LEUNG WAI KEE v. COMMISSIONER OF RATING & VALUATION

Rating - application of comparables - preference at this level in the market for direct comparison of rents on and inclusive of rates basis; the same basis as premises are usually let - insufficient weight given to detrimental factors influencing value - insufficient evidence adduced to determine the added value of the illegal roof top structure - level of values in the valuation list in excess of the market as at the relevant date of 1st July 1983. Sections 7 and 7A Rating Ordinance Cap. 116.

IN THE LANDS TRIBUNAL OF HONG KONG

(Appellate Jurisdiction)

Rating Appeal No. 165 of 1984

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DECISION

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1. This appeal was originally dismissed when the appellant did not appear. It was reinstated on review when the appellant's explanation was accepted and the respondent offered no objection.

2. The appellant is the owner and occupier of premises listed as 54-56 Ki Lung St., 5th Floor, Flat C and Roof, Kowloon. It is the rear top floor flat, and the roof directly above, in a six storey building comprising three domestic tenements on each floor above the two shops on the ground floor. There is no lift. The building was completed in 1976 and is situated on a street in the Mong Kok area which was described to me as a market street largely used by hawkers selling fruit and vegetables and other produce. In 1977 the appellant constructed an unauthorised structure on his roof top area. This roof top structure is well constructed having brick walls as well as a corrugated asbestos roof and false ceilings. It is a self contained unit with a similar layout and accommodation to that in the flat below. That is each of them has two bedrooms a living room and a kitchen. The 5th floor flat has  a bathroom whereas the roof top unit has a smaller room combining a w. c. and shower. Both units have been valued by the Commissioner of Rating and Valuation as one tenement.

3. The appeal is against the Commissioner's notice of decision with respect to the subject premises dated 16th October 1984. It stated that the rateable value of $34,200 on the valuation list was to be reduced to $31,200. The appellant considered that the reduced figure was still in excess of the rent at which the subject tenement might be reasonably expected to let from year to year under the provisions of section 7(2) of the Rating Ordinance. Under section 12 the designated date of assessment is 1st July 1983. (the Hong Kong Government Gazette GN 2412 of 1983). The rateable value of $31,200 equates to $2,600 per month exclusive of rates.

4. The appellant considered that the Commissioner had given insufficient weight to certain detrimental factors. These include the premises being situated on a market street, being in close proximity to the noxious trade of a bottle dealer, and being a rear unit on the top floor of building without a lift lie said that lesser rents wore paid for premises in market streets and, that similar rear units let at between $100 and $200 less that the adjoining front units. He was unable to rely on any particular rental evidence, but he believed it was common knowledge that this difference existed. He considered that the rental value for the 5th floor flat, on its own, as at July 1983, should be $1,500 per month exclusive of rates, and that the roof top unit would be worth an additional $686 per month, making a total of $2,186 per month. That is a Rateable Value of about $26,400.

5. The appellant drew particular attention to an adjacent pre-war building which was used by a bottle dealer. He said that the old bottles gave off a bad smell which would affect the value of premises in the immediate locality. Mr. H.P. Chung, a Rating and Valuation Surveyor who gave evidence on behalf of the respondent, did not consider the existence of the bottle business would have much of a detrimental effect on the value of the immediate locality which was already used as a market street. He considered that being in a market street depressed the rental value by about 5%.

6. The appellant, Mr. Leung, has actually let his 5th floor premises from time to time but has never been able to hold on to a tenant for more than a few months. He said this was probably due to him insisting on too high a rent. Each time the 5th floor flat was let he and his family lived in the roof top unit. One of these lettings was between 1980 and 1981 and intended to be for a term of 2 years. The tenant only stayed 2 or 3 months. The rent was $2,050 per month. On another occasion, he did lot the whole of the premises; that is the 5th floor and the roof. This was in 1981, and at that time he and his family moved out to his shop premises. The rent he received was $2,600 per month, but the tenant only stayed 2 months. These rents were inclusive of rates.

7. Mr. Chung's valuation was based on a list of comparable rents at appendix C of his report and valuation submitted under rule 18 of Lands Tribunal Rules, Cap. 17. This valuation was made in relation to the appellant's submitted proposal following the publication of the valuation list in March 1984.

8. Mr. Chung, in his evidence, said that the revaluation of this locality was actually carried out during 1982, and well before the relevant date of July 1983. As a result the assessments were generally about 10% above the market as at July 1983. This has been verified by the subsequent submission, at the request of the Tribunal, of a document showing the relationship between the rateable values and the comparables. The comparable rents led the Commissioner to issue a notice of decision reducing the rateable value of the subject premises from $34,200 to $31,200. That is from a rateable value equivalent to $2,850 per month to one equivalent to $2,600 per month.

9. Both parties relied mostly on the comparable rent for premises a block away, but in the same street. It is a 5th floor front flat at 22 and 24 Ki Lung Street and listed as comparable 3 on Mr. Chung's list. It is roughly the same area as the 5th floor flat portion of the subject promises. It let at $2,000 per month inclusive of rates from 15th August 1983 for a term of 2 years. This rent was well supported by the ether listed comparables, particularly comparable 1, a second floor flat at Nos. 59-61 Ki Lung Street situated on the opposite side of the read to the subject building. This is a rear unit whereas comparable 3 is a front unit facing the street. These premises have a covered area of about 29 square metes against a covered area, of 33.9 square metres for the fifth floor flat portion of the subject premises. The rent was $1,900 per month inclusive of rates for a term of 2 years from 15th May 1983. The comparables showed a general level in the region of $2,000 inclusive of rates per month for this type of tenement in this locality as at the relevant date. While obviously there can be no objection to the use of analysed rates per square metre to compare rental values, it is sometimes easier at this level of the market to merely look at each flat as a whole and consider what the typical hypothetical landlord and tenant might be willing to agree. Rents for such premises are usually on an inclusive of rates basis and it seems to me more realistic for the purposes of comparison, to make no adjustment for the rates element until a rent has been determined on the basis it would actually be negotiated in the market. Obviously a few dollars here or there for rates is not going to alter the negotiated rent appreciably, particularly when the premises being considered are very similar in size and value. Also it is most likely that there is an in built risk element in these negotiated inclusive rents which should be acknowledged when converting rents from a inclusive basis to an exclusive basis as required by the Rating ordinance. If a landlord lets on an inclusive basis and elects to pay the rates, he obviously does so because, at this level of the market, he feels he does not wish to rely on his tenant to do so. Under section 21 of the Rating Ordinance he is ultimately responsible for the payment of the rates even though it is deemed to be an occupiers rate. He therefore has the bother of receiving the rates demand and ensuring payment. He also risks the possibility of the rates being increased while having to maintain a fired rent during the term of his tenancy agreement. In these circumstances, it is reasonable to expect that he would require a little more in rent for the service he extends to the tenant and the risk he elects to take regarding rate increases. Therefore the deduction of the actual amount of the rates per month to reach an equivalent rent on an exclusive basis is not really as accurate an approach as it might at first appear. On the other hand, agreements on an exclusive basis place the onus on the tenant to ensure rates are paid and any increases are met.

10. Bearing these factors in mind, I have preferred to compare the subject fifth floor flat directly with the fifth floor flat listed as comparable 3 and letting at $2,000 per month inclusive of rates. I accept the appellant's submission that it is superior to the subject premises due to its being a front unit compared to a rear unit. Both premises ere in the same market street. Having had the advantage of an inspection, I consider the subject premises to be a little more adversely affected by this factor. Also I accept that the bottle disposal business next door would have some detrimental effect on value. Conversely the subject premises does enjoy a little better light and air. Taking all of these factors into account, I would expect the subject premises, by comparison, to let at about $1,800 per month inclusive of rates.

11. Comparable 1, which I mentioned previously, is a rent for a second floor rear unit in a building on the opposite side of the street to the subject premises. It is a smaller flat and has less light and air but is superior due to its being more conveniently located on the second floor of a building with no lift. It is also further removed from the bottle disposal business. Being a letting of $1,900 per month inclusive of rates it would tend to support a rent of $1,800 per month inclusive of rates for the subject premises.

12. I would allow $100 per month for rates for the reasons expressed previously and therefore determine the monthly exclusive rent for the 5th floor portion of the subject premises at $1,700 per month.

13. There was little evidence put before me with respect to the rental value of the unauthorised structure on the roof. Mr. Chung placed a value of $786 per month on this structure based on a unit rate of $26.2 per square metre per month. He gave no explanation as to how this figure was determined but he listed as a comparable, similar roof top promises in Playing Field Road and near to Nathan Road. These premises, with a covered area of 47.8 square metres, let at $2,200 per month inclusive of rates from lst May 1983.

14. The appellant's earlier letting of the whole premises in 1981 compared to the letting of the 5th floor flat portion only, showed the additional value of the roof at that time to be in the region of $600 per month inclusive of rates. This, of course, occurred much earlier than the relevant date. Also, judging by his assessment, Mr. Chung apparently did not consider the Playing Field Road comparable to be very reliable. The recent decision by this Tribunal in respect of Cheung Man Yee v. Commissioner of Rating and Valuation Rating Appeal 41 of 1984 concerned the assessment of a tenement with an illegal extension. The analysis of a comparable which included an illegal extension of a substantial nature, showed the rental value per square metre of the extension to be approximately half that of the flat proper. It is perhaps significant to note that it was held by the Tribunal, in the case cited above, after argument, that the rateable value must include the value of any illegal extension, but that such value is to be based on the hypothetical parties' assumed full knowledge of the risks incurred in agreeing to rent premises which are unauthorised. The point was not argued in the present case.

15. Although there is little conclusive evidence before me, I accept Mr. Chung's assessment of the roof top structure but round the figure up to $800, thereby giving a total assessment of $2,500 per month.

16. I therefore determine the rateable value At $30,000 and make the following order.

The rateable value of 54-56 Ki Lung Street, 5th floor, Flat C and Roof, Kowloon is to be reduced from $31,200 to $30,000. The Collector of Rates is directed to amend the valuation list accordingly effective from 1st April 1984, and to make any refund of rates which may be necessary as a consequence of the rateable value being decreased. There will be no order as to costs.

Dated this 31st day of October 1985.