PCM & ASSOCIATES LTD. v. TAI WAI YIN, HONARD

Landlord and Tenant - Part IV application for a new tenancy - determination of prevailing market rent - question as to what is the significance of the words, "but disregarding the effect of this Ordinance" within the definition of prevailing market rent - is it an effect of the Ordinance that the rent falls to be determined after the date the tenancy was due to be renewed - if so does this preclude the use of comparables agreed after that date-Held-The inclusion of the phrase, "but disregarding the effect of this

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Tribunal Application No. L.T.2513/88

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D E C I S I O N

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1. This is an application for a new tenancy under sec. 117(1) of Part IV of the Landlord and Tenant (Consolidation) Ordinance Cap. 7. The subject flat is on the fifteenth floor, of Number 26 Belleview Drive, Repulse Bay and is part of the development known as Repulse Bay Garden. The tenancy includes a covered car-parking space. It is agreed that a new tenancy is to be granted from 1st August 1988 and to be for 2 years. The terms and conditions, which include a "break clause" whereby the tenant is permitted to terminate the tenancy by giving the landlord 2 months notice at any time during the second year of the tenancy, are to be retained. Only the rent is in dispute.

2. There was some argument on the matter of minor repairs being required However in accordance with a similar application in Union Carbine Asia Ltd. v. The Hong Kong Land Co. Ltd. (1982) HKDCLP 75 the premises are to be considered as if they were in reasonable tenantable condition with the liability for any repairs being honoured by the relevant party according to the terms of their agreement.

3. Mr. Mar Po Chiu, the managing director of the applicant company appeared for his company. Mr. MAR is the occupant of the subject flat. He submitted that the prevailing market rent should be $23,000.00 per month exclusive of rates. The respondent's counsel, Mr. Walter Lau argued that the prevailing market rent should be $26,000.00 per month.

4. The difference of $3,000.00 is not substantial. Being less than 10% of either of the proposed rents, it would seem to be reasonable to accept that either figure might be somewhere in the region of what could be expected to be the rent at the relevant date of 31st July 1988. In spite of the narrow difference, the parties could not come to any agreement.

5. Mr. Mar relied on the evidence of Mr. Brian Lewis who is a chartered surveyor with J.Wilburn & Associates, Mr. Lewis' assessment of $23,000.00 was based on agreed rents within the Repulse Bay Garden development which consists of a number of similar blocks. His comparable lettings were as follows : No. 30 Belleview Drive, 12/F, for a lease from 1.3.1988 for 2 years at $19,000.00 per month; No. 24 Belleview Drive, 14/F, for a lease from 1.4.1988 for 2 years at $21,000.00 per month; No. 32 Belleview Drive, 13/F, for a lease from 21.5.1988 for 2 years at $21,000.00 and No. 34 Belleview Drive, 13/F, for a lease from 1.8.1988 for 2 years at $27,500.00 per month. All of these leases include a carpark, and, with the exception of the flat in No. 34, all have the same floor area and layout as the subject flat. Mr. Lewis after making adjustments for the time difference in respect of those comparables let some months before the relevant date as well as the view, concluded that the appropriate rent at 31st-July 1988 should be $23,000.00 per month.

6. The respondent relied on the evidence of Mr. Chiu Kam Kuen, a chartered surveyor in the firm of Jones Lang Wootton. He valued the subject premises at $26,000.00 per month. Mr. Chiu relied on a number of more recent rents for 2 year tenancies in Repulse Bay Garden to arrive at his figure of $26,000.00, His earliest comparable commenced on 1st June 1988 and the latest on 16th September 1988. All were for flats having the same area and layout as the subject flat. They ranged between $25,000.00 for the 1st of June lease and $28,000.00 for the 16th September lease. However in the latter case, the kitchen and the bathrooms of the flat had been recenty retiled. My inspection revealed that at some point in time, the same sort of improvements had been carried out on the subject flat.

7. Before I deal with the rest of the evidence concerning the most relevant comparables it would be appropriate to deal at this stage with Mr. Mar's submission that the definition of prevailing market rent precluded the use of any comparablcs which were after the relevant date. Mr. Mar drew my attention to the definition of prevailing market rent in section 115 of the Landlord and Tenant (Consolidation) Ordinanee Cap 7. It is, "the rent, ... at which premises might reasonably be expected to be let at the date on which the current tenancy would, ... have come, to and end under section 119(1) or section 119A(5), on the terms of the new tenancy granted under this Part, but disregarding the effect of this Ordinance". (underlining added)

8. Mr. Mar considered, with reference to the words, "but disregarding the effect of this Ordinance", that it was an "effect" of the Ordinance within the meaning of the definition that the rent for his flat was having to be determined after the date the tenancy came to an end on 31st July 1988. But for the Ordinance, information of rents agreed after this date would not have been available and hence should be disregarded.

9. Other statutes requiring valuations to a specific date, admittedly without the addition of this phrase, have had various judgments criticise any contention that hindsight should not be permitted. This principle is often known as the "Dwllfa Principle" by reference to the case of Bwllfa & Merthyr Dare Steam Collieries v. Pontypidd Waterworks Co. (1903) A426 which laid dowm that information which was an accomplished fact, but only became available after a relevant date, was not only permissable but was also preferable to that which was known before the date, but could form only the basis of an estimate at the time when it became available.

10. The principle of using sales information after a relevant date was referred to in Mccathie & Ors v. The Federal Commissioner of Taxation (1944) 69 CLR 1, 16 by williams J. by reference to his earlier unreported judgment in Daandine Pastoral Co. v. Commissioner of Land Tax of the Commonwealth of Australia "But I will venture to repeat the remarks I made in the Danndine case on tae question whether the evidence was admissible ; - values must be calculated in the light of circumstances which existed on the material date, in this case 30th June 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances. Subsequent sales are just as admissable in evidence as prior sales, provided that in all the circumstances they are comparable".

11. It has been reiterated on numerous occasions by this Tribunal that the concept of prevailing market rental value within the meaning of the definition assumes that the subject premises are presented on the market vacant and to let. The prevailing market rent is that rent which a hypothetical landlord and a prospective hypothetical tenant might be expected to agree for the premises so offered. Any imperfect knowledge of the hypothetical landlord or the hypothetical tenant when coming to an agreement on the relevant date should be disregarded. So also, in accordance with the relevant words in the definition, should any effect that the workings of the Ordinance might have on such a rent.

12. I would venture to say that the inclusion in the definition of the phrase, which led to this submission, seems to be unnecessary, Also it is not without some degree of ambiguity for there are two possible interpretations which come to mind. If, for example, the effect of the Ordinance contemplated is to create a higher or lower rent than would have otherwise have been expected, it would be necessary to identify and, quantify what that increase or decrease was. It then can be either added or substracted from the figure derived from the affected comparables to determine the rent at a level as if the Ordinance had had no effect on it. On the other hand, taking the words more literally, it could mean that we are to ignore the existence of any increase or decrease and determine the rent strictly in relation to the market evidenced by the comparables. That is we should not concern ourselves as to how the market got to be where it is and should ignore any effect, the Ordinance might have on it. Before Roberts C.J., sitting as President of the Land Tribunal in Pfizer Corporation v. The Hong Kong Land Company Ltd. T.8 of 1982, found in favour of the second alternative, I was inclined more to the first interpretation.

13. In any event it is difficult to imagine just what effect the Ordinance might be expected to have on rents within Part IV, other than that raised here That is, it might have the effect of increasing the sitting tenant's bargaining power by virtue of the security of tenure he enjoys due entirely to the Ordinance. As previously explained, it is not the rent which he as a sitting tenant be able to negotiate which is to be determined. Rather it is, the rent which a hypothetical incoming tenant might have been expected to agree with a hypothetical landlord as at the relevant date. The question as to whether the provisions for rent control which are included in Parts I & II of the Ordinance, have any effect, should not arise in Part IV where there is no rent control provision.

14. Therefore the words "disregarding the effect of this Ordinance" should not, as Mr. Mar suggests with respect to Part IV, rule out any benefit of hindsight, for we are not concerned with the fact that the sitting tenant with his right to security of tenure, finds himself in the position of arguing the appropriate rent after the date his new tenancy is due to commence. Similarly it follows that we are not concerned that his dispute on that rent has come before the Tribunal for determination after the relevant date. We are disregarding this effect, as in fact we are disregarding anything concerning the position of the sitting tenant in favour of the hypothetical situation. The valuer when determining what these hypothetical parties might have agreed at a specific date should not be prevented from the benefit of having knowledge of rents agreed after the date any more than he should be denied knowledge of those rents agreed before-the date while he is expected to take account of what aspects of value would be most important to those dealing in that level of the market, placing most weight on the more appropriate features, the valuer is not to be restricted to that information which would only be available to the hypothetical parties at the date their bargain is struck.

15. Returning to Mr. Chiu's evidence it is apparent that he did not consider the view from the subject property to be in any way inferior to that from the block, Nos. 38 and 40, where his best comparables were located. In fact Mr. Chiu-concluded that the view from the subject flat was slightly better. As this seemed to be where there was the greatest difference of opinion, I considered it advisable to inspect the subject flat and the comparables. Having done this, in the company of representatives of both parties, I must disagree with Mr Chiu. Block Nos. 38 and 40 has a broader view directly out to sea. The subject block is orientated so that its view is of a much narrower area to the East over Repulse Bay Beach and extends only some 150 yards or so into the bay itself. The proximity of the subject flat to its neighbouring block, Nos. 22 and 24, is a further detrimental factor which seemed to have been ignored by Mr. Chiu.

16. While rents within the subject block are usually the best evidence; in this case the two comparables located on the 11/F, and the 14/F of the subject block are conflicting and appear to be out of line with those agreed elsewhere. In fact. Mr. Mar gave evidence of the 11/F agreement being for one year rather than the usual two. I would prefer to leave alone the various theories expressed, by each of the parties as to whether this would result in a higher or lower rent than usual. It is sufficient to note that it is doubtful if it is an agreement for 2 years which is the duration required for the subject flat and was, for that matter, the duration for all the other agreements cited as comparables.

17. Mr. Chiu's comparables nonetheless are closer to the relevant date than the rents relied on by Mr. Lewis who made a fairly arbitary adjustment of some 15% to his comparables 2 and 3 which were for leases in April and May 1988 to arrive at a rent for 31st July 1988.

18. It has to be noted that Nos. 38 and 40 is a block in single ownership. The foyer has been refurbished and it has had incorporated on the ground floor, an exercise room and a sauna which might be expected to enhance its marketability; but I doubt if many tenants would place much in the way of additional value on these facilities. More importantly the difference in view and the proximity to the adjoining block made the subject flat inferior to those in Nos. 38 and 40. The rental evidence suggested that while $26,000.00 a month might be the market level for a higher floor in No. 38 it should be something less for No. 26.A 10% reduction would seem appropriate with respect to the view. It is a very subjective matter when it comes to deciding what should be allowed for the nearness of an adjoining block given that block, Nos. 38 and 40, is similarly, but to a lesser degree, affected by the development known as Repulse Bay Apartments. Repulse Bay Apartments is not as close to Nos. 38 and 40 as No 26 is to its neighbour, No.24. A 10% reduction for view on a rent of $26,000.00 gives $23,400.00. Therefore to allow for the proximity of No. 24 it would seem reasonable to reduce the rent to about $23,000.00.

19. However having done this, and having had the benefit of the inspection, I am able as most valuers should, to stand back and take an overall view relating the subject premises generally to all the evidence available.

20. There was other evidence of lettings in the immediate locality. Mr. Chiu referred to rents in Repulse Bay Mansions which did not give much guidance as this is an older development, being very different in style with a different type of appeal. Mr. Mar drew attention to the evidence of lower rents than those listed by Mr. Chiu being agreed in Nos. 38 and 40 by the HongKong and Shanghai Bank. Those rents were not very helpful due to their being part of a parcel of a number of flats. A discount for this fact would not be unreasonable or unusual.

21. I am then left with the question of whether the modernised kitchen and bathrooms in the subject flat should affect the rental value. Generally, these days the finish to these rooms can have a significant influence on value. The comparables in Nos. 38 and 40 were not mentioned as having had similar improvements. Only the flat at No. 26, fourteenth floor was stated as having had this sort of work done. If it had been carried out recently it may well have infiuenced the agreement for the rent of $28,000.00 and caused this rent to be out of line with the others available. I therefore believe the condition of the kitchen and  the bathrooms would improve what might otherwise be the rental value of the subject promises and an upward allowance of at least $1,000.00 per month should be made.

22. I therefore propose to fix the rent at $24,000.00 per month and I make the following order.

23. A new tenancy shall be granted for 2 years from 1st August 1988 at a rent of $24,000.00 per month exclusive of rates. The new tenaney is to be otherwise on the same terms and conditions as the previous tenancy save for the deposit clause which shall be altered to reflect the new rent.

24. There is no order as to costs