Alice in Computerland v. Lam Yuk Wan and Others

LDNT 336/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LDNT NO. 336 OF 1999

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JUDGMENT

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Background

1. This is the application for the grant of a new domestic tenancy under the Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. The applicant is the tenant and the respondent the landlord of the domestic suit premises of House 2 and Car Parking Space No. 17 on 1st Basement Car Park, The Arcadia, 8 Forfar Road, Kowloon City, Kowloon.

2. The existing tenancy was for a term of two years seven months and 15 days from 16th November 1996 to 30th June 1999 at a monthly rent of $37,500, exclusive of rates and management charges. A form CR101 was served by the landlord on 16th June 1999 to terminate the existing tenancy on 31st December 1999. The parties agreed that the new tenancy should be for a term of two years commencing from 1st January 2000. The only issue in dispute was the level of the prevailing market rent at the relevant date of 31st December 1999, the date of expiration of the previous tenancy. Otherwise, both parties agreed that the new tenancy should be on terms similar to those of the expired tenancy.

3. The applicant was represented by Ms. Alice Lau Oi See who also gave evidence and written submission. The respondent was represented by Messrs. Tam, Pun & Yipp. The respondent called Mr. James K.T. Cheung, Chartered Surveyor to give expert evidence.

Applicant's evidence & submission

4. The applicant produced a report on the analysis of the prevailing market rent, which was marked as Exh. A-1. The report was structured in 3 parts: analysis on rental comparable, analysis on purchase prices and analysis on rateable value. The applicant came to a conclusion that the prevailing market rent of the subject property as at the relevant date was $29,100.

5. The analysis on purchase prices and rateable values have no bearing at all to the present exercise, which is the assessment of the prevailing market rent of the subject.

6. The applicant's analysis was summed up in Page 33 of Exh. A-1. The applicant analysed a total of 6 comparable rentals, viz. House Nos. 91, 79, 16, 68 of No. 1 Hereford Road (various houses in the development known as "Sunderland"), House No. 9 of No. 1 Cassia Road and No. 57 Kadoorie Avenue. The comparables were the same as those used by Mr. James K.T. Cheung in his first valuation report dated 28th December 1999 (Exh. R-1) with the exception that House No. 68 of Sunderland replaced House No. 57 of Sunderland. House No. 68 also appeared in Mr. Cheung's second valuation report dated 5th January 2000 (Exh. R-2).

7. The applicant arrived at adjusted unit rates of between $148.53 and $200.24 per sq.m for the subject. The applicant adopted a unit rate of $183.96 in assessing the prevailing market rent of the subject property. This gave rise to a figure of $29,135.80 to which the applicant rounded to $29,100.

8. In the applicant's cross-examination of Mr. James K.T. Cheung, the expert witness called by the respondent as well as the applicant's final submission, the applicant raised a number of queries. Firstly, the applicant opined that Mr. Cheung did not distinguish sufficiently the differences between Kowloon City (the district where the subject property was located), with Kowloon Tong, Yau Yat Chuen and Kadoorie Avenue. The subject's district was zoned "Residential Group A" while all the other three districts were zoned "Residential Group B". It was, by comparison, more densely populated than and inferior to the others.

9. The applicant also stressed the differences between the subject and the comparables in terms of noise level, traffic convenience, accessibility to shopping facilities and parks

10. In the written report, the hearing and the written submission, the applicant gave in details the disrepairs and the present internal and external condition of the subject property. The disrepairs included the following:

- cracking and peeling off of paints, differences in color or uneven painting at various locations, especially in the master bedroom kitchen, service quarters, corridors and toilets

- poor condition in the ground floor toilet and kitchen caused by previous repair works undertaken by the landlord

- wooden doors in poor condition

- wood flooring of upper staircase deteriorated by insects

- unsightly appearance of the garden area caused by the repair works

- different color external tiles being used after the repair works

11. The applicant gave evidence that there had been a long history of repairing work being undertaken by the former landlord, since the commencement of the first lease by the applicant many years ago.

12. As a result of the poor condition of the subject property, the applicant suggested to give a downward adjustment of a flat 15% for all the comparable rents.

13. The applicant gave varying adjustments of between 5 to 20% for the differences in the age of the subject and the comparable properties.

14. As for the location, the applicant thought that it was appropriate to adjust downward at rates of between 5% and 15% for the comparables.

15. For the time adjustments, the applicant suggested that it should be based on the Jones Lang LaSalle Index for Large and Luxury Flats.

Respondent's evidence

16. The respondent's witness, Mr. Cheung, produced two valuation reports dated 28th December 1999 and 5th January 2000 respectively. A total of 12 comparables were considered in the second report dated 5th January 2000 (Exh. R-2). This included House Nos. 91, 79, 16, 57, 68 and 19 of No. 1 Hereford Road (6 houses in the development "Sunderland"), House No. 9 of No. 1 Cassia Road and Nos. 57, 69, 75, 67 and 95A of Kadoorie Avenue.

17. Mr. Cheung carried out detailed adjustments to reflect the differences between the subject premises and the comparables in location, lease term, house type, age, ancillary accommodation and facilities. These were clearly summarised in page 12 and 13 of Exh. R-2. The reasons for the adjustments and the valuation comments were set out in details in page 8 to 12 of Exh. R-1 and p. 2 to p. 4 of Exh. R-2. The total adjustments ranged between +5% and +25%. Applying these to the respective unit rates of the comparables gave adjusted unit rates of between $232.71 and $347.48 per sq.m. for the subject.

18. Mr. Cheung calculated the average of these adjusted unit rates to be $294.04 per sq.m. He then applied this adopted unit rate to the saleable area of the subject premises, 152.9 sq.m. and the garden area of the subject premises, 54.8 sq.m. (adopting one tenth of the rate of the saleable area of the subject), giving the figure of $46,570, say $46,600 as to be the prevailing market rent for the subject at the relevant date.

Choice of comparables by the Tribunal

19. No expert evidence was called by the applicant to support the analysis of the rental comparison, rateable value and purchase prices of various comparable properties and the subject. Even if there were expert evidence, the evidence of the rateable value and purchase prices would be irrelevant for the present application and should be disregarded. As both parties adopted the same valuation method- the direct rental comparison approach, only the rental comparables, their analysis and adjustments would be relevant.

20. First, the Tribunal has to decide which comparables are the best out of all the comparables quoted by the applicant and the respondent. I have considered in details all the 12 rental comparables quoted by the respondent (of which 6 were analysed by the applicant). To summarise again, there are 6 comparable properties in Sunderland, an estate of row houses located at Hereford Road, 5 detached houses in Kadoorie Avenue and 1 row house at 1 Cassia Road.

21. The houses in Kadoorie Avenue should not be relied upon as comparables because the quality of the neighbourhood is different from that of the subject property. The small area of Kadoorie Avenue and Braga Circuit has been well recognised as a luxurious residential enclave of urban Kowloon. It is predominantly developed with aged but stylish houses and apartments, built either pre-war or early post-war. If we compare the reported rents passing of the comparable properties at Kadoorie Avenue, we find that they range between $65,000 and $79,000, much higher than $37,500, the rent passing of the subject premises prior to 31 December 1999. Also, their saleable areas ranging between 232.0 sq.m and 288.8 sq. are much Targer than that of the subject.

22. The other comparables at Hereford Road and Cassia Road are also larger than the subject and are fetching rents higher than the existing rent of the subject property prior to the termination of the tenancy. However, the discrepancies are not as large as those of the comparables at Kadoorie Avenue. Also, they are by comparison more similar to the subject premises in terms of location than the comparables at Kadoorie Avenue.

23. Of all the six comparables at Sunderland, Hereford Road, two have lease terms unusually short. They are listed as the respondent's comparables No. 6 and 11 (see Exh. R-2). Comparable 6 - House 57 has a term of 10 months from 1st June 1999 whilst Comparable 11 - House 19 a term of 6 months from 1st July 1999. The Tribunal agrees with the Applicant that these short-term tenancies should be discarded as it will be difficult to arbitrarily adjust for the differences in the lease term of the comparables and that of the subject, which is on the usual 2-year term.

24. Finally, the Tribunal considers that comparable No. 1, House 91 of Sunderland is not a good comparable for the subject because of the large difference between their saleable areas. The comparable, with a saleable area of about 262.2 sq.m., is over 71% larger than that of the subject premises, at 152.9 sq.m. As there are other comparables which are more similar in size to the subject, the Tribunal prefer these other comparables to comparable No. 1.

25. The remaining comparables are the respondent's comparables No. 2, 3, 4 and 8. Their rental partciulars, equivalent areas calculations, rental analysis, the adjustments proposed by the applicant and the respondent, and the adjustments finally adopted by the Tribunal are set out in the next section below.

Analysis of comparables by the Tribunal

26. The parties agreed to the adjustments of the rents passing of the comparables to the same basis, i.e., exclusive of rates and management fees and inclusive of the use of one car parking space. They mutually agreed that the value of a car park be $4,000 per month. This is accepted by the Tribunal.

27. The applicant and the respondent adopted very different adjustments to the comparables. With the exception of the adjustments for age and ancillary accommodation & facilities, they could not agree on the quantum of adjustments of all other factors. In order to appreciate the differences between the subject and the comparables, the Tribunal, in company with the parties and the applicant's lawyer and expert witness, inspected the subject premises as well as the comparables on 18 February 2000. We inspected both the interior and exterior environment of the subject premises. We were unable to gain access to the inside of the comparables. As a result, we only inspected the comparables externally.

28. For the location of each comparable, the Tribunal adopted an adjustment rate somewhat in between the parties' proposed rates.

29. As for the house condition, the Tribunal agrees with the applicant that the subject premises suffer from disrepairs which is quite serious for this type of property.

30. It has been well established that valuations under Part IV of the Landlord and Consolidation Ordinance are made on the assumption that both parties will perform their contractual repair obligations. Where one party has defaulted, the other party has the right to enforce performance under the tenancy agreement. This basis was decided in the first Part IV case in the early 1980's : Union Carbide Asia Ltd. V The Hong Kong Land Co. Ltd. [1982] HKDCLR 75. There are, however, exceptions to this general principle. For example, if a defect such as dampness cannot reasonably be rectified, that defect, notwithstanding any contractual obligation on the part of the landlord, may be taken into account in favour of the tenant: Nordic Asia Ltd. v Strawberry Hill & Anor [1980-82] CPR 95. Also, allowance should be given to the tenant for the time and inconvenience of undertaking the repairs during the continuation of tenancy.

31. The Tribunal accepts that certain defects in the subject premises may be of a long lasting nature and cannot reasonably be rectified. Based on the evidence available to the Tribunal, an allowance of say 10% is considered to be sufficient to reflect the differences between the subject and the comparables.

32. As for the house type, the Tribunal is also convinced that we should not only consider the physical design of the subject house as such. The subject premise is very close to the common entrance of 2 blocks of flats. The ground floor of the subject actually faces onto the common podium of the adjacent high-rise blocks of flats. Therefore, the Tribunal agrees with the applicant that all the advantages of an otherwise free-standing house are more or less set off by the special design of the whole development which includes the subject premise, the adjacent houses and 2 large high-rise apartment blocks behind. Thus, no adjustment for the house type is warranted when the subject is compared with comparable row houses in Sunderland and No. 1 Cassia Road, Yau Yat Chuen.

33. For the timing of the comparable lettings, the Tribunal agrees with the applicant that in the absence of other better evidence, adjustments based on the Jones Lang LaSalle Index, an index well recognised in the real estate and appraisal profession, are warranted.

34. The details of the adjustments of the comparables No. 2, 3, 4 and 8 by the parties and the determination by the Tribunal are set out below:

Comparable No. 2 House 79, 1 Hereford Road

Reported rental at $42,500 per month, 2 years lease from 1st January 1999

Monthly rental, exclusive of rates, management fee and inclusive of one car park = $46,500

Saleable area of 218.7 sq.m. plus garden 32 sq.m., top roof 57.5 sq.m. and yard 2.6 sq.m.

Assuming ancillary area rate = 1/10 of house area rate

Equivalent weighted area = 227.9 sq.m.

Unit rental rate = $204.04 per sq.m.

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable No. 2 = $204.04 X 0.934 = $190.57

Comparable No. 3 House 9, 1 Cassia Road

Reported rental at $60,000 per month, 2 years lease from 1st February 1999

Monthly rental, exclusive of rates, management fee and inclusive of one car park = $48,978

Saleable area of 163.4 sq.m. plus terrace 5.1 sq.m., side roof 24.5 sq.m. and top roof 15.9 sq.m.

Assuming ancillary area rate = 1/10 of house area rate

Equivalent weighted area = 167.95 sq.m.

Unit rental rate = $291.62 per sq.m.

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable No. 3 = $291.62 x 0.784 = $228.63

Comparable No. 4 House 16, 1 Hereford Road

Reported rental at $50,000 per month, 2 years lease from 1st April 1999

Monthly rental, exclusive of rates, management fee and inclusive of one car park = $54,000

Saleable area of 191.3 sq.m. plus garden 9.2 sq.m., top roof 49.6 sq.m. and yard 2.6 sq.m.

Assuming ancillary area rate = 1/10 of house area rate

Equivalent weighted area = 197.44 sq.m.

Unit rental rate = $273.50 per sq.m.

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable No. 4 = $273.50 X 0.824 = $225.36

Comparable No. 8 House 68, 1 Hereford Road

Reported rental at $50,000 per month, 2 years lease from 15th November 1999

Monthly rental, exclusive of rates, management fee and inclusive of one car park = $50,000

Saleable area of 191.3 sq.m. plus garden 32.8 sq.m., top roof 49.6 sq.m. and yard 2.6 sq.m.

Assuming ancillary area rate = 1/10 of house area rate

Equivalent weighted area = 199.8 sq.m.

Unit rental rate = $250.25 per sq.m.

Adjustments for -

Based on the above, the adjusted weighted unit rental rate of Comparable No. 8 = $250.25 X 0.90 = $225.22

Estimation of the prevailing market rent of the subject

In summary, there are four comparable after the others are discarded for various reasons stated above. These comparables No. 2, 3, 4 and 8 give after-adjusted unit rates of $190.57, $228.63, $225.36 and $225.22 per sq.m. respectively. The Tribunal considers that these reasonably justify a rental rate of $225 per sq.m. for the subject.

Adopting the saleable area of the subject premise quoted by the parties and using the unit rental rate of $225 per sq.m., the prevailing market rent of the subject premises is estimated as follows:

$225 per sq.m. x (Saleable Area 152.9 sq.m. + garden area 54.8 sq.m. x 1/10)

= $225 per sq.m. x equivalent area 158.38 sq.m.

= $35,635 rounded to $35,500

Orders

The Tribunal gives the following order for this application:-

(1) New Tenancy for 2 years from 1st day of January 2000;

(2) New rent $35,500 per month (exclusive of rates and management charges); leave to respondent to pay applicant over-payment of rent (if any) within 1 month;

(3) Deposit to be adjusted pro rata in accordance with the new rent, leave to respondent to pay applicant the adjustment within 1 month;

(4) Other terms of new tenancy same as in the previous tenancy agreement

(5) No order as to costs.

Dated 27 April, 2000