THE FINANCIAL SECRETARY INCORPORATED v. TRUE ACT LTD

LANDLORD and TENANT - Landlord and Tenant (Consolidation) Ordinance (Cap.7) - Part IV - Application for a new tenancy of a domestic flat under Section 117(1) - Matters of valuation in arriving at the prevailing market rent concern interpretation of comparables - Points covered include preparation of proof of evidence and reliability of evidence - provision of break clauses in the lease - orientation of the flats and size of units - the effects of tenant inertia on comparable rents - the approach placing a value on furniture.

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Tribunal Application No. 2420/88

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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 section 117(1) of Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7, for Flat B, 11th floor, Shiu Fai Terrace Garden, 3-4 Shiu Fai Terrace, Hong Kong, together with one carparking space. The previous tenancy should have been terminated on 13th May 1988 but by the. service of notice under Section 119(1 on 9th March 1988 the new tenancy commences six months after that date and the date of 12th September has been agreed between the parties as the date of commencement for a further two year period on the same terms as the previous tenancy agreement. Therefore only the rent is in dispute.

2. The difference between the parties lies at $15,000 proposed by the applicant's expert witness and 18,000 put forward by the landlord's expert witness. Comparables from the same block were used by both sides to substantiate their values and further evidence was called from a witness Mr. Stanislaus Tsao who is Managing Director of the Respondent company plus executive director of a further company with interest in other flats in the building His evidence clarified the circumstances of a number of the comparable lettings. The Respondent's valuer included $1,000 in his assessment to reflect the benefit of a tenant's break clause.

3. The facts of the case and evidence put forward are relatively straight forward and more a question of interpretation of the comparables.

4. The property in question is a 12-storey block built in 1981 in an L-shape with two flats per floor. The block is located on the north side of Stubbs Road with views over the cemetary, Aberdeen Tunnel fly-over, the Happy Valley Racecourse, Causeway Bay and distant views of Kowloon. The conclusion of the assessment of the prevailing market rent is not particularly contentious with a difference between the parties of only $3,000 per month.

5. There are however a few points which, because of the effluxion of time and the differing emphasis of the trend of the property market, would benefit by reiteration.

Preparation of Proof of Evidence

6. The report put forward by the respondent was signed by a director of the instructed company being a chatered surveyor, however the report was drafted by Mr. Jack Ng who inspected the premises, recommended the valuation and also appeared before the Tribunal to give evidence. Mr. Ng is not a qualified Chartered Surveyor.

7. The proof of evidence is an extension of the oral evidence given by the expert witness and the report should be signed by the expert appearing before the Tribunal to give it any weight at all. The report must also be signed by the individual not a firm's collective signature.

8. The Tribunal hears a number of expert witnesses who are not technically qualified by examination and although such qualifications do add weight to an expert's opinion, providing that the "expert" can show that by experience or on other grounds he is an expert and why his evidence and reasoning is sound then the Tribunal will hear him as an expert witness.

Reliability of evidence

9. Counsel for the applicant raised the issue of reliability of evidence as information with regard to comparable rents had been gleaned from a third party without documentary evidence or confirmation from a party involved in the contracts,

10. As the Lands Tribunal is by its nature more informal than a civil court of law, the strict rules of evidence are relaxed by virtue of Section 10(6) of the Lands Tribunal Ordinance, so that virtually any evidence which either side considers of help to the Tribunal can be submitted. It is up to the Tribunal to decide what should be accepted and what weight to attach to each submission. The matter of substantiating quoted comparables is also refered to in Union Cabide Asia Limited v The Hong Kong Land Company Limited (1982 HKDCLR 75) where Cruden D. J. stated that." we propose to allow an expect, notwithstanding the contrary English practice, to put in a list of comparables without being obliged to prove their contents as he would have to in a court. We would of course expect an expert valuer to take normal professional care to ensure that the comparables he uses are accurate,

Break Clause

11. As the subject property has the benefit of a break clause in the Tenancy Agreement it was considered by the respondent's valuer that this would add a further $1,000 to the potential monthly rental. He based his assumption on the case of The Colonial Treasurer Incorporated and Cali Enterprises Ltd (LT 11 of 1983 and LT43 of 1983). In this case The Colonial Treasurer Incorporated agrued that the break clause was of value to a tenant particularly in a falling market because the tenant could leave sooner if he wishes to rent another comparable property more cheaply. Robert C. J. in his decision was "persuaded that this is so though it is largely a matter of speculation as what this advantage to the tenant represent in money terms ........ conscious that some allowance should be made but with little guidance as to the quantum we take a figure of HK$1,000".

12. These two cases were hold in 1983 where the market was in a decline and prices generally falling. At the present time when the market is strong and rents are on an upward trend, a break clause which is restricted to the tenant to exercise is of no pecuniary advantage to a tenant as if it were exercised the tenant would be leaving a lower historic rent to go to a comparatively higher rental level. Therefore whilst attention should be had to a break clause when negotiating the rental level, in this case as there is a rising market I do not consider it would in this application affect the rental level.

Orientation

13. Argument was put forward by the respondent's valuer that Block D, being nearer to Stubbs-Road, was slightly noiser than Block A which backs on to Siu Fai Terrace.

14. In assessing a prevailing market rent, as pointed out in Graham Miller (Hong Kong) Limited v Heesing Company Limited (LT 1822/88) both parties would be fully cognisant with the factors which may influence the figure. Nevertheless, although factors are present, their effect on value may be minimal and it is then a matter of how much store a hypothetical tenant would place on the factors when negotiating the rental.

15. In this application I consider that the noise level differential would not have any material effect on the rent level.

Size of units

16. The difference between Flat A and Flat B amounted to some 3 sq. m. being an extra bay window. As outlined in, one of the first Part IV cases, being Mass Transit Railway Corporation and others and Hsu & Sons Ltd (1982 HKDCLR 93), a prospective tenant would net be concerned about small differences in area between flats in approximately similar size bands, and this is especially true in flats in the same block. A Landlord or tenant in such a case would expect the same rent to be charged for both units as they are substantially the same.

Basis of valuation

17. The basis of prevailing market rent is set down in the Ordinance. Counsel for the applicant raised the matter that the respondent valuers had stated that his open market rental depended on the premises being freely exposed to the open market. The applicant argued that because it was a renewal then the promises could not be exposed to the market as there, was only the one prospective tenant. This is in fact not correct. The Ordinance states that the effect of the Ordinance must be disregarded and the theory in arriving at the prevailing market rent is that the promises are available and vacant and to let on the assumption that the landlord and tenant will arrive at an agreed rent for the relevant date.

Tenant inertia

18. The point of the tenant inertia element, which is raised often in the Lands Tribunal, is that comparable rents of renewed promises reflect that a tenant is in a weaker negotiating position than he would be if he were coming in as anew tenant on a fresh letting. This is because he would rather pay slightly more than the open market rent to avoid the trouble and expense of moving to alternative premises.

19. There is, of course, logic to this argument but. tenant inertia is only one small part in the overall picture of the negotiating strategy of both the tenant and the landlord and the market conditions also have a major bearing on the tenant's thinking when it comes to moving premises.

In the present market conditions, which is what we are concerned about in this case, it has been shown in many cases that renewals are being agreed with existing tenants at figures which are lower than fresh lettings in the same block at the same time and this is especially true of older properties without facilities. There is, therefore no conclusive evidence in the market today that rents being quoted as comparable rents for renewals by existing tenants are above open market because of tenant inertia.

Furniture

20. In some of the comparables put forward the flats are let subject to furnishing being provided. In one of these a lay witness, who is employed by the company owning one of the comparable flats, took the Tribunal through the steps which the landlord considered, to give the figure for the furniture element in the rental. The steps involved depreciating the cost of furniture on a straight line basis over five years' without taking account of interest because the tenant's deposit (which was nearly the same figure) would be used to pay for the cost of purchasing the furniture. This is a perfectly satisfactory approach and shows the landlord's reasoning.

21. We also have to look at the exercise from the tenant's point of view and a tenant would not be as exact in his calculation. .If he were, then it is likely that he would depreciate the cost, or his opinion of the cost, over the length of the lease or possibly a second term if he were likely to be in Hong Kong for that length of time. Therefore the tenant's approach would by necessity vary from tenant to tenant and the most likely approach would be to be two or three bids over the base rent in units of say $500 or $1,000 depending on the level of rent of the flat. As a guideline in this case, expenditure in the order of $50,000 might encourge a tenant to make two bids of $1,000 above the open market rent.

22. It must be remembered that each case is quite different and in comparing rented premises it should be substantively proven what amount should be deducted for furniture by comparing an empty flat with a furnished flat.

23. In arriving at my opinion of the prevailing market rent I took account of Flat B on 3rd floor let furnished at $15,500 in March where I consider the amount of extra rent for the furniture (+1,000 and the increase in rent during the period (1.5% per month as put forward by both parties' valuers) would round out at $15,500 per month. Similarly Flat A on 11th floor when adjusted for time and rounded out would be at this figure. Also Flat B on the first floor, let at the same time, when adjusted to allow for a carpark, and $2,000 per month to allow for the tenant having to renovate the flat without a rent free period, this also equates to the assessed monthly rental of $15,500.

24. Given that the size difference and proximity to Stubbs Road would not influence the value substantially, nor would the existence of the break clause, the rental value of the subject premises is determined at $15,500 per month exclusive of rates for a two year term commencing on 12th September 1988.

DATED this 3rd November, 1988.