AMERICAN INTERNATIONAL ASSURANCE CO LTD v. HOCK KIM THYE (MACHINERY) LTD

LDNT 26/2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 26 of 2004

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J U D G M E N T

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1. The American International Assurance Co. Ltd has been the tenant of House No.14, Watford Road, Hong Kong (known as the Subject Premises) since 1st January 2002. Hock Kim Thye (Machinery) Limited owns the Subject Premises. The tenancy of the Subject Premises expired on 31st December 2003. A CR 103 Notice under s.119A (1) of the Landlord & Tenant (Consolidation) Ordinance, Cap. 7 was served on the landlord, requesting for a new tenancy to commence on 1st March 2004. In its reply to this notice, the landlord rejected the request.

2. On 27th February 2004, the tenant lodged the Form 22 to the Lands Tribunal requesting for the grant of a new tenancy. Confronting with the tenant's Form 22, the landlord made no change in its mind and remained opposing the grant of the new tenancy. The landlord, known as the Respondent in the subject application, confirmed persistently in the Tribunal its opposition although the intention was confusing in its Form 7. Its grounds of opposition in brief are as follows: -

(a) The Applicant habitually failed to pay the rent on the due day;

(b) The Applicant kept on raising unjustified complaints/requests regarding repairs, constituting a disturbance to the Respondent;

(c) The rent requested under the new tenancy is unreasonable and lower than the rateable value assessed by Government.

Tribunal's Views

3. Regarding ground (a) above, the Respondent provided the Tribunal with the Applicant's past payment records. These records indicate the periods of the Applicant's delay (in payment) in the past two years. A stack of standard short letters to the Applicant regarding the outstanding payments was also produced as Exhibit A2. The Applicant explained that there was no delay but a sheer inaccurate recording by its Accounts Section regarding the payment for the second month. The omission to pay for the second month was not aware of until very late. Notwithstanding the Applicant's explanation, the Tribunal finds from the records produced that this is not so. The Tribunal finds that in some of the periods, two payments were made in the same month. This indicates that the Applicant was aware of the non-payment. The Applicant obviously realized that it was paying the rent late by roughly one month since February 2002.

4. The Applicant's solicitor, however, was right to opine that by the contents of the short letters sent to the Applicant, these letters were not the warning letter referred to in s. 119E(1)(d), but reminders. The Tribunal, in this respect, agrees this. To constitute a warning letter, the Respondent must set out in the letter the consequence of failing to comply with the provisions of the tenancy conditions. Stating the right of the landlord under the tenancy agreement does not suffice nor does it suffice to quote just the part of the provisions of the tenancy agreement that the Applicant is in breach of.

5. As to grounds (b) and (c), the Tribunal also shares the view of the Respondent's solicitor. These are not the grounds acceptable under s. 119E(1). The Tribunal must therefore, dismiss the Respondent's opposition.

The New Tenancy

6. When considering the terms of new tenancy and particularly the level of rent payable, a number of controversial issues need to be resolved. Such issues are discussed in the ensuing paragraphs.

(a) Building Condition

A lot of the time was expended on elaborating the detailed external and internal conditions of the Subject Premises. The Applicant's witness (Mr. Kwong Lap Shun), the Property Manager of American International Assurance Co. Ltd., gave in court his saga of how he had dealt with the Respondent concerning the repairs required on the Subject Premises. In all the documents filed (over 100 pages submitted), he aggressively attacked the Respondent's irresponsibility. The Respondent held a quite different view concerning the state of building defects described and even on the responsibility for repairing them.

In fact, nothing in Mr. Kwong evidence convinces the Tribunal that the Subject Premises were on the verge of becoming uninhabitable. Although the Applicant's expert witness (Ms. Winnie Koo) stated in her valuation report that there were unauthorised structures on the Subject Premises, he avoided mentioning this sensitive issue any more. He intentionally allowed the issue to quietly slip through. In respect of this issue, the Respondent claimed that it received a letter from the Applicant proposing the paying to it compensation as a compromise for not referring the unauthorised structures to the Building Authority. The Respondent requested that the letter concerned be submitted. The Applicant's solicitor disagreed its submission. The Respondent was not allowed to submit, as the compensation proposal was irrelevant to neither the issue of repair nor the issue of building condition.

There is no need for the Tribunal to mind about those building defects that can be made good without affecting the normal function or that have not been made good pending investigation on the responsibility. The Tribunal should be concerned with by how much the prevailing condition of the Subject Premises as at the valuation date has lowered the enjoyment when compared to those properties adopted for valuation. Summing up the two parties' evidence, the Tribunal has a fair impression that the external/internal condition is not as good as those of properties of the same type and in more or less the same age. Adjustments, therefore, to reflect the inferior condition are justified.

(b) Valuation Methodology

The valuation approach of the Applicant's expert witness is far from desirable. She adopted the Rating and Valuation Department provided Rental Schedule of 25th March 2004 (known as "the former Schedule") as the basis of her valuation. The Rental Schedule contains properties the tenancies of which commenced by one year or otherwise15 months earlier than the relevant valuation date. She gave up the Rental Schedule of 11th June 2004, which contains properties leased out in the same month or otherwise leased out by not more than four months earlier.

No doubt, she received the Schedule of 11th June 2004 (known as "the latter Schedule") very late. The Tribunal had suggested that the case be adjourned to enable her to do the valuation again. She amazingly rejected this suggestion. The Applicant's solicitor rejected the suggestion, too. She explained that the properties on the latter Schedule all located away from the neighbourhood of the Subject Premises though also within the Peak, whereas those on the former Schedule all located in the same neighbourhood. The difference in location but not the transaction time is however her principal criteria for selection of comparable properties. It is also her chief reason that she rejected the properties on the latter Schedule.

The Tribunal finds this approach undesirable because, firstly, comparing the different aspects of the Subject Premises as at the valuation date (i.e. 1st March 2004), such as the view, general environment, building condition and accessibility etc., to those of the comparable properties one year or 15 months ago (i.e. January/March 2003), one should require the data of these aspects relevant to both points of time. The data in respect of January/March 2003 obviously is not available and cannot be assumed identical to that in March 2004. With the wide gap in transaction time, the situation between March 2004 and January/March 2003 could be quite different. By making adjustment for the difference in the time of transaction through the property index without catering for the difference in other aspects in different times of transaction, the adjustment is not comprehensive. It is not to the Tribunal's experience and knowledge that expert witnesses in the same profession had ever submitted valuation reports using data more than one year old whilst similar type properties in the same district but different neighbourhood, leased out within four months or less in time, are available. The expert witness should need to study and understand the rationale behind the practice of her profession to limit the choice of comparable properties to those transacted within 6 months.

Secondly, the Tribunal notes that the By Class Private Domestic Indices were used for adjusting the difference in time. These are the indices collectively for the whole Hong Kong territory and of course by size. In other words, the indices depict the over-all trend of the rental market and for individual size class from January 2003 to March 2004. As we all know, the over-all rental market had continued to plummet since the peak in 1998 and becomes stable after the SARS until the first quarter of 2004. This applies to Class E (large size) properties. This, no doubt, is the typical trend of the over-all rental market of Hong Kong including the Class E rental market. It is not the trend of luxurious properties in different districts, especially those at the upper end, i.e. the house type properties at the Peak. By common sense (could be regarded as judicial notice), the upper end class of properties has up-surged considerably after the SARS and picked up a substantial portion of its loss since 1998. The adjustment presently made by the Applicant's expert witness in her approach to reflect the difference in time distorted the quantum of adjustment deserved.

To ascertain the true picture, the Tribunal attempted to compare the net rental of the comparable properties on the two Schedules. The net rent is derived by deducting from the rent passing reported the management fee, rates and the equivalent rent for rent-free periods. The same conversion ratio used by the Applicant's expert witness for garden, podium and the like is also followed. The unit net rent in respect of the latter Schedule is from $311.07 to $610.58 at an average of $419.04. In the case of the former Schedule, it is between $252.06 and $487.94, and at an average of $271.75. The conclusion of comparison shows that there has been a rise of 154% since January/March 2003. This finding points to that there must be something anomalous in the expert witness's adjustment. The transactions on the two Schedules may not be the only properties leased out in those periods but must, in the view of the Rating and Valuation Department, be the akin most to the Subject Premises. If the Rating and Valuation Department (or any one) were to construct the indices for similar properties at the Peak, the two sets of unit rental value above should form the core of the statistics. The figure of 154% might not be the precise quantum of rise; it at least shows the correct direction of the rental movement from January/March 2003 to March 2004, which is contrary to the expert witness's view. If this problem and the earlier one raised above are not resolved, the result of valuation on the basis of the former Schedule is unreliable and should be rejected.

Finally, the Tribunal concerns the number of comparable properties used for valuation. The Applicant's expert witness was only able to gain entry into the first three comparable properties on the former Schedule but no others. Therefore, she assessed the rental value on the basis of only three properties. She checked out that these three properties were all with unauthorised structures. She had no information regarding the others and she did not bother to check the position by alternative ways. She nevertheless assumed that there were not any unauthorised structures. Therefore, she had prepared her valuation on the basis of only three properties. Upon inquiry, she proposed adjustments for the last three properties along the same line as she had given for the first three, deeming that the last three were free from unauthorised structures. This approach poses another problem. Either there is insufficient number of comparable properties for valuation or there is the doubt whether she is comparing like with like in the absence of findings in respect of the other three properties.

(c) Adjustment Factors

The Tribunal does not consider such adjustment factors (the expert witness adopted in her valuation) as Position, Time, House Type, View/Aspect, Availability of Swimming Pool, and Provision of Chattels/Furniture unacceptable. The Tribunal considers that the adjustment for Time based on the By Class Private Domestic Rental Indices fails to reflect the luxurious type of properties at the Peak (this aspect has been sufficiently addressed in the foregoing paragraphs). The adjustment for size is also considered excessive as there is no evidence adduced that there is an inequilibrium in the demand and supply of large and small (in terms of the Subject Premises and comparable properties) house type property. If adjustment is necessary, it might be needed to reflect the saving in cost, which is relatively very small. The difference between detached and semi-detached house could also be insignificant as far as rental properties are concerned.

Apart from these, the Tribunal disagrees that the unauthorised structures be taken into account. The Tribunal disagrees not entirely on the aspect of the utility value suggested but the likelihood of having unauthorised structures erected within the other three comparable properties. All six comparable properties including the Subject Premises are within the same neighbourhood and very spacious in local term. Erection of unauthorised structures generally tends to be a localized vogue. If some owners/occupiers have erected some unauthorised structures and the Building Department takes no action for reason albeit being just a matter of priority, it encourages others in the same neighbourhood to do likewise. It may not be fair to deem that the latter three properties are without such structures simply because no inspection has been made. The spacious living area of all seven properties also makes the utility value of these unauthorised structures very marginal. All in all, they are not part of the original design and are subject to demolition at any time. Therefore, the Tribunal does not find it necessary to include them into the valuation.

The Respondent gave no rebuttal on the Applicant's adjustment factors and the adjustment quantum the expert witness awarded, except that it considered the existing rent reasonable. Other than the points made in the above paragraphs, the Tribunal has no objection to the expert witness's adjustment factors and quantum.

(d) Saleable Area

The Applicant's expert witness pointed out that the figure provided by the Rating and Valuation Department includes the area of unauthorised erections. She had verified the figure against the approved building plans and took measurement on the spot. She advised the Tribunal that the correct saleable floor area is 335.8 sq. m. excluding the floor area of the garage. The Respondent disagreed to all but gave no evidence to prove the otherwise.

Valuation

7. The Tribunal is in a dilemma as to how to proceed with the rental assessment given the fundamental problems inherent in the Applicant's valuation. If the Tribunal discards the Applicant's valuation entirely, the Tribunal will work in a vacuum since the Respondent did not produce its valuation. The Tribunal has no alternative but to follow the views given above to revise the Applicant's valuation ignoring temporarily the factor of Time. The revised valuation is appended as hereunder: -

Average: 224.62

8. The total rental is $224.62 / sq. m. x (335.8 sq. m. + 380.8 sq. m. x 0.1) =$83,980.93. This rent has not been adjusted for the difference in transaction time. Examining the unit rent obtained from the data on the two Rental Schedules, the Tribunal finds that the Respondent's request (i.e. to maintain the same rent at $105,000 per month exclusive of rates and management fee) equates to $105,000 /$84,000 = 1.25 or a rise of 25% since January/March 2003. Comparing this to the rise of 1.54 or 54% [see sub-paragraph 5 in paragraph 6(b) above], the Respondent's request is not unreasonable.

Orders

9. The Tribunal hereby orders that: -

(a) A new tenancy for a fixed term of two years be granted commencing on 1st March 2004 and at a monthly rent of $105,000 exclusive of rates and management fees.

(b) A new deposit in the sum of $210,000 is to be paid within one month from the date hereof, less the amount already held by the Respondent.

(c) The parties shall each bear their own costs.