STEPHEN PETER STUART WEATHERSEED v. MIGHTY UNIT CO LTD

LDNT 163 of 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 163 OF 2004

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JUDGMENT

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Background

1. The Applicant is the tenant and the Respondent the landlord of the premises known as Flat 52, 5/F., and Car Parking Space No. 4 on 1/F., Robinson Mansion, 77 Robinson Road, Hong Kong (“the Premises”).  The Premises was previously held under a tenancy agreement dated 19 October 2001 between Irish Ball Ltd., the former landlord and the Respondent as the tenant, for a term of 3 years commencing from 22 October 2001 at a rent of $27,000 per month, on the basis of exclusive of rates and management fee.  By a letter dated 13 May 2003, they agreed to revise the rental of the above said tenancy to $18,000 per month, inclusive of rates and management fee for the residue of the term.  In July 2004, the Respondent purchased the Premises from the former landlord.

The issue

2. This is one of the last few cases of new tenancy applications that had been initiated by the parties under the former Part IV procedure prior to the enactment in July 2004 of the Landlord & Tenant (Consolidation) Ordinance 2004.  There was no dispute that the Applicant’s application fell within the provisions of the former Part IV of the Ordinance.  As such, there was no opposition from the Respondent on the application by the Applicant for a new tenancy.  The parties also agreed that the new tenancy should be for a term of 3 years, i.e. same as that for the previous tenancy between the former landlord and the Applicant, and that the commencement date of the new tenancy should be 22 October 2004.  The only dispute was in the assessment of the Prevailing Market Rent (“PMR”) for the new tenancy.

Summary of valuation of the expert surveyors called by the parties

3. The Applicant called for the evidence of Mr. Ian Cullen (“Mr. Cullen”) who submitted a valuation report dated 20 January 2005 and a supplementary report dated 3 March 2005 whilst the Respondent called for the evidence of Mr. Li Chi Ho (“Mr. Li”) who submitted a valuation report dated 27 January 2005.  Although Mr. Li had analyzed some rental comparables not located in the subject development, he nevertheless agreed in his valuation to adopt only the comparables in the subject development, same as those used by Mr. Cullen.  These common comparables were Apartment No. 34, 42, 62 and 31 (Comparable Ref. C1, C2, C3 and C4 as shown in Mr. Cullen’s valuation reports).  The 2 surveyors had different opinion on the appropriate percentages of adjustments for various factors they identified.  The total adjustments adopted by Mr. Cullen for Comparables C1 to C4 were –16.55%, -21.1%, -24.4% and –28.4% respectively.  Those of Mr. Li were 8.15%, 6.1%, -3.3% and 5.7% respectively.  The main differences between the 2 surveyors rested on their different view on two factors, viz. (i) the internal condition of the Premises including floor cracks, etc. found in the Premises, and (ii) the problems of low or erratic water pressure found in the Premises vis-à-vis the Comparables.  Apart from this, they also differed in their estimates of a car parking space in the subject development as well as in the adjustment to account for the longer than usual, 3-year term of the new tenancy.  In the final analysis, Mr. Cullen estimated the PMR of the Premises to be $20,500 per month whereas Mr. Li gave an estimate of $29,900 per month, both on the same basis of inclusive of rates and management fee. 

Evidence from other witnesses

4. There were 2 other factual witnesses, including the tenant, Mr. Stephen Weatherseed, who gave evidence himself.  He said that he had inspected quite a number of apartments in the subject development where he had resided for over 3 years because he was interested in purchasing an apartment for self-occupation.  In general, the states of repair in other apartments were better than his.  He complained that the Premises was of odd layout, and had no master bedroom en-suite and no amah’s quarter.  He added that the layout in the Premises was different from most other apartments in the development which all had 3 bedrooms.  Moreover, there were large, dangerous gaps appearing in the wood parquet flooring of the Premises, which also suffered from the problem of low and erratic water pressure. 

5. In addition, Mr. Chan Kai Yen, a director of the Respondent gave evidence.  He said that he himself, his family and affiliated companies together owned 10 apartments in the development, where he was also the Chairman of the Incorporated Owners.  Therefore, he knew many owners in the development and also had the opportunity in viewing the interior of many apartments there.  He said that the Premises had a large kitchen and an enclosed balcony when compared with most other apartments in the development.  Otherwise, he opined that there was not much difference in the internal layout, the internal condition, and the water pressure between the Premises and the other apartments (including the comparables adopted by the parties).

Adjustments of the Comparables

6. I have summarized below the adjustments to the 4 common comparables made by 2 surveyors, as well as the adjustments adopted by me.  I will comment on the adjustments in the next paragraph below.

A: Applicant’s witness; R: Respondent’s witness; LT: Lands Tribunal

# Including factors such as effect of proposed repairs/renovation work; internal state of decoration and floor cracks etc.;

Analysis of the rent passing to arrive at the unadjusted unit rates for the Comparables

7. There were minor differences in the unadjusted unit rates for the Comparables, the main reason being that Mr. Li chose to estimate the saleable areas of the Premises and the Comparables by scaling off from the registered floor plan.  On the other hand, Mr. Cullen adopted, as most surveyors in the market in general do, the saleable areas quoted by the Rating & Valuation Department in the schedule of rental comparables provided to the parties when the latter applied for such information to the Department.  Usually, the registered floor plans kept in the Land Registry have a large scale, and these plans are distorted after being photocopied.  Hence, it would not be advisable to scale off these plans in arriving at the areas of properties, if there are other better sources.  For this reason, I prefer to use the areas quoted by the Rating & Valuation Department and adopted by Mr. Cullen, in preference to Mr. Li’s figures.  Therefore, I adopt Mr. Cullen’s computed figures for each Comparable in the above table before applying the following adjustments:

(i) Timing

Both surveyors used as their basis for time adjustments the Rating & Valuation Department’s Residential Class D Rental Index (i.e. for units with size of between 100 sq. m. and 159.9 sq. m.).  There were very slight differences between their computed figures, which might be attributed to rounding errors.  Other than that, Mr. Cullen used the date of 21 October 2004 as the valuation date and after interpolation, adopted an index reference figure of 87.7.  On the other hand, Mr. Li adopted 22 October 2004 as the valuation date.  Since Mr. Cullen’s adopted date is correct, I adopt the percentage adjustments for time difference put forward by Mr. Cullen.

(ii) Refurbishment / Condition

The 2 surveyors and the other 2 factual witnesses gave conflicting evidence on this factor as well as the next factor, the alleged complaint of insufficient water pressure, which affected the use and enjoyment of the Premises and/or the Comparables.  These 2 factors combined account for much of the differences in the two valuations submitted by the parties.

Mr. Cullen gave evidence that the Premises was in an unsatisfactory state of internal repairs.  He gave detailed reports of these in his first report.  After viewing all the Comparables, he set out in his supplementary report a more detailed analysis of various aspects of the Premises when compared with the Comparables.  On the other hand, Mr. Li reported that all the defects identified in the Premises were common defects, which also appeared in other apartments in the building.  Hence, he opined that no adjustment at all was warranted.  Mr. Li was during cross examination challenged by the Applicant as to how he could still describe the Premises as to be in a reasonable and satisfactory maintenance condition when a proposal prepared by HAR Consultants Limited on 21 September 2004 (which was appointed by the building’s Incorporated Owners) contained over 10 areas where remedial works were proposed.

I do not agree with Mr. Li that no adjustment is warranted for all the Comparables.  However, I also do not accept the extent of overall adjustments proposed by Mr. Cullen (from –12% to –21%).  I consider that since these adjustments were of the same nature, we could not simply add up all the suggested adjustments without having regard to the overall effect on the rents for the purpose of assessment of the PMR for the Premises.  In the circumstances, I reduce Mr. Cullen’s adjustment percentages and estimated overall adjustments of -5%, -7%, -7% and -8% for Comparables C1, C2, C3 and C4 respectively. 

(iii) Water Pressure

Similar differences in evidence from Mr. Cullen and Mr. Li were heard.  At the end, Mr. Cullen suggested a downward adjustment of -7.5% for each Comparable whilst Mr. Li proposed nil adjustment.  On balance, I decide that Mr. Cullen’s evidence is preferable to Mr. Li’s.  And, I allow a lesser adjustment of -5% for each Comparable for this factor.

(iv) Floor Level

Both surveyors held the same view that adjustments for floor level were appropriate; yet they differed in the percentages of adjustments.  Mr. Cullen gave evidence that there were no appreciable difference between the Premises and the Comparables and they all did not have sea view.  He adopted an adjustment of 0.5% for each floor upward.  Mr. Li suggested a much higher adjustment of 3% per floor.  In particular, he gave evidence that Comparable C3 enjoyed partial sea view hence it warranted a downward adjustment.  After taking into consideration the evidence adduced by the parties, I am inclined to agree with Mr. Cullen on the adjustments for this factor. 

(v) Chattels

Although both considered this to be factor which might affect the rental assessment, they agreed that no adjustment for any comparable is warranted.  I agree with their common view as the Premises and all the comparables were most probably let with similar chattels.  There was no evidence to suggest otherwise.

(vi) New Letting / renewal

Mr. Cullen in his revised valuation report dated 3 March 2005 stated that since the comparables could be adjusted on the basis of differences in their internal decorative condition, it would be unnecessary to make a further adjustment to account for new letting or renewal.  Mr. Li maintained all along that this factor was unwarranted.  I agree with them that no adjustment is warranted.

Rental value of a car parking space in the subject development

8. Both surveyors did not adduce any actual rental evidence for car parking space in the subject development or in its vicinity.  Mr. Cullen said that the car parking space No. 4 on the first floor of the subject development, which formed part of the Premises, was a small car parking space and was only suitable for a very small car.  Based on asking rents of car parks of $2,000 with some as low as $1,500, Mr. Cullen opined that the rental value of the car parking space of the Premises should be only $1,500.  On the other hand, Mr. Li opined that based on his estimate of the “normal rent” for a car park in the vicinity, which ranged from $2,100 to $2,500, his estimate was $2,300 per month.  As there was no factual evidence for me to base upon, I adopt a mid point figure of $1,900 per month.

Computation of the adjusted unit rate for valuation of the Premises

9. Mr. Cullen adopted the evidence weighting method.  He placed a higher weighting (a factor of 3) for each of the fresh lettings of Comparables C1, C3 and C4, as against a lesser weight (a factor of 1) for Comparable C2, a renewal, since it might contain some elements of “tenant’s inertia”.  However, Mr. Li submitted that since all the comparables were transacted within 2 months from the valuation date, and were of similar sizes, and with Comparable C2 and C3 being respectively situated only one floor below and above the Premises, any artificial weighting to the adjusted unit rates would not be meaningful.  I agree with Mr. Li’s approach in this case.

Adjustment for the difference in the duration of the term of the tenancy

10. Although both parties agreed that the new tenancy should be for a term of 3 years, the 2 surveyors held very different view as to how much adjustments should be made to the Comparables, which were all let on 2-year terms.  Mr. Cullen opined that a +2% would suffice.  On the other hand, Mr. Li attempted to tackle the issue by calculating the differences in the return to the landlord if the rising rental trend could continue at the same rate as before.  As correctly pointed out by the Applicant, this pre-supposed that the historical rental trend would continue in the 3 years to come.  I do not find this to be a reasonable assumption.  On the whole, I agree with Mr. Cullen in his adjustment.  

Determination of the PMR of the Premises

11. Applying the average adjusted unit rate (on exclusive of rates and management fee basis) of the 4 comparables, at $150.23 (from the above table), to the saleable area of the Premises of 127.5 sq. m. (as given by Rating & Valuation Department and adopted by Mr. Cullen), I calculate the monthly rent for the apartment to be $19,154.  Adding this to the estimated rent of $1,900 for the car parking space, the PMR (on exclusive of rates and management fee basis) of the Premises was $21,054.

12. However, the average adjusted unit rate was derived from comparables all of which were under 2-year terms, as opposed to a 3-year term in the new tenancy for the Premises.  To account for this difference, I apply an adjustment of +2%, as suggested by Mr. Cullen.  Therefore, the PMR of the Premises on a 3-year term basis was $21,054 x 1.2, or $21,475.  Finally, as the parties agreed that the rent of new tenancy should be inclusive of rates and management fee, further adjustments are made, as follows: -

Costs

13. Both parties realized that Section 117R of the Landlord & Tenant (Consolidation) Ordinance (Cap. 7) provides that “In any proceedings under this part, the Tribunal shall not make any order as to costs against a party unless the party has conducted his case in a frivolous or vexatious manner.”  

However, the Applicant submitted that costs should be awarded against the Respondent on the ground that the hearing on 1^st February 2005 had to be adjourned “as a result of the late production of R’s valuer’s second valuation report dated 27^th January 2005”.  Otherwise, the Applicant did not seek costs for the proceedings of this new tenancy application.  On the other hand, the Respondent submitted that there should be no order as to costs for this case including the costs of and occasioned by the adjournment on 1 February 2005.

14. In the written submission filed by the Applicant, it was submitted that the conducts of the Respondent was both frivolous and vexatious for the following reasons:  (1) frivolous as it did not initially treat the application in a serious manner; (2) vexatious because of the very late production of the report and the Respondent’s insistence through its counsel at 1 February 2005 that the hearing could proceed that morning “was intended to vex and / or harass Applicant by trying to gain an advantage by deliberately using a report produced at the last minute” and (3) compounded by the Applicant’s claim “that the first report was not supposed to be a Rule 20 report in the first place”.  The Respondent in the written submission denied all these allegations.

15. This is a simple Part IV case involving valuation of an apartment unit.  The main differences between the 2 surveyors centred on whether adjustments should be made in respect of 2 factors, one on internal condition and one on water pressure problem.  Although there was an adjournment on 1 February after the case was heard for about an hour, it was ordered by consent of the parties, with costs reserved.  I note that on 1 February 2005, the Tribunal then also ordered that “parties to have joint inspection by their experts on 5 comparables.”  As a result of this, Mr. Cullen prepared a supplementary valuation report dated 3 March 2005 in which he gave minute descriptions of the differences between the Premises and the Comparables.  With the benefit of hindsight, this report might not be completed without the benefit of the joint inspection, which was made possible by the adjournment.  And Mr. Cullen would not be able to produce this supplementary report in support of his evidence and revised his adjustments to the Comparables during the subsequent hearing on 8 March 2005.

16. On the whole, after considering all the points made by the parties, I do not find that the Respondent had conducted herself in a frivolous or vexatious manner.  Therefore, I give an order that there be no order as to costs.

Orders