UNI-GROUP CONSULTANTS LTD v. COMMISSIONER OF RATING AND VALUATION

LDRA 85 OF 2009

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

RATING APPEAL Application No. 85 of 2009

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J U D G M E N T

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Background

1.  This is an appeal made by the Appellant, the owner of the property at 18 Pak Pat Shan Road (Cedar Drive), The Redhill Peninsula, House 83 (“The Appeal Tenement”) against the decision of the Respondent, the Commissioner of Rating and Valuation (“the Commissioner”) that “the Rateable Value in the Valuation List is considered reasonable and shall not be altered”.  The ground of appeal as stated by the Appellant in the Notice of Appeal pursuant to section 42(1) of the Rating Ordinance, Cap. 116 are that “the Rateable Value at $1,167,120 is 145% (sic) higher than the actual rent of $802,284 which was the best offer from the open market after eight months in search of the tenant”.  The Appellant seeks an order from the Tribunal under section 44(1) of the Ordinance that the Rateable Value be adjusted to $802,280 and that all overpaid Government Rates since 1 July 2008 be refunded to the Appellant.

The Appellant’s case

2.  Mr. Chan Chi Kong Eddie (“Mr. Chan”), the shareholder and director of the Appellant gave evidence in the hearing.  He filed to the Tribunal and served to the Respondent his witness statement.  He further set out the reasons supporting his Appeal in a written submission.  Taking these documents together, supplemented by his oral evidence and submission, he raised the following reasons in support of his case:

(1)  There was inconsistency in the Rateable Values of the Appeal Tenement for the subject year of assessment 2009/2010 and the previous year of assessment 2008/2009, when compared with the actual rents he received, or the movement of the average monthly net rentals of the houses in the Red Hill Peninsula (even if one were to base on the rental data filed by the Commissioner’s expert);

(2)  The Commissioner has not taken into account the actual internal condition of the Appeal Tenement as evidenced in the expert report filed by the Commissioner’s expert, and the photographs taken and produced by the Appellant;

(3)  The Rateable Value of the Appeal Tenement as at the relevant valuation date of 1 October 2008 for the year of assessment 2009/2010 should be based on the open market rent of the actual lease that the Appellant was able to enter into with the actual tenant after the Appeal Tenement was put up for lease in the market for a number of months, through (a) by the placing of advertisements in the SCMP and (b) various property agents;

(4)  The tenants of the five comparables cited in the expert report filed by the Commissioner’s expert were sitting tenants who only agreed with their respective landlords the rents for renewals of tenancies, and therefore, they were not tenants who actually chose to lease the houses in the Red Hill (including the Appeal Tenement) that were vacant and available for leasing at the relevant time in the market;

(5)  The Hong Kong Property Market Monthly Reports of the qualified property consultant/surveyor, Messrs Knight Frank show that “the declining trend in the luxury residential rentals” of 26.1% for the period from September 2008 to December 2008, which similar to the 30% drop of average monthly net rental, for the period from August 2008 to February 2009 as shown in the expert report filed by the Commissioner’s expert.

Evidence relied upon by the Appellant

3.  Although Mr. Chan agreed that the suitable method of valuation to be the direct comparison method, he did not adduce any rental evidence to substantiate his Appeal.  He also chose not to call for the expert evidence of any valuation surveyor or the property agents who helped him to market the Appeal Tenement during the relevant time.

4.  Mr. Chan produced photocopies of name cards of estate agents to support his statement that although he had sought the service of numerous agents in 2008 he was only able to find the present tenant after putting the Appeal Tenement for letting for about 8 months.  In answering to the Tribunal’s question on whether he kept any record of the asking rents that he had been seeking and the counter-offers, if any, that he had received during the said period, Mr. Chan said that although he was prepared to consider whatever rental that was offered by any prospective tenant during the said 8 months’ period, he had not received any offer until the tenant of the current lease that started 1 January 2009 made an offer of $80,000 per month.  He could not produce any record of his whole letting period but he produced a letter dated 29 October 2009 from one of his Agents, a Mr. George Sze, Associate Director of Redhill Plaza Branch of Ricacorp Properties Limited confirming that his company “failed to source a tenant” for the Appellant.  In the letter, Mr. Sze further commented that, “In that period of global financial crisis, the rental market in the entire Redhill Peninsula was stagnant.  It was a buyers’ market with few experts (sic) (less coming and more leaving) renting, existing tenants negotiating rent reduction and the general public cautious on spending.”   Mr. Sze did not give evidence in the Appeal hearing.

5.  Mr. Chan said that the leasing market in 2008, during the period from the date when his former tenant left, was very bad.  He further added that because of the poor state of the property market caused by the financial tsunami, the Government had to give rates’ concession for six consecutive quarters since 1 July 2008.

6.  Regarding the internal state of repair of the Appeal Tenement, he drew the Tribunal’s attention to the photographs attached to his written submission and contrasting them with similar photographs of the Appeal Tenement as shown in the expert report of the Respondent.  He claimed that the Respondent’s expert did not use close-up shots as a result of which the internal conditions could not be easily identified in her photographs.

7.  He drew attention to the following “wears and tears” in the Appeal Tenement: the holes on all aluminium casement windows; the tarnished bathroom fittings; the mal-functioned door-phone system; the cracked ceramic tiles on the kitchen walls; the worn-out painting and cracks on the external walls and the numerous holes on the wooden stair rails.

8.  Although Mr. Chan commented that the comparables identified by the expert for the Respondent were all renewals, he did not have any reason opposing their use as comparables.  He was of the view that one of the comparables (Comparable 3, House No. 97) was the best comparable, but found it to be much superior in terms of the internal condition, vis-à-vis the Appeal Tenement.  He also placed much importance on the relatively inferior state of repair and condition of the Appeal Tenement as the finishes and fittings (for the kitchens and the bathrooms, for instance) were the same as originally installed by the property developer, and that it had been leased out for the last 2 decades without any up-grading apart from minor touching up works (costing about $20,000 plus in the last occasion).  However, he plainly admitted that, being not a professional on valuation, he could not give any estimate as to the discount that the Tribunal should place on this factor in valuing the Rateable Value of the Appeal Tenement.

Valuation by the Appellant

9.  In the written submission, the Appellant estimated the Rateable Value of the Appeal Tenement, adopting the adjusted net rent of $254 per sq.m. (being the unit rate of the actual tenancy of the Appeal Tenement, or net rent of $66,867 / 263.5 sq. m.) as the Main Rate (“MR”) to the main accommodation, and applying certain ratio of MR as the appropriate unit rates for the ancillary accommodation, similar to that adopted by the Commissioner’s expert, as follows:

          Main Accommodation:

          263.5 sq. m. @ $254 per sq. m. = $66,929 per month

          Ancillary Accommodation:

          Open Side Roof: 6.7 sq. m. @ 15% of the MR = $255.3 per month

          Open Top Roof: 27.1 sq. m. @10% of MR = $688.3 per month

          Yard/Garden: 58.7 sq. m. @12% of MR = $1,789.2 per month

          Covered carport for 2 cars: $6,200 x 81.38 % = $5,045.6 per month

The above gives a total monthly rental estimate of $73,707.4, and hence rateable value of $73,707.4 x 12, or $884,488.80

10.  Therefore, the Respondent sought to amend the Rateable Value for the year of assessment 2009/2010 to $884,488.80; to have the amount of overcharged rates be refunded to the Appellant and that the Respondent all bear all the costs of the Appeal.

11.  However, I find that the arithmetic of the Appellant’s addition of the above figures in his written submission (produced, as Exhibit A1) was incorrect.  His total rental estimate should add up to $74,707.4, and hence, his estimate of rateable value should therefore be $74,707.40 x 12, or $896,488.80.  However, more importantly, although Mr. Chan stated that he had adopted the above analysed unit rate of the actual rent of the tenancy of the Appeal Tenement as the MR for the main accommodation, and used the same methodology of the Commissioner’s expert in valuing the ancillary accommodation of the Appeal Tenement, in arriving at the above assessment of the monthly rent, and hence the rateable value, this was not the case.  The Commissioner’s expert actually only adjusted the actual rent passing of $80,000 for the rates and management fee to arrive at the net monthly rent of $66,867 (i.e., on the same basis as the Rateable Value), which was reduced to a unit rate of $253.73 per sq. m.  Mr. Chan adopted this figure of $253.73, which was rounded to $254, in his assessment.  However, on top of that, he assessed the ancillary accommodation as a percentage of the MR of the main accommodation, and added a lump sum figure for the covered carport.  Therefore, Mr. Chan seemed to have misunderstood the approach of the Commissioner’s expert in her analysis of the comparables and the valuation.  On the whole, even assuming that Mr. Chan adopted the rent of his actual tenancy as the basis, his valuation steps as set out in his written submission and reproduced in paragraph 9 above was incorrect.  Instead, if Mr. Chan held the view that the Rateable Value should be based on the actual rent passing of the tenancy entered into between the Appellant and the tenant, he could just seek to have the Rateable Value reduced to $802,404 (based on the actual net rent of $66,867, exclusive of management fee and rates x 12).

Responses by the Respondent

12.  The Respondent set out the following response to the Appellant’s case:

(1)  Although there is no statutory prescribed method of valuation, the abundance of direct rental evidence of properties similar to the Appeal Tenement render the direct comparison method of valuation more appropriate than other methods of valuation;

(2)  The Respondent submits that the burden rests on the Appellant to prove that the Appeal Tenement has been valued above its proper Rateable Value.  Since the Appellant has failed to discharge its burden to adduce any substantive evidence to prove that the Appeal Tenement has been valued above its proper Rateable Value, the Appeal should be dismissed.

(3)  The Rateable Value of the Appeal Tenement for the year 2008/2009 has to be ascertained by reference to its market rent as at 1 October 2008, on the assumption as stipulated under section 7A(4) of the Ordinance.  In addition, the actual rent that was accepted by the Appellant on 1 January 2009 could at best be accepted by the Tribunal as a reference but could not be regarded as the market rent of the Appeal Tenement, for the purpose of assessing the Rateable Value as at the relevant valuation date of 1 October 2008.  Notwithstanding the short period of time between 1 October 2008 and 1 January 2009, the Respondent submitted that that however was a period when the property market, affected by peak of “the financial tsunami”, was in turmoil, and therefore, it would not be right to consider rental transactions that were concluded more than one and a half month away as it was very difficult to make adjustment for the differences due to the timing of the transactions and the relevant valuation date of the subject Appeal.

(4)  It is trite law that the rateable value “should be the market value of a tenement, which is not necessarily the same as the actual rent agreed between a landlord and a tenant, which can be below the market rent.”

Evidence by the expert of the Respondent

13.  The Respondent called for the evidence of Ms. Lui Sau-kwan, an “in-house” qualified valuation surveyor who has filed to the Tribunal and served to the Appellant an expert valuation report

14.  In the Report, Ms. Lui set out the chronology of events of the Appeal and the basis of valuation, both of which were un-challenged.  She further set out the location & neighbourhood description of the rateable tenement.  She then described the tenement and set out the comparable rental evidence in Appendix G.

Choice of valuation method and comparables

15.  Although Mr. Chan for the Appellant did not adduce any evidence of rental transaction apart from that of the actual tenancy and the previous tenancy of the Appeal Tenement, it is sheer common sense that the only appropriate valuation method of this type of residential tenement must be the direct comparison method.  Ms. Lui for the Commissioner collected a few comparable rental transactions of houses in Red Hill, being all very close to the relevant valuation date.  Although Mr. Chan gave evidence that the market in Red Hill in 2008 was very poor, I do not accept that the market was so poor as to be completely devoid of any rental evidence.  Also, although Mr. Chan complained that Ms. Lui’s comparables were all renewals, I find that Comparable 5 was in fact a “fresh” letting.  I further note that in cross examination, the Respondent did not seek to challenge Ms. Lui’s valuation including her adjustments of the comparables to reflect the differences between the Appeal Tenement and the adopted comparables, with the exception of the issue of the inferior internal state of repair and condition of the Appeal Tenement.  Mr. Chan plainly admitted that there was no ground for him to challenge the evidence of Ms. Lui as an expert giving evidence to the Tribunal.  Summing up, I decide that there is no reason to reject the comparables of Ms. Lui, nor her analysis of the comparables, adjustments and the resulting valuation of the Appeal Tenement.  Next, I will consider the other reasons relied upon by Mr. Chan to see if these had any effect on the value of the Appeal Tenement, or had not been properly taken into account in Ms. Lui’s valuation.

Rental evidence of the actual tenancy of the Appeal Tenement or comparison with Rateable Value of previous years  

16.   I agree with the submission of the Respondent that the Rateable Value of a tenement shall not necessarily be the same as the actual rent passing of the tenement as the latter could be below or above the market rental level.  In light of the evidence of both parties that the market was severely affected by the incident of the collapse of a major investment bank in October 2008, I agree with Ms. Lui that it would be more preferable to consider comparable transactions that might not be affected by the incident.  As such, I accept that M. Lui’s transactions were more likely to be not affected by the incident, having regard to their dates of commencement and the time lag between the oral agreements and the actual commencement dates of the tenancies.  On the other hand, the commencement date of the actual tenancy of the Appeal Tenement was 1 January, 2009.  Therefore, I agree with Ms. Lui that it was most probably more affected by the said incident.  As such, I agree that it should be discarded in light of other evidence being available.

17.  The Appellant submitted that the Commissioner’s valuation of the Rateable Value for the year of assessment 2009/2010 was obviously wrong when one took into account the actual rents passing of the Appeal Tenement from 1 January 2009, the actual rent of the tenancy before that, the previous Rateable Value of the Tenement for the year of assessment 2008/2009 and the drop in rental values during these 2 years.  However, since the present appeal is only in respect of the Rateable Value of the Appeal Tenement for the year of assessment 2009/2010, there is no jurisdiction by this Tribunal to consider the level of assessment or the Rateable Value for the previous year of assessment.  Hence, I shall not consider this line of reasoning any further.

Inferior internal state of repair and condition of the Appeal Tenement

18.  In respect of the alleged inferior internal state of repair and condition of the Appeal Tenement, Ms. Lui, in citing the British rating case of Saunders v Maltby (V.O.) [1976] RA 109) said,“One of the fundamental principles in ascertaining rateable value is that the landlord is responsible for up keeping the tenement in a condition ‘necessary to maintain the tenement in a state to command that rent’, i.e. the level of the rateable value.  However, if the tenements have deteriorated to such an extent they are totally beyond normal remedies or where it is totally uneconomical to bring the tenements up to an acceptable state of repair, that due allowance must be made in determining the rateable values”.

19.  On the issue of the internal condition of the Appeal Tenement, Ms. Lui had the following findings: “Nevertheless, based on my internal inspection on 26 November 2009, I am satisfied that the internal condition of the Appeal Tenement has been maintained in a state to command a normal market rent.  I do not see any proof that the Appeal Tenement has deteriorated to a state to justify any adjustment to account for a major repair in which the open market rent for the Appeal Tenement should be lower than the average rental of similar properties in the subject development.”

20.  Upon cross-examination and re-examination, Ms. Lui acknowledged that both the photographs shown in her expert report and those shown in the written submission prepared by Mr. Chan for the Appellant depicted similar parts of the Appellant Tenement even though they were taken at different levels of zooming and angles.  However, Ms. Lui gave evidence that as these disrepairs could be easily remedied and as such, they were ignored in the course of her valuation, following the well-established principle of rating law as up-held by the case laws such as Saunders v Matby (supra).

21.  Having considered the evidence of Ms. Lui and that of Mr. Chan, I agree with the evidence of Ms. Lui.  This is in fact supported by the evidence of Mr. Chan, who confirmed that he only spent a sum of some $20,000 in the last touching up works.  Therefore, I do not agree that the Appeal Tenement could not be directly compared with other comparable lettings in Red Hill by virtue of the inferior state of repair or condition, as alleged by the Appellant.

Rates concession by the Government

22.  As to the rates concession given to the ratepayers including the Appellant, Ms. Lui disagreed that they were provided by the Government as a result of the outbreak of the financial tsunami, which started since the middle of 2008.  Ms. Lui said that the rates concession was an administrative measure to reduce the tax burden on the public at large; and has neither anything to do with the performance of the rental market nor the assessment of the rateable values.  I agree with Mr. Chan’s evidence and hold that no allowance should be given to this factor.

Performance of the rental market

23.  Lastly, on the issue of the performance of the rental market as summarized in the report & letter of property consultants and agents, Ms. Lui said that “the Knight Frank Property Market Monthly Reports depict the general performance of the local property market from October 2008 to January 2009 with some general price/rental statistics provided whereas the letter from the Ricacorp Properties Limited (Redhill Plaza Branch) only provides a very general opinion about the rental market of the Redhill Peninsular during the second half of 2008 to early 2009.”  As such, Ms. Lui opined that they do not provide “any specific and relevant rental evidence which can assist in the assessment of the subject rateable value of the Appeal Tenement.”  I agree with Ms. Lui’s opinion.  Generally speaking, it is difficult and inappropriate to use a general opinion of the rental market or a generalized rental index to determine the rental value of a tenement, in the direct comparison method of valuation.  Instead, it is very often necessary and preferable for a valuation surveyor to make subjective opinion, in the adjustments of comparables, including the time adjustment to reflect differences in the market conditions.  I therefore do not find the index of Messrs. Knight, Frank to be of much use.

Effect of the financial tsunami

24.  During the hearing, in answering the question raised by the counsel, Ms. Lui confirmed that she has considered appropriate to identify comparable sales very close to the relevant valuation date of 1 October 2008 (as required by the Rating Ordinance, for the year of assessment of 2009/2010) as she was aware of the downturn of the property market caused by the financial tsunami, which was in turn caused by the collapse of the major investment bank, Leyman Brothers in the month of October of 2008.  She added that there was normally a lapse of a few weeks between the date of signing of provisional tenancy agreement (usually done by the estate agents) and the subsequent signing of tenancy agreement.  Thus, she only identified and adopted rental information of other similarly leased properties in the same Redhill estate for the period of plus or minus a few weeks around 1 October 2008, in order to avoid the difficulty of adjusting for the time differences caused by the sudden downturn of the market caused by the financial tsunami.  I am satisfied with the above explanation of Ms. Lui in that she has taken the necessary and reasonable steps, as far as possible, in the collection and analysis of the market evidence of leasing of similar properties in the Redhill estate in order to avoid the effects caused by the financial tsunami.

25.  Ms. Lui further disagreed with Mr. Chan that the financial tsunami in the normal sense of the words extended to the middle of 2008, and that the rates concession given by the Financial Secretary also meant to alleviate the adverse effects of the financial tsunami.  In this respect, I accept the evidence of Ms. Lui and the submission of the Respondent.

Conclusion

26.  In the analysis of the comparables by Ms. Lui, she arrived at the following adjusted unit rate (per sq. m. of saleable area) of the comparables, based on the saleable areas of their main accommodation, on net rent basis (i.e., exclusive of management fees and rates): Comparable 1- $372, Comparable 2- $388, Comparable 3- $374, Comparable 4- $420 and Comparable 5- $423.  Ms. Lui opined that among these comparables, Comparable 3 was considered the best as it had (i) a similar size, (ii) a similar view as the Appeal Tenement, and (iii) the lease commencement date closest to the relevant valuation date.  The average unit rate of these 5 comparables was $395.40 and that of Comparable 3 was $374.  At the end, Ms. Lui adopted a unit rate of $369 per sq. m. in arriving at the monthly rent of $97,260 and the RV of $1,167,120.  After carefully consideration of the facts and the reasons given by the witnesses, I accept the evidence of Ms. Lui as to be fair and reasonable.

27.  Summing up, I am not satisfied that the Appellant has discharged the burden of proof that is required of the Ordinance.  I accept the evidence of Ms. Lui that the Rateable Value of the Appeal Tenement for the year of assessment 2009/2010 was properly assessed by the Commissioner under the provisions of the Rating Ordinance.  For this reason, I dismiss the appeal and give the following orders:

(1)      The Appeal of the Appellant dated 12 October 2009 be dismissed;

(2)      Costs Order Nisi: the Costs of Appeal be to the Respondent, at the High Court scale, to be taxed if not agreed; either party may apply to vary the costs within 14 days from today after which the Costs Order shall become absolute.