Tioga Corporation Limited v. Gold Flight Investment Ltd.

LDNT379/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. 379 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 Unit C, 10th Floor and one car park of Celestial Garden, a residential development located at No. 5 Repulse Bay Road, Hong Kong ("the Premises"). The parties agreed that the Tribunal should grant a new tenancy for a term of two years commencing from 28 October 2000. The outstanding issue was the amount of the prevailing market rent (PMR) as at the relevant valuation date of 27 October 2000.

2. The Premises was subject to a tenancy agreement for a term of two years commencing from 28 October 1998 at a rent of $60,000 per month.

3. The Applicant was represented by Mr. Wenk, Guido Karl who gave evidence himself. The Respondent was represented by it's property manager, Mr. Yip Kin Shing who gave evidence. Also, the Respondent called for the evidence of a Chartered Surveyor, Mr. David W.I. Cheung of FPD Savills (Hong Kong) Limited, a firm of international property consultants to give evidence. The Applicant in the opening proposed that the PMR should be $62,000. This was reduced to $60,000 when the Applicant gave the final submission. On the other hand, the Respondent submitted that the PMR should be $73,000 as opined by the Respondent's expert surveyor.

The Applicant's case

4. The Applicant filed a schedule of reported rents dated 1 December 2000 (Exhibit A1) from the Rating & Valuation Department. Mr. Wenk claimed that only the rents of the comparable properties in that schedule should be relied upon and that the Respondent's additional comparables as revealed by the Respondent's expert in the hearing should not be relied upon by the Tribunal. He stated that the rents at Exhibit A1 supported his estimated figure of $60,000 per month. However, he did not actually show to the Tribunal how he would arrive at such a figure from the schedule of rents. With leave from the Tribunal, the Applicant filed another document (Exhibit A2) on 28 February 2001. In Exhibit A2, he compiled a large number of photocopies of newspaper cuttings of South China Morning Post regarding the listing of flats for rent in several residential developments, including Park View, Ruby Court, Repulse Bay Apartment, Trafalgar Court, Horizon Drive and Cavendish Heights. He also summarized his comments for the subject development and three other developments (Park View, Ruby Court and Repulse Bay Apartment) and the range of asking rents for these flats were summed up. In the final analysis, the Applicant concluded that with "reference to the marketing information from the South China Morning Post, around $60,000 is the market price (sic) of Unit C, 10th Floor and one covered car park, Celestial Garden, Repulse Bay Road, without considering the poor and unmaintained condition of this unit."

The Respondent's case

5. Mr. Cheung produced a valuation report (Exhibit R1) in which he analyzed a total of 8 comparables in the subject development. The first six comparables appeared in the Rating & Valuation Department's schedule (Exhibit A1) while the remaining two comparables, Comparable 7 and 8 were, according to Mr. Cheung, "2 more transacted comparable evidence.... obtained from our in-house agency department."

6. Mr. Cheung adjusted the comparables for the following factors in order to bring them in line with the Premises: floor level, view and orientation, covered/uncovered car park and time. He also considered the factors of new letting against renewal and the lease terms of the lettings. However, he came to the conclusion that no adjustment was required for these two factors. At the end, he calculated that the comparables had the following after-adjusted unit rates (per sq. m. of saleable area):

He concluded that "with the exception of Comparable 1, 7 & 8, all other comparables are in line with each other ranging from $395.42 p.s.m. to $404.88 p.s.m. Those unit rentals of these 5 comparables demonstrate very consistent pattern and show a maximum difference of only 2.39 %." Therefore, he put more weight to these 5 comparables and took the average figure of the after-adjusted unit rates of these 5 comparables as the appropriate unit rate for the valuation of the subject premises. He calculated this to be $401.246 per sq. m.. He multiplied this with the saleable area of the Premises, 182.3 sq. m., in order to arrive at an estimated PMR of $73,000 per month, exclusive of rates and management fee, for the Premises.

7. Mr. Cheung produced a location plan (Exhibit R5) and a number of photographs (Exhibit R2 to R4) showing the view of different types of flats in the subject development. He used these to justify his adjustment for the factor of view for the comparables.

8. During the hearing, Mr. Cheung gave evidence that he was aware of two more transactions after the completion and filing of his valuation report. He produced the details of these two transactions and their analysis in a document marked as Exhibit R6: Unit B on 9/F which was rented at $72,000 per month for a 2 year lease from 9 October 2000 and Unit B on 18/F which was rented at $76,000 per month for a similar 2 years lease from 7 October 2000. From the after adjusted rates of these two transactions, he estimated an appropriate unit rate of $419.91 per sq.m. Applying this to the saleable area of 182.3 sq.m. for the Premises gave an estimated rent of $76,000. However, Mr. Cheung said he did not intend to put too much weight on these two comparables. He did not actually explain why. In his evidence, he maintained that the PMR of the Premises should be $73,000, same as what he estimated in his valuation report.

The Tribunal's choice of the best comparables

9. In one of the earlier Part IV tenancy cases decided before the Lands Tribunal, Sentry Holdings (Asia) Ltd., v. Cali Enterprises Ltd. [1983-1985] CPR p.140, the Tribunal held that

"where recent comparable lettings in the same property were available in sufficient numbers to enable a 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."

10. The above quoted statement is in line with one of the established principles in adopting the direct comparison method of valuation. This is because it is obviously more subjective and difficult to adjust for the differences between buildings than to adjust for differences between flats in the same building.

11. In this application, the Applicant submitted that his estimate of the PMR of $60,000 was supported by the schedule of rents provided by the Rating & Valuation Department. He did not explain why. Instead, he set out in details the range of asking rents of flats in several of what he considered to be comparable developments in various parts of Hong Kong Island. Given the availability of sufficient number of comparables in the subject development, the Applicant's approach is not accepted by this Tribunal. There is no apparent reason that the Tribunal should compare the Premises, being a flat in Repulse Bay district, with flats in other parts of Hong Kong Island. In addition, it is plainly obvious to everybody in the market and the valuation profession that actual market transactions are always much more reliable than asking rents, whether they are offers or invitation to treat. The newspaper advertisements produced by the Applicant are lacking in details with no precise description of the actual unit for rent. The areas quoted are usually building areas or gross floor areas but not the saleable area as quoted for the Premises. Finally, the quoted rents in these classified advertisements are of very little value because for any development where vacant flats were advertised for rent, the range of asking rent is far too much to serve any useful purpose.

12. In the circumstances, the Tribunal has to decide whether only the first six comparables, being the comparables provided by the Rating & Valuation Department, or all the ten comparables considered by the Respondent's expert witness should be used by the Tribunal. The Applicant criticized Mr. Cheung and even alleged that he could ask another expert to give evidence for a valuation he wanted. The Applicant asked the Tribunal to restrict to the first six comparables provided by the Rating & Valuation Department as they were from an independent reliable source.

13. The Tribunal considers that any party in any proceeding should refrain from giving any derogatory remark which attempts to undermine the credibility of an expert. He should instead concentrate his remarks on the facts of the case and the opinion given by an expert. In this case, the Tribunal notes that Comparable 6 and 7 have been shown in Mr. Cheung's Report which was filed to the Tribunal and served to the Applicant for the purpose of this application. However, for Comparable 8 and 9, it was only revealed by Mr. Cheung at the hearing. There was therefore no time for the Applicant to consider and investigate these two comparables. In any event, these two comparables were not relied upon by the Respondent. To conclude, the Tribunal decides that it is not bound to restrict itself exclusively to the comparables provided by a government department, Rating & Valuation Department, unless there is reason to support the authenticity and correctness of the other comparables quoted by the parties. In this respect, Mr. Cheung's evidence is accepted. Therefore, the Tribunal will consider the Comparables 1 to 7 and their adjustments below.

Adjustments of the comparables by the Tribunal

14. Since Mr. Cheung was the only expert witness called by the parties and the Applicant did not attempt to comment on the adjustments of the comparables, the Tribunal decides that the comparables should be adjusted on the basis of the factors suggested by Mr. Cheung. For the factors of floor level, new letting/renewal, time, the Tribunal adopts entirely the adjustment, where appropriate, made by Mr. Cheung. For the difference between an open car park and a covered car park (such as that provided by the Premises), Mr. Cheung makes an adjustment of 2% of rent, the Tribunal finds this adjustment to be $1,330 for Comparable 2 and $1,299 for Comparable 6. This appears to be slightly on the high side. The Tribunal therefore substitutes the 2% by a flat amount of $1,000 to account for this difference.

15. As for the factor of view, after hearing the evidence and submission, and examining the photographs and plans produced by the witness, the Tribunal agrees with Mr. Cheung that Unit A in the subject has the most inferior view but disagreed that these is any material difference between Unit B and Unit C. Therefore, Mr. Cheung's upward adjustment for view in respect of Unit A (i.e. Comparables 3 and 4) is accepted. Otherwise, no adjustment for the other comparables is warranted.

16. The Tribunal summarized below the rents passing of the comparables, the adjustment percentages adopted by the Tribunal, the total adjustment and the resulting adjusted rents:

Reconciliation of adjusted rents

17. The above analysis and adjustments show that Comparables 1 to 8 have, after adjustments, rents in the range of between $64,675 and $92,160. However, the rent fetched by Comparable 7 at $92,160 is obviously out of line with the rest, which falls within a reasonable range of between $64,675 and $73,633. In the circumstances, it would be fair and reasonable to adopt the average of the remaining 7 comparables as to be the PMR for the Premises. This, the Tribunal calculates to be $69,959 which can be rounded to $70,000.

Determination of PMR by the Tribunal

18. The Tribunal therefore determines that the prevailing market rent of the Premises, on the basis of exclusive of rates and management fee, should be $70,000 per month.

Orders

1. New Tenancy for two years commencing from 28 October 2000;

2. New rent at $70,000 per month (exclusive of rates and management fee); leave to the Applicant to pay the Respondent arrears of rent, if any, within one month;

3. Deposit to be increased pro rata in accordance with the new rent; leave to Applicant to pay the Respondent the adjustment within one month;

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

5. No order as to costs.