HACKWOOD SERVICE CO (HK) LTD v. WILHELMINA CHI YING WU

In the LDNT 135 of 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 135 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 described by the parties as Annex of No. 50 Sassoon Road, Hong Kong (“the Premises”), or No. 50A Sassoon Road.  The Premises comprises the ground and second floor of a 3-storey semi-detached building, which contains a third floor, unoccupied and in disrepair.  The subject building is an extension of and is therefore described as an Annex of No. 50 Sassoon Road, the adjoining semi-detached building, which is also vacant and has fallen into disrepairs for some years.  Both buildings probably formed part of the original Villa Ellenbud estate as they are situated at the rear of the main house of Villa Ellenbud (No. 52 Sassoon Road).  The subject building is situated near the end of Sassoon Road on a headland looking out to Peng Chau.

2. The Premises was previously subject to a residential lease for a term of 2 years commencing from 1 August 2002 at a rent of $70,000 per month, on the basis of exclusive of rates and management fee. 

3. Both parties have called for the evidence of expert surveyors who submitted valuation reports in which both experts acknowledged the unusual nature of the Premises as a result of which the Tribunal, with the agreement and company of the parties’ lawyers and surveyors carried out a site inspection of the Premises as well as the comparables identified by the surveyors on 16 December 2004.

The issue

4. Since the parties had initiated the former Part IV procedure prior to the enactment of the Amendment Ordinance 2004 to the Landlord & Tenant (Consolidation) Ordinance (Cap. 7), there was no dispute that the Applicant’s application fell within the provisions of the former IV of the Ordinance.  Therefore, this Judgment only deals with the outstanding issue, i.e., the determination of the Prevailing Market Rent (“PMR”) of the Premises.  The parties agreed that the duration of the new tenancy of the Premises would be for a term of two years commencing from 1 September 2004.  They also agreed that the terms of the new tenancy, other than the rent, would be the same as in the previous tenancy agreement. 

Accommodation and area of the Premises

5. The report (i.e. Exhibit A1) prepared and produced by Ms. Alex Meikle, the Applicant’s surveyor contained a detailed description of the Premises including its situation and locality, accommodation and condition.  By comparison, the report (i.e. Exhibit R1) of Mr. Wayne Lee, the Respondent’s surveyor did not contain sufficient details as to the internal state of the Premises.  In particular, the report did not take sufficient note of the unreliable electricity supply and the various defects which were very likely caused by the aged structure of the building, especially when the Premises was only tastefully decorated about 2 years ago when the Applicant first entered into a tenancy with the Respondent.

6. The subject building is a pre-war building, however, there are no building plans filed at the Buildings Department to confirm its age of construction.  The Premises comprises the kitchen and ancillary areas on the ground floor, the sitting/dining room as well as a master bedroom and a study on one side and a guest bedroom on the other side of the first floor.

7. According to the Rating & Valuation Department, the saleable area of the Premises was 178 sq. m. (excluding the garden).  However, both surveyors agreed that the accommodation was more extensive than this and they took measurements on site to ascertain the true area.  At the end, both surveyors agreed the following areas:

Accommodation	Area (sq. m.)
House (Ground & first floors)	185.9
Garden House	11.7
Garden	190

8. In calculating the effective area of the Premises, Ms. Meikle used a weighing factor of 1 to 5 and 1 to 10 for the Garden House (described by her as Garden Room) and Garden respectively.  However, whilst Mr. Lee agreed to use the same weighing factor of 1 to 10 for converting the Garden area into the effective area of the Premises, he reckoned that the Garden House was as good as and should command the same rent as the House proper.  This was the case notwithstanding the fact that the Garden House was a freestanding dilapidated structure with no electricity supply.  With the benefit of my inspection, I agree with Ms. Meikle that the Garden House can only provide ancillary accommodation.  As such, her adopted factor of 1 to 5 is considered to be reasonable.  On this basis, the effective area of the Premises, as calculated by Ms. Meikle, is taken to be 207.2 sq. m. (i.e. 185.90 + 11.70 x 1/5 + 190 x 1/10).

9. There is also further ancillary accommodation in the form of an underground storeroom / cellar but since it is in a dilapidated state, I agree with both surveyors to disregard this accommodation in the valuation.

10. Other than the partly tiled and partly landscaped garden surrounding the subject building, there are no recreational facilities.  Also, there is no car parking provided at the Premises for the Applicant even though the Applicant managed to secure, with the consent of an owner of a neighboring property, the use of a parking space nearby.

Summary of the valuation by the expert surveyors

11. Ms. Meikle estimated the PMR of the Premises using the 6 comparables provided by the Rating & Valuation Department.  She determined the PMR of the Premises to be $53,302.  She carried out two cross check valuation. Firstly, using the rent under the previous tenancy of $70,000 as the basic rent and applying the rental index compiled by her company, she arrived at a time-adjusted rent of $59,849, which is about 12% above her initial valuation.  Secondly, she analyzed 2 comparable asking rents identified in the market. After making adjustments to these 2 comparables, she arrived at an estimated value of $55,456 for the Premises.  After reconciliation of the initial valuation and these 2 cross checks, she opined that the reasonable PMR of the Premises would be $54,000 (i.e., equivalent to 207.2 sq. m. x $260.62 per sq. m.)  From this estimate, she suggested to make allowances in the total sum of $10,317 reflecting the disturbance effect due to the repairs to be done to the Premises.  At the end, she estimated the adjusted PMR of the Premises to be $44,000 per month.

12. On the other hand, Mr. Lee in his valuation report estimated the PMR of the Premises to be 75,800 per month.  Mr. Lee also opined that the previous rent passing for the Premises at $70,000 should serve as a good comparable for the present valuation exercise.  On this basis, he submitted that since his estimate of the PMR was closer to the previous rent than Ms. Meikle’s estimate, his valuation should be more accurate.  I cannot agree with this reasoning.  As rightly pointed by the Applicant, the Applicant did not seek the advice of lawyers and professional surveyors prior to entering into the tenancy agreement.  Besides, for a property such as the Premises, it is even more difficult for any prospective tenant to ascertain the market value at the time of leasing.

13. After re-consideration of his valuation during the hearing, Mr. Lee agreed to make some changes in his analysis of comparables, including (1) correcting his typographical errors, (2) agreeing to make allowance for the inferior internal condition of the Premises when compared with the normally expected condition of the comparables (as he had not made any inspection of the latter), (3) changing the adjustment for the difference in car parking provision between the Premises and the comparables, and (4) adding a new comparable (1/F of Old Alberose, 132A Pokfulam Road) identified by Ms. Meikle.  As a result, he revised his valuation of the PMR of the Premises to $64,880.7 (i.e., equivalent to 216.60 sq. m. x $299.54 per sq. m.).  Unlike Ms. Meikle, Mr. Lee did not opine that there was the need to make adjustment to allow for the amortization for the costs of repairs and the disturbance to the tenant due to the repairs.

14. Both surveyors admitted that the comparables identified and adopted by them were not good comparables.  However, as there was no other better method of valuation than the direct comparison method of valuation for valuing the PMR of a residential property such as the Premises, they still had to use these comparables in their valuation.

15. I agree with the 2 surveyors that their comparables are not good comparables for the Premises.  In fact, I doubt if there would be any good comparable for the Premises as pre-war properties of a similar type and available for letting are rarely found nowadays in Hong Kong.  Newer properties do not provide good comparables because they normally do not have the same structural and dampness problems as an aged property such as the Premises.  Also, the Premises was much better than most of the comparables in terms of its superior view and setting (i.e., the factors of “View”, “Location” and “Character” as described by Ms. Meikle, or the factors of “View” and “Exclusivity, Tranquility, Privacy” as described by Mr. Lee).

16. According to Ms. Meikle, the comparable flat at Old Aberose was let at the rent of $70,000 per month prior to the hearing.  Therefore, I agree with the 2 surveyors to adopt this comparable as an additional comparable, Comparable 7.  The other additional comparable cited by Ms. Meikle remained vacant and for letting.  Therefore, as suggested by Mr. Lee, that comparable was discarded in this valuation exercise.

17. The large differences between the Premises and the comparables were evidenced by the substantial overall adjustments of 40% to 52.5% made to the original 6 comparables by Mr. Lee in his revised valuation schedule, and to a lesser but still a large extent (from 6.2% to 44.8% for the same 6 comparables), by Ms. Meikle.  However, both surveyors found the new Comparable 7 at Old Aberose identified by Ms. Meikle to be a much similar comparable than the original 6 comparables.  Their overall adjustments to this Comparable 7 were relatively more modest: Ms. Meikle allowed a total adjustment of –6% whilst Mr. Lee a total adjustment of +24.5%.

18. Also, as pointed out by the parties and their surveyors, although the surveyors have between them considered and allowed adjustments in 9 factors of adjustments (grouping the factors of exclusivity, tranquility and privacy used by Mr. Lee under the factors of view and character by Ms. Meikle), the differences in the total adjustments for all the comparables between the two surveyors, with the exception of Comparables 3 and 4, and the new Comparable 7, were less than 5%.  A summary of their total adjustments for all 7 comparables is as follows:

Estimates and adjustments of rents for car parking space

19. Both Ms. Meikle and Mr. Lee could not find any evidence of car parking space for lease at any nearby or comparable developments.  Since the Premises does not have the use of any car parking space, Ms. Meikle has allowed “an amount of $4,000 per covered space based on the monthly charge at the Wilson car park in Chi Fu Fa Yuen (the nearest public car park to the subject property) uplifted from $2,750 per month.  This uplift is to allow for the travel costs from the public car park to the subject property and the inconvenience involved.”  On this basis, for the comparables, she allowed $4,000 and $7,500 for the comparables with 1 covered space and 2 covered spaces respectively.  For Comparable 5, she allowed an amount of $5,000 as she did not know if the 2 car parking spaces were covered spaces or not.  On the other hand, Mr. Lee allowed amounts of $2,000 and $4,000 for comparables with 1 car parking space and 2 car parking spaces respectively.

20. After consideration of the 2 surveyors’ estimates, I adopt rates of $3,000 and $5,000 respectively for comparables with 1 car parking space and 2 car parking spaces respectively.

Adjustments of gross rents to net rents on the same basis as for the Premises

21. I follow the approach of both surveyors and find that the comparables have the following monthly net rents and unit rates, on the basis of exclusive of rates and management fee:

The Tribunal’s adopted adjustments for the comparables

22. In light of the consensus of the 2 surveyors that Comparable 7 was the best comparable among all 7 comparables, I have given serious consideration as to whether I should only cast my attention to this comparable but disregarded the other 6 comparables.  However, I decided at the end to follow the 2 surveyors and considered all 7 comparables in this valuation.  Similarly, in the analysis of the comparables, I have accepted the factors of adjustments cited by the 2 surveyors as to be relevant factors.  I have also considered the facts adduced by the parties as well as the subjective opinion and the figures adopted by the 2 surveyors before arriving at my own opinion as the appropriate quantum of adjustments for all 7 comparables, a summary of which is as follows:

Time

I adopt Ms. Meikle’s adjustments for time, based on her company’s index of rental trends.  Contrary to the normal practice of valuation surveyors, Mr. Lee did not suggest any adjustment for this time factor on the ground that he was not aware of any appropriate index for use.  I find that in Hong Kong, time is a more important element than in most other jurisdictions because property rental values could fluctuate a lot within a short period of time.  So, in theory, I agree that applying time adjustments are reasonable.  Mr. Lee also challenged Ms. Meikle’s adjustments on the ground that he was not aware of the index used by her.  I do not accept this to be a sufficient ground for making no adjustment.  In any event, adjustments adopted by surveyors and the Tribunal, or indeed anybody else who wishes to carry out a valuation, for time or other adjustments, are bound to be subjective.

Internal Condition

Ms. Meikle suggested an upward adjustment of 5% for Comparable 1, 4, 5 and 7.  Lee in his original valuation did not see fit to allow for this factor.   However, during the hearing, he agreed to give weight to this factor and adopted an across the board adjustment of –2.5% for Comparables 1, 4, 5 and 7.  I understand that this adjustment is to account for the general inferior condition of properties at renewals as against properties for new letting.  However, as I agree to give allowance for the disrepairs of the Premises at a later stage of this Judgment, I find that there is no need to give any allowance of this adjustment factor.

Age

Although both surveyors gave upward adjustments for all the comparables, Ms. Meikle gave more adjustments for newer comparables while Mr. Lee allowed a flat rate of 5% for all.  He also brushed aside Ms. Meikle’s adjustments on the ground that they were unnecessarily too mechanistic.  I agree with Ms. Meikle to give more adjustments for newer comparables as against older comparables.

Size

Similarly, whilst both surveyors gave upward adjustments for all the comparables, they differ in quantum.  Mr. Lee gave lesser adjustments and also criticized Ms. Meikle’s adjustments as to be too mechanistic.  I also agree with Ms. Meikle’s adjustments.

Facilities

Both surveyors adopted the same adjustments for all the comparables.  I adopt their figures.

Term

Ms. Meikle made a downward adjustment of –2% for Comparable 5, which was let for a term of 3 years but not the usual 2 years.  Other than that, she did not make any adjustment.  Mr. Lee considered that nil adjustment was warranted for Comparable 5.  I accept Ms. Meikle’s adjustment for Comparable 5 as a longer lease term is generally regarded as a negative factor and requires an upward adjustment in rent.  Therefore, to put Comparable 5 in the same basis as the Premises, a downward adjustment of –2% is reasonable.

Layout

In the hearing, Mr. Lee abandoned his adjustments for this factor.  I agree.

View, location and character

As stated before, the differences in the sum of adjustments for these factors are less than 5%, with the exception of Comparable 3, 4 and 7.  After reviewing the evidence of the surveyors and their adjustments, I agree to adopt the figures suggested by Ms. Meikle apart from the adjustment figures for view for Comparables 3 and 4 for which I allow a figure of 10% each.

Summary of adjustments for the comparables

23. On the above basis, I recalculated the adjustment percentages adopted, as follows:

Estimates of the PMR of the Premises before adjustments for repairs

23.         Applying the adopted total adjustments to the respective net monthly unit rental rates of the comparables, I have calculated the adjusted unit rates for the comparables below:

24. Applying the average unit rate of $288.6 per sq. m. to the equivalent saleable area of the Premises of 207.2 sq. m., I arrive at a figure of $59,798.  As a check, using the adjusted unit rate of the best comparable, Comparable 7, I arrive at a figure of $59,487.  I agree with both surveyors that this is the best comparable overall, particularly in terms of the age of structure.  The estimation of the PMR of the Premises using the best comparable is also well supported by the average of the adjusted unit rates of the remaining 6 comparables, at $59,860.  On reconciliation, I am of the view that the PMR of the Premises should best be referenced to the estimate obtained from the average adjusted unit rates of all 7 comparables, i.e., $59,798, rounded to $59,800.

Valuation of the PMR Premises taking into account the disrepair and the covenants of the lease

25. Ms. Meikle opined that from her estimated PMR of the Premises of $54,000, it would be necessary to make deductions to take into account (1) the present value of the amortised monthly amount for the estimated renovation costs of $175,000, in the sum of $7,645; (2) 10% reduction of PMR for the first 3 months of renewal term, in the sum of $675; and (3) 27 days’ rent free period, in the sum of $1,997.  On the other hand, Mr. Lee opined that there would be no need to make any deduction as suggested by Ms. Meikle.

26. The Respondent drew my attention to the general approach adopted by the Tribunal in the past, as reported in the following passage in page 271 of Gordon Cruden’s book, Land Compensation And Valuation Law In Hong Kong (Second Edition, Butterworths):

“Valuations are generally made on the basis that the premises are in good tenantable repair.  The justification for this approach is that a tenancy agreement usually provides for the premises to be kept in good repair.  Commonly, the landlord is responsible for the structure and the tenant for the interior.  Valuations are made on the assumption that both parties will perform their contractual repair obligations.  Where one party default the other has the contractual right to enforce performance: Union Carbide Asia Ltd. V The Hong Kong Land Co Ltd. [1982] HKDCLR 75.  Similarly, minor defects and the inconvenience suffered by tenants during the maintenance period of new buildings will not affect rent particularly where the comparables suffer the same disadvantages: Cathay Pacific Airways Ltd. V Wharf Properties Ltd. [1985] HKDCLR 39.  Refurbishing was a relevant factor in Henkel Chemicals (HK) Ltd. V Pokfulam Development Co Ltd [1993] HKDCLR 147

27. In McKinsey & Co Inc. Hong Kong & Ors v Sky Alliance Development Ltd. [1991] 1 HKC 486, Member MW Philip held that where it could be shown that defects were not readily remediable or where it would be uneconomical to the extent that one could not reasonably expect repairs to be carried out, then due account has to be taken in the rent determined for such premises. 

28. The Respondent submitted that they did not say that the Applicant had been making the Premises in disrepairs deliberately.  However, the Respondent alleged that if the deductions as suggested by Ms. Meikle were accepted, it would mean that any tenant could allow any property into disrepair and then expect to have the PMR reduced at the time of renewal.  In addition, the Respondent submitted that even if deductions were allowed, the Applicant would have the benefit of enjoying a reduced rent but no repairing work would be carried out in the Premises.

29. However, I agree with the Applicant that the previous decisions in Union Carbide case does not apply because it is clear from the evidence that under the repairing covenant of the previous tenancy (which will be adopted for the new tenancy), the Respondent as the landlord is not obliged to carry out any work dealing with the disrepairs complained of by the tenant.  The unusual repairing covenant specifically excludes the obligation of the landlord to carry out, for example, the structural repairs, which is otherwise generally accepted as the landlord’s liability in residential leases.

30. I find that on the evidence, there were the disrepairs (for example, the dampness) in the Premises due to the deficiency in the electricity supply and installation of the Premises and the structural defects.  Therefore, I agree to adopt the approach of HH Deputy Judge Yung (as he then was) in Booz Allen Hamilton (HK) Ltd. V Skyhorse Ltd. [1998] HKLT1 in which he decided that the rent should be assessed on the basis of what a well-informed hypothetical tenant would have paid, but not assessed without regard to the defects leaving the tenant to enforce the landlord’s covenant to repair.  According to Ms. Meikle, the total reduction in rent allowed for over the 24-month lease equated to about 20%.

31. I note that Ms. Meikle basically followed the Tribunal’s determination in the case of Booz Allen Hamilton (HK) Ltd in making her estimates.  However, I think this should be a matter of estimates based on facts applicable in each case.  In this regard, I have also taken into account another case decided in the Tribunal by HH Judge Chow and myself, Brecon Limited v Perm Finance Company Limited (unreported, case LDNT 421 of 1999, Date of Judgment: 21 December 2000).  In that case, we decided that, “as to the quantum of allowance for the defects or dilapidation of the Premises over and above the normal defects of the comparables, we accept that one method is to base on the estimated cost of carrying out the repairing work and amortising the costs over the period of tenancy.”

32. In the present case, I decide to make similar deductions.  I agree with the Respondent that the works to be carried out would not have effect only for the period of 24 months.  However, following the amendment of the Ordinance in July 2004, a tenant of domestic premises will not have the security of tenure after the expiration of the tenancy. Therefore, I have to assume that to a well-informed hypothetical tenant, before entering into a new tenancy with the landlord, the expenditure he incurred for the purpose of carrying out the necessary repairing works will have to be reflected within the 2 years duration of the proposed renewal term.  Hence, the assumption adopted by Ms. Meikle to amortize the costs over a 24-months period is agreed.

33. Although the Respondent challenged some of the figures in the quotations of repairing costs shown in Ms. Meikle’s report, they did not produce any alternative quotations for my consideration.  All in all, I find Ms. Meikle’s estimate of $175,000 and her amortised monthly sum of $7,645 to be reasonable.  By comparison, assuming that the PMR of the Premises, on repairing condition similar to the comparables, is $59,800, the estimated cost is about 3 times the PMR.  In fact, I find that neither this estimated expenditure is out of all proportion to the value of the Premises nor it would not make economic sense to carry out the repairs.

34. However, I do not find that it is necessary to allow a 10% reduction in PMR for the first 3 months of renewal term in disrepair.  Also, I agree with Ms. Meikle’s estimate of 27 days’ rent-free period and the estimated monthly deduction of $1,997 for the repairing works to be carried out.

35. Therefore, from my previous estimate of the PMR of $59,800, I allow the two deductions, as follows:

35.   In conclusion, I determine the PMR of the Premises on the basis of exclusive of rates and management charges to be $50,000 per month.  If the Applicant agrees, in the new tenancy with the Respondent to pay the Government Rent in addition to Government rates and management fee, the parties shall make the appropriate deduction in the amount of rent to be paid by the Applicant to the Respondent.

Orders

1.  By consent, a new tenancy of the Premises shall be granted for a term of 2 years commencing from 1 September 2004;

2.  The new rent of the new tenancy is determined by the Tribunal at a sum of $ 50,000 per month, exclusive of rates and management fee; leave to the Respondent to pay the Applicant over payment of rent, if any, within 1 month from today;

3.  The deposit shall be adjusted pro-rata with the new rent; leave to the Respondent to pay the Applicant the adjustment, if any, within 1 month from today;

4.  All the other provisions of the new tenancy shall be the same as for the previous tenancy;

5.  No order as to costs.