BAYER CHINA CO. LTD. v. MID-LEVELS PORTFOLIO (BRANKSOME) LTD.

IN THE LANDS TRIBUNAL OF HONG KONG

LANDS TRIBUNAL APPLICATION NO. 2589/94

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DECISION

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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. The applicant is the tenant and the respondent is the landlord of Flat C on the 18th floor of 3 Tregunter Path, Hong Kong. The development, known as Branksome, is a 24 storey residential block in the prestigious May Road area. It was built in 1976.

2. The tenancy was terminated on 14th July 1994 ( the relevant date for determining the new rent) by the serving of a form CR101 on 16th December 1993. The landlord did not oppose the granting of a new tenancy which was agreed to be for a further two years. However the landlord now seeks a variation in the terms of the tenancy to allow the landlord to serve a 6 months notice to quit in the event that the landlord intends to redevelop. The proposed variation and the new rent are not agreed.

3. Mr. Warren Chan Q.C. argued on behalf of the respondent that the Tribunal should grant the right to terminate before the expiry of the usual 2 years duration if redevelopment is contemplated. His client believes that the property is ripe for redevelopment. Accordingly, he said it was correct estate management practice to ensure that all tenancies conform to one another to enable redevelopment of the entire property at some time in the future. He drew attention the fact that the property would also be more valuable in the event that the respondent wished to sell. He cited a number of similar developments on Hong Kong Island which have tenancies with the clause included.

4. At the end of March 1994, the landlord company instructed it's solicitors to include the clause in all new tenancy agreements. Since then, out of a total of 49 new tenancy agreements, 44 have the redevelopment clause included. It is noted that Branksome has in all, a total of 94 flats. According to Miss Margaret Cheng, who is the Legal Officer for Kerry Properties Ltd., the landlords parent Company, not all the tenants who were presented with the redevelopment clause have agreed to it. The Government did not agree for the one flat it rents, and the Hong Kong Bank, for the 20 flats which it rents, has agreed to it only on the basis that it could not be exercised until 12 months of the tenancy had elapsed. So in effect, in the Bank's case, the duration is secure for 18 months.

5. Under section 119J of the Ordinance, the Tribunal, when determining terms which are not agreed, "shall have regard to the terms of the current tenancy and to all relevant circumstances". Mr. Chan believed the Tribunal has a wide discretion. He drew attention to the decision of the Tribunal in the case of McKinsey & Co. Inc and others v Sky Alliance Development Ltd. LT's 3598, 3685 and 2837 of 1991. In that case the Tribunal allowed a "break clause" to allow the tenant to terminate the tenancy before the expiry of the full 2 years duration.

6. Mr. Merry for the applicant, accepted that the Tribunal had a discretion but in accordance with it's review decision in Banque Paribas v. O. Kees and Co. (H.K.) Ltd. LT 1676 of 1986, the onus was on the respondent to show very good reason for amending the terms of the current tenancy. In that case the Tribunal said it, "should endeavour to adhere to the existing agreement between the parties or such terms as are usual in tenancy agreements for similar premises so far as that is practicable. The Tribunal is not free to re-write the current tenancy, however reasonable that may be, simply because the parties cannot agree on certain terms".

7. In the present case, the application for variation of the terms touches on duration which is governed by section 119I which gives the Tribunal a discretion in as much, "as may be determined by the Tribunal to be reasonable in all circumstances". Duration and a break clause unlike other varied terms are inter-related. They may properly be considered together - 2 Woodfall on Landlord and Tenant (29th Edn) 22.153. Both similarly affect rent so far as the length of the new tenancy is relevant.

8. With respect to terms other than duration section 119J states that, "The Tribunal shall have regard to the terms of the current tenancy and to all relevant circumstances".

9. It is not disputed that the burden of proof is on the Respondent, - O'May v. City of London Real Property Co. Ltd (1983) 2 AC 726 HL. The onus is therefore on the respondent, to show good reason for the terms of the current tenancy to be varied. In this case there is no planned redevelopment. It is merely a distant possibility. The present duration is for a relatively short period of 2 years. The Landlord in his next Form CR101 may oppose the grant of a new tenancy on the ground of redevelopment. At the hearing the new tenancy only had a balance of 17 months to run. I am aware that some English cases have allowed break clauses were there has only been a possibility of redevelopment. However, the position in England is significantly different to Hong Kong. In England the law only applies to business tenancies. More importantly, unlike Hong Kong, the durations are not limited to a maximum of 3 years. In practice many English tenancies are for much longer periods up to the maximum duration of 14 years. Clearly for such longer periods it is reasonable to adopt a more liberal attitude by varying a new tenancy's terms to include a break clause.

10. I do not believe the arguments put forward for the respondent present sufficient reason to vary the terms of the current tenancy. I also take into account that one of the aims of the Ordinance is to preserve the tenant's security of tenure.

11. The new tenancy shall be on the same terms as previously. The Prevailing Market Rent based on those terms is to be determined within the definition set out in section 115 of Cap. 7. The relevant date for that determination is 14th July 1994.

12. The applicant's surveyor Mr. Cullen in his report relied on comparables which were all some months before the relevant date. Since then he has obtained further information nearer to the relevant date. Flat 7C has been let at $90,000 per month from 1st August 1994. This was a special case, involving the tenant moving from "Tavistock" (also owned by Respondent Company) during the course of a tenancy at $49,000 per month to facilitate the redevelopment of that block. Therefore the first 5 months of this 2 year tenancy which overlap the "Tavistock" lease are at the same rent of $49,000 per month and only the remainder is at $90,000 per month.

13. Mr. Cullen's valuation of $82,000 per month relied mostly on the letting of Flat D, 9/F. at the equivalent of $76,000 per month from 1.7.94. However this flat was let at a rent of $912,000 in advance for the first year.

14. The equivalent monthly rent, on my rough calculations would be from $76,700 to $77,000 per month. In any case, on the basis it was let, this is not the most reliable letting on which to base a valuation. The flat is also in the lower sector of the block.

15. A better comparable which was also used by the Respondent's expert, Miss Yabsley, was the new letting of flat 16D for $95,000 per month from 1.6.1994. Also in Mr. Cullen's list were Flat 3D let at $85,000 per month from 6.4.94 with no carpark but some furniture, Flat 15B let from 1.4.94 at $82,000 per month, Flat 11B renewed at $74,000 per month from 1.4.94 and Flat 22A renewed at $78,500 per month from 1.4.94.

16. Miss Yabsley's comparable evidence included Flat 16A renewed at $85,000 per month from 6.3.94 and Flat 16D, already mentioned, as well as Flat 19C which realised $100,000 per month from 1.10.94 on renewal. She said that the Prevailing Market Rent should be $106,000 per month.

17. During the hearing comparables for Flat 17B and Flat 16B were obtained. Flat 17B let at $90,000 per month from August '94 and Flat 16B let at $92,500 per month also from August '94.

18. These two lettings were the best available evidence, both being very close to the relevant date and agreed at a time when the rental market had more or less stabilised from its volatility earlier in the year.

19. So in addition to the valuation reports we have very good evidence, which shows rents for the higher floors in Branksome, at or about the relevant date, as being in the region of $90,000 per month. I inspected the subject flat and some of the comparables. I was able to confirm that Block AB has a better outlook than Block CD. AB's view is not affected by the building in front which is known as "May Tower". However it does, overlap Block CD to some extent. The rents in August for B flats were about $90,000 per month or a little more (B16, $92,500). I do not subscribe to the 1/2% allowance for the difference in value per floor advocated by many valuers. Flats in different sections of the block command different rents. That is, the higher flats in the block with better views are undoubtedly worth more than those lower down, but not strictly at a rate of 1/2% per floor.

20. So if Flat 16D was able to command $95,000 at June '94, it would be reasonable to assume that Flat 18C (the subject premises) would fetch at least that in July. But, if the better end of the block at the same level was renting at $90,000 and $92,500 per month, a little later on, then it does seem that the $95,000 for the D Flat might have been slightly out of line. In my view the rental at this floor level is about $90,000 per month irrespective of which end of the development the flat is located. But if say Block A/B is worth slightly over $90,000, then Block C/D must be, at best, worth $90,000 per month but no more.

21. I note that if the rent for Flat 16A of $85,000 for 3/94 is adjusted for time lag at say 3% per month (the generally accepted rise at the time), it results in a figure of $95,000. This, of course, is not as accurate an exercise as that based on the August rents. However 16A is at the better end of the block and further suggests that 16D's rent at the same $95,000 was a high rent. I therefore propose to fix the Prevailing Market Rent as at 14th July 1994 at $90,000 per month.

22. It is therefore ordered that a new tenancy shall be granted for 2 years from 15th July 1994 at a rent of $90,000 per month exclusive of rates and maintenance fees. Otherwise the new tenancy shall be on the same terms and conditions as the previous tenancy save for the deposit clause which shall be altered to reflect the new rent.

23. There is no order as to costs.

Dated this 27th day of January 1995.