the 20% suggested by his former colleague, we end up with a net adjustment of +32% or $170 psf (N), which is lower than the actual passing rent of $178 (p.81) which the sitting tenant, FPB, ultimately agreed to pay.”  In addition, I have also substituted the +20% by +25% (the upper limit of adjustment as opined by Mr. Pendleton) and found the end result to be $177 psf (N), which is still lower than the actual passing rent of $178 psf (N).

39. In summary, I agree with the Respondent that whether (i) using the Private Retail Rental Index approach to take into account the rental increase since 1994 or (ii) using the comparison approach with Queen’s Plaza as the best comparable and adopting the adjustments as proposed by Mr. Lau (save and except for layout for which his former colleague’s suggested figure or Mr. Pendleton’s figure was used), one would arrive at the same conclusion: that what the sitting tenant FPB had ultimately agreed to pay was more than the assessed FMR. Therefore, I come to the same conclusion as the Respondent that the Applicant had suffered no loss in respect of the ground floor retail space.

Valuation approach for the office floors/unit

40. The Applicant’s expert adopted the “benchmark” approach (i.e., valuing a reference unit at a “benchmark” date and then valuing all other floors/unit with regard to the said reference unit) whereas the Respondent’s expert adopted the usual direct comparison approach (i.e., valuing each office floor/unit at different dates of valuation with different sets of comparables).

41. Mr. Lau opined that by adopting a reference unit in his benchmark approach, there were internal consistencies between the assessed FMR of various floors/unit of Fung House, as well as consistencies between the assessed values at different valuation dates for each floor/unit.  Mr. Lau further said that he had adopted more appropriate and better comparables in similar office buildings hence reducing the difficulties of making subjective adjustments between different buildings.

42. Mr. Au Yeung, the Respondent’s first expert who filed the Rule 20 valuation report dated 20 July 2005 treated the valuation of each office floor/unit as if each was independent of the other floors/unit in terms of values.  Basically, he adopted the traditional unit comparison approach in valuing the office portion of the Properties in the present case.  From his valuation schedules (Bundle B2, page 354 to page 377), the assessed FMR ranged between the lowest $489 per sq. m. (3/F at valuation date of 1/4/1997) and the highest $784 per sq. m. (22/F at valuation date of 26/6/1995).  He adopted different comparables and different adjustments for valuations of different floors/unit but it is suffice to note that the overall adjustment percentages of the comparables could have a narrowest range of 10.3% for 2/F (i.e. adjustments of comparables of between +5.4% and +15.7%) and a widest range of 31.1% for 7/F (i.e. adjustments of comparables of between –1.5% and +29.6%).

43. The Applicant commented that the comparables used by Mr. Au Yeung were inferior in quality when composed with Fung House, and were of different sizes and floor levels.  Also, the Applicant criticized that Mr. Au Yeung’s assessments could not stand the “reality test” as in most cases, the assessed FMR were lower or barely above the then passing rents of the affected tenancies, “thus absurdly suggesting that Fung House were as good as with the road works, or even benefited from it.” 

44. I agree with the Applicant’s criticisms of Mr. Au Yeung’s valuations.  However, I note that even if adopting Mr. Lau’s approach of valuing his chosen reference unit at his chosen benchmark date, there is still the need to value each individual office floor/unit at different tenancy dates by adjusting the assessed value of this reference unit at the benchmark date with regard to both (i) the different dates of tenancies (by using the RVD’s Office Rental Index or other more subjective means) and (ii) the differences in the floor levels and in some cases, the differences in the view between the reference unit and the floors/unit in question.

45. In this regard, I note that the experts have no dispute that before the roadwork began to affect the Properties, the actual tenancies entered into between the Applicant and the tenants were made at market level so that the Tribunal could actually use the recent market rents fetched under these actual tenancies as the reference unit for the respective floors/unit under consideration.  The only adjustment needed in each case will be the time adjustment between the date of the actual tenancy that is used and the relevant dates of valuation of various tenancies for each floor/unit during the affected period.  The thorny problem of finding the appropriate rental comparables from other similar office buildings will not even arise.

46. Counsel for the Applicant submitted that although the Applicant preferred Mr. Lau’s approach to be used in the valuation of the FMR, this Tribunal could use the rental index approach as “both experts agreed that this was also a reasonable method of valuation for the FMR of offices in Fung House during that period of time”.

47. In the Final Written Submission, counsel for the Respondent went even further.  He submitted that the rental index approach was “conceptually superior to either approaches originally propounded by the two sides”.  He compared the three approaches in his submission, “The benchmark approach assumed the applicability/integrity of the Grade A Office Rental Index, but then introduced a number of highly subjective factors such as adjustments to the comparables chosen.  Neither approaches allowed for the marketing policy/inclination of the Applicant, because they only looked at outside comparables.  The Rental Index Approach by contrast dispensed with all subjective adjustments, and further took into account the marketing policy/inclination of the Applicant, because the starting point is the rental actually achieved by the relevant units in the SB (subject building) before the road works began”.

48. To conclude, after comparing the 3 valuation approaches (i.e. the 2 approaches of the parties and the third valuation methodology outlined above), I find that the third approach, i.e., the rental index approach best suits the present case.  That is, in assessing the FMR of office floors/unit at each relevant date of valuation, it will just be necessary to adopt,as the reference rent, the rent fetched in the actual tenancy of each floor/unit (or in the rare occasion of its absence, that of a similar floor/unit) in the recent past before the roadwork commenced and adjust that by the RVD’s Office Rental Index.  The choice of the suitable set of index, i.e., whether the Grade A or the Grade B Office Rental Index should be used, will be discussed later below.

Revised valuations of the parties assuming an alternative methodology

49. During the hearing, I have invited the parties to provide alternative valuations using the third valuation approach as outlined above but on the basis of either RVD’s Grade A Central Office Rental Index or Grade B Office Index.  I am indebted to the parties’ kind efforts in providing such revised valuations, which are detailed in various schedules attached to the counsel’s Final Written Submissions.  In particular, although Mr. Lau for the Applicant all along considered that the subject building, Fung House, should be classified as a Grade A office building, he prepared the alternative valuations on the basis of either RVD’s Grade A Central Office Rental Index or RVD’s Grade B Office Rental Index (which are respectively detailed in Attachments T5 and T6 of the Final Written Submission of the counsel for the Applicant).

50. I summarize below the revised valuations of the parties’ assuming my adopted valuation methodology for the assessment of the FMR of the office floors/unit: -

51. The above summary table shows that, assuming the RVD’s Grade A Central Office Rental Index is used for projection, the total loss estimated by the Applicant for the office portion will be about $10,260,000 (i.e. Attachment T5) whilst the total loss similarly estimated by the Applicant will be about $9,120,000 if the RVD’s Grade B Office Rental Index is used (i.e. Attachment T6).  The Respondent only carried out an estimate using the RVD’s Grade B Office Rental Index.  It shows that the total estimated compensation is about $2,770,000. 

52. However, in the Final Written Submission, counsel for the Respondent submitted that if the Tribunal considers it to be appropriate, the Respondent would not seriously dispute the following compensation to be awarded to the Applicant: -

For basement-			$412,104
For ground floor-			$0
For upper floor offices, loss due to
(i)	claims other than vacancy	$1,260,058
(ii)	vacancy claims	$1,505,265
(iii)	additional compensation if no rent review clause condonable	$116,903
(iv)	additional compensation due to “commercial pressure” (for tenancies before roadwork and reduction within the term)	$442,080
		---------------
	Sub-total of U/F		$3,324,306
			---------------
Total compensation			$3,736,410

Which RVD’s rental index should be adopted in adjusting for time?

53. Therefore, before we could start estimating the losses to the Applicant, the owner of the upper floors/unit, it would be necessary to determine which RVD’s rental index is appropriate for the valuation of the FMR of these office space.

54. Mr. Lau gave evidence that it would be more appropriate to use RVD’s Grade A Office Rental Index for the subject building.  He said that the grouping of rental index of Grade B office alongside the supply under the heading “in Central” in RVD’s tables was misleading.  In fact, the rental index for Grade B office from RVD reflected the overall Grade B office market in Hong Kong rather than specifically for the Central district.  He further added that during the affected period, the building was much newer than the date the Tribunal made the inspection.  Also, the building resembled more to Grade A office buildings in Central than Grade B office buildings in Hong Kong as a whole.  For these reasons, he opined that the performance of rental market for Fung House should be more comparable to RVD’s Grade A Central Office Rental Index than RVD’s Grade B Office Rental Index.

55. Mr. Pendleton wrote in his report (Bundle B2, page 404) that whilst he accepted that “Grade A and Grade B office rentals generally move in the same direction and the order of magnitude of increases and decreases can often be similar”, he opined that Mr. Lau had wrongly adopted RVD’s Rental Indices for Grade A offices in Core District (Sheung Wan/Central) for time adjustment purpose.  He said that by reference to the RVD’s definition, Grade A office should be “modern with high quality finishes; flexible layout; large floor plates…effective central air condition…parking facilities normally available”. 

56. Having considered the differences between Grade A and Grade B offices and the evidence adduced by the experts for the parties, I am of the view that offices in Fung House is closer to Grade B offices than Grade A offices, according to the RVD’s definition.  As such, the time adjustment for the rental values of offices in Fung House in the present exercise should be based on RVD’s Grade A Office Rental Index instead of Grade B Index.

Period(s) affected by the roadwork

57. The Applicant submitted that the affected period should be from 20 February 1995 to 6 November 1998.  Mr. Lau gave evidence to support this by reference to a photo taken on 21 July 1998 (see Exhibit A8), which clearly showed that the use and enjoyment of the upper floor office of Fung House had been adversely affected by the reinstatement of the canopy of the building, which took place for over 4 months.  Further, the Applicant pointed out that the steel prop and formworks erected for the roadwork, which had extended to the full width of the pavement outside Fung House nearly covered up the entire entrance to the building.  Therefore, the Applicant submitted that it would be unreasonable to suggest that the upper floors were not affected during the relevant period.

58. The Respondent agreed that the roadwork had started on 20 February 2005 but it should end on two different dates: (i) 30 June 1998 for the upper floors and (ii) 6 November 1998 for the ground floor and the basement floor.  The Respondent explained that following the completion of the construction works along the carriageway of Connaught Road Central on 18 June 1998, only the ground and basement floors but not the upper floors were affected by the remaining work, being the canopy reinstatement. 

59. Having considered all the evidence, I agree with the Applicant that the whole of Fung House, including the upper floors, the ground & basement floors were affected by the roadwork for the entire period from 20 February 2005 to 6 November 1998.

Losses due to the Granting of Concessions to existing tenants and re-letting

60. The losses under this head could be divided into 2 different categories: (i) reduction in rental during the unexpired terms of the existing tenancies (“concession during term”) and (ii) at renewal (“concession at renewal”).  There was dispute between the parties as to whether these concessions granted to the tenants by the Applicant should be allowed as compensation to the Applicant.  In addition, there was dispute that whether reduced rent at re-letting of certain floors/unit should be compensated.  We will consider these in details below.

The need to insert a rent review clause in new tenancy?

61. The parties disputed as to whether the Applicant should have included a rent review clause in those tenancies made after 22 April 1996 as they had been informed by a letter of the even date from the Lands Department that the roadwork would be tentatively completed in early 1998. 

Losses due to vacancy of floors/unit

62. The losses under this head could be divided into 2 different categories: (i) vacancy due to natural expiry of the existing tenancy and (ii) vacancy due to early termination.  There was dispute as to whether some of the losses under this head should be allowed.  We will consider these in details below under the heading of “Loss for 22/F”.

Estimation of compensation for the office floors/unit

63. I have decided above that the best approach to tackle the valuation problems for office portions in the present case is to adopt the third alternative, the rental index approach, instead of either the approach of Mr. Au Yeung / Mr. Pendleton or that of Mr. Lau.  Therefore, there is no need to decide on the best comparables buildings for all the office floors/unit in Fung House.

64. Basically, in the rental index approach, the actual rents paid by the tenants to the Applicant under the tenancies prior to the roadwork are used as the reference rents.  By adjusting the said actual rents for the differences in time, using the RVD’s Grade B Office Rental Index, the FMR of various office floors/unit at different dates of tenancies were determined.  These are then compared with the actual rents passing under the existing terms (when these were reductions granted by the Applicants), the renewals or the new lettings in arriving at the loss to the Applicant.  Since different floors/unit have different rental history, it is necessary to consider in details the tenancies of each floor/unit that fell within the affected period before the losses suffered by the Applicant could be determined.

Estimated FMR of various office floors/unit at different dates

65. Before working out in details the valuation of the rental losses and hence the compensation to the Applicant for various office floors/unit, I first extract from the Attachment T6 ofthe Final Written Submission of the Applicant’s counsel (compiled by Mr. Lau for the Applicant, and confirmed by counsel for the Respondent that these had been checked to be in order) the assessed FMR of each floor/unit at various dates.  Although the experts could not agree on the area figures for each floor/unit, I have adopted Mr. Lau’s figures since they were the same as those used by the Applicant in the leasing of the Properties.  In any event, counsel for both parties agree that it makes very little difference whether the set of areas used by either expert is used.  Mr. Lau’s assessed FMR using this methodology are summed up below: -

Floor	Valuation Date	Saleable Area (sq. ft.)	Indexed Market Rent i.e. Estimated FMR Per month ($)
1/F	1/9/1995 1/9/1997 1/1/1998	3,433 3,433 3,433	$120,668 $107,901 $109,411
2/F	1/8/1996	3,433	$133,347
3/F	1/3/1997 1/4/1997	3,433 3,433	$137,804 $141,726
4/F	1/2/1996 20/2/1997	1,972 1,972	$113,256 $91,948
6/F	22/9/1995 16/6/1996 1/10/1996	1,972 1,972 1,972	$118,404 $97,726 $98,871
7/F	1/2/1996 20/2/1997	1,972 1,972	$113,256 $92,516
8/F	1/4/1997	1,972	$81,297
9/F	1/9/1995 1/9/1997	1,972 1,972	$84,952 $75,964
10/F	1/3/1996 1/3/1996 1/2/1997	1,972 1,972 1,972	$88,532 $88,532 $87,485
12/F	5/2/1997	1,972	$98,925
13/F Unit 1301	1/2/1996 1/10/1996	1,072 1,072	$71,040 $56,788
14/F	17/2/1997	1,972	$98,925
16/F	11/12/1995 11/12/1995	1,972 1,972	$88,766 $88,766
17/F	22/9/1995 22/9/1996	1,972 1,972	$97,694 $83,524
18/F	1/3/1995 1/9/1995 1/9/1997 1/9/1997 1/9/1997	1,972 1,972 1,972 1,972 1,972	$84,817 $77,945 $69,698 $69,698 $69,698
20/F	1/4/1994 1/7/1996	1,972 1,972	$118,404 $100,699
22/F	26/4/1995	1,514	$88,480

66. I will directly use some of the above indexed market rents for office floors/unit as the assessed FMR without going through the indices myself again in the later part of this Judgment below.     

Differences in the assessment of the losses for office space

67. Counsel for the Respondent summed up in the Attachment A to his Final Written Submission the workings of the Respondent’s assessments of compensation amounts for each office floor/unit.  This is similar to what Mr. Lau for the Applicant has done (see Attachment T6 of the written submission from the Respondent’s Counsel).  For ease of comparison, the respective losses and hence the compensation amounts assessed by the Applicant and the Respondent in respect of the office floors/unit are summed up below: -

Tribunal’s computations of compensation for office floors/unit

68. The compensation amount for all the office floors/unit are assessed below.

Loss for 1/F

69. The Applicant assessed the loss at $0 and the Respondent accepted nil loss too(see Attachment T6 and Attachment A respectively, same below for loss for other floors/unit).

70. Based on the rental index approach, the assessed FMR of the 1/F at various valuation dates were less than the actual rents in those various periods, with the exception of the rent for the term from 1/1/1996 to 31/12/1996 where there was concession of reduced rental granted to the tenant due to the affection of the roadwork.  However, I agree with the Respondent that this concession should not be allowed because as the tenancy commenced in 9/1995, both the landlord and the tenant should be fully aware of the impact of the roadwork by mid 1995 when the tenancy was negotiated.  Therefore, I find that the Applicant as the landlord has no obligation to give concession of reduced rent to the tenant.  Not only that it was not a legal obligation on the part of the Applicant to reduce rent, the Applicant did not even have the commercial pressure to give the concession since the tenant should have been aware of the roadwork before taking up the tenancy.

71. Therefore, no compensation should be given in respect of the 1/F as there was no loss suffered by the Applicant that could directly be attributable to the roadwork.  The same conclusion will be drawn in respect of the 20/F where the tenancy was also made when the roadwork should have been known to the tenant.  For other reductions in rent during the existing terms (i.e., for claims for losses for 4/F, 7/F and Unit 1301 of 13/F), although it was also strictly speaking not a legal obligation on the part of the Applicant as the landlord to agree to such reduction, I accept the Applicant’s submission that there was much commercial pressure at that time.  It was reasonable in the circumstances for the Applicant to accede to these tenants’ requests as their tenancies were concluded in ignorance of the impending roadwork.  Also, it was reasonable for the Applicant to grant such concessions in order to avoid a large number of tenants from ending the tenancies pre-maturely, before the expiration of the then existing tenancies, having regard to the impacts these might cause to the new lettings in Fung House, the damage to the reputation of the landlord and the high costs of legal proceedings to recover damages from defaulting tenants.

72. All in all, I find that the loss for 1/F is nil.

Loss for 2/F

73. The Applicant assessed the loss at $3,912 whilst the Respondent assessed nil loss.  The minor difference is due to the use of Grade B Office Rental Index by the Applicant in Attachment T6, as against the use of Grade A Office Rental Index by the Respondent in Attachment A.

74. I adopt the Applicant’s assessment in Attachment A where the indexed market rent was computed to be $133,347, higher than the actual rent of $133,184 for the term of 2 years from 1/8/1996: -

	Indexed market rent	$133,347
Less	Actual rent	$133,184
	Difference	$163
		---------
X	Term (in no. of months)	24
		---------
	Loss	$3,912

75. I agree with the Applicant that the loss allowed for 2/F should be $3,912.

Loss for 3/F

76. The Applicant assessed the loss as $475,169, including vacancy loss of 1 month’s rent of 3/1997 whilst the Respondent assessed the loss as 18 months’ rental loss for the term from 1/4/1997, in the sum of $312,140.

77. For this floor, the actual market rental evidence “pre roadwork” was not available.  The Applicant used the 2/F’s rental at August 1994 as the base market rental for indexation but the Respondent used the rental of 4/F, another floor leased by the same tenant as the base market rental.  I prefer to use the Respondent’s adopted base rental of 4/F as it was only 2 months’ away from the valuation date in the present case. 

78. Hence, I adopt the computation of the market rental shown in the Respondent’s Attachment A with the exception that I have to use the Grade B Office Rental Index to index the effective rent arrived by the Respondent in order to arrive at the indexed FMR of 3/F at the relevant date of 1/4/1997.  Based on the tenant’s FMR for 4/F of $37 psf (gross basis) and adjusting for the 45 days’ rent free period, the effective rent of the Applicant’s asking rent equals to $37 x 22.5 / 24 x 4,162 sq. ft. (gross), or $144,369.  Since the rental index for January 1997 (the date of the offer letter at Bundle B2, page 112 for 4/F) and March 1997 (the date of the offer letter at Bundle B2, page 105 for 3/F) are 155.1 and 158.1 respectively, the indexed market rent for 3/F equals to $144,369 x 158.1 / 155.1, or $147,161.

79. I accept the Respondent’s view that it would be reasonable for the landlord to state in the letter of concession that any such concession would only last for the duration of the roadwork.  Therefore, although the term from 1/4/1997 was for 2 years, I only allow the loss claim for 20 months as the last 4 months were in respect of the period after the completion of the roadwork (“post roadwork”) when the tenant ought to have reverted back to the original rent reserved for the existing tenancy should the Applicant had inserted an appropriate “rent review clause” to that effect when granting the concession to reduce rent even during the continuation of an existing tenancy.  The last 4 months “post roadwork” would not be compensated: -

	Indexed market rent	$147,161
Less	Actual rent	$128,762
		---------
	Difference	$18,399
X	Term (in no. of months)	20
		--------
	Loss	$367,980

80. Also, the vacancy claim would not be computed under the heading of 3/F but would be computed, together with vacancy claims of all other floors/unit under the heading of loss for 22/F.  Summing up, the loss I allow for 3/F, excluding the vacancy loss to be dealt with under 22/F is $367,980.

Loss for 4/F

81. The Applicant assessed the loss as $426,319 whilst the Respondent assessed the loss as $326,257 including (i) the reduction in rent of $123,552 during the existing term from 1/2/1996 and (ii) $202,705 being the total difference between the indexed market rent and the actual rent for the term from 20/2/1996 but excluding the difference in the 3 months “post roadwork”. 

82. For the term from 1/2/1996 to 19/2/1997, a total of 12.7 months, I agree with the Applicant that the loss allowed should be the reduction in rent for the 12.7 months, instead of the 12 months as adopted by the Respondent.  The loss allowed for is $102,960 x 10% reduction x 12.7 months, or $130,759.

83. For the term from 20/2/1997, I accept the Respondent’s view that it would be reasonable for the landlord to state in the letter of concession that any such concession would only last for the duration of the roadwork (i.e. with the insertion of a rent review clause).  Therefore, although the term from 20/2/1997 was for 2 years, I only allow the loss claim for 21 months as the last 3 months were “post roadwork” and should not be compensated. 

84. The Respondent submitted that even if the parties and the Tribunal could use the rental index approach to estimate the indexed market rent for this floor, and similarly for other floors/unit, the Tribunal should adopt the Applicant’s actual “asking rent” at the relevant dates if it was found that the Applicant’s actual “asking rent” was lower than the indexed market rent.

85. The Respondent said that from the evidence of the Applicant’s factual witness Mr. Cheuk and the documentary evidence adduced, and on a fair and natural reading/interpretation of the relevant letters, the actual “asking rent” (i.e. the “current market rate” as stated in the Applicant’s offer letter must mean the rate without taking into account of the roadwork.  Also, the Respondent submitted, “Mr. Cheuk’s evidence was that there was in fact a “price list” for all the unit in the SB (Subject Building), which would be updated from time to time.  If these were available, they would be the best evidence of what the Applicant’s asking price for individual units were at the relevant times.  Unfortunately, these were not available”.  The Applicant disagreed with the interpretation of the meaning of the “current market rate” in these offer letters.  After having considered thoroughly the evidence and the possible different interpretation of the term “current market rate” as appeared in these offer letters, I agree with the submission of the Respondent.  Therefore, I decide that for this floor and other similar floors when the Applicant’s “asking rent” was lower than the indexed market rent, the former should be used in the computation of the loss to the Applicant.  The computation is as follows: - 

	Applicant’s asking rent	$89,286
Less	Actual rent	$79,633
		---------
	Difference	$9,653
X	Term (in no. of months)	21
		---------
	Loss	$202,713

86. Summing up, I allow for the loss for 4/F the total of $130,759 and $202,713, which equals to $333,472.

Loss for 6/F

87. The Applicant assessed the loss for 6/F as $1,944,143 consisting of (i) vacancy losses of 7.8 months from 22/9/1995 (due to early surrender by the tenant) and 3.5 months from 16/6/1996 in the sums of $923,551 and $342,041 respectively, (ii) the difference in indexed rent and market rent, in the total sum of $504,168 for 24 months from 1/10/1996 and (iii) the claims for management fees and rates in the sums of $126,527 and $47,856 respectively.  The Respondent assessed the loss for the term of 24 months from 1/10/1996 to be $226,512 but assessed the vacancy loss separately, as a charge to the loss under 22/F.

88. Similar to the case for 4/F, the Respondent’s estimate of the indexed market rent for 6/F is capped by the Applicant’s asking rent at the time.  I agree to the Respondent’s view on this and the Respondent’s valuation, which is as follows: 

	Applicant’s asking rent	$87,302
Less	Actual rent	$77,864
		---------
	Difference	$9,438
X	Term (in no. of months)	24
		-----------
	Loss	$226,512

89. I agree with the Respondent that there is no basis for accepting the total loss of rent for 7.8 months from 22/9/1995 due to the early surrender by the tenant per se.  The loss due to the early surrender, if considered to be part of the vacancy loss of the office portions in Fung House, as well as the other vacancy loss for 3.5 months from 16/6/1996 will be considered in one go under the heading of claim for 22/F.

90. Summing up, the loss I allow for 6/F, excluding the vacancy loss, is $226,512

Loss for 7/F

91. The Applicant assessed the loss as $482,165, being (i) the reduction of rent within the term from 1/2/1996 in the sum of $172,973 and (ii) the reduction of rent within the term from 20/2/1997 in the sum of $309,192.  On the other hand, the Respondent assessed the loss for the term from 1/2/1996 in the sum of $185,328 and the loss for the term from 20/2/1997 in the sum of $178,621 giving a total of $363,949.

92. For the term from 1/2/1996, for the reduction of rent within the existing term, I agree with both parties that this should be allowed.  The Applicant allowed the loss for 11.2 months but the Respondent allowed for 12 months.  Therefore, based on the Respondent’s computation at Attachment A which is more beneficial to the Applicant, the loss is assessed as follows: -

	Rent reserved	$113,256
Less	Actual reduced rent	$97,812
		----------
	Difference	$15,444
X	Term (in no. of months)	12
		----------
	Loss	$185,328

93. For the term from 20/2/1997, I agree with the Respondent’s view that it would be reasonable for the landlord to state in the letter of concession that any such concession would only last for the duration of the roadwork (i.e. with the inserted of the “rent review clause”).  Therefore, although the term from 20/2/1997 was for 2 years, I only allow the loss claim for 21 months as the last 3 months were “post roadwork” and should not be compensated.  There was a difference in the indexed market rent as computed by the Applicant in Attachment T6 and the Respondent in the Attachment A, I adopt the figure arrived at by the Applicant, i.e. $92,516 as it should have been based on the Grade B Office Rental Index.

	Indexed market rent	$92,516
Less	Actual rent	$79,633
		---------
	Difference	$12,883
X	Term (in no. of months)	21
		---------
	Loss	$270,543

94. Summing up, the total loss I allow for 7/F is the sum of $185,328 and $270,543, or $455,871.

Loss for 8/F

95. Both the Applicant and the Respondent assessed that there should be nil loss for 8/F as the actual rent from 1/4/1997 was higher than the indexed market rent.  I agree.

Loss for 9/F

96. Similarly, I agree with both parties that there should be nil loss for 9/F as the actual rents for the terms from 1/9/1995 and 1/9/1997 are both higher than the respective indexed market rents.

Loss for 10/F

97. The Applicant assessed the loss as $712,040, including (i) the loss of rent under the existing term from 1/3/1996 in the sum of $23,694, (ii) the early surrender from the tenant for the term from 1/3/1996 in the sum of $389,541, being the vacancy loss for 4.4 months, (iii) the loss of rent under the term from 1/2/1997 in the sum of $230,904 and (iv) the management fee and rates in the sums of $49,267 and $18,634 respectively.  The Respondent said that the vacancy loss would be dealt with separately under the head for 22/F.  Otherwise, the Respondent assessed the losses for the existing term from 1/12/1995 and the term from 1/3/1996 in the sums of $20,592 and $75,690 respectively.  For the term from 1/2/1997, the Respondent submitted that according to Mr. Cheuk’s evidence, there was no offer letter because A had got what they asked for.  Besides, no document whatsoever about the new tenancy was exhibited.  Therefore, there should not be any compensation in respect of the rent under the term from 1/2/1997.  My findings for the rents under the various terms are as follows.

98. For the term from 1/12/1995, I adopt the computation of the Respondent although it was not set out in the Attachment T6 of the Applicant.  This shows a loss of $20,592.

99. For the term from 1/3/1996, I adopt the computation of the Applicant as it was based on the RVD’s Rental Index for Grade B Offices, as follows: -

	Indexed market rent	$88,532
Less	Actual rent	$84,942
		---------
	Difference	$3,590
X	Term (in no. of months)	6.6
		---------
	Loss	$23,694

100. I agree with the Respondent that there should not be any compensation for the term from 1/2/1997.  As for the early surrender and the resulting loss due to vacancy of the floor, this will be dealt with under the heading of vacancy loss when I consider the loss for the 22/F.

101. Summing up, I find that the loss for 10/F, apart from the vacancy loss, which will be dealt with under 22/F, is the sum of $20,592 and $23,694, or $44,286.

Loss for 12/F

102. The Applicant assessed the loss as $361,320, being the loss in rent for 24 months for the term from 5/2/1997 whilst the Respondent assessed the loss as the one month’s rebate of $87,516, based on the evidence of Mr. Cheuk.

103. After going through the relevant documents adduced and the Transcript, I agree with the Respondent’s submission that the actual rent achieved was in fact the market rent and that the only concession granted was the one month’s rebate.  Although I have decided in the present exercise to use the rental index approach to estimate the indexed market rent (where there is a need) it does not follow that compensation will be given regardless of the evidence adduced by the Applicant.  One must bear in mind that the estimation of the FMR, regardless of the methodology, is not an exact science.  If the witness of the Applicant confirmed that what was offered and accepted was the market rent at that time, there is no reason that the Applicant should be compensated for the difference between the indexed market rent and the actual rent.  Therefore, I decide, as submitted by the Respondent, not to award any other compensation to the Applicant apart from the one-month rebate as stated in Mr. Cheuk’s evidence.  The loss to the Applicant is determined to be $87,516

Loss for 13/F Unit 1301

104. The Applicant assessed the loss for Unit 1301 at $123,058 whilst the Respondent assessed nil loss.  The Respondent submitted that this case was similar to 4/F and 7/F as far as reduction within the existing term from 1/2/1996 (after the commencement of the roadwork in December 1994) was concerned.  For the term from 1/10/1996, the Respondent submitted that no document was exhibited by the Applicant.  Also, since it was Mr. Cheuk’s evidence that there was no offer letter because they got what they wanted, there should not be any compensation for the term from 1/10/996.

105. I have already stated under the head “Loss for 1/F” my reasons for rejecting the claim for 1/F and 20/F but accepting the claims for other reductions within the existing terms (i.e. 4/F, 7/F and Unit 1301) when the existing terms commenced before the commencement of the roadwork.  It also applies here.  I note that the Applicant allowed for the loss for 8 months whist the Respondent 9 months.  Therefore, I allow for the reduction of rent from 1/2/1996 in the total sum of $133,200 [(i.e. Indexed Market Rent of $71,040 – Actual Rent of $56,240) x 9].  As for the term from 1/10/1996, I agree with the Respondent and do not find that any compensation should be given.  All in all, I decide the loss for 13/F in the sum of $133,200.

Loss for 14/F

106. The Applicant assessed the loss for 14/F at $361,320 whilst the Respondent assessed the loss at $87,516.

107. The tenant for this floor was the same as 12/F.  The same scenario applies to this floor as for 12/F.  For the same reason as for 12/F, I decide to determine the loss at $87,516.

Loss for 16/F

108. The Applicant assessed nil loss for 16/F as the actual rents were higher than the indexed market rents.  The Respondent submitted that as there was no mention of discount for roadwork for 16/F, there may be problems with the tenant’s business and in any event, the loss was not caused by the roadwork.  I agree and determine that there should be nil loss for 16/F.

Loss for 17/F

109. Similarly, the Applicant assessed nil loss for 17/F as the actual rents were higher than the indexed market rents.  Similarly, the Respondent submitted that for the term from 22/9/1995, there should be no loss as the actual rent was higher than the indexed market rent.  However, for the term from 22/9/1996, the Respondent submitted during the Final Submission that the loss should be assessed as follows: -

	Indexed market rent	$91,017
Less	Actual rent	$90,090
		---------
	Difference	$927
X	Term (in no. of months)	24
		---------
	Loss	$22,248

110. Although this loss is higher than the nil loss assessed by the Applicant, this may be because the Respondent used the RVD’s Grade A Index in his computation whilst the Applicants used the Grade B Index.  To be consistent with the other assessments in the present case, I therefore decide not to award any loss for 17/F.

Loss for 18/F

111. The Applicant assessed the loss for 18/F in the total sum of $107,442 all being vacancy loss because for the rents under the terms, the Applicant’s assessments showed that the indexed rents were lower than the actual rents.  On the other hand, the Respondent assessed the loss in the sum of $46,518.

112. Since the vacancy loss will be dealt with under the head for 22/F, and that the Applicant’s computation of the indexed rents should be preferred to the Respondent’s as the former was based on the Grade B Index, I decide not to award any loss for 18/F.

Loss for 20/F

113. The Applicant assessed the loss at $1,231,017 including (i) the vacancy loss of $906,291, (ii) the loss due to the reduction of rent within the existing term, in the sum of $184,040 and (iii) the loss of management fee and rates in the sums of $102,571 and $38,115 respectively.  The Respondent submitted that the vacancy loss should be dealt with under the head for 22/F.  As for the reduction of the rent within the existing term, the Respondent submitted that this floor was similar to the case of 1/F and the claimed loss should not be allowed.

114. For reasons stated under the head “Loss for 1/F”, I agree with the Respondent that the reduction of rent within the existing term (from 1/4/1994, prior to the commencement of the roadwork) should not be allowed as compensation.  Therefore, I decide that the loss for 20/F, apart from vacancy loss which will be dealt with under 22/F, is nil.

Loss for 22/F

115. The Applicant claimed the loss of $2,892,953 for 22/F in the form of vacancy loss (27.8 months of rent at $88,480 per month for the period from 26/4/1995).  On the other hand, the Respondent submitted that this vacancy claim should not be considered in isolation but should be considered in the light of the total vacancy claim for all the Properties owned by the Applicant.

116. The Respondent submitted in the Final Written Submission that it would not be correct to award the compensation to the Applicant for all the vacancy losses for various floors/unit without having regard to the normal vacancy of Fung House before and after the roadwork and the average vacancy level of similar office buildings in general.  Also, the Respondent submitted that it seriously objected to the award of compensation for those floors/unit where the existing tenants vacated the premises without completing the original terms of the existing tenancies on the sole ground that there was roadwork affecting the tenanted office floors/unit.  I agree to both of these submissions.  I cannot agree with the Applicant’s submission that Fung House could always actually achieve a very low to nil vacancy rate.  It is against the common sense of property professionals and this Tribunal.  In fact, as was pointed to Mr. Cheuk by the Respondent, a landlord could achieve a higher occupancy rate (and therefore lower vacancy) than what was prevailing in the market by offering a rent that was slightly below market, especially to new tenants.  The Respondent suggested that the vacancy figures in Exhibit A5 seemed to have confirmed that “the Applicant was pursuing a marketing policy of maximizing occupancy.  This can only be achieved at the expense of offering rentals that were slightly below the prevailing FMR.”  

117. Counsel for the Respondent set out in his written submission the various vacancy rates of Fung House (as shown in Exhibit A5) and those reported by RVD in respect of Grade A and Grade B office buildings in Central in the RVD’s Hong Kong Property Review and Exhibit R1.  He submitted that “in the absence of road works, one may assume that the SB (Subject Building) would have achieved the same performance vis-à-vis the Grade A or Grade B office buildings generally”.  He computed and estimated that regardless of whether Grade A or Grade B indices were used, it would be reasonable to assume that, had there been no roadwork, Fung House would still have sustained a natural vacancy of 5%. 

118. Using his estimated natural vacancy of 5% as a starting point, counsel for the Respondent continued to estimate the vacancy losses that should be allowed for 22/F as well as other office portions of the Properties of the Applicant which were affected by the roadwork, as follows (reproduced in the next 3 paragraphs): -

“By reference to exhibit “R1”, the number of sf-month on offer during the period is 1,681,254.  Applying the figure of 5.0%, this means that 84,062 sf-month would not have been let out as a result of natural vacancy, even without road works.  The actual vacancy figure was 109,695 sf-month.  The additional vacancy that may be attributed to the road works is therefore the difference, or 25,633 sf-month.”

“Taking the view most favourable to the Applicant, it may be assumed that the whole of this 25,633 sf-month was vacancy for 22/F (because this floor would attract the highest market rental).  This translates into 16.93 months of rental (25,633/1,514), say 17 months”.

“In other words, compensation for additional vacancy attributable to the roadwork may be assessed as equivalent to 17 months of rental for the 22/F.  As the attached computation shows, this translates into a claim of $1,420,945.”

119. The Respondent submitted that in addition to the above-assessed overall vacancy loss of $1,420,945, the Applicant should also be entitled to claim for management fees and rates for such period of vacancy, which was computed to be $277,627.

120. However, the Respondent further submitted that it would be necessary to deduct from the estimated overall vacancy loss the following sums: (i) the forfeited deposit of $77,220 in respect of the 18/F and (ii) an unspecified amount ranging from 11 days to 2 months and 11 days in respect of 10/F (based on the evidence of Mr. Cheuk).  The Respondent assumed the average of the two periods of time and estimated that the deposit for 41 days had been forfeited in respect of 10/F.  The forfeited amount was estimated to be $84,942 x 41/30, or $116,087.

121. Therefore, the Respondent computed that the total claim in respect of rental loss due to “additional vacancy” caused by the roadwork, after deducting the forfeited deposits for 18/F and 10/F, is $1,505,265 ($1,420,945 + $277,627 - $77,220 - $116,087).

122. Although the Applicant opposed the computation for overall vacancy loss as stated in the Respondent’s submission, it did not address the challenges to the validity of the claims for vacancy losses for various floors/unit despite of the opposition raised by the Respondent.  For instance, I am absolutely not satisfied that the vacancy loss for 22/F for the whole period of 27.8 months should be awarded.  I find that the Applicant has certainly failed to show that it has conducted reasonably to mitigate the loss in light of the vacancy for such a prolonged period of time.  I also find that the Applicant has in fact adduced no evidence (apart from the oral evidence of Mr. Cheuk) to substantiate its efforts to market the floor during the prolonged vacancy period.  I am not satisfied that the evidence adduced was sufficient in light of the prolonged period of vacancy and the large sum of claimed amount involved. 

123. In addition, I also find that the Applicant should not simply allow the tenants with legally binding tenancies to “walk away” and then claimed for compensation for vacancy from the Respondent.  One must bear in mind that even if the existing tenancy continued the occupation while the affected roadwork is continuing, the tenants were legally entitled to claim compensation against the Respondent.  So, there is no reason that the Tribunal should award all these claims for vacancies due to early surrender.  In addition, I do not agree that the Tribunal should award all the other claims for vacancies for various floors/unit without first addressing the issue of the natural vacancy of the building Fung House as a whole. 

124. In the circumstances, I find that the proposed computation made by the Respondent is fair and reasonable having regard to the claims for vacancies for the Properties in the present case.  I therefore allow to award compensation in the sum of $1,505,265 in respect of vacancy in 22/F and other floors/unit owned by the Applicant during the affected period.

Orders

125. Accordingly, I order that the Respondent do pay the Applicant compensation in the total sum of $3,657,634, the breakdown of which is as follows: -

Floor/unit	Compensation
Basement	$412,104
Ground	$0
1/F	$0
2/F	$3,912
3/F	$367,980
4/F	$333,472
6/F	$226,512
7/F	$455,871
8/F	$0
9/F	$0
10/F	$44,286
12/F	$87,516
13/F Unit 1301	$133,200
14/F	$87,516
16/F	$0
17/F	$0
18/F	$0
20/F	$0
22/F (and reflecting vacancy claims in respect the office floors/unit of the Properties and forfeiture of deposits for 10/F and 18/F)	$1,505,265
Total	$3,657,634

126. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Registrar, with liberty to apply for any other ancillary and consequential matters.