Samwise Ltd. v. Leong Mai Leng

LDNT68/2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. 68 of 2001

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JUDGMENT

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Background

1. The Applicant is the tenant and the Respondent the landlord of the subject premises known as Flat 2 of Block B, No. 34 Magazine Gap Road (Cameron Mansions), Hong Kong ("the Premises", also commonly known as Flat B2). Under the previous tenancy agreement dated 1st June 1999 made between the parties, the tenancy of the Premises included "one car parking space (no. 16) thereto and a servants' room adjoining thereto and another servants' room (no. 2) in the basement of the said Premises" (extracted from clause 1 of the tenancy agreement, page 30 of the Agreed Bundle, Exhibit AR-1). During the hearing, Mr. Robert Wang, a long-time occupier of the Premises and a Manager of the Applicant, questioned the absence of another servants' room in the basement for the exclusive use of the Applicant. But it was subsequently agreed by the Applicant that this issue will be pursued elsewhere, if necessary. For the purpose of this application, it was agreed by the parties that only one servants' room would be provided under the proposed new tenancy for the use of the Applicant.

2. The Premises was subject to a tenancy agreement for a term of two years commencing from 1st June 1999 at a rent of $45,000 per month on exclusive basis. The terms of that tenancy, including the rent, was agreed by the parties after negotiation without resorting to a determination by the Lands Tribunal. Also, the parties agreed that the Tribunal should grant a new tenancy for a term of two years commencing from 1st June 2001. The only outstanding issue was the amount of the prevailing market rent (PMR), on the basis of exclusive of rates and/or outgoings) as at the relevant valuation date of 31st May 2001.

3. The Premises is part of a 4-storey building known as Cameron Mansions completed in 1951. The building is situated on an elevated site accessible via Magazine Gap Road in the Peak District, Hong Kong Island. There are altogether 9 residential flats in the building, which is wholly owned by the Respondent. In fact, three other adjacent buildings (Nos. 30, 36 and 38 Magazine Gap Road), all completed at about the same time, are also owned by the Respondent. The parties agreed the saleable area of the Premises to be 170.7 sq. m.

4. Mr. Robert Wang gave evidence covering the history of his over 25 years' occupation of the Premises, the state of condition of the building as a whole, and the common parts in particular. He also complained about the lacking of proper building management services as well the extent of repairing, renovation and improvement works that he had to make to the Premises. To sum up, he stated that he had spent over $1 million on the Premises and even excluding the renovation and improvement works which were made to suit his own taste and preferences, the total expenditure would still be in the region of $300,000 to $400,000.

5 , The Applicant called for the evidence of Mr. A.V. Togher, Chartered Surveyor. He analyzed five comparables, four of which were in the same subject building and the fifth at No. 38 Magazine Gap Road, an adjacent building also owned by the Applicant.

6. Mr. Togher opined that since Comparable 1 is the closest comparable, the adjusted unit rate of $266 per sq. m. from Comparable 1 should be adopted for the Premises. Applying this unit rate to the saleable area of the Premises gave a rental figure of $45,406 per month. He then sought to make two further adjustments, firstly a downward adjustment of 10% to reflect the renovated state of the comparables and secondly, a notional sum of $1,000 to reflect the inferior state of privacy of the Premises due to its position in the subject building. This resulted in an estimated PMR of about $40,000 per month, on exclusive basis. In addition, Mr. Tougher opined that, should the Applicant be deprived of the use of a servant's room in the basement, an estimated sum of $1,000, being the value of a servant's room, should further be deducted from the above rental figure of $40,000.

The Respondent's case

7. Ms. Chow, Yin Fong Kathy, a secretary of Lingnan Land Investment Company Limited, the lawful attorney of the Respondent gave evidence. Her statement and oral evidence was that the "adjoining servant's room" stated in the previous tenancy agreement for the Premises in fact referred to the servant's room inside the Premises. There was no other servant's room adjoining the Premises that could be made available to the Applicant.

8. Ms. Chow confirmed that for the comparables used by Mr. Togher, Comparable 1 (Flat B5) had 2 servants' rooms, Comparable 2 (Flat A4) had only 1 servant's room inside the flat, similar to that of Premises while Comparable 3 (Flat C9) had the use of 2 servants' rooms.

9. Ms. Chow gave evidence that there was no vacancy in the subject building of No. 34 and the adjacent building No. 30. For No. 38, the first floor was vacant since March 2001 while for No. 36, the first floor was vacant since January 2002.

10. Ms. Chow admitted that she did choose tenants on behalf of the Respondent. Although she gave similar terms to all tenants, she used to give discount to a tenant (usually a corporate tenant) who rented more than one flat. For example, she claimed that the rent passing of Flat A4 was only $1,000 more than that of Flat C9 even though the commencement dates of both tenancies were at about the same time and that the size of Flat C9 was much smaller. This is because she gave a discount to the tenant of Flat A4, who was the same corporate tenant of Flat B5. Whenever the tenancies in relation of Flat A4 and B5 were to be renewed, the tenant would negotiate with the Respondent on both tenancies.

11. Regarding the management of the subject building, Ms. Chow while admitting that there was no regular on-site management staff, disagreed that the Respondent provided no management services. Ms. Chow refuted the allegations against the Respondent made by Mr. Robert Wang in respect of the management of the building, the condition of the common area as well as the improvement and renovation of the building. Ms. Chow said that the Respondent had taken steps to improve and renovate the building. This included maintenance and repairing work made to the Premises. In support of her statement, she submitted invoices to the contractors in respect of the improvement and renovation works.

12. Ms. Chow also disputed Mr. Togher's statement that the comparables had recently been renovated. Ms. Chow however admitted that renovation to the timber flooring had been effected to Flats A4 and B5 as the tenant "had all along maintained a good standing relationship with the Respondent and the flooring had become worn owing to long use by the corporate tenant."

13. Regarding Mr. Togher's Comparable 4 (Flat B8), Miss Chow pointed out that "in about the end of 1997, there was leakage problem at the roof above B8 which was later fixed by the Respondent." As a result, the rent at renewal in 1999 "was revised downwards to $46,000, which was exceptional in the circumstances."

14. The Respondent also called for the evidence of an expert witness, Ms. Lai Yuk Yin, Chartered Surveyor. Ms. Lai in her valuation report filed with this application made references to 8 rental comparables, based on a schedule of rents provided by the Rating & Valuation Department. These were rents of flats in various buildings in the Peak district, including 4 comparables in No. 30, 36 and 38 Magazine Gap Road. But none of these 8 comparables were from No. 34, the subject building.

15. Ms. Lai submitted that the choice of comparables from buildings other than the subject building should be preferred since this would eliminate the landlord's monopoly element caused by single ownership of the subject building by the Respondent. On that basis, Ms. Lai analyzed her 8 comparables and made adjustments in respect of the factors of location, age, floor level, size, timing and view. After applying a weighing factor to each comparable, she arrived at an after adjusted rate of $296.05 per sq.m. for the Premises. Applying this to the agreed saleable area of the Premises gave a figure of $50,535.74. On top of this, she gave an allowance of $500 for an additional servant's room in the basement for the Premises. This added up to a PMR of $51,000 per month (Exhibit "AR-1", page 27).

16. During the hearing, Ms. Lai helpfully produced a revised valuation sheet (Exhibit "R-12"), using the 5 comparables adopted by Mr. Togher. She carried out adjustments to these 5 comparables and arrived at an estimated PMR of $50,000 per month, on exclusive basis. Based on the evidence given by Mr. Robert Wang, she assumed in this revised valuation that the Premises would only have the use of one servant's room. Hence, prior to the adjustments for various factors, she deducted $500 from the rents passing of Flats B5 and C9, both of which had the use of two servants' room. Also, apart from the factors of time, level, view, size and age, she adjusted for the factors of block letting and concessionary rate.

The Tribunal's choice of the best comparables

17. In one of the earlier Part IV tenancy cases decided before the Lands Tribunal, Sentry Holdings (Asia) Ltd., v. Cali Enterprises Ltd. [1983-1985] CPR p.140, the Tribunal held that

"where recent comparable lettings in the same property were available in sufficient numbers to enable a reasonable assessment to be made of the prevailing market rent, there was no need to rely on comparisons with premises in other buildings, save to the extent necessary to show that rents in the same property did not diverge sharply from the general market level. Save for this limited purpose, outside comparison would be necessary in such circumstances only if it was suggested that there were special factors which had influenced rents on the subject premises."

18. The above quoted statement is in line with one of the established principles in adopting the direct comparison method of valuation. It is obviously more subjective and difficult to adjust for the differences between buildings than to adjust for differences between flats in the same building. This is especially so in the present case where the subject building was an aged building completed over 50 years ago.

19. The Respondent's expert suggested the issue of possible existence of landlord's monopoly as the reason for not adopting the comparables in the subject building. H.H. Judge Yung, in a recent unreported judgment of Chen, Jeffrey Hui v. Humphreys Esate (Douglas) Holdings Limited and Fronta Limited (New Tenancy Application No. LDNT 352/2001) dated 7th February 2002, had a discussion on the issue. I agree with his conclusion that only "when there is evidence to show that the landlord let out his flats in the same block at higher than market rent, it would be safer to check by looking at comparables elsewhere". I also consider it appropriate to add that it is indeed an established valuation principle that if there is evidence to show that the landlord let out his flat in the same block at higher or lower than market rent, it would be safer for any valuer and the Tribunal to check by looking at comparables elsewhere. Otherwise, the more fundamental principle of adopting comparables from the same building, or from the same estate (as far as houses are concerned) should prevail.

20. In the present case, there is no evidence that the rents in the subject building are anything but market rents agreed by the landlord (the Respondent) and the tenants. Although Ms. Chow for the Respondent stated that she normally gave a discount to tenants renting two flats, she did not spell out the percentage of discount. Besides, she also gave evidence that she agreed to renovate the floor of Flats A4 and B5 because they were rented by the same corporate tenant. Therefore, the discount that she might give to a corporate tenant might be compensated by what she agreed to do, say in terms of renovation works for the flats of the same tenant.

21. For the above reasons, Comparables 1 to 4 of Mr. Togher's list of Comparables are preferred in this valuation. However, on further analysis, it is noted that Comparable 4 had a commencement date of 1st September 1999, about 21 months from the date of valuation of the Premises. It was only three months away from the commencement date of the expired tenancy of the Premises. Therefore, this comparable should be discarded.

22. Although after discarding Comparable 4 and 5, there are only 3 comparables left for the purpose of this valuation, the Tribunal considers that this is sufficient for the present valuation exercise. After all, it is always the case that the quality of the comparables and their relevance but not the quantity that count.

Adjustments of differences in the provision of servants' room

23. The Tribunal agrees with the approach adopted by Ms. Lai in her revised valuation. That is, before making adjustments to various factors of time, view, etc., an allowance should be made to Comparable 1 and 3 (i.e. flats B5 and C9 respectively). However, instead of adopting a sum of $500 for the additional servants' room of these 2 comparables, the Tribunal decides that Mr. Togher's estimate of $1,000 to be more appropriate.

24. Since only comparables in the subject building are used in this valuation, there is no need to consider further the evidence of Mr. Robert Wang regarding the management of the building and the state of the common parts.

25. The Tribunal summarizes below the three adopted comparables, their rents passing, saleable areas, unit rates and the adjusted unit rates after adjusting for the differences in the provision of servants' room:

Summary of other adjustments to the Comparables

26. The Tribunal further summarized below the other adjustments adopted by the Tribunal, the total adjustments and the resulting adjusted unit rates:

27. The adjustments adopted by the Tribunal are elaborated below:

(1) Timing

Both experts considered that no time adjustments were required for Comparables 1, 2 and 3. This is accepted by the Tribunal.

(2) Level & privacy

The experts agreed the percentage of adjustments for differences in level of the flats. In addition, Mr. Togher opined that an additional negative allowance of $1,000 should be made for the relative lacking of privacy for the Premises. This is agreed by the Tribunal. However, this allowance should be more appropriately grouped under this heading of adjustment for "level & privacy". Adjustments of -2% each for Comparables 1 and 2, and -3% for Comparable 3 are warranted.

(3) Size

The experts agreed the adjustments on this factor, the only difference being in the rounding off of the percentages. The Tribunal agrees to adopt the rounded off figures used by Mr. Togher.

(4) View

Mr. Togher's assessments and proposed adjustments for this factor are preferred and adopted.

(5) Block Letting

Despite what Ms. Chow said, the Tribunal does not see sufficient evidence to warrant the adjustment for this factor, and certainly disagrees the allowance of 7% adopted by Ms. Lai. That amounts to a sum of $3,500, based on Ms. Lai's estimate of the PMR for the Premises. Since this allowance, if given at all, would be given to two flats rented by the same tenant. And, since the tenancies in the building were invariably of 2-years term, the allowance suggested by Ms. Lai would mean that for the savings in time and trouble of negotiating and leasing with two tenants instead of one tenant, the Respondent was prepared to forgo, during a 2-years period, a total of $168,000 ($3,500 per month x 24 months x 2 tenancies))! If a management agent is actually doing that sort of discounting without first seeking his principal's approval, one would imagine that the agent might probably be blamed for the lacking of due care in the management of the building.

(6) Adjustment to allow for the state of the comparables or the Premises

Mr. Togher stated that since the comparables had been renovated, a figure of +10% was adopted to reflect the decoration of the comparables. However, this was denied by the Respondent. Although Ms. Chow admitted that renovation works to Flats A4 and B5 had been made, the Tribunal decides that no adjustment should be made, as there is no evidence that the floor of the Premises is anything other than in a reasonably good condition. In addition, Mr. Robert Wang contended that since he had spent considerable amount in repairing, renovating and improving the Premises, this should be reflected in the PMR of the Premises. The Tribunal agreed with the Respondent this argument was wrong in principle. Any improvement works to the Premises would in general form part of the Premises. The Tribunal should not make any adjustment to reflect the contribution that has been made by the tenant. All in all, no adjustment is allowed for this factor.

Determination of the PMR of the Premises

28. The above analysis and adjustments show that Comparables 1 to 3 have, after adjustments, provided unit rates of $258.87, $255.00 and $275.89 per sq. m. respectively. Applying these unit rates to the saleable area of the Premises of 170.7 sq. m. results in the estimated rents of $44,189, $43,529 and $47,094 respectively. They are all comparables in the same building. Therefore, in the circumstances, it would be fair and reasonable to adopt the average of all these 3 comparables as to be the PMR for the Premises. This the Tribunal calculates to be $44,937, which can be rounded to $45,000. The Tribunal therefore determines that the prevailing market rent of the Premises, on the basis of exclusive of rates and management fee, is $45,000 per month.

Costs

29. The Respondent submitted that the conduct of this case on the part of the Applicant warrants the Tribunal to make a costs order against the Applicant with certificate for counsel. This is totally unreasonable. The Applicant's second witness, Mr. Robert Wang might have spent some time during the hearing to set out the history of his occupation and that the provision of ancillary servants' accommodation by the Respondent to the Applicant did not tally with what was stated in the tenancy agreement of the expired tenancy for the Premises. This is logical and actually assists the Tribunal in the findings of the facts of the case. The Tribunal does not find that any party was conducting the case in a frivolous or vexatious manner, to merit the award of costs order against any party, in the light of section 119R of the Landlord & Tenant (Consolidation) Ordinance, the section that provides for the circumstances under which costs order should be made.

Orders

1. New Tenancy for two years commencing from 1st June 2001;

2. New rent at $45,000 per month (exclusive of rates and management fee); leave to the Applicant to pay the Respondent arrears of rent, if any, within one month;

3. Deposit to be adjusted pro rata in accordance with the new rent, if necessary; leave to the Applicant to pay the Respondent the adjustment within one month;

4. Other terms of the new tenancy to be the same as the previous tenancy agreement;

5. No order as to costs.