Merrill Lynch International Inc. v. Regent Focus Consultants Ltd.
Read the full judgment text of LDNT 196/2000 on BabelCite. This LDNT judgment was delivered on 14 December 2000.
1. The Applicant is the tenant and the Respondent the landlord of the subject premises known as Low Wood, 32 Chung Hom Kok Road, Hong Kong ("the Premises"). The parties agreed that the Tribunal should grant a new tenancy for a term of two years commencing from 15 August 2000. The outstanding issue was the amount of the prevailing market rent as at the relevant valuation date of 14 August 2000.
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LDNT000196/2000 LDNT196/2000 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION Application No.: LDNT No. 196 of 2000
Coram: HH Judge CHOW and Member W K LO Date of hearing: 23 November 2000 Date of judgment: 14 December 2000 ____________________ JUDGMENT ____________________ Background 1. The Applicant is the tenant and the Respondent the landlord of the subject premises known as Low Wood, 32 Chung Hom Kok Road, Hong Kong ("the Premises"). The parties agreed that the Tribunal should grant a new tenancy for a term of two years commencing from 15 August 2000. The outstanding issue was the amount of the prevailing market rent as at the relevant valuation date of 14 August 2000. 2. The Premises is a post-war colonial style detached garden house named Low Wood, standing on Rural Building Lot No. 502 with a site area of 563.92 sq.m. (6,070 sq.ft.). The house is a single storey "bungalow" type house with a large lawn/garden area to the south. It was completed in 1947 with alteration made in the late 1970's. It has been agreed that the new tenancy shall also include the garage located on the opposite side of Chung Hom Kok Road. The parties during the hearing managed to agree to adopt the following saleable areas of various portions of the Premises and the respective percentage of the unit rate to be applied in the estimation of the prevailing market rent (PMR) for the Premises:
3. The Premises was subject to a tenancy agreement for a term of two years commencing from 16 August 2000 at a rent of $150,000 per month. In addition, it was specified in the tenancy agreement that a separate rental of $4,800 per quarter was payable for the garage from 15 August 1998 subject to periodic review. 4. The Applicant called Mr. Esmond Yu, Registered Professional Surveyor to give evidence. Mr. Yu produced two valuation reports, one dated 21 August 2000 (Exhibit A-1) and a Supplemental Report dated 13 November 2000 (Exhibit A-4). The Applicant submitted that the PMR as at the relevant date, using a unit rate of $482 per sq.m. was $121,600. On the other hand, the Respondent in the final submission submitted that the PMR of the Premises should, in any event, not be lower than $180,000, same as that assessed by the Applicant's witness, Mr. Gilbert Yuen, Chartered Surveyor. In his valuation report (Exhibit R-4) produced, Mr. Yuen adopted a unit rate of $660 per sq.m. in his calculation. The Applicant's case 5. Mr. Yu submitted two valuation reports. In paragraph 6.0 of Mr. Yu's Supplementary Report, he summed up the results of his analysis and adjustments as follows:
6. Using this average unit rate as the basis, Mr. Yu valued the Premises including the main house and other accommodation. 7. As stated above, the Applicant has during the hearing agreed with the Respondent on the different areas of various portions of the Premises, as well as the percentage of unit rate to be applied to each of these portions, with the exception of the roof accommodation. Therefore, we calculate that the "equivalent area" of each of these portions as estimated by the Applicant, by multiplying the agreed area of each portion with the percentage of unit rate to be applied to each portion, as follows:
As a result of the concessions by both parties in agreeing with each other a common set of areas for various portions of the Premises, the Applicant revised its PMR estimate in the final submission, as follows:
Alternatively, the estimated PMR can be attributed to the estimated values for the various portions, as follows:
The Respondent's case Mr. Yuen produced a valuation report (Exhibit R-4) and gave evidence in the hearing. His report analysed a total of 7 comparables, the first six of which appeared in Mr. Yu's Supplemental reports. Their respective numberings are as follows:
In section 12.0 of Mr. Yuen's Report, he had the following analysis and conclusion:
Hence, Mr. Yuen estimated the PMR of the Premises to be $180,000 per month. This was submitted by the Respondent to be the minimum of the PMR of the Premises. Potential conflict of interest of Mr. Yu as an expert witness 8. There were two expert witnesses for this new tenancy application, Mr. Esmund Yu and Mr. Gilbert Yuen. The Respondent stated in the final written submission that as Mr. Esmund Yu works for Jones Lang LaSalle, which has also acting as the agent for the Applicant since 1998 "all along in connection with all the dealings, disputes and negotiations with the Respondent Landlord including but not limited to the negotiation of terms and renewed rental for renewal of the existing tenancy." The Respondent submitted that as Jones Lang LaSalle both acted as the Applicant's agent and valuer, "the Applicant's valuation reports prepared by Jones Lang LaSalle and the oral evidence given by Mr. Esmund Yu of Jones Lang LaSalle are biased and therefore the same should not be given a normal hearing". The Respondent also asked the Tribunal "to see the first sentence of paragraph 1.5 on p.3 of Mr. Yu's first Report" (Exhibit A-1), which reads,
We do not find the above statement given in Mr. Yu's Report to be anything unusual. In the course of valuation of any property, a valuation surveyor who has accepted an instruction from a client will usually receive certain information on the property from the client (whether as an owner, tenant or mortgagee bank, etc.) or the client's agents or lawyers. 9. In paragraph 27 of the Respondent's written submission, the Respondent has also made the following allegation:
10. We consider this to be a serious allegation. However, after we have studied and compared the two valuation reports prepared by Mr. Yu, we notice that whilst the first valuation report considered a total of 6 rental comparables, the supplemental sought to consider and analyse a further 6 comparables, in addition to the first 6 comparables reviewed in the first report. It is therefore only logical that any valuation surveyor, given the additional rental information available, may draw a different conclusion. It would not be fair for the Respondent to attack the independence and impartiality of an expert witness just because the witness's evidence and conclusion may not suit the expectation of the Respondent. 11. Although the Respondent did not actually say so, it is obvious from their submission that they suspected that there might be a conflict of interest for Mr. Yu to give expert evidence in this hearing. Firstly, it must be clearly stated here that it was Mr. Yu himself, but not his employer, who acted as the expert witness of the Tribunal. Secondly, it is also very common in Hong Kong that a landlord or tenant uses the same firm of real estate consultants in handling its sale and leasing matters as well as valuation assignments, including those that may lead to the giving of evidence in the Courts. In reality, in a small place like Hong Kong, the choices are sometimes quite limited. We have to a large extent relied on the integrity and professionalism of the persons who act as experts and give evidence in the law courts. In this regard, Mr. Yu is known to the Tribunal to be a qualified valuation surveyor, with much experience of giving evidence to the Tribunal in the past. 12. Although we agree that whenever possible, the expert witness should avoid the situation when allegation of conflict of interests could be anticipated, in this case, we do not agree that the evidence given by Mr. Yu is biased and should not be given a normal weighting. Percentage of unit rate to be applied to the roof accommodation 13. A roof structure accessible by an external metallic staircase exists in the Premises. Both parties agreed that certain value should be given to the roof structure but they could not agree on the percentage of the unit rental rate that should be applied to the roof area. The roof provides the accommodation of a bedroom, a study room and lavatory with shower facilities and is best suited for guests visiting the occupiers of the Premises. In fact, Mrs. Howes, an occupier of the Premises who gave evidence, confirmed that guests visiting her family had stayed in the roof accommodation. She admitted that the roof, being on higher level, commands seaview and sunset view. However, she complained of the difficulty and danger of access to the roof, particularly by children and the elderly. 14. Mr. Yu drew attention that based on the approved alteration plans by the Buildings Department dated 30 October 1978, only a storeroom was allowed to be erected on the roof. He therefore considered the present roof structure to be an unauthorized structure. Also, the roof structure has lower headroom and the roof level is stepped and cannot be used efficiently. Finally, Mr. Yu estimated that "a discounted rate of 30% to the unit rate of the main house for the ancillary roof accommodation with the benefit of the appertaining roof areas" would be appropriate. 15. The Respondent submitted that Mr. Yu did not provide sufficient evidence to prove that the existing roof structure is unauthorized. Mr. Yuen for the Respondent estimated that a much higher discounted rate of 65% to the unit rate of the main house should be applied to the agreed roof accommodation area. In addition, Mr. Yu opined that further upward adjustment in favour of the large open roof area of the Premises should be given in the analysis of his Comparables. These we find to be 4 to 6% or between $2,400 to $7,200. 16. Having considered the evidence from both sides and their submission, we decide that an appropriate percentage to be applied to the roof accommodation should be 50%. We share the view of the Applicant that the access to the roof is inconvenient, particularly at night time or during inclement weather, and for the children and infirm at all times. We also decide that the value so attributable to the roof accommodation already reflects the additional value of the open roof. A further percentage adjustment to the comparables reflecting the extra value of the open roof, as suggested by Mr. Yuen, is not preferred because the total value adjustment will be too excessive for the type of accommodation that the roof of this Premises provides. Following Mr. Yuen's analysis and valuation, we notice that he attributed a value of about $17,380 for the roof accommodation and a further adjustment of about 4 to 6% to the remainder of the roof (amounting to a sum of $2,400 to $7,200 for his 7 comparables, or a mean of about $4,500). The resulting notional value of about $22,000 for the roof accommodation and the adjoining open roof is too excessive. 17. As a result of our findings and determination for the roof accommodation, we therefore estimate that the Premises possess the following equivalent area (assuming that all portions of the Premises are converted to the Main House area) as follows:
Selection of appropriate comparables by the Tribunal 18. It is common ground that the Premises is quite unique in Hong Kong and all comparables provided by the Rating and Valuation Department and analysed by the parties are not good and close comparables. Yet both parties agree that for this valuation exercise, we should use the direct comparison method in which analysis and adjustments of the comparables are needed before arriving at an adopted unit rate for the Premises. However, the Tribunal decides that it would be first of all appropriate to consider which are the better comparables, both from the view point of their similarities in terms of location and characteristics, as well as the sort of rental range that the comparables actually command in the market, as compared with the existing rent of the Premises and the estimates made by the two experts themselves. 19. The number of comparables considered by both expert witnesess total 12. In Mr. Yu's Supplemental Report, he listed 11 comparables which include all of Mr. Yuen's comparables with the exception of Mr. Yuen's Comparable No. 7 (House No. 1, Rosecliff, 20 Tai Tam Road). 20. Mr. Yu concluded in his Supplemental Report that Comparables 1, 4 and 11 are the most relevant comparable properties as they "are most similar with the Property in terms of house type, garden size and facilities." Mr. Yu also excluded his Comparables 3, 7 and 8 on the ground that they achieved the lowest and highest unit rate after adjustments. On the other hand, Mr. Yuen excluded his Comparables 3 and 4 (described as Comparables 5 and 10 respectively by Mr. Yu) as their adjusted unit rates were significantly lower. Mr. Yuen suggested that "it could well be tht these two comparables were selected from lower price-bracket houses not matching with the property". Also, Mr. Yuen discarded his Comparable 7 as its adjusted unit rate appeared a bit higher than the general tone. 21. Mr. Yu's adjusted rates for all his 11 comparables are summed up below, alongside with their actual rents passing before the adjustment:
22. We find that apart from his Comparable 3 which adjusted unit rate of $387.25 is obviously very much on the low side and unsupported by the remaining 10 comparables, We agree with the Applicant that this Comparable be discarded in the final analysis. 23. The adjusted unit rates of the remaining 10 comparables fall within two narrow range of values, with a comparable (Comparable 1) in between. In particular, we note that the adjusted unit rates of Comparables 6, 10, 4 and 5 fall within a very narrow range of between $439.58 per sq.m. and $452.82 per sq.m. We also look at their actual rents passing and find that 3 of these five have rents of between $60,000 and $90,000 whilst the other two have rents of $100,000 (Comparable 9) and $107,000 (Comparable 4). By comparison, the actual existing rent of the Premises was $150,000 prior to the granting of the new tenancy, and the estimates by the two experts also range from $120,000 and $180,000. It is also the parties' consensus that the Premises is much superior than all the comparables as a result of which the parties give very substantial upward adjustments in the analysis of the comparables to reflect the so-called "exclusiveness and uniqueness of the Property and its single lot occupation" (quoted from Mr. Yu). The total adjustment for these factors already account for a minimum of 20% (Comparable 1) in Mr. Yu's adjustments and reach a higher end of 43% in Mr. Yuen's adjustments (for Mr. Yuen's Comparable 5). Therefore, we decide that it is not coincidental that Comparable 3, with the lowest adjusted rate, also has one of the lowest actual rents. It is a clear indication that despite the substantial upward adjustments made by both parties, albeit at different percentages, the comparables with the lower actual rents all fetch the lower adjusted unit rates, from $387.25 to $452.82 per sq.m. The lower actual rents comparables may well be in a different sub-market from that of the Premises. We therefore decide that it is more appropriate to discard all the comparables with the lower actual rents and corresponding lower adjusted unit rates. That is, in addition to Comparable 3, four other comparables, Comparables 6, 10, 2 and 5 should be excluded in the final analysis. And, since the adjusted unit rate of Comparable 4 fall within the narrow range of adjusted unit rates of Comparables 6, 10, 2 and 5, we decide that it should be excluded as well even though its actual rent is marginally higher than the rest. 24. After the above process, we find that the remaining Comparables of Mr. Yu are Comparables 1, 11, 9, 7 and 8, in the order of the adjusted unit rate. Mr. Yu did not analyse Mr. Yu's Comparable 7. As for Mr. Yu's Comparables 11, 9, 7 and 8, they correspond to Mr. Yuen's Comparable 1, 5, 6 and 2. Mr. Yuen himself agreed that his Comparable 3 (Mr. Yu's Comparable 5) and Comparable 4 (Mr. Yu's Comparble 10) should be excluded for being on the low side and his Comparable 7 be discarded for being on the higher end. Since we do not know the corresponding adjustment for Mr. Yu's Comparable 1 by Mr. Yuen, we will concentrate on the remaining common 4 comparables, namely Comparbles 11, 9, 7 and 8. We first attempt to consider the parties' differences in the adjustments. 25. Both parties considered a large number of adjustment factors to all the comparables in their valuation. We decide to divide them into three different types: firstly, there are some common adjustment factors which both experts attribute similar adjustments to the comparables; secondly, there are some common adjustment factors which the experts differ in opinion but the differences are not substantial; and finally, there are some remaining adjustment factors which the experts differ substantially in their opinion as to their appropriateness and levels. They are considered below. 26. The common adjustment factors for which the two experts give the same levels of adjustments for the 4 Comparables, Comparable 11, 9, 7 and 8 are the factors of age, exclusiveness/prestige, house type, location and view. We will not comment further as these adjustments are agreed. For an additional car park in the comparable properties, the Applicant allowed an adjustment of 2%, roughly equivalent to about $2,000, which was the figure adopted by the Respondent, who adjusted the rent by this amount before calculating the unit rate. Therefore, the adjustments by both parties are almost identical. 27. For the second category of adjustment factors which the experts differ in opinion but the differences are not substantial, they are the factors of house size, swimming pool and chattels. Although the parties debated heatedly during the hearing and the submission especially for chattels, we find that their differences for these adjustments are not great. If we add all these factors together, we find that the adjustments made by the parties are the same for Comparables 8 and 9 and different by 2.7% and 2.8% respectively for Comparable 7 and 11. Since these are subjective adjustments which should best be made by the experts and their differences are relatively modest, we decide that we should not estimate different adjustment for each and every of these factors. We consider that the adjustments by the Applicant are more reasonable and should be relied upon in the final analysis. We will have to consider the remaining adjustments one by one. Time adjustment 28. The Applicant stated in his Supplementary Report that he has adjusted the time differences between the Premises and each comparable by reference to the Hong Kong Property Index published by Jones Lang LaSalle Limited, and also with reference to the Rating & Valuation Department's private domestic - rental index. On the other hand, the Respondent has allowed the time difference primarily by making reference to CB Richard Ellis luxury residential index - Island South. In addition, Mr. Yuen opined that since he believed that "the rise in rental of detached house during this period should be higher than the apartment, due to the limited supply of detached houses in the rental market." He therefore allowed a premium to the above percentage differences. In our opinion, this is too arbitrary and is not substantiated. We prefer the method taken by Mr. Yu. Garden size 29. Both parties gave subjective estimates of adjustments for the differences in garden of the Premises and the comparables. On the whole, we decide that Mr. Yu's adjustments are more reasonable and are preferred. No. of storey 30. This factor is given by the Respondent only. The Respondent in his report argued that "A single storey house allows a more efficient use of the house area, given the fact that no internal staircase occupies the house area and less enclosure walls which are taken into account for the saleable area. It is considered that a single storey house should be better in this respect, and an adjustment is given to this factor." Consequently, the Respondent gave upward allowance of 3% for Comparable 11 and 8% for Comparables, 9, 7 and 8. We decide that even if accepting the Respondent's argument that a single storey house has more efficient use of the floor area, the percentage of adjustments given by Mr. Yuen are far too excessive. More importantly, as the experts have already given significant allowances for the exclusiveness and the single lot condition of the Premises, this factor overlaps with the other adjustment factors. As such, we do not consider it to be appropriate to accept Mr. Yuen's adopted adjustments for this factor. Roof 31. Again, this factor of adjustment is made by Mr. Yuen only. In addition to the value of the roof accommodation which we have covered in the earlier part of this Judgment, Mr. Yuen made allowances for the extra value of the open roof deck. As stated in the assessment of the roof accommodation, we have in adopting the value for the roof accommodation already reflected the value of the open roof deck. Therefore, an extra of 4% to 6% for the open roof is considered to be not acceptable. No allowance is to be made. 32. Therefore, in the final analysis, we find that we accept the adjustments made by Mr. Yu in his valuation. No further adjustment is warranted. To recoup, the Comparables 11, 9, 7 and 8 have the following after adjusted unit rates:
33. In addition, we note that the remaining fifth comparable, Comparable 1, has an after adjusted unit rate of $484.84 per sq.m. We decide that we should take an average of the unit rates of all the above 5 comparables, being the best comparables out of all considered by both parties, in arriving at an appropriate unit rate for the valuation of the PMR for the Premises. This we calculated to be $529.98 per sq.m. Determination of PMR by the Tribunal Applying the average unit rate of the 5 best comparables, i.e. $529.98 per sq.m. to the equivalent area of the Premises determined by us before, 260.37 sq.m. we estimate the PMR of the Premises to be $137,990 which we round to $138,000. 34. Thus, we determine that the prevailing market rent of the Premises, on the basis of exclusive of rates, should be $138,000 per month. Orders
Representation: Mr. Simon REID-KAY of Messrs. Linklaters, for the Applicant Mr. Dustin CHAN of Messrs. Johnson Stokes & Master for the Respondent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||