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Thompson Leung, Marina Boniface v. Rapid Grow Ltd

Read the full judgment text of LDNT 136/2003 on BabelCite. This LDNT judgment was delivered on 14 April 2004.

1. This is an application for the grant of a new tenancy in respect of Flat D, Ground Floor, Park Villa, No. 37 Island Road, Hong Kong (hereinafter referred to as "the Subject Premises"). Both parties were legally represented with expert witnesses called to give valuation opinion. The Applicant's expert witness is Mr. Wayne Lee from RHL Appraisal Limited and that of the Respondent is Mr. Ryan Ho from Debenham Tie Leung International Property Adviser. The Tribunal took two whole afternoons to fin

Case No.LDNT 136/2003
Court
LDNT
Date14 Apr 2004
Judge—
Case Document
100%Judiciary

LDNT000136/2003

LDNT 136/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

New Tenancy Application No. LDNT 136 of 2003

_________________

BETWEEN
Thompson Leung, Marina Boniface Applicant
AND
Rapid Grow Limited Respondent

Coram: Member C.Y. LAM, Member of Lands Tribunal

Dates of Hearing: 17 & 25 March 2004

Date of Judgment: 14 April 2004

___________________

J U D G M E N T

___________________

The Introduction

1.This is an application for the grant of a new tenancy in respect of Flat D, Ground Floor, Park Villa, No. 37 Island Road, Hong Kong (hereinafter referred to as "the Subject Premises"). Both parties were legally represented with expert witnesses called to give valuation opinion. The Applicant's expert witness is Mr. Wayne Lee from RHL Appraisal Limited and that of the Respondent is Mr. Ryan Ho from Debenham Tie Leung International Property Adviser. The Tribunal took two whole afternoons to finalize the hearing.

The Differences in Terms

2. (a) Term of Tenancy

The Applicant requested that a full two-year term be granted whereas the Respondent was only prepared to accept a maximum of 18 months.

The Respondent's solicitor pointed out that the last tenancy expired on 11th February 2003. Had there been no delay in procedure, the new tenancy should commence on 12th February 2003 instead of 18th September 2003. Should the Tribunal grant a two years term, the de facto length of tenancy would become two years and seven months. This is contrary to S.119I of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 (unless specified, all enactment quoted hereinafter in this judgement shall refer to this Ordinance), which provides that the new tenancy shall commence on the coming to the end of the current tenancy. The solicitor considered that such length of tenancy is inconsistent to the term of the expired tenancy, which is two years only.

The Applicant's solicitor advised that the delay was not attributable to the Applicant but mainly due to re-service of the CR101 Notice initiated by the Respondent. He further advised the Tribunal that the need for the re-service of the CR101 Notice apparently was due to the invalidity of the first CR101. During the period between the expiry date of the last tenancy and the commencement of the new tenancy, the Applicant continued to pay the rent at the rate stipulated under the expired tenancy agreement.

The Tribunal shares the view of the Applicant's solicitor. The Respondent benefited from such rent since both the property market and the local economics in the year 2003 bottomed in the said period due to SARS. If a new rent were to be fixed and to take effect by then, the amount would be less than the stipulated one. The said period should rather be regarded as an extension of the expired tenancy than a part of the new tenancy since the rent was paid at the rate provided under the expired tenancy.

(b) Management Fee

The Applicant requested that the provision under the expired tenancy in connection to the Respondent's right to collect from the Applicant the management fee be taken out under the new tenancy. He complained that such stipulation requiring the Applicant to pay to the Respondent any amount of the fee upon notice issued by the Management Office rendered her incapable of challenging the Management Office regarding the reasonableness of the fee, which was increased last year by 50% without providing to the Applicant with any justification. The Applicant's solicitor pointed out that the Respondent wholly owns the development and is also the one, which employs the management firm for managing the development. The absence of an Owners Incorporated gave the management firm a free hand to set the level of management fee. Being the Respondent's employee, the firm no doubt takes instructions from the Respondent and not from anywhere since an Owners Incorporated does not exist. Although the Tribunal set a ceiling on the level of rent two years ago, the Respondent practically increased the income from the tenancy during the fixed term through increasing the management fee. Without providing the evidence of a corresponding increase in management outlay, the increase is not justified and genuine.

The Respondent did not refute the Applicant's submission regarding the ownership of the development. The Respondent's second witness, the representative of the management firm, also did not deny the enormous increase in the fee. He was, nevertheless, unable to advise the Tribunal whether the Management Office had ever prepared a development management budget for the last few years or the period the annual budget covered normally. The Respondent's solicitor emphasized that the Respondent and the management firm were separate entities and of a different management structure each making independent commercial decisions. He considered that there was no case for the Tribunal's intervention in this issue. He also said that the matter did not relate to rent but a commercial decision of the Management Office as to how the development should be managed.

The Tribunal does not share with the Respondent's view. The Respondent's second witness does not appear to be honest. As a staff member of the Management Office at managerial grade, he even forgot the commencement date of the annual budget and whether there was a budget ever prepared. He was evasive when crossed-examined by the Applicant's solicitor. The Tribunal understands that the standard of management is very often pegged to the level of management fee payable and hence, it is a choice between the degree of quality and the level of outlay. No doubt, the decision of any choice between quality and outlay is a value judgement. The Tribunal of course does not wish to intervene into such, but why is there the need for a go-between to exist, who did not represent the Applicant's interest and who did not, as claimed, take part in the making of the management decisions? The answer is in the negative. As a landlord, would the Respondent's interest be prejudiced if it were not given such role? The answer is also in the negative. On the other hand, the Respondent's role under the expired tenancy agreement had prevented the user of a service (i.e. the tenant) to properly monitor the performance of the service provider (i.e. the Management Office). The best of all suggestions available is to make it an obligation of the Applicant to pay the fee directly to the Management Office. If the Management Office consider it appropriate at any time to up-grade the management standard resulting in a corresponding increase in the fee payable, let them justify the increase to all tenants of the development including the Applicant. The past role of the Respondent to collect the fee for the Management Office is unnecessary and the provision in this regard should not re-appear under the new tenancy agreement. Under S.119J, the Tribunal is empowered to determine whether other conditions than the condition on rent should remain having regard to all circumstances.

The Different Views in Valuation

3. (a) Choice of Comparable Properties
Mr. Wayne Lee, the expert witness for the Applicant, suggested that it sufficed to base on Comparable 1 and 2 to arrive at the rental of the Subject Premises. His reason was that other comparable properties on the Rating and Valuation Department rental list were located at Shouson Hill Road, which were of a distance from that of the Subject Premises. Comparable 1 and 2 were residential units within the same development as the Subject Premises. They therefore well served as a good indication on the rental level. Notwithstanding this view, he did give the Tribunal a detailed analysis on other comparable properties in his valuation report. He considered that if the Tribunal accepted such view, the Tribunal might ignore the analysis given. The Applicant's solicitor also asserted that by the definition of Prevailing Market Rent under S.115, it should preclude the use of other comparable properties for valuation, which were all Part IV tenancies and the rent of which, according to Mr. Lee, were inflated to compensate for the restriction on termination.
The Respondent's solicitor made no submission in this regard and the Respondent's expert witness, Mr. Ryan Ho, despite his ambiguous answers given when cross-examined, continued to base on all six comparable properties for valuation purpose.
It does not appear that the Respondent held a different view regarding the Prevailing Market Rent definition. The Tribunal also finds that the two parties seemingly agreed that Comparable 1 and 2 were not Part IV tenancies and that the rest on the rental list were. Comparable 1 and 2 are tenancies for a term less than one year and the premises are furnished according to the information provided in the Remarks Column of the rental list. The other four are all of a term around 2 years. These, perhaps, are the factors leading to their belief or inference.
Whilst the Tribunal holds no contrary view to the two parties' inference, it has grave concern to rely only on two comparable properties to assess the rental value. Relying only on two comparable properties exposes the valuation to high risk of getting it wrong since there does not exist a perfect property market and a perfect free circulation of market information. The rent could be agreed out of distorted market information or personal preference, and such rent committed is not a market rental. Though the Tribunal agrees that the desirable approach is to select as far as possible those properties for valuation with the minimum number of aspects requiring adjustment, in the circumstances of the subject valuation exercise, the two expert witnesses should include all six with adjustments made to reflect the difference between Part IV and non-Part IV cases, as they had done for the other valuation factors in the same exercise.
(b) Location
On the need to adjust for location, Mr. Lee's view was somewhat ambiguous. On one hand, he tried to justify that the rest four comparable properties were not suitable for comparison by pointing out the difference in location. On the other hand, he seemed to agree with Mr. Ho that the need to adjust did not arise in the way he had dealt with the factors for adjustment. He had not included the location factor as one of the adjustment items in his valuation. Whatever the genuine intention, Deputy Judge Wong's previous decision in the last valuation exercise concerning the same property should still stand. In fact, Comparable 1 and 2 together with the other four comparable properties are all located in prime low-density residential areas of more or less the same environmental quality though the two groups of properties are at some distance apart.
(c) The Effect of the Early Determination Clause
The Tribunal has noted that both Messrs Lee and Ho made adjustments for Comparable 3, 4, 5 and 6 in their respective valuations. The two solicitors gave no submission on such. The Tribunal does not find that these adjustments are necessary. If they all regarded that these were Part IV tenancies, the security of tenure prescribed under Part IV should prevail notwithstanding any provision on early determination in the expired or new tenancy. The Tribunal dismisses the need for such adjustments.
(d) Tenancy Term
The Tribunal agrees that in normal circumstances, a one-year tenancy conduces higher leasing out cost than a two years tenancy. Sometimes, such a cost could be very high depending on how soon to get a new tenant after the expiry of the earlier tenancy. The additional cost does not entirely fall on the landlord. The tenant needs to pay commission to estate agents and removal cost a second time within a short duration. The two expert witnesses who made adjustment purely from the sole perspective of the landlord or tenant, failed to give the Tribunal a useful analysis of a complicate issue. The issue in the Tribunal's view should be tackled under three scenarios.
The first scenario is that both the landlord and tenant for their own reasons are only prepared to lease out / in the property for a duration of one year less one day. The second scenario is that the landlord is prepared to lease out the property for any duration but the tenant is only prepared to lease in for one year less one day. The third scenario is the reverse of the second scenario that the landlord is only prepared to lease out for one year less one day but the tenant is flexible. In the first scenario, the level of rent is determined by the quantity of demand and the availability of properties in the market for leasing for a term of one year less one day. The availability of properties for leasing for a term of two years or more is irrelevant in this scenario. These two batches of properties are not suitable comparable to each other. The rent agreed in this scenario is never the proper indication on the amount of adjustment that should be made or the level of rent of a two years term tenancy. In the second and third scenario, it is natural that the party who is inflexible to pay the extra cost as the flexible party can lease out/in the property to and from other tenants or landlords to avoid paying the extra cost. Nonetheless, the extra cost of the landlord and tenant may not be equal. The expert witnesses should first establish the scenario applicable before adjustments should be made instead of in the ways that they had done. The Tribunal, in this connection, has not been given the basis for analysis and thus, dismisses the adjustments made.
As regards the definition of the Prevailing Market Rent under S.115, the crux of the matter is not so much concerning the Part IV restrictions. The Part IV restrictions are a ground for the landlord to charge more (to compensate for the subsequent application of the restrictions). The market force is the more important determinant to enable the landlord to charge more. If those non-Part IV tenancies (i.e. new lettings or tenancies for a term of less than one year) are indeed due to the market force that enables the landlord to charge more, then the Tribunal agrees that the rent passing of those renewal cases should be adjusted to reflect the Part IV restrictions.
There was also the controversy as to whether at time of a falling market, the rent for a one year tenancy should be higher than a two years term tenancy so as to compensate for the lower rent obtainable upon tenancy renewal or when the property is re-let on expiry of the one year tenancy. Again, Mr. Lee had committed the same mistake in methodology. He viewed the issue and adjusted the rent passing totally from the prospective of the tenant ignoring the say of the landlord, who has an equal role to play in the rental negotiation.
(e) Renewal vs. New Letting (Internal Condition)
The Tribunal dismisses the need to make adjustment to account for new letting/renewal. The adjustments made by the two expert witnesses are not to account for the difference for the same property in the respective cases of renewal and new letting, but for various properties. They in fact compared a property newly let to another property which tenancy has been renewed. It may be true that for the same property, if it is newly let, the landlord may like to do some extra decoration works to lure the prospective tenants whereas in the case of renewal, for a variety of reasons (e.g. the inconvenience to the sitting tenant during the period of works), only some minor touch-up will be done. Therefore, there is a difference in the internal condition but this is absolutely not the case when comparing a property which tenancy has been renewed to another property, which is newly let. The basis for comparison simply does not exist. One never knows, unless the properties concerned have been inspected and compared, whether the internal condition of a newly let property is better than that of another which tenancy has been renewed or vice versa as at the effective date of the new tenancy.
(f) Chattels/Domestic Appliances
The divergence in this respect lies in the adjustment for Comparable 4. Mr. Lee did not consider adjustment necessary and Mr. Ho gave 2% to reflect the availability of domestic appliances. The Tribunal agrees with Mr. Lee as there is no dispute that the Subject Premises are also to be leased with basic domestic appliances. The description in the Remarks Column of the rental list lacks clarity and cannot be relied on.
(g) Time
Basically, both Messrs Lee and Ho followed the statistics obtained from Rating and Valuation Department to work out the percentage. The divergence occurs in the decimal places taken. Mr. Lee adopted two but Mr. Ho, just one. To avoid the inaccuracy, the Tribunal agrees to Mr. Lee's figures.
(h) View
Again, the two expert witnesses did not diverge much in this aspect. The only difference is in conjunction with Comparable 4. Mr. Ho gave 8% adjustment meaning the property was particularly better than the other two at Shouson Hill Road without sea-view. He stated in his report and depicted with a plan to show its longer distance from other buildings. The Tribunal, however, has not been given the necessary exemplification from Mr. Lee as to why all Comparable 4, 5 and 6 should be the same. The Tribunal accepts Mr. Ho's adjustment.
(i) Car Parking Space
Mr. Ho deducted $2500 from the gross rent for the additional car parking space leased with Comparable 4. Mr. Lee suggested $3,000 per month. Both had provided the Tribunal with no rental evidence to support their figures. The Tribunal sees no disagreement to $3,000 given the prime low-density residential location of the Subject Premises and comparable properties.
(j) Nuisance
This refers to the noise and probably the dust produced from the construction site on the opposite side of a local road. The development under construction is similarly low rise. Mr. Ho advised the Tribunal that the construction works might commence some time shortly after the Valuation Date. Around 18th September 2003, it remained a bare site said Mr. Ho. As at the date of hearing, he estimated the outstanding works might take another 6 to 9 months to complete and Mr. Lee estimated 9 to 12 months from the date of his site inspection (i.e. 17th February 2004). Both Messrs Lee and Ho do not diverge in great regarding the period that the Subject Premises have been and will be affected by the nuisance. The Tribunal accepts Member Lo's previous opinion (quoted by the Respondent) given for a similar case. Therefore, the Tribunal declines to accept the lower of the two adjustments

Valuation

4. Having regard to the above, the Tribunal has revised the valuation as follows: -

Comparable 1 2 3 4 5 6
Type New Letting New Letting Renewal New Letting New Letting Renewal
Term 11 months & 28 days from 23.5.03 11 months & 28 days from 20.7.03 24 months from 1.11.03 24 months from 1.12.03 24 months from 1.12.03 24 months from 1.12.03
Rent Free Period Nil Nil Nil 0.5 month Nil Nil
Parking Space 1 1 1 2 1 1
Monthly Rent $27,000 $28,000 433,000 $28,644 $24,000 $26,000
Saleable Area (sq. m.) 126.4 126.4 109.8 125.4 114.7 110.3
Monthly Rent exclusive of rates, management fee and additional parking space $22,240 $23,240 $28,869.8 ($28,644 x 23.5) / 24 - $3,000 = $25,047.3 $19699 $26,000
Unit Rate
(per sq. m.)		 $175.95 $183.86 $262.92 $199.74 $171.74 $235.72
Adjustments
Term -3% -3% 0% -3% -3% 0%
View 0% 0% -15% -8% -5% -5%
Floor Level 0% -1% -1% -0.5% -0.5% 0%
Chattels and Home Appliances -4% -4% 0% 0% 0% 0%
Nuisance 0% 0% -7% -7% -7% -7%
Time -4.78% -1.86% -1.47% -0.67% -0.67% -0.67%
Total -11.78% -9.86% -24.47% -19.17 -16.17 -12.67
Unit Rate
(per sq. m.)		 $155.22 $165.73 $198.58 $161.45 $143.97 $205.85

Average: $171.80

Net Rent ($/ sq. m.): $171.80
Saleable Area (sq. m.): 126.4
Rent: $21,715.52, or say, $21,700 per month exclusive of rates, management fee but inclusive of one car parking space:

5. Order

(1)The Tribunal hereby orders that a new tenancy be granted on the following terms: -

(a) A fixed term of two years to commence on 18th September 2003;

(b) The rent at $21,700 per month exclusive of rates, management fee but inclusive of the rent of a car parking space;

(c) A deposit equivalent to the sum of two months rental (any excess held by the Respondent to be refunded to the Applicant within one month from the date hereof);

(d) Save the provision for the Respondent to collect the management fee, other conditions in the previous tenancy agreement to remain.

(2)The Tribunal grants no order as to the cost of this application.

C.Y. LAM
Member
Lands Tribunal

Representation:

Mr. Simon CHEUNG of M/S Simon Cheung & Co., for the Applicant

Mr. P. KWAN of M/S Deacons, for the Respondent