PAINTER, ALLAN DAVID v. FOOK SHING ENTERPRISES LTD

LDNT 102/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 102 of 2003

_________________

_________________

_________________

J U D G M E N T

_________________

1. This is an application for the grant of a new tenancy pursuant to Section 117(1) of the Landlord and Tenant (Consolidation) Ordinance, Cap.7. The Landlord (i.e. the Respondent) did not oppose the grant of a new tenancy but disagreed to the rent proposed by the tenant (i.e. the Applicant). The two parties, however, reached agreement on the term of tenancy, tenancy commencement date, break clause and deposit amount. The written tenancy agreement is to be signed and executed within one month from the date of the Court Order. The two parties do have diverged views in quite many places.

2. The Matters in Dispute and the Tribunal's Views

(1) Internal Condition

The Respondent's expert witness made no adjustment to the rent passing of the comparable properties (to reflect the difference in internal condition between the comparable properties and the subject property). He did not do so not because he considered the difference needed not be reflected but because the internal condition was unknown to him. The internal condition was unknown to him because he was unable to gain access into all the comparable properties. He, nevertheless, held the view that his failing to make adjustment should not pose assessment accuracy problem because the building age generally could reflect the internal building condition. His assessment did include adjustments due to the building age. In this regard, the likely inadequacy, in his view, should have been made up for.

The Applicant held the view that all the comparable properties are in a much better condition than the subject property. When assessing the market rental, the expert witness should take into account the difference. If the expert witness failed to do so, the assessment could not be regarded as perfect. He admitted that he had inspected the interior of House Nos 21,137 and 142 only but had only viewed the conditions of House Nos. 61 and 57 from the outside. As the outside of House Nos. 61 and 57 was better than the subject property, he presumed that the internal condition would also be better. He maintained this view because in his opinion, property owners would hardly be inconsistent towards the internal and external repair requirements. For someone who considered the repair and maintenance important, he/she would not just feel the need to repair the outside (or inside) but tend to maintain both the internal and external aspect of the building to the same standard.

The Tribunal cannot agree with the Respondent's expert witness that the building age can fully reflect the building condition. It can reflect the relative condition between one property to another only if the same standard of maintenance/ repair has been applied to both properties built in the same workmanship standard and with the same quality of building materials. For some properties with regular maintenance/repair or refurbishment works being carried out, the effect of building age on the building condition tends to be minimized notwithstanding the building is older than the other. If the adjustments made to the rent passing of the comparables are just for the age without having regards to the actual building condition, the Tribunal would only agree that a minimal adjustment should be made. The Tribunal is sceptical to the appropriateness of the substantial adjustment made by the Respondent's expert witness.

The Tribunal also cannot accept the Applicant's view in entirety that property owners tend to be consistent towards the internal and external requirements. This is only an inference. It could be true in many cases but not always true in all cases. The inference is not evidence. He should demonstrate with evidence that the internal is as good as the external.

(2) Maintenance/Repair

The Applicant considered that the subject property was in lack of proper maintenance and repair. He provided the Tribunal with photographs showing the building defects. He emphasized that he was not asking for refurbishment but at least the building defects in many places should be made good to a decent state. The lack of proper maintenance and repair is affecting his enjoyment and therefore, should be reflected in the rental assessment.

The Respondent firstly disagreed (through the expert witness) that the condition of the subject property was sub-standard, secondly, denied that it had received any request for repair from the Applicant (had it received any, it would have no hesitation to implement the repair), and thirdly, the Applicant had the obligation to hand back the subject property in a tenantable manner (meaning at the end of the tenancy, the subject property should be handed back to the Respondent free from building defects and in a shape as good as the original).The Respondent obviously suggested that the Applicant should be held liable for the alleged lack of proper maintenance and repair and did not consider it justified to reduce the rent upon renewal because of the Applicant's obligation to hand back the subject property in good shape.

The Tribunal does not share the Respondent's argument that the subject property, without refurbishment but through regular maintenance/repair, could maintain the original condition it was some years ago. Through time, the condition of the property, because of wear and tear, would deteriorate. Unless refurbishment is to be carried out, the usual piecemeal maintenance and repair works, which seek to sustain the normal function of the accommodation and facilities therein, cannot restore fully the original shape of the property. On the other hand, from the photographs produced by the two parties, the Tribunal is unable to find that there are significant differences between the internal condition of the subject property and that of the comparable properties. The building defects pointed out by the Applicant do warrant attention but they are not irreparable. If repaired, the over-all enjoyment should not have been exploited in any significant degree. The crux of the matter is whether there have been any requests put forth to the Respondent if the Respondent is liable. In this regard, the Applicant did not clarify in open court.

(3) House Design/Style

The Applicant advised the Tribunal that Houses 70, 197, and 32B were not suitable for comparison because they were of different size, design and style. He pointed out that these houses were all with two balconies. The Respondent's expert witness did not seem to know that they were with balconies, as he had not inspected these three houses. He considered that they should not be excluded simply because of the differences in design/style and size. Nevertheless, he agreed that the balconies be taken into account in the assessment if there were such balconies.

The Tribunal shares the expert witness's view noting that the houses and the subject property are homogeneous in class (i.e. house type development) notwithstanding the different design/style but does consider detached house such as House 197 should not be taken to compare semi-detached property given the number of semi-detached house available for comparison in the present exercise. The Tribunal also notes that the size difference (2000 vs. 2150 sq. ft gross floor area) should not lead to the houses being considered unsuitable for comparison.

(4) Open Market Rent/Prevailing Market Rent/ Fair Market Rent

There were arguments as to whether the Open Market Rent, Prevailing Market Rent or the Fair Market Rent should be assessed. In the Applicant's view, it appeared to him what the Tribunal should be looking for in the present exercise should be the Fair Market Rent. The Respondent held a somewhat different view. The Respondent's solicitor advised the Tribunal that under S.119K of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7, it should be the Prevailing Market Rent though sometimes, the expert witness quoted Open Market Rent when giving evidence. The Respondent seemed to equate the Prevailing Market Rent to Open Market Rent. The Applicant was unable to give the Tribunal his definition concerning Fair Market Rent upon being enquired.

The word "Open", according to the Oxford Advanced Learner's Dictionary, carries the meaning of "public; free to all; not limited to any special persons, but for any one to enter". The word "Prevailing", according to the same Dictionary, means "be widespread; be generally seen, done, etc." The word "fair' means "not showing favour to either person, side etc; acting in an honest and honourable manner; in accordance with what is deserved or with the rules". From these definitions, the Tribunal does not see that regardless whatever of the above terms that might have been adopted in the two parties' assessments, there are any fundamental and serious divergences. These three terms generally point to more or less the same thing although they are not exactly identical literally. What worries the Applicant, perhaps, is the misunderstanding that a rent paid for in the open market by the majority might have been paid for under the wrong assumption of the actual facts. The Tribunal does not see that such a worry is necessary, as the Tribunal never views that such a rent paid by the majority is a market rental.

(5) Void Rental Costs

This is referred to in the Applicant's report as the period for which the Respondent should not claim rent. He drew analogy to the fact that House 21, being a property also owned by the Respondent, took one month and 24 days to lease out. The same long time ought to apply when the Respondent finds a tenant for the subject property. The Applicant also noticed that a rent-free period of seven days had been granted to the tenant of House 21. Therefore, he considered that the equivalent of 61 (or 62 if one month is counted as 31 days) days' rent be deducted from the rent finally assessed for the subject property. The Respondent's expert witness disagreed to such calculation saying that this was not a practice currently adopted by surveyors in the valuation field. Secondly, he pointed out that the so-called rent-free period was not part of the tenancy term according to the details specified on the Rating and Valuation Department Rental Information Sheet

Whether it is a practice in the valuation field is not the Tribunal's prime concern. The Tribunal does not wish to follow the Applicant's view to deduct for the first 54 days (one month and 24 days) because the factors that led to the requirement of 54 days to lease out were unclear. The cause could be that the initial rent on offer to the prospective tenants was too high (higher than the presently agreed rent), or, could be a delay to sign the agreement accepted by the landlord and tenant pending clarification of any tenancy terms or awaiting the completion of certain repair works. The Applicant ought to establish the cause and substantiate it. The Tribunal, however, finds it necessary to make rental adjustment for the latter 7days. These 7 days are rent-free period enjoyed by the tenant notwithstanding the actual tenancy commencement date was set upon expiry of the 7 days. The total rent passing for 24 months reported for House 21 should, in the Tribunal's view, be divided by 24 months plus 7 days to arrive at the adjusted rent for comparison (instead of a direct deduction from the final rent calculated for the subject property in the same way as it is done by the Applicant).

(6) Adjustment for House 21 Decoration Works

The Applicant considered that the decoration/renovation works made to up-grade House 21 needed to be taken into account when considering the rent of the subject property. Given the quality of the decoration/renovation works, he estimated that the cost of works was about $31,000, which should be amortised over 24 months to arrive at a monthly sum for deduction from the rent of the subject property.

The Respondent disagreed with the Applicant's estimation on the cost of decoration/renovation works. The Respondent's solicitor advised the Tribunal that the Applicant's report was received only a few days before the hearing. Had it been received earlier, the outlay on decoration/renovation works could be provided to the Tribunal and the Applicant in good time. In the absence of the actual cost, he did not agree the Tribunal to base on a layman's estimation. On the other hand, the Respondent's expert witness shared the view not to make any deduction from the rent on account of the works because of the Respondent's views given in paragraphs (1) and (2) above (in regard to tenant's maintenance/repair responsibility and the internal condition).

The Tribunal does not find it appropriate to deduct from the rent the cost of works on the basis of the Applicant's estimation. He is not in that profession qualified for the estimation. The estimated cost could depart from the actual cost substantially. What is more important in fact is to what extent House 21 is better than the subject property (maybe none or even worse). In this connection, the Tribunal has not been given the appropriate evidence, e.g. the photographs.

(7) Sloping Garden

The Applicant advised the Tribunal that the garden of the subject property is not on a level site but at a slope of 1 in 8. This gradient makes the garden less usable than a level one. The Respondent admitted that the garden is not entirely level but considered the gradient quoted by far exaggerated.

From the photographs provided by the Applicant, the Tribunal does not find the sloping so severe over-all. It does only for a part of the garden.

(8) Large Kitchen/Additional Stairs/G.F. Amah Room

These additionally provided accommodation or facility, and conversion works, in the eyes of the Applicant, would add value to the rent of Houses 21, 137, 142, 61 and 57. The Respondent pointed out that these additional accommodation/facility/conversion works were provided at the sacrifice of existing floor area used for some other purposes, e.g. the provision of a larger kitchen took up the floor area designated in the original design for amah room and the G.F. amah room converted from a portion of the covered car parking space results in a smaller area for parking purpose.

Whilst the Tribunal agrees that these additional accommodation/facility/conversion works would add value to the rent, the loss of floor area for other purposes allowed in the original design should not be ignored. There might still be gain in the end after subtracting the lost value. That gain might not be significant as the contribution due to the additional accommodation/facility/conversion works form a little part of the over-all rent bearing in mind that both the subject and comparable properties are around 150 sq. m. in saleable area. Unless there is evidence to indicate that the increase in rent is so significant in relation to such large size properties or a full list of the major and ancillary accommodation/facility/conversion works for all properties involved is drawn and provided to the Tribunal for comparison, there is a great problem for the Tribunal to ascribe a fair value for them.

(9) Adjustment for Different Commencement Date

The Respondent expert witness professed himself having good experience concerning the rental market of properties in that particular locality. He based his own experience to adjust for the difference. In his view, those tenancies commenced before July 2003, i.e. April of the same year, would be able to command more rent, whereas those after July 2003, i.e. August and September, the rent should be lower. He dismissed that Houses 137 and 142 were suitable comparables because of their respective commencement dates being Dec.2002 and Feb.2003 (relatively remote from the relevant date).

This rental trend is consistent with the statistics provided by the Applicant in Exhibit A13 and in accordance with many people's understanding of the rental market post and before S.A.R.S. On the contrary, the Applicant's calculation of the rent of the subject property in July 2003 by comparing the average rent for 160 sq. m. properties in N.T. in July 2003 and two years ago is inappropriate. Not only the agreed rent two years ago might not be the market rent, but also he had taken the average rent for the wrong property category. The subject property is as a matter of fact less than 150 sq. m. in saleable area. Apart from this, the Tribunal agrees that in view of the fact that there are already more than 6 suitable comparable properties available for reference, Houses 137 and 142 need not be included.

(10) External Condition

The Applicant considered the external condition of the subject property was no better than that of any comparable properties. The Respondent's expert witness opposed to this view. He considered that with the exception of House 29 which is better than the subject property, all are similar. From the handful of photographs provided by the two parties concerning the exterior of the subject property, the Tribunal only had a fair view that the Applicant might be true. A systematic comparison is impossible so as to form a relative objective view on the extent of quality one property is above or below the other.

(11) Orientation and View

The Respondent's expert witness gave adjustments due to different orientation and view. The Tribunal notes that almost all house sites abut on a local road with the back contiguous to another house plot. Houses are seen in the front and at the back with the exception of House 70, which borders with derelict padi-field. Some are corner sites with a major road on one side and some with a hill-slope on the other side of the road, such as House 32B. It is difficult to perceive as to why there should be significant difference in view that warrants rental adjustments.

As the houses are built in pairs, windows are not possible only on the one side contiguous with another house. The orientation is much less affecting the comfort of the occupants in the case of houses than in the case of high-rise development where there are usually four or more flats per one floor.

The expert witness's reasoning for the adjustments given was not clearly elaborated. The Tribunal is unable to discern as to why some house sites are classified as with "open view" or "no view", or better than the others in orientation.

(12) Garden

The Respondent's expert witness roughly set the rent for garden similar in size to the subject property at $1,000 per month and for those above 200 sq. m. up to 270 sq. m. (approximate) at $1,500. This gives a unit rent of about $5.88 to $6.25 sq. m. per month. The difference in the unit rent is due to rounding up or down to the total rent of $1,000 or $1,500 per house. The Tribunal does not find this unacceptable. The Applicant gave no opinion in this regard.

(3) Conclusion

Summing up the above, the Tribunal does consider the need to make rent adjustment for the difference in the external condition between the subject property and the comparables, the difference in the tenancy commencement date in the manner recommended by the expert witness, the difference in garden size also in the same way performed by the expert witness, and for the availability of balconies (the size of the two balconies was not provided by the two parties and by scaling from the layout plan provided by the Respondent, it is approximately 5.475x 3 x 2 sq. m.). The adjustments are appended as hereunder:

Average: 117.0

4. The Tribunal agrees that taking the average of the adjusted unit rent is appropriate. By averaging, the risk of error (e.g. excessive weight given to adjust for certain physical attribute of the property, or over or under charging of rent etc.) is to some extent minimized. The rent, inclusive of management fee and rates, of the subject property is therefore 148.3 sq. m. x $117.0 per sq. m. + $750 (reduced rent for garden agreed by the Respondent) + $1,012 (rates) + $2,070 (management fee) =$21,183.0, say, $21,000 per month.

(5) Orders

The Tribunal hereby orders that: -

(1)	a new tenancy for two years be granted commencing on 1st July 2003;
(2)	the new tenancy be terminated by the tenant by giving the landlord two months notice in writing provided that such notice shall not be served within the first ten months from 1st July 2003;
(3)	the rent under the new tenancy be at $21,000 per month inclusive of rates and management fee;
(4)	other conditions applicable in the previous tenancy shall remain;
(5)	the deposit be maintained at the same rate as stipulated under the previous tenancy agreement and any excess be refunded to the tenant upon execution of the new tenancy agreement;
(6)	the new tenancy agreement be signed and executed within one month from the date hereof;
(7)	there be no order as to costs of this application.