Strawberry Hill Development Ltd. v. Bank Austria Creditanstalt International AG.

LDNT48/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDNT No. 48 of 2000

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JUDGMENT

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Background:

1. The applicant is the tenant and the respondent the landlord of the subject premises known as House 36, Strawberry Hill, 8 Plunkett's Road, The Peak, Hong Kong. The existing tenancy was for a term of 2 years commencing from 21st March 1998 at a monthly rent of $143,000 per month, exclusive of rates and management charges. The applicant applied for a new tenancy under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. Both parties agreed that the new tenancy should be for a term of two years commencing from 21st March 2000 but they could not agree on the level of the prevailing market rent at the relevant date of 20th March 2000.

2. The subject premises is a house in a 3-storey "walk-down" style terraced house of reinforced framed concrete construction with a pitched tile roof completed in about 1976. The house includes the provision of a car parking space that can accommodate two cars. The house has southerly aspect facing towards Aberdeen but the view is obscured by the trees to its front. The house is in the Phase II of the development known as Strawberry Hill located off Plunkett's Road in the Peak district of Hong Kong Island. Phase I of the development is on the higher ground while the much larger Phase II is below. The development comprises two types of terraced houses, the "walk-up" style house with its main entrance on the ground floor and two other floors above while the "walk-down" style has access from the top main floor with two lower floors. The development comprises a wide range of recreational facilities including clubhouse, swimming pool, tennis court and children's playground.

3. It is common ground that the house has a saleable area of about 301.9 sq.m., based on the information provided by the Rating and Valuation Department. There is no garden for the subject premises.

4. The Applicant filed a valuation report (Exhibit A1) prepared by Mr. Ian R.C. Cullen, an expert surveyor who estimated the prevailing market rent of the subject premises as at 20th March 2000 at $108,000 per month, exclusive of rates and management fees. Mr. Cullen gave evidence and made certain minor amendments to his report, including the introduction of an additional comparable (House 11) brought to his attention by the Respondent and the addition of adjustments in respect of the factors of domestic appliances and the end of terrace effect for certain comparables. Mr. Cullen revised his estimate of the prevailing market rent of the subject premises to $106,000 per month. The Respondent called another valuation surveyor, Mr. Simon Lynch to give expert evidence. He filed a valuation report (Exhibit R1) in which he estimated the prevailing market value of the subject at $120,000 per month, on exclusive basis.

The Applicant's evidence

5. Mr. Cullen gave evidence that he had appeared before the Tribunal about two years ago in respect of the valuation of the same subject premises. At that time, he and the other party had conducted a joint inspection with the Tribunal. They inspected the subject premises and the other comparables. Other than that, Mr. Cullen said that he had inspected the subject premises and some comparable several times. In his opinion, the "walk-down" style houses built below ground level, including the subject premises are much inferior to the houses of more traditional design and built with windows on both sides. These should be categorised as two different house types with significant differences in values.

6. In Exhibit A1, Mr. Cullen analysed 4 comparables (House 25, House 37, House 29 , House 23). During the hearing, he explained the basis and the amounts of adjustments he adopted for these comparables. Mr. Cullen described the internal condition of the subject premises as to be not in the same state as the newly redecorated fresh letting premises. He followed the Tribunal's previous rulings and made a small adjustment of -3% to the new letting comparables to reflect the internal condition of the subject.

7. Mr. Cullen allowed a downward adjustment of 5% for the comparable houses (i.e. House 25, 29, 23 and 11) which were of traditional design. He gave adjustments of between 1% and -3% for the differences in the views of the comparables and the subject. He followed the Jones Lang La Salle Index for large and luxury properties in making the time adjustments. He allowed the adjustment of -1% for domestic appliances for both House 37 and House 11, and the adjustment of -3% for end of terrace effect for House 37. He also set out the analysis of House 11, which letting information was brought to his attention by Mr. Lynch.

8. In the final analysis, he arrived at the following adjusted unit rental rates for the comparables and the corresponding weighing factors:

Mr. Cullen gave the highest weighing to House 37 as this was the only comparable built on the hillside, similar to the subject premises. As such, it was considered to be the best comparable. He calculated that based solely on this comparable, the prevailing market rent of the subject would be the region of $112,000.

9. Mr. Cullen dismissed suggestions by the Respondent and Mr. Lynch that House 29 should be disregarded for being out of line with the rental level of the other comparables. Similarly, he disagreed that House 25 should be rejected because the tenant had business relation with the landlord and the tenant had spent considerable sum in renovating the house prior to the leasing. He suggested that since the landlord owned a number of properties in the development, it might actually be to the landlord's advantage if a new letting with a related party was to be transacted at a level higher than what would otherwise be market level.

10. Based on the above, Mr. Cullen estimated the appropriate unit rate for the subject premises to be about $350 per sq.m. Applying this to the saleable area of the subject premises of 301.9 sq.m. gave a figure of $105,665, rounded to $106,000.

The Respondent's evidence

11. Mr. Lau Yun Ho of Harriman Leasing, the leasing agent of the Respondent gave evidence. He produced the quotation document for the renovation work of House 25 undertaken by the tenant at the commencement of the lease. He added that the tenant of House 25 had business relation with the Respondent. The tenant was not a subsidiary of the Respondent but was the agent for some trading products owned by the Respondent group of companies.

12. Mr. Lynch agreed that the best comparables should be those within the Strawberry Hill development. Mr. Lynch analysed 11 rental comparables in his valuation report. He made various adjustments of time, size, facilities, view, natural lighting, domestic appliances, house type and car parks to the comparables. He found that after adjusting the rents, there was a considerably wide range of unit rents per square metre which range from $313 and $488 (Exhibit R1, pages 48 and 49). He considered his comparable No. 5, 7 and 9 to be out of line as a result of which he disregarded these lettings. He further added that of the remaining comparables, he preferred those within Strawberry Hill since these are largely identical to the subject premises. These provide unit rents of between $371 to $422 per sq.m. , translating to rents of $112,000 to $127,000 per month.

13. Mr. Lynch noted that Mr. Cullen and he had allowed similar adjustments for the comparables, with the exception of the design/lighting factor where their differences were more pronounced. The main difference between the two experts was due to the adoption of different comparables. In particular, Mr. Lynch opined that House 29's actual rental of $88,000 was very low, when compared with the actual rentals of the other comparables which ranged between $110,000 and $141,000. Even after the necessary adjustments, the adjusted rental of House 29 was still out of line with the rest. Mr. Lynch suggested that for House 29, the tenant directly approached the landlord at the time of renewal. The landlord made a surprisingly low offer to which the tenant accepted. Hence, this transaction should be disregarded for being out of line with the general level of rental values in the market. As for House 25, Mr. Lynch considered the rental figure to be not reliable as it was a related transaction. Hence, Mr. Lynch suggested that the Tribunal should adopt the remaining three Strawberry Hill transactions in arriving at the prevailing market rent for the subject premises. Using the adjusted unit rental rates of House 37, 23 and 11, he arrived at estimated rents of $112,000, $121,000 and $127,000 respectively, or an average figure of $120,000, for the subject premises.

14. In conclusion, Mr. Lynch gave the opinion that the subject premises would lease at $120,000 per month or $397 per sq.m. He crossed check this by indexation of the previous rent assessed by the Tribunal about two years ago. He was satisfied that his valuation was in line with the result of the indexation.

Final submission by the Respondent

15. The Respondent asked the Tribunal to accept Mr. Lynch's estimate of $120,000 as to be the prevailing market rent for the subject. The Respondent submitted that they were also the owner of House No. 25. As the tenant of House No. 25 had business relationship with the Respondent and that the house was in a dilapidated state of repair at the time of leasing, the Respondent suggested that regard should not have had to this comparable.

16. The Respondent object the Applicant's request for the addition of a tenant's break clause in the new tenancy. The Respondent considered this to be unfair to the Respondent as there was not such a clause in the previous tenancy agreement. If the Tribunal were to grant a break clause, the Respondent asked that it should only be exercisable after one year and that the landlord should be given at least two or three months' prior notice.

Final submission by the Applicant

17. The Applicant submitted that Mr. Cullen's conclusion and approach be preferred. Mr. Cullen was more experienced in the valuation of the houses in this development. His valuation should be relied upon by the Tribunal.

Choice of the comparables by the Tribunal

18. In one of the earlier Part IV Tenancy cases decided before this Tribunal, Sentry Holdings (Asia) Ltd. v. Cali Enterprises Ltd. [1983-85] CPR p.140, the Tribunal held that

"where recent comparable lettings in the same property were available in sufficient numbers to enable an reasonable assessment to be made of the prevailing market rent, there was no need to rely on comparisons with premises in other buildings, save to the extent necessary to show that rents in the same property did not diverge sharply from the general market level. Save for this limited purpose, outside comparison would be necessary in such circumstances only if it was suggested that there were special factors which had influenced rents on the subject premises."

19. The above statement in quotation is in line with one of the established principles in adopting the direct comparison method of valuation. Although the above case refers to the valuation of a flat in a multi-storey building, the same principle applies for the valuation of a house.

20. In general, it is more subjective and difficult to adjust for differences between houses in different developments than to adjust for differences between houses in the same development.

21. In this application, the main difference between the two experts is in the choice of comparables, or whether certain comparables should be discarded. Having considered the evidence and the reasoning by the experts, the Tribunal accepts Mr. Lynch's request that House 29 be discarded. We agree with Mr. Cullen that House 37 is the best comparable. If the rent passing of House 37 is compared with the rent passing of House 29, we find that it is 34% than that of House 29. As such, we are satisfied that the rent passing of House 29 is out of line with the general level of rental values of similar houses in Strawberry Hill. In accordance with the established principle of valuation, such a rental such be disregarded as a comparable.

22. However, for House 25, we do not agree with the Respondent that because the tenant had a business relation with the landlord (Respondent), the rental must be disregarded. Also, we do not accept that all the works as shown in Exhibit R1 were works due to the state of disrepair of House 25. Therefore, we agree with the Applicant that this rental can be adopted as one of the comparables for the subject premises.

23. With regard to the total adjustments applied to the four comparables, House 25, House 37, House 23 and House 11, the experts had little difference between them. In the circumstances, we decide to adopt the total adjustments proposed by Mr. Cullen. However, in treating the value of the ancillary accommodation such as the garden area, we agree with Mr. Lynch to equate them to one tenth of the area of the house proper. Also, we accept Mr. Lynch's adjustment of $2,500 for House 23 which could only house one car parking space. On the above basis, the Tribunal's adopted figures are set out below:

Average of above four adjusted unit rate = $380.90

Valuation

24. Applying the adopted unit rate of $380.90 per sq. m. to the saleable area of the subject premises, 301.9 sq.m. gives a figure of $114,994. This we would round to $115,000. This is adopted as to be the prevailing market rent of the subject premises as at the relevant date of 20th March 2000.

Other Terms of the new tenancy

25. The new tenancy was for an agreed fixed term of two years, with the date of commencement of the tenancy to be 21st March 2000. The deposit shall be adjusted pro-rata in accordance with the newly assessed rent. There was agreement that the other terms of the new tenancy shall be the same as the previous tenancy. The only exception was that the Applicant asked for the addition of a break clause. After consideration and having regard to the normal clauses for a new tenancy of this type of premises, the Tribunal decides that a similar clause is justified. However, the break clause could only be exercisable by the tenant after at least one year from the commencement date of the new tenancy.

Orders

1. New Tenancy for 2 years from 21st March 2000;

2. New rent $115,000 per month (exclusive of rates and management charges); leave to respondent to pay applicant over-payment of rent (if any) within 1 month;

3. Deposit to be adjusted pro rata in accordance with the new rent; leave to respondent to pay applicant any adjustment within 1 month;

4. A break clause exercisable by the tenant after at least one year from the commencement date of the new tenancy, after giving at least two months' notice in writing to the landlord.

5. Other terms of the new tenancy same as in previous tenancy agreement.