DOULTSONS LTD. v. LEE PUI NANG

LDNT 107/2002

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 107 of 2002

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J U D G M E N T

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1. The Applicant is the tenant of the premises known as All Those Flat No. 1 on the 19th Floor of Block F and Car Parking Space Nos. 238 and 15 of Villa Monte Rosa, No. 41A Stubbs Road, Hong Kong ("the Premises"). The Respondent is the Landlord of the Premises. The Applicant's application is for a new tenancy under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. The Respondent does not object to the grant of a new tenancy to the Applicant. Both parties have agreed that the new tenancy can be for 2 years commencing on 21 July 2002. The only issue in this case is the amount of the prevailing market rent for the new tenancy.

The Applicant's case

2. The Applicant called two witnesses to give evidence at the trial. The first witness, Mr. Hasso Gobindram Melwani, is a director of the Applicant and the occupant of the Premises on behalf of the Applicant. He gave evidence to the effect that he had lived in the Premises for 6 years and throughout this period there was no renovation done to the Premises. He even had to replace some of the chattels himself. However, during his cross-examination, Mr. Melwani admitted that the Applicant as tenant had the duty to maintain the Premises and replace damaged chattels under the tenancy agreement. He also stated that the Premises had been kept in fair conditions.

3. The second witness, Mr. Lee Wing-kwan, is an expert witness. His expert report is contained in Pages 36 to 65 of Exhibit "AR1". He referred to 6 comparables provided by the Rating and Valuation Department as follows:-

(1)	41A Stubbs Rd., Flat E2, 10th Flr. & Parking Space No. 316 on G/F ("Comparable No. 1").
(2)	41A Stubbs Rd., Flat C2, 14th Flr. & Parking Space No. 324 ("Comparable No. 2").
(3)	41A Stubbs Rd., Flat F2, 2nd Flr. & Parking Space Nos. 21 & 22 ("Comparable No. 3").
(4)	41A Stubbs Rd., Flat F1, 20th Flr. & Parking Space No. 167 ("Comparable No. 4").
(5)	41 Stubbs Rd., Block C 7th Flr., Flat 62 & Parking Space ("Comparable No. 5").
(6)	43 Stubbs Rd., 12th Flr., Flat B2 & Parking Space No. 260 on 2nd Flr. ("Comparable No. 6").

4. The information of Comparable Nos. 1 to 6, as contained in the Schedule of Information from Rating and Valuation Department on Page 63 of Exhibit "AR1", are as follows:-

5. Mr. Lee, however, discarded Comparable No. 1 on the basis that it was a renewal of an existing letting with commencement date falling in August 2002 and the basis of the determination of the rent reserved, whether it was prescribed by the terms of the existing letting or based on a projection of the future rent, was not known. It was also discarded on the basis that the difference in floor area between Comparable No. 1 and the Premises was considered to be rather wide.

6. Mr. Lee also discarded Comparable Nos. 5 and 6 as they were situated in developments of different building ages and external condition, enjoying different facilities and subject to different standard of management as the Premises. In support of this contention, Ms. Courbet for the Applicant cited the case of Sentry Holdings (Asia) Ltd. v. Cali Enterprises Ltd. [1983-85] CPR 14, where the Lands Tribunal held that:-

"Where recent comparable lettings in the same property are available in sufficient numbers to enable a reasonable assessment to be made of the prevailing market rent, there is no need to rely on comparisons with premises in other buildings, save to the extent necessary to show that rents in the same property do not diverge sharply from the general market level."

7. Thus, Mr. Lee only relied on Comparable Nos. 2, 3 and 4 in assessing the prevailing market rent of the Premises and made various adjustments to these 3 comparables as follows:-

8. Adopting the average adjusted unit rent of Comparable Nos. 2, 3 and 4, i.e. $181.8/m2, Mr. Lee assessed the prevailing market rent of the Premises at $51,200 per month as follows:-

$181.8/m2 x 263.1m²

+$1,800 (Car Parking Space No. 238)

+$1,600 (Car Parking Space No. 15)

=$51,232

Rounded to$51,200

The Respondent's case

9. The Respondent called only one witness, Ms. Lo Yee-tak Ellen, to give evidence. Ms. Lo is an expert and her expert report is in Pages 66 to 86 of Exhibit "AR1". Ms. Lo also referred to Comparable Nos. 1 to 6 (i.e. comparables 1, 3 to 7 respectively in her report). In addition, Ms. Lo included a new rental transaction of 41A Stubbs Rd., Flat F2, 6th Floor & Car Parking Space No. 295 on G/F (i.e. comparable 2 in her report) in her assessment. The particulars of this additional comparable, which I shall refer to as Comparable No. 7, as well as the particulars of Comparable Nos. 1 to 6 adopted by Ms. Lo are as follows:-

10. Ms. Lo made various adjustments to Comparable Nos. 1 to 7 as follows:-

11. In her report, Ms. Lo stated that the average of the adjusted unit rent was computed at $208/m2, but she did not mention that this figure was only the average of Comparable Nos. 3 and 7. The Applicant thought that Ms. Lo was using all 7 comparables to compute the average figure and was wrong in her computation. The Applicant also produced Exhibit "A2" to show that even by adopting Ms. Lo's adjustments, the prevailing market rent would not be as high as what she had assessed.

12. Ms. Lo, however, explained in her evidence that she only relied on Comparable Nos. 3 and 7 in her computation. She opined that Block F in the subject development was unique because of the large floor area and each flat containing 4 bedrooms. Her view was that as there were only 40 out of 280 flats in the subject development that had such large floor area, the supply of these flats was low, and they were different from the smaller flats. Thus, she adopted only those comparables with the same size as the Premises.

13. On the other hand, Ms. Lo discarded Comparable No. 4 because of its exceptionally low rent. The Respondent produced Exhibit "R2" to show that in September 2001 there was a suicide committed on the 21st Floor of Block F of the subject development, just one floor above Comparable No. 4 and this offered an explained to the exceptionally low rent for Comparable No. 4.

14. Thus, Ms. Lo assessed the prevailing market rent of the Premises as follows:-

$208/m2 x 263.1 m²

+$2,500 (Car Parking Space No. 238)

+$2,000 (Car Parking Space No. 15)

=$59,225

Rounded to$59,200

Choice of Comparables

15. I agree with the ruling in Sentry Holdings (Asia) Ltd. v Cali Enterprises Ltd., supra. When there are sufficient comparables in the same development as the Premises, it is not necessary to refer to comparables in other developments. I shall therefore discard Comparable Nos. 5 and 6.

16. Mr. Lee discarded Comparable No. 1 and one of his reasons for so doing was that the difference in floor area between Comparable No. 1 and the Premises was considered to be rather wide. This in fact supports Ms. Lo's opinion in discarding comparables of smaller floor area.

17. However, if Comparable No. 1 is to be discarded because of its size, I see no reason why Comparable No. 2 should not be so discarded too. The size of Comparable No. 1 is 185.8m2, whereas the size of Comparable No. 2 is 194.2m2. Their sizes are not much different from each other, but both are significantly smaller than the Premises, the size of which is 263.1m2.

18. Since both experts considered the size difference as an important factor, I shall discard both Comparable Nos. 1 and 2 to avoid any uncertainty or necessary adjustments.

19. As to Comparable No. 4, there is no evidence that the suicide on the 21st Floor did in fact affect the rental of Comparable No. 4. It is purely speculation that the suicide had an adverse effect on the rental of Comparable No. 4. I agree with Ms. Courbet that if it did have an effect on the rental of Comparable No. 4, it should have similar effect on the rental of the Premises because the Premises is just one floor below Comparable No. 4. In fact, Comparable No. 4 would then be more relevant as a comparable to the Premises than Comparable Nos. 3 and 7.

20. Nevertheless, as there is no evidence that the suicide did in fact affect the rental of Comparable No. 4, I am not prepared to discard Comparable No. 4 on that basis.

21. I shall therefore assess the prevailing market rent of the Premises by reference to Comparable Nos. 3, 4 and 7 as aforesaid.

Car Park Rentals

22. Mr. Lee stated in his report that the rental for a covered single car parking space was $1,800 per month, whilst an uncovered one was $1,600 per month. However, for adjacent car parks, each might fetch a higher rental of $1,900 per month.

23. On the other hand, Ms. Lo opined that the rental for a covered single car parking space was around $2,500 per month, whereas the rental for an uncovered one was around $2,000 per month. For adjacent car parking spaces, a higher rental of $2,600 per month each could be fetched.

24. Mr. Lee, however, conceded in his evidence that the difference in adopting his estimates and Ms. Lo's estimates was small and he had no objection to adopt Ms Lo's estimates.

25. In the circumstances, I shall adopt the rental value for car parks as suggested by Ms. Lo.

Adjustment for time

26. Mr. Lee made adjustment for time by reference to the most updated Private Domestic-Average Rents by Class of the Hong Kong Property Review-Monthly Supplement July 2002 published by the Rating and Valuation Department. Ms. Lo, on the other hand, referred to the Hong Kong Property Index (April 2002) published by Jones Lang LaSalle.

27. I find that the index used by Mr. Lee as being more accurate and updated than the index used by Ms. Lo. In fact, Ms. Lo had to use her own projection in making the adjustment, which could be unreliable. I do not find her explanation on the adoption of 14.5% for Comparable No. 4 satisfactory or convincing.

28. I shall therefore adopt the index and adjustments used by Mr. Lee in my assessment for the adjustment for time. I also accept his view that there had been no significant change of rental level during the month that followed, i.e. June 2002, and I assume that there was no change for the month of July 2002 either. Mr. Lee did not make adjustment for Comparable No. 7 because he did not rely on it. However, since the lease commencement date for Comparable No. 7 was on 1 May 2002, it is not necessary for me to make any adjustment for time for Comparable No. 7 by adopting the index used by Mr. Lee and his analysis.

Adjustment for Floor Level

29. Both experts adopted 0.5% adjustment per floor level. I shall also adopt this figure for the adjustment for floor level.

Adjustment for Internal Condition

30. Mr. Lee was of the view that since all the comparables were reported as new lettings, they were presumed to be in good tenantable conditions and a downward adjustment of 2% was necessary to reflect their superiority over the Premises in internal condition. Ms. Lo, however, did not make such an adjustment.

31. The evidence of Mr. Melwani was that he had occupied the Premises for 6 years without any renovation and the internal condition of the Premises was fair. The Respondent did not challenge that. Thus, I have to accept that the internal condition of the Premises should not be as good as new lettings like the comparables. I agree with Mr. Lee that there should be a downward adjustment of 2% to each of the comparables for internal condition.

Adjustment for Chattels' Condition

32. Both experts opined that a 2% downward adjustment was necessary to reflect the inferiority of the chattels in the Premises when compared to the chattels in new lettings.

33. However, Ms. Lo did not give such an adjustment to Comparable No. 7. There is no mentioning that Comparable No. 7 was inclusive of chattels, but I would assume that there should be some basic chattels, like air-conditioners provided. I am therefore of the view that a similar downward adjustment of 2% should be applied to Comparable No. 7.

Summary on Adjustments

34. In the circumstances, I summarize my adjustments to Comparables 3, 4 and 7 as follows:-

Assessing the Prevailing Market Rent

35. The average of the adjusted unit rent of Comparable Nos. 3, 4 and 7 is $195.5/m2. I note that the adjusted unit rent of Comparable No. 4 is much lower than the adjusted unit rent of Comparable Nos. 3 and 7. However, as there are only 3 comparables here, I cannot say that Comparable No. 4 must necessarily be out of range. It is also possible that Comparable Nos. 3 and 7 are at the high end too. I do not therefore find it necessary to discard Comparable No. 4.

36. In the circumstances, I adopt the average adjusted unit rent of $195.5/m2 to assess the prevailing market rent as follows:-

$195.5/m2 x 263.1m²

+$2,500 (Car Parking Space No. 238)

+$2,000 (Car Parking Space No. 15)

=$55,936

Rounded to$55,900

37. I therefore assess the prevailing market rent of the Premises to be at $55,900 per month, exclusive of rates and management charges.

Orders

38. Accordingly, I order as follows:-

(1) New tenancy be granted to the Applicant for a term of 2 years from 21 July 2002;

(2) New rent at $55,900 per month, exclusive of rates and management fees;

(3) The rental deposit is to be adjusted in accordance with the new rent;

(4) The Respondent shall refund any excess payment of rent and deposit to the Applicant within one month from the date hereof;

(5) Save as aforesaid, the terms of the new tenancy shall be the same as the previous tenancy agreement; and

(6) No order as to costs.