MATTHEW M KINGMAN v. GENTLE INVESTMENT LTD

LDNT 118/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 118 of 2003

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J U D G M E N T

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1. This is a new tenancy application made by the tenant, Mr. Matthew M. Kingman, pursuant to Section 117 (1)(a) of the Landlord and Tenant (Consolidation) Ordinance Cap. 7. The landlord now known as the Respondent under the subject application, served the form of CR101 on the tenant (i.e. the Applicant) on 21.5.2003 requiring the tenant to deliver up vacant possession of the property on expiry of the tenancy on 31.8.2003. The Respondent claimed that the property was required for occupation by one of its directors (the Respondent is a limited company). By the notice in the form of CR 102, the Applicant rejected the Respondent's request. The Applicant took steps to lodge the aforesaid application to the Lands Tribunal on 15.7.2003. The Respondent did not appear to insist on the Applicant's return of the property. Under the Form 7 submitted on 5.8.2003, the Respondent only required the Tribunal to determine the amount of rent.

The Property

2. The concerned property demised for residential purpose, is located at No. 9 Oxford Road, Kowloon Tong. The property includes the ground floor of a three-storey building, a private garden and two covered car parking spaces (hereinafter known as " the subject property"). The G.F apartment is 258.4 sq. m. and the private garden, 570 sq. m. These details on accommodation size are originated from the Rating and Valuation Department. The two expert witnesses involved cast doubt on the accuracy. One of the so-called covered car parking spaces is actually partly with a metal shelter. Gentle Investment Limited, the Respondent of the captioned application, owns the subject property together with the upper floor units.

The Assessment Factors

3. The Applicant employed Mr. Wayne Li of RHL International Property Consultants to assess the rent and give evidence, and the Respondent hired the service of Mr. Eddie Yiu, a Chartered Surveyor from Memfus Wong Surveyors Limited.

(1)	Comparables
	Both parties based on the 6 transactions provided by the Rating and Valuation Department for the purpose of assessment.
(2)	Effective Rent
	Mr. Wayne Li deducted the management fee and rates etc from the rent passing and adjusted for the rent-free period to arrive at the net rent. His argument was that if the deduction were not made at the beginning, the adjustments made to the rent of the flat would inflate the rent it ought to be. The management fee and rates are not subject to the same assessment factors as the flat itself. Mr. Eddie Yiu did not in whole share this view. He only deducted from it the management fee and rates but not the car park rental. His unit rental for calculation of the final rent of the subject property included the rent for two car parking spaces and such unit rent was adjusted for the difference in the various assessment factors between the subject property and the comparable properties.
	The Tribunal's view is that there should not be any halfway house solution to the issue. Mr. Li might have gone to the extreme, as the distortion he envisaged might not be substantial. His way of handling the adjustments, nonetheless, is consistent. Mr. Eddie Yiu 's approach apparently is not.
(3)	Comparable 2 Management Fee
	Mr. Wayne Li considered that in the absence of any indication by the Rating and Valuation Department on the Rental Information sheet, the appropriate management fee for Comparable 2 might be about $1,000 per month. Mr. Eddie Yiu considered that this amount appeared on the high side. His investigation revealed that the management service provided was confined to refuse collection. He estimated the fee payable might be about $300 having regard to the fees paid for other comparable properties.
	The Tribunal considered Mr. Yiu's estimate more acceptable. In fact, instead of speculating the likely amount payable, he had bothered to find out the nature of service provided and based on that to arrive at the reasonable fee possibly to be charged.
(4)	Time
	This is the adjustment made to the rent to reflect the difference in the start date of tenancy. The rental market is not at all stable. It fluctuates from time to time to follow the socio-economic situation. At different time of tenancy, the rent agreed by landlords and tenants could be different. Mr. Eddie Yiu based not on the Rental Average/Indices obtainable from the Rating and Valuation Department but his own rental records for properties at Mid Levels. He considered that in the post S.A.R.S period between July and October 2003, the rental market was stable but compared to May 2003, there was a rise, which he estimated to be about 3% in August 2003. Mr. Wayne Li adopted a hybrid approach, i.e. he based partly on the information from the Rating and Valuation Department and partly on his personal observation. He adopted such approach because he considered the Rental Average/Indices were derived from a sample/population of less than 20 cases. He suggested that since May 2003 and up to August 2003, the market had dropped by 1.5% per month and continued to drop at the same rate in the few months afterwards.
	The Tribunal consider that Mr. Yiu's rental records may not serve as a perfect indicator of the market trend for properties in Kowloon Tong. Mr Yiu's view concerning the market trend is, however, more realistic having regard to the over-all local economics of which the property market forms an important part. Mr. Li's view in regard to the post S.A.R.S rental movement is unconvincing. The Tribunal also find it hard to accept his rationale given for the methodology of his approach.
(5)	Location
	The two expert witnesses did not hold any diverged view regarding Comparable 1 and 2 but did have opposite view for Comparables 3, 5 and 6. As to Comparable 4, Mr Eddie Yiu suggested that it be discarded because it was located far away from the rest of the comparable properties and more importantly, far away from the subject property. It was also within a neighbourhood different from that of the subject property. Mr. Wayne Li disagreed to such opinion.
	The Tribunal agree that the controversial Comparable 4 be excluded. It is uncertain whether it is located in a general environment different from that of the subject property. One aspect that it is for sure different from the others is that it is susceptible to the traffic noise from Cornwall Street, which is a major distributor utterly different from either Oxford Road or La Salle Road. Another aspect noticeably different is that Comparable 4 and the nearby buildings are mostly developments of mid-1960s and thereafter, whereas the neighbourhood of the subject property was developed at least 10years earlier. The Tribunal also hold the view that Oxford Road is not in significant degree less affected by wheeled traffic noise than La Salle Road. That section of La Salle Road on which some comparable properties abut, remains similarly quiet. The Tribunal dismiss the need to make adjustment in the aspect of location for Comparables 3, 5 and 6.
(6)	Floor Level
	The two expert witnesses' views appear both founded on good arguments. Notwithstanding this, their divergence remains not in mild degree but polarized. Their views appear both founded on good arguments but with severe divergence because they had both justified their own views only on factors to their favour and avoided those factors to their disadvantage.
	It is a common phenomenon for units on lower floors to command less rent than those on higher floors in the case of high-rise development. It is not sure whether the same applies to low-rise developments of 3 storeys only. Some tenants may really find it an inconvenience to walk up and down the stairs everyday. Some do not find this a problem in so far as a 3 storeyed building is concerned. On the other hand, the so called better ventilation and view associated with a first floor flat could be just very marginal, being just one floor above a ground floor flat. Littering by occupants of flats on higher floors and dripping (arising from condensation) pertinent to A/C units on high floors that could be serious in certain type of high rise developments, may not be so in some other similarly high rise developments elsewhere. Whether the same applies in low-rise developments is indeed doubtful.
	The expert witnesses are property surveyors. The word "survey" denotes the scope of the surveyor's duties i.e. to examine, to measure, to size up the situation before forming an expert's view. The two expert witnesses obviously had not performed anything to survey but based on common sense to draw up their own lists of merits and drawbacks. In the Tribunal's view, it is worthy of doing such survey, which could be pursued by way of an opinion poll, or analysing the prices set for high and low floor flats by property developers and how quickly these flats were taken up. In fact, what is more important is not whether the list is exhaustive. Whether the list drawn is exhaustive is not difficult to compromise but how and what weight is ascribed to these merits and drawbacks by the end-users are where the controversy lies. Yet, the end users' weights given to these merits and drawbacks are unknown. It is only the guesswork of the two expert witnesses. The Tribunal, somehow, must make a decision and the Tribunal's decision in this respect is to follow Mr. Li's suggestion, i.e. to adjust by 0.5% per floor. having regard to the fact that the merits associated with the first floor flat out-number its drawbacks when comparing with a ground floor flat.
(7)	Flat Size
	Mr. Wayne Li considered that the larger the size of property, the lower will be the unit rent and hence, he adjusted the rent of Comparable 4, 3, 5, and 6 by +4%, -3%, -4% and -3% respectively. Mr. Eddie Yiu considered no adjustment on account of flat size necessary, as the difference in flat size between the subject property and the comparable properties was minor. He quoted the Tribunal's decision made in the case of Richard Nicholas Tanner v. Pharmakon Limited [LDNT 1/2003] to support his argument.
	The Tribunal do not oppose Mr. Li's remarks if such remarks were made for generality. The rule that larger size properties are qualified for a discount in unit price obviously because there are savings in production cost or overheads (please refer to the case of LDNT 1/2003 above-mentioned) (Mr. Li did not suggest that it was the result of imbalance in the demand and supply). The saving does not occur in exact proportion with the increase in size. It may not even occur because some units of production or overheads are not divisible (into smaller unit of any size) or cannot even be broken down at all. Therefore, the saving will come in only when the increase reaches an effective size. As such, Mr. Li's must adduce evidence to indicate such size that will produce that saving in order to justify his proposed adjustments. In the absence of evidence on such size and to avoid the high risk of getting the adjustment wrong, the Tribunal can only accept that discount should apply where the two products are homogeneous (e.g. both are flats of three bed-rooms and two sitting/dinning rooms) and of a significant size difference, e.g. Comparable 5 which is 66% of the size of the subject property.
(8)	External/Internal Condition
	The Applicant provided photographs and gave evidence in person in open court on the internal condition. He described it as unbearable. He attributed the messy condition partly to the engineering works next door and partly to the Respondent's adamant attitude towards his repair request. The Respondent denied all these and the two expert witnesses did not consider themselves competent to advise whether the building defects concerned were structural in nature.
	The Tribunal do not consider it necessary to deeply bother with these building defects. Somehow, these defects would be made good in accordance with the relevant provisions under the tenancy agreement. This is not a new letting where the rent should be assessed on the basis of "as is" condition. It is a renewal case where the tenant is the same person and obliged to hand back the property in a tenantable condition upon expiry of the tenancy. The landlord is practically the same landlord who is required to carry out the necessary repair to the defects even they occurred before the renewal. The landlord's responsibility to repair does not discontinue upon expiry of the last tenancy.
	Mr. Wayne Li advised the Tribunal that he was unable to gain entry into any of the comparable properties and therefore knew nothing about their internal condition. His adjustment was made out of inference taking into account the building age, and whether or not it was a new tenancy or renewal of existing tenancy. Mr Eddie Yiu did not advise whether he had inspected the internal of the comparable properties or not but tended to found his adjustments on a somewhat similar premise. However, they held different view on the quantum of adjustment.
	As to the external condition, Mr. Li considered it insignificant to raise the tenant's enjoyment level despite whatever refurbishment works being done by the Respondent. Mr Yiu disagreed with him. He de-capitalized the sum expended by the Respondent in the refurbishment/renovation of the external and common parts of the building (see Exhibit R3) and adjusted the rent by making some reference to the de-capitalized amount.
	The Tribunal consider both expert witnesses' adjustments for the internal condition were made out of speculation and are inappropriate. They should compare the actual condition of the comparable properties to that of the subject property. Whether it is a new tenancy or tenancy renewal may be useful to establish the likely difference in condition of the same property in the cases of tenancy renewal or new tenancy. It is not useful in the case of a different property because the respective standard of the two (or more) properties for comparison could be quite different at start. The yardstick of landlords and tenants on the need to refurbish subsequently could also be very different. The condition upon tenancy renewal of one property could remain better than another which tenancy is freshly entered into with touch-up or renovation works performed. To get it right, this is likely to be a complex exercise. The problem should not be dealt with in a simplistic way. Instead, the simple and straightforward approach appropriate to the issue is to find out their respective condition today and make a direct comparison.
	The capital sum expended by the Respondent for external and common parts refurbishment/renovation is not relevant in the present exercise. The two expert witnesses are to compare the subject property to the 6 (or 5) comparable properties on the Rating and Valuation Department Rental Information sheet. They are both to make adjustment to the rent passing of these comparable properties to arrive at the rent of the subject property. Therefore, what is relevant and more important is the difference in external condition (common parts, too) between the subject property and the comparable properties. In this regard, the Tribunal are dismayed that there were no substantial evidence from the two expert witnesses to facilitate the making of a suitable decision.
(9)	Home Appliances
	Mr Wayne Li made no adjustment for this item. Mr. Eddie Yiu considered 2% appropriate. Mr. Li 's reason was that he was unclear as to what home appliances were provided as the Rental Information sheet only stated "some provided".
	The Tribunal consider it appropriate to follow Mr Li's approach. The provision of some (not the full range of) home appliances might be taken rather to lure the tenant than intending for additional rent.
(10)	View and Natural Lighting
	Mr. Wayne Li considered that this should form part of the location attribute. In the adjustments he had made for the location factor, weights in this aspect had already been ascribed and reflected. Mr. Eddie Yiu gave adjustments from 0% to +5% to reflect the difference.
	From the photographs and Mr. Yiu's evidence given in open court, the Tribunal do not find any meaningful difference between the comparable properties (Comparable 4 was discarded by Mr. Yiu) and the subject property. The trees in front of Comparable 1, 2 and 5 indeed block part of the view and natural sunlight. They may, however, be considered aesthetical by some occupants. They also serve as a noise shield and screen the property from public view. The Tribunal also observe that these trees are within the privately owned garden. If the disadvantage derivable from these trees out-weighs the advantage, the occupants will simply trim them. If separate adjustments are justified, there is also the question of partial duplication with the adjustments given for floor level. The Tribunal is not convinced that Mr. Yiu's adjustments are necessary.
(11)	Car Parking Space
	Mr. Wayne Li valued the additional car parking space let with the subject property at the rent of $1,500 per month. He based his valuation on the rent passing of 8 car parking spaces at No.20 Durham Road, which were let around mid 2002. Mr.Eddie Yiu Suggested that it be valued at $3,000 per month based on the rent charged by the nearby Kowloon Tong Owners' Association which operated there a fee paying car park open to non-members of the Association.
	The Tribunal accept Mr. Yiu's valuation as the 8 parking spaces at Durham Road were let in bulk and dated back to mid 2002, which is remote from the date of the proposed new tenancy.
(12)	Private/Shared Garden
	Mr. Wayne reckoned the area of the private garden to be 302 sq. m. by scaling off from the tenancy plan. Mr. Eddie Yiu advised the Tribunal that it be 345 sq. m. including the area of the veranda. He worked out the area through the building plans and verified his calculations by taking measurement on the ground. Mr. Li gave no value for the availability of communal garden but Mr. Yiu did so. Mr. Li considered the rental of garden was about 1/8th of that of the flat and Mr. Yiu considered it 1/7th.

4. The Tribunal consider Mr. Yiu's reckoning on the garden area more reliable. The Respondent obviously wanted to lease out the whole of the property. Whatever shown on the building plan that owned by him should be his intention for leasing to the Applicant without reservation. The tenancy plan very often is indicative and may not provide with the survey details, which normally are contained in the building plan. It is also the Tribunal's observation that most surveyors reckoned 1/8th of the rent of the G.F. flat as the rent for garden.

5. The Tribunal also agree that the communal garden is a facility of benefit to the tenants. The adjustment made by Mr. Yiu is not to suggest that a flat let with the right of use of a communal garden gives the tenants more enjoyment than a flat let with a private garden. Since the private garden has been excluded from being a factor for adjustment and separately assessed for rent, those comparable properties with the benefit of a communal garden should be given rental adjustment as the two expert witnesses had similarly done for other factors of assessment.

6. Conclusion

Following on from the above, the Tribunal revise the adjustments to the rent passing of the comparable properties as appended hereunder: -

Average :136.4

7. The monthly rent of the G.F. flat is: - 258.4 sq. m. x $136.4 per sq. m. = $35,245.76 and that of garden is: - 345 sq. m. x $17.1 per sq. m. = $5,899.5. The two car parking spaces each valued at $3,000 per month give a total rent of $6,000 per month. The total rent of the subject property is, therefore, $47,145.26 or say, $47,000 per month.

8. Orders

1.The Tribunal hereby order that a new tenancy be granted: -

(1)	for a fixed term of three years commencing on 1st September 2003;
(2)	at a monthly rent of $47,000 exclusive of rates and management fee (any rent over-paid by the tenant to the landlord should be refunded within two weeks from the date hereof);
(3)	with a new deposit to be paid to the landlord, at the time of execution of the new tenancy agreement, in an amount equivalent to the sum of two months rental and at the same time, the deposit paid under the previous tenancy be refunded to the tenant; and
(4)	to contain the same terms applicable under the previous tenancy other than those specified above.

2.The Tribunal also order that the two parties do bear their own costs of this application pursuant to S.119R of Landlord and Tenant (Consolidation) Ordinance, Cap. 7(save the costs of hearing on 3.10.2003 for which a separate order has been granted).

(Remarks: The Tribunal do not consider it appropriate to dictate the form of tenancy agreement. Whether a plan should be annexed is up to the two parties to decide.)