MRS. VERONICA BOURKE v. MAXWELL INDUSTRIAL BUILDING MANAGEMENT CO. LTD.

Head Note

New tenancy - Valuation - Prevalent Market Rent - Difference between one and two year leases - Approach in little or lack of evidence - View

LDNT 345/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

NEW TENANCY APPLICATION NO. 345 OF 2000

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MRS. VERONICA BOURKE v.

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JUDGEMENT

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I. Introduction

1. The Applicant ("the Tenant") is a Part IV tenant under a tenancy agreement dated 14 December 1999 and is now applying for renewal of tenancy. The Respondent ("the Landlord") is the landlord.

2. The premises in question is known as ALL THAT Apartment D1 on the Ground Floor of the building ("Premises") erected on ALL THAT piece or parcel of land registered in the Land Registry as THE REMAINING PORTION OF SECTION A OF RURAL BUILDING LOT NO.368 and known as "RIVIERA APARTMENT" NO.4 SOUTH BAY ROAD, REPULSE BAY, HONG KONG ("Development") together with one single covered car parking space (collectively known as the "Property"), under a term of two years commencing from 1 November 1998 at HK$45,100 (exclusive government rates and management fees) per calendar month.

3. In the present application, the Tenant applied for a new tenancy for two years to commence upon the expiration of the current tenancy on 31 October 2000 and at a rental to be determined by this Tribunal. The Landlord does not oppose the application but asked this Tribunal to determine the prevailing market rental of the Property as at 1 November 2000. Parties had also confirmed that the same terms of the new tenancy should be the same as that of the previous tenancy.

4. Therefore the outstanding issue is the amount of the prevailing market rent ("PMR") which is defined under Section 115 of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 as

"... the rent, exclusive of rates at which premises the subject matter of a tenancy to which this Part applies might reasonably be expected to be let, at the date on which the current tenancy would, apart from section 119N, have come to an end under section 119(1) or section 119A(5), on the terms of the new tenancy granted under this Part, but disregarded the effect of this Ordinance"

5. The Tenant's valuation expert was Mr. Simon Dominic Lynch ("Mr. Lynch") of Chesterton Petty Limited. He had made a report dated 20 September 2001. The Landlord was represented by Mr. Brian Wing Kang LI ("Mr. Li") of Dudley Surveyors Limited. He had made a report dated 26 June 2001.

6. The Premises is a 4 bedrooms apartment on the Ground Floor of Block D of Riviera Apartments, a small residential development comprising of two blocks of 3-storey apartments with 2 flats on each floor in each block. The saleable floor area of the Premises is approximately 192.5 sq.m.

7. The Premises is situated in a secluded and luxurious residential district. Developments in the vicinity comprise a mixture of medium, low rise luxury apartments and detached/semi-detached garden houses of various ages. It is located on the western side of South Bay Road and south of South Bay Road in Repulse Bay of the Hong Kong Island. Shopping facilities are provided at the Repulse Bay. The Development comprises of four 3-storey buildings with reinforced concrete framed construction completed in 1958.

8. Mr. Lynch has considered rental evidence of 8 properties within the Development. He made adjustments to reflect the time movements, the view, the position and the floor size. He then arrived at a range of unit rates between $170 and $220 per square meter giving a range of rental of $38,500 to $40,500. He then chose the figure of $208 per square meter as the unit rate and multiplied that by 192.5 which gave the monthly rent of $40,040. Adding $500 for the value of secure car park he arrived at a monthly rent of $40,500. This figure represented a fall in 11% from the rental in November 1998. As a cross check, Mr. Lynch compared this fall with a property outside the Development, namely, 4th Floor, Flat H, 76 Repulse Bay and found it was consistent.

9. Mr. Li has considered rental evidence of 7 properties within the Development. He made adjustment by reference to HK$5,000 given by the Landlord to the Tenant in consideration of the Tenant accepted that the Landlord shall not be responsible for any further repairs and maintenance. He also made adjustment to time movements and floor and arrived at $248 per square meter. Adding 10% this gives 273 per square meter. He then said the figure should be $270 per square meter because he had adopted two comparables (CB4 and CB6) in 76 Repulse Bay Road and through adjustments to difference in characteristics in terms of lease commencement dates, age, external maintenance, chattel provision etc. The adjusted unit rates of those two comparables, CB4 and CB6, are $273 and $266 respectively, which gave an average of $270. Multiplying $270 by 192.5, Mr. Li arrived at the figure of $51,975. Adding $500 to reflect on the covered parking, Mr. Li arrived at $52,475 and he was of the opinion that the PMR should be $52,400.

Choice of Comparables for Analysis

10. In view of the uniqueness and age of the Development, and the number of comparables available in the Development, I consider that I should concentrate on the rents from the Development itself. The experts are also in agreement with this approach.

11. As regards choice of comparables within the Development, the Landlord proposed Comparable CA 1 and CA 5 on p.10 of Mr. Li's report are closest and Comparable CA 5 should be used. Mr. Lynch regarded that Comparable CA 2 as a better comparable. The Landlord said that Comparable CA 2 is not suitable because it is against the trend and the unit rental is the lowest among all comparables in the Development and as a general rule the highest and lowest rental comparables are not used in assessment. Alternatively, the average unit rate of CA1 to CA7, namely, HK$240.70 should be adopted.

12. In my judgment, if either Comparable CA5 or average of Comparables CA1 to CA7 is adopted, there must be some objective fact to serve as a cross check for such view. In the present case, the figures derived from these two methods show an increasing trend in rental. However, this contradicts with the trend of the Landlord's proposed use of the Jones Lang La Salle Luxury Residential Index ("JL Index"), in the circumstances, it is obvious that the two methods proposed by the Landlord has suffered a logical inconsistency when measured against an objective fact, namely the JL Index.

13. In my judgment Comparable CA 2 is the closest comparable in time and this must be treated as the best comparable in the circumstances.

14. There has been some dispute over other aspects :-

(a) external condition ;

(b) internal condition in particular any adjustment to 76 Repulse Bay comparables ;

(c) restriction to the use of the communal garden ;

(d) noise and renovation in adjoining building.

15. In respect of all these aspects, since I am convinced that the best comparable should be based upon comparables with the Development, I agree with Mr. Lynch that there should be no impact.

Difference between one and two year tenancy

16. The major difference between the Tenant and the Landlord is whether there should be any difference between rents in the Development let on one year's terms and with those of two year terms. In Jan GW Blaaum v. Maxwell Industrial Building Management Co. Ltd. (unreported) LDNT No. 123 of 2000, in considering the PMR of Flat C3, this Tribunal was not presented with any evidence and accordingly ruled that there is no evidence to support any difference between the two.

17. Mr. Lynch had considered the evidence of the other developments and did not consider there should be any adjustment up or down for lettings on one year leases. His logic is this : in respect of the 76 Repulse Bay Road comparables he had considered he found the range of rental was between $180 to $214, and in respect of the 16 Headland Road comparables he had considered he found the range of rental was $208 to $241. These two ranges of value are close to those within the Development which is $200 to $210, and Mr. Lynch said the range is similar and so no adjustment should be made.

18. I think this is not an entirely satisfactory way of looking at the matter. The range of rentals of 76 Repulse Bay comparables of Mr. Lynch was arrived at after adjustment of over 37 % in each case. The range of rentals of 16 Headland Road comparables also requires adjustments between 16% and 20%. These adjustments are very large indeed. However, I have to bear in mind that :-

(a) there is no comparable within the Development on 2 year leases, and the case of Jan Blaaum ibid did not have evidence on the difference between one and two year leases ;

(b) there is also no comparable on one year leases before this Tribunal on properties outside the development.

19. At the end of the day, I believe the right approach is to bear in mind that such large adjustments demonstrate clearly the unsatisfactory nature of relying too heavily on comparables outside the Development in the present case. However, this Tribunal must do the best it can in the circumstances to assess this aspect, and to take into account any evidence, however little there is, of the difference between one or two year leases.

20. The Landlord's expert Mr. Li in the present case has asserted in his report that the Landlord had experienced difficulty in finding new tenants especially that of expatriates family with children. Therefore the rental was at a discount to the market price. However, Mr. Li in cross examination admitted that in about November 2000 there was shortage of luxurious residential units.

21. On the other hand, the Landlord produced evidence to show that in the one year tenancies, it was provided in the tenancy agreements that the Landlord would pay $5,000 to the Tenant at the commencement of the tenancy to cover expenses required for the repair and maintenance of the apartments. This is equivalent to $416 per month. I accept this is quite different from the nature of Clause C (4) of the Tenancy Agreement which provides for a sum of HK$30,000 for repairs already incurred by the Tenant during the term of the tenancy. There might also be a difference between a one year tenancy and those over one year which may be protected under the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. Little evidence as it may now appear to me I agree that there should be an adjustment to the comparables within the Development on this aspect to reflect the difference between the one and two year lease.

22. I do not think however there is sufficient evidence to justify a total of 10% difference to reflect the difficulty of the Landlord to attract new tenant and hence the difference between one and two year leases. It must be remembered that already the Landlord had offered $5,000 to attract new tenants, and there does not appear to be any vacancy in the Development. Mr. Li had said in November 2000 there was a surge in demand for the same type of properties.

23. Doing the best as I can, I would allow a 3% adjustment on the difference between one and two year leases.

Adjustment to view

24. Both experts agreed that the Premises has a tree view, whereas flats on the second floor have a more open view. Their difference was in respect of Apartment C1 (that is, Comparable CA2 of the Respondent) which Mr. Lynch says that it has a partial sea view and a partial tree view. This has an impact of about 5% on the valuation.

25. The other difference between the experts in respect of view is whether the difference between rents of Blocks A/B and Blocks C/D is due to difference in view or difference in nature of the land lease.

26. After considering all the evidence including the photos and explanations given to me in oral testimony, I am convinced that Mr. Lynch is correct. There should be no adjustment in terms of view between Comparable CA2 and the Property in my final calculations. Since I have chosen Comparable CA2 as the best comparable, I do not make any ruling on the reason for the difference on rents between Blocks A/B and Blocks C/D.

Time Adjustment

27. Mr. Lynch relied upon the JL Index and Mr. Li relied upon the Rating and Valuation Department Index for large size properties of saleable area at or above 160 sq.m. ("RV Index"). In relation to the period between May and November 2000, the JL index shows 4.5% difference and RV Index shows a 3.1% difference in rental between the two period. The difference is not material.

28. Both indexes are conventional indexes being used by expert surveyors or valuers for valuation. However, although the RV Index has a larger sample size, it has suffered from the problem that it includes properties in the whole territory. If the concept of comparables is adopted then location is an important guide for the choice of index. Technical notes for the RV Index also states that the index understates trends. Having regard to all the evidence before me, I prefer the JL Index.

Other factors

29. I was drawn attention to the fact that there is an incentive given to the Tenant in the previous tenancy, namely, a sum of HK$30,000 under Clause C(4) of Second Schedule of the Tenancy as expenses incurred by the Tenant for repairs during the term of tenancy. The Respondent says that this should be deducted. On balance I accept the view that this sum of (HK$30,000 /24) or HK$1,250 per month should be deducted, absent any defects in the Premises.

30. However, it is clear to me from the photos that there have been various defects in particular those due to dampness. The costs of repainting and other work of repairs the various walls should be taken into account. Bearing in mind that it was expressly agreed in the Tenancy Agreement that HK$30,000 had been spent on repairs, I believe this is an objective figure and the same sum should be included for repainting in the Tenant's favour. This sum should cover any defects including water proofing.

31. Therefore no adjustment is necessary after setting off these two sums.

Covered car park

32. It is not in dispute that a sum of HK$500 should be deducted for a covered car park.

Summary

33. In summary' my adjustments are as follows :

	Adjustments	Comparable CA 2
1.	View Adjustment	0%
2.	After making Time Adjustment	HK$215
3.	One year letting against two years letting	Add 3%
	Equals :	HK$221.45
	192.5 sq.m. x 221.45 =	HK$42,629.13
4.	Add : $500 for covered car park =	HK$43,129.13
	PMR	HK$43,200

Conclusion

34. I therefore give judgment in the following terms :-

(a) By consent, there be a new tenancy for 2 years commencing on 1 November 2000.

(b) The new rent is HK$43,200 per month (exclusive of rates and management fee).

(c) Leave to the Applicant to pay the Respondent any arrears of rent, if any, within one month and leave to the Respondent to repay the Applicant any overpayment of rent, if any, within one month.

(d) The rental deposit is to be adjusted pro rata in accordance with the new rent.

(e) Leave to the Respondent to repay the Applicant any reduction in rental deposit within one month.

(f) Other terms of the new tenancy to remain the same as those set out in the previous tenancy agreement.

(g) No order as to costs.

35. I would like to thank parties for their preparation and efforts, in particular their lists of differences and final submissions have greatly facilitated this Tribunal in arriving at a decision.