RICHARD NICHOLAS TANNER v. PHARMAKON LTD

LDNT 1/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 1 of 2003

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J U D G M E N T

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1. The Application

On 6th January 2003, Mr. Richard Nicholas Tanner (the Applicant), the tenant of Flats A and B, 7th Floor, Roofs A and B and Car Parking Space no.1B on Ground Level, Wah Sen Court, No.68 Conduit Road (the "Subject Premises"), filed the Form 22 with this Tribunal requesting the grant of a new tenancy to take effect from 24th February 2003.The landlord is Pharmakon Limited (the Respondent).

2. The Terms Agreed

Both the Respondent and the Applicant have no disagreement to the term of new tenancy being fixed for two years and other terms of the expired tenancy to remain in the new tenancy. The outstanding issue yet to be resolved is the rent payable.

3. The Matter in Dispute

The Applicant has appointed FPD Savills International Property Consultants to give an expertise view on the level of rent, whereas the Respondent, for the same purpose, has engaged the service of Memfus Wong Surveyors Limited. Mr. Eddie Yiu from Memfus Wong Surveyors Limited and Mr. William Wong from FPD Savills International Property Consultants each produced their respective expert reports and gave evidence in open court. Mr. Eddie Yiu suggested that the rent of the Subject Premises be $49,000 per month exclusive of rates and management fee but inclusive of the rent of the above car parking space. Mr. William Wong suggested that the appropriate amount on the same basis be $38,500 per month. Mr. De Witt is the solicitor who represented the Applicant in the hearings on 8th and 11th August 2003.

4. Tenant's Grievance

The Applicant appeared in court on 8th August 2003 and gave evidence concerning the condition of the Subject Premises. He described the internal condition of the Subject Premises as unsatisfactory and horrible (with the support of photographs). Not only were there seepage of water on wall and ceiling but also a defective electrical wiring system. He had quite a few grumbles about the landlord's attitude towards his request for repair of these defects. What is even unfair to him, as he considered, is that he has only been able to park his car on an open car parking space instead of a covered one to which he is entitled.

5. Landlord's Defence

The Respondent defended that the building defects as depicted in photographs produced by the Applicant and in the report of the Applicant's expert witness were unknown to him. Had there been proper notice for want of repair from the Applicant, he would have them repaired beyond any doubt. In fact, he produced building contractors' quotations and receipts of charges for repair works done in the past to show that he is a responsible landlord.

6. Choice of Comparables

The Applicant's Expert Witness, Mr. Wong (hereinafter referred to as "AW"), based on the comparables obtained from the Rating and Valuation Department in the pursuit of his valuation. The Respondent's Expert Witness, Mr. Yiu (hereinafter referred to as "RW"), included Flat C, 1/F, Mirror Marina, 47 Conduit Road known as Comparable 7 in his valuation report, in addition to those from the Rating and Valuation Department. The flat size of Comparable 7 is 154.4 sq. m., approximately 62% of that of the Subject Premises. Comparable 7 was let on 20.11.2002 at a rent of $26,000 per month.

7 . I am not precisely clear of RW' purpose to include Comparable 7 as the tenancy of Comparable 7 was struck three months earlier than the tenancy commencement date of the Subject Premises, whereas all those obtained from the Rating and Valuation Department are just one to six weeks before or after the commencement date. Although this may not poses valuation problem (so long as it is only three months earlier), the huge difference in flat size up to 62 % does not render it to be a suitable comparable. By the same token, I do not see that the inclusion of Comparable 1 is appropriate as Comparable 1, likewise, is even smaller than Comparable 7 in size.

8. Adjustment Factors to be excluded

(1) Management Standard

The quality of management does play an important role in the tenant's decision on the level of rent payable. RW, in this aspect, gave no assessment because he had not had the opportunity to inspect the comparables. AW did make assessments but he did not inspect the comparables either. His assessments were simply made on the basis of whether the company responsible for management is a professional firm (or prestigious) or not. This practice of assessment does not seem to be normal. What should be counted is the actual management quality but not the management company's reputation. As such, I consider that there is no evidence to support his assessment and dismiss the adjustments made.

(2) Building Age

Building age, by itself, should not be a ground for rental adjustment. I agree that by whatever good maintenance or renovation, some kinds of deterioration due to building age cannot be perfectly made good, but the extent of loss in enjoyment due to such kinds of deterioration in most cases is minimal. Even though there were such kinds of deterioration that affect the tenants' enjoyment, it might happen only in a handful of cases and as such, it should better be reflected in the evaluation under the heading of "over-all building condition". In fact, when both AW and RW surveyed the building and gave their respective views on the over-all building condition, I am sure that they had not separated those deteriorations due to building age from others.

(3) Flat Size

Since after excluding Comparable 1 and 7, the rest comparables are all within the range of flat size from 205.4 sq. m. to 258.3 sq. m., there does not appear to be any justification for adjustment due to quantum (i.e. for the difference in size from the Subject Premises). In my view, adjustment for quantum is warranted, insofar as most people accept it, in two cases. Firstly, when the same basic unit of goods are transacted in bulk, a reduction in its unit price is warranted because there are savings in the vendor's administrative cost, in the rental of warehouse and in the costs of other over-heads, e.g. when someone is purchasing a block of flats from the developer as compared with someone who purchases only one flat, there usually exists price discrimination in the transactions with the two purchasers. The former purchaser is normally given a more favourable flat price than that given to the latter purchaser. Secondly, in the case of property development where a developer is to provide e.g. many small factory units on a site for construction of factory buildings, ignoring the effect of demand and supply, he would charge a higher unit sale price than in the case where he is to provide only a few large units. The latter purchasers (for large units) are offered a more favourable unit price than the former (for small units) because the unit cost of providing many small factory units is higher (more wall and basic facilities per sq. m. of factory unit). The above range of flat size does not appear to fit well with the first case nor does it fit neatly with the second. It is not my observation that the market considers that 205.4 sq. m. being 75% of the subject premises should be subject to a separate and higher unit price because of the relatively higher but only slightly higher unit cost which effect on the selling price is very often offset by the price fluctuation due to imbalance in demand and supply.

(4) Duplex

AW did not consider duplex unit a disadvantage. RW did so consider it a disadvantage because of the inconvenience caused from bedrooms being not on the same floor as the living rooms. He gave upward adjustment in the rental of Comparable 5 for it's being a duplex unit. RW's view does not seem to agree with most people. It is my observation that duplex units can command higher rent than ordinary flats.

(5) Top Floor Effects

This is not an item for adjustment under RW's valuation but does an area of concern in AW's report. AW considered the solar heat affects the enjoyment derivable from a top floor unit. Whilst this is very true, the top floor is affected less by the noises generated from activities at the ground level, by the dripping from A/C units, by problems associated with blockage of down pipes and by littering by occupants living on higher floors. The adverse effect due to solar heat tends to be cancelled by such advantages.

9. Adjustment Factors to be adopted

(1) Time

RW pursued the adjustment by the use of the Rating and Valuation Department Rental Indices. AW made use of the indices provided by the Research Division of his own firm. The research was carried out in conjunction with the University of Hong Kong and the indices obtained from the research are specifically applicable to properties at the Midlevel. In terms of accuracy, AW's indices are more reliable as the Rating and Valuation Department Indices are not produced on sub-district basis.

(2) Floor Level

Both expert witnesses do not dispute on the adjustment percentage but AW appeared to have wrongly calculated that for Comparable 5. Since the adjustments made are not in dispute, I do not feel it necessary to depart from their agreed figures.

(3) Home Appliances

Having considered the evidence given by the Applicant, the Respondent, AW and RW, AW's views and adjustments appeared to be more reliable than RW's. I also agree that the A/C units provided on the Subject Premises are sub-standard.

(4) Location and Noise

AW gave the factors of location and level of noise each a separate adjustment. RW gave no separate adjustment for noise level but adjustment for location only. It is not surprised that some surveyors do not evaluate separately for the noise level, as the noise level obviously is one of the very basic and important determinants on whether a location should be regarded as good or bad. Combining AW's adjustments for the two above factors, it gives the results not dissimilar to RW's assessments for the majority of comparables except those adjustments for Comparables 3 and 4. Examining the evidence given by AW and RW, I find that RW's views and adjustments are more justifiable.

(5) Building Age/Condition

As explained in paragraph 6 (2) above, I do not feel the need to separately evaluate the factors of building age and condition. However, when examining the evidence given by AW and RW, I find that the combined adjustments made by AW in respect of the five comparables are not inconsistent, i.e. all the five comparables are in a better building condition than the building of the Subject Premises with Comparables 5 and 4 being the best and the second best. As such, I am prepared to follow AW's assessments in this respect.

(6) View/Orientation

The orientation should also be counted when assessing the rent, although this is not as important as the view aspect in view of the advancement in building technology (such as the use of tinted glass window and air conditioners etc.). RW gave no adjustment for orientation but AW did so. With the exception of Comparable 4, RW considered all other four comparables identical in the aspect of view. This appears unrealistic since the Subject Premises have no open view at all. I share the view with AW and would adopt RW's adjustment only for Comparable 4.

(7) Internal Condition

I do not see that this is normally a justifiable factor for adjustment as through constant and reasonable maintenance, the internal defects as depicted by photographs would be made good (if not now, then some time later), regardless whether the tenant or landlord should be held responsible under the tenancy agreement. Whilst the landlord had signified its willingness to repair, the tenant did have a responsibility to notify the landlord of the need to repair. If the landlord failed to perform the repair on request as claimed, the tenant should take legal steps to get the landlord do it or get it done at the expense of the landlord. The internal condition, as it has been revealed, nevertheless is now so sub-standard that it may take some unusual long time to up-grade. The repair works, therefore, will for a period of time, affect the sitting tenant's enjoyment. Albeit being subjective, somehow, this adverse effect should be reflected. I would suggest a reduction by 2% from the final rent calculated though I disagreed with the adjustments of AW who had actually made no inspection of the internal conditions of the comparables.

(8)Roof-top Structures/Open Area

AW adopted 1/10th of the unit rent for open area, 1/8th for canopy and 1/5th for covered and enclosed area, whereas RW adopted 1/3rd for covered and enclosed portion and 1/8th for the remaining part. Both AW and RW had adduced no evidence to support their arguments. Any suggestion from the Tribunal would likewise be subjective. My view is that RW's assessment is on the high side. I would suggest 1/5th for the covered and enclosed portion and 1/10th for the rest. As to the size of the covered and enclosed portion and the remaining area, I would adopt the calculations shown on Exhibit R8 that gives all the required clear and unambiguous details.

(9) Car parking Space

There was dispute on whether the car parking space referred to in the tenancy agreement should actually be CPS No. 1B or 20B; one being an open car parking space and the other a covered one. The agreement in court is that for open car parking space to be taken up under the new tenancy, the rental is $1,000 per month and for covered one, then $1,500. The two parties can resolve as to which car parking space is to be leased before the signing of the new tenancy agreement.

10. Assessment

Following on from the above, the adjustments and hence the final units rent are as appended below: -

* Non-standard car parking space large enough for the parking of two motor vehicles with only one side abutting on drive-way where the first parked in motor vehicle cannot exit out of the parking space without having the second one driven away.
# Adjustment for rent free period of 6 days not advisable.

11. The average rent is $158.56 per sq. m. Deducting from it by 2% to account for the internal condition, the revised unit rent is $155.38 per sq. m. Applying this unit rent to the gross floor area of 251 sq. m., it gives a monthly rental in the sum of $39,000, exclusive of management fees, rates but inclusive of the rent of a covered car parking space. Adding to it the rent for the roof-top structures and open portion calculated hereunder; -

(i)	Covered and enclosed portion	39.7 sq. m.
	@ 1/5th of $155.38 per sq. m.	$31/sqm.
	Sub-total	$1,230.7
(ii)	Open Portion	158.5 sq m.
	@ 1/10th of $155.38 per sq. m.	$15.5/sq. m.
	Sub-total	$2,456.75
	Total:	$3,687.45

12. I am of the view that the total monthly rent is $42,687.45 or say $42,700. If an open car parking space is to be leased instead of a covered one, then the rent should be revised down to $42,200.

13. Orders

I hereby order that: -

(1) A new tenancy for a fixed term of two years be granted commencing on 24th February 2003;

(2) At a rent of $42,700 per month exclusive of management fee and rates (i.e. tenant to be responsible for management fee and rates and the landlord responsible for government rent) but inclusive of the rent of a covered parking space (if an open parking space is to be let, then at $42,200 per month);

(3) A deposit equivalent to the sum of two month rental and the landlord should refund the excess of deposit at the time of execution of the new tenancy agreement;

(4) The new tenancy agreement be signed and executed by both parties within one month from the date of Orders; and

(5) Other conditions under the last tenancy agreement shall remain unchanged and applied throughout the full term under the new tenancy.