Roger King v. Luke Him Sau

LDLA000041/1983

Landlord and tenant - Part IV - on grant of new tenancy onus on party seeking to vary prior agreement by insertion of different clause in now tenancy - affect of 'break clause' on prevailing market rent - Sections 115, 1191 and 119J Landlord and Tenant (Consolidation) Ordinance, Cap. 7.

IN THE LANDS TRIBUNAL OF HONG KONG

Coram: TRIBUNAL: His Honour Judge Cruden, Presiding Officer and M.W. Phillips, Esq., Member.

Date: 6th day of September, 1983

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JUDGMENT

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1. This wan an application by the tenant for a new tenancy under Part TV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 in respect of the residential premises known as Flat B7, Repulse Bay Towers, 119 Repulse Bay Road, Hong Kong.

2. The previous tenancy agreement was for a period of 2 years from the 1st day of October 1977 at a rent of $7,000 per calendar month exclusive of rates. Since the expiration of the period expressed in the tenancy agreement, the tenant has remained in possession by virtue of the statutory continuance of the tenancy and is at present paying rent in the sum of $12,350 per calendar month exclusive of rates.

3. At the hearing the parties, subject to a dispute in relation to the applicant seeking a right in favour of the tenant of prior determina-tion, were agreed:

4. Each party called a chartered surveyor to give expert evidence as to the prevailing market rent as at the 1st day of July 1983. Mr. F. Choi, Chartered Surveyor, gave evidence for the applicant. In his opinion the prevailing market rent was $23,000 per calendar month exclusive of rates. In arriving at that rent he considered 3 comparable tenancies in Repulse Bay Towers. These comparables included Flat F7 which was on the same floor as the subject property and let for 2 years from the 1st day of July 1983, at $24,000 per calendar month exclusive of rates. The other Repulse Bay Towers comparables were Flats D9 and All, each let For 2 years from the 1st day of January 1983, at $25,000 Per calendar month. Mr. Choi pointed out that Flat F7 at 2,578 square feet was smaller than Flat D9 which com-prised. 2,844 square feet and Flat All comprising 2,818 square feet. Mr. Choi understood that the rent for Flat F7 was probably negotiated during June 1983. While accepting that the best rental evidence was within Repulse Bay Towers, he prudently elected also to check his conclusions by referring to other flats at Repulse Bay Mansions and Repulse Bay Apartments. These rents, he concluded, supported his primary comparable for Flat F7 in Repulse Bay Towers. He pointed out that neither of the latter two properties, unlike Repulse Bay Towers, has a communal swimming pool.

5. Returning to the three Repulse Bay Towers comparables, Mr. Choi stated that the rent of Flat F7 equalled $9.31 per square foot while the rent of Flat D9 was $8.79 per square foot and Flat All $8.87 per square foot. He stated that rents for this type of property had since the beginning of the year continued to fall, but the fall was now not as sharp as earlier. After taking these various factors into account, he arrived at a prevailing market rent for the subject property of $23,000 per calendar month exclusive of rates.

6. Mr. P.K. Cheung, Chartered Surveyor, gave evidence for the respondent landlord. He selected the same Flat F7 at Repulse Bay Towers as his primary comparable and confirmed Mr. Choi's evidence that it was let from the 1st day of July 1983 at a rent of $24,000 per calendar month exclusive of rates. Mr. Cheung also took into account as secondary comparables Flat D9 and Flat A11 at Repulse Bay Towers. After considering these comparables Mr. Cheung concluded that the prevailing market rent for the subject property was $24,000 per calendar month exclusive of rates.

7. There was minor disagreement between the valuers as to the area of a comparable. Both agreed that the area of the subject property was 2,522 square feet. However, in respect of the clearly important comparable Flat F7, Mr. Choi gave the area as 2,578 feet while Mr. Cheung gave the area as 2,522 square feet. Mr. Cheung also produced floor plans of other 7th floor flats, which showed Flats B and F as identical and supported his view that the designed area was 2,522 square feet. However, the difference is in fact so small in relation to flats of this type and size to make minimal, if any, difference to any final valuation. Nevertheless, Mr. Cheung, while not conceding that Flat F7 was slightly larger, stated that if the Tribunal held to the contrary, then he would be prepared to reduce his calculation of the rent for the subject premises down to $23,500 per calendar month exclusive of rates.

8. On the evidence, of much greater significance was the time when the new rent for Flat F7 was fixed. The importance of this date is underlined by the fact that both witnesses agreed that rents for this type of residential property had been steadily falling since the 1st day of January 1983. Mr. Cheung estimated this fall at approximately 1% per calendar month. His written valuation report was made on the 24th day of May 1983 and we note that in adjusting comparables, where new tenancies commenced on the 1st day of January 1983, he allowed a time difference adjustment of -5%. In relation to Flat F7 Mr. Cheung agreed that as he had the rent details when he compiled his report, they must have been agreed upon not later than May 1983. On this basis, Mr. Cheung agreed that a further adjustment of 1 or 2% for time difference was necessary. By itself, this would reduce his initial rent of $24,000 per calendar month down to nearly $23,500.

9. So even if we ignore the fact that possibly there is no difference in area between the subject premises and Flat F7, the valuers arrive at very similar rentals of $23,000 and $23,500 per calendar month exclusive of rates.

10. However, as the hearing progressed, it became apparent that the more substantial dispute between the parties was the applicant's oral request that the terms of the new tenancy agreement should include a clause giving the tenant the right, after the expiration of the first 12 months, to terminate the tenancy upon giving 1 month's notice to the landlord. The landlord opposed the grant of this right of termination - commonly called a "break clause" - to the tenant. The respondent further submitted that if the Tribunal granted the tenant the right of prior termination, then 1 month's notice was unreasonable and that a period of 3 months' notice should be required.

11. Both valuers were agreed that if the new tenancy agreement granted the tenant the right of prior termination, then the rent would have to be increased. The increase would be in recognition that the tenant was being granted a beneficial right and the landlord was being subjected to the risk that his position would thereby be prejudiced. Mr. Choi, for the tenant, was of the opinion that if the prior right to termination was included, the rent should be increased by $1,000 to $24,000 per calendar month exclusive of rates. In evidence, he stated that it was very difficult to quantify the appropriate sum for a break clause but he was guided by the Tribunal's recent decision in Sentry Holdings (Asia) Ltd. and The Colonial Treasurer Incorporated v. Cali Enterprises Ltd. L.T. Nos. 11 & 43/83 where it observed:

"Conscious that some allowance should be made, but with little guidance as to quantum, we take a figure of $1,000."

He also stated that whether the notice requirement was either 1 or 3 months, he considered an additional $1,000 per calendar month remained adequate. It was pointed out later by the applicant's counsel that the extra $1,000 allowed in Sentry Holdings (Asia) Ltd. and The Colonial Treasurer Incorporated v. Cali Enterprises Ltd. was in respect of a basic rent of $28,500, so an increase of $1,000 for the subject premises was proportionately higher.

12. The respondent's valuer, Mr. Cheung, accepted that an increase of $1,000 was adequate for a break clause requiring 3 months' notice, which he pointed out was the period of notice stipulated in Sentry Holdings (Asia) Ltd. and The Colonial Treasurer Incorporated v. Cali Enterprises. However, if only 1 month's notice was necessary, he was of the opinion that the landlord would be further prejudiced and that the increase in rent should be from $1,200 to $1,300 per calendar month.

13. These figures were based on the $1,000 allowance in the latter case. We would record that figure was not one which was precisely calculated by the Tribunal after having heard substantial evidence on this issue. In fact there was an absence of evidence but the Tribunal agreed with the parties that the inclusion of a break clause in favour of the tenant only, would normally result in an increase in the rent otherwise payable to the landlord. The difficulty in that case, in the absence of substantial evidence, was to quantify the amount of the increase. Faced with that situation the Tribunal was compelled to do the best it could in the circumstances and after referring to the lack of substantial guidance, estimated the increase, on the particular facts of that case, as $1,000 per calendar month. In view of those special circumstances, valuers would be foolish to apply that sum mechanically to the facts of different cases they may have to consider in the future.

14. Mr. Cheung agreed that break clauses were increasingly common in favour of corporate tenants but maintained they were uncommon in the case of individual tenants. Three months was a typical period of notice. In his experience he had never known of a break clause requiring only 1 month's notice.

15. However, it would only be necessary to consider further the valuers evidence on the rental implications of a break clause if we first were to hold that the now tenancy agreement should include a break clause. We will therefore first determine this issue. The applicant seeks a break clause in the terms we have already recorded. The respondent is equally opposed to such a clause.

16. Whether there is a break clause is a matter which would affect the duration of the new tenancy agreement. The position is therefore governed by Section 119I which provides that, in the absence of agreement, the duration shall be such:

"... as may be determined by the Tribunal to be reasonable in all the circumstances, being a tenancy for a term not exceeding 3 years ..."

17. These words confer a wide discretion on the Tribunal. We have held on a number of occasions, commencing with Union Carbide Asia Ltd. v. The Hong Kong Land Co. Ltd. L.T. No. 17/82, that "the duration of a previous tenancy may properly be taken into account as one of the circumstances". We would confirm too, that the onus is on the party seeking to introduce different terms to satisfy us that they should be inserted. The position in the instant case is similar to that we adverted to in Nordic Asia Ltd. & Ors. v. Strawberry Hill Development Ltd. & Anor L.T. Nos. 32 & Ors./82, and more recently in John H. Lee v. The Hongkong and Shanghai Hotels Ltd., L.T. No. 15/83. In those cases we considered the position of different new terms under Section 119J. Here we are acting under Section 119I but except for slightly different statutory provisions, the principles applicable are similar. As to the nature of the onus placed on a party 1 Hill and Redman's Law of Landlord and Tenant (17th Edn.) 780 in relation to other new terms under the English legislation states that:

"In practice if any party wants a variation in terms he must adduce cogent reasons."

18. The reasons advanced by the applicant were that such clauses are increasingly common and that in any event the prior agreement after the expiration of its initial 2 years, continued thereafter as a monthly tenancy terminable by the tenant on 1 month's notice. A break clause, it was submitted, was basically no different to this tenant's prior rights. We accept that at least in the case of corporate tenants break clauses have become, in the recent falling market, more common than hitherto.

19. As to the previous contractual position between the parties, the position is not quite as simple as the applicant asserted. The prior tenancy agreement under Clause 1 thereof was for a period of 2 years. It is true that Clause 22 includes a proviso which refers to a subsequent monthly tenancy. However, we understood Counsel to allege that the tenant under Clause 22 was entitled to continue in possession as a monthly tenant after the expiration of the initial 2 years duration. As a matter of law the proviso does not grant the tenant such a right. All it does is to provide that the parties may agree to the tenant remaining in possession thereafter on that basis. There is no option granted in favour of the tenant to remain. The agreement of the landlord is required. In passing we would observe that as the proviso seems to be no more than an agreement to agree it probably has no contractual effect. In fact the tenant has remained in possession under the protection of the Ordinance in accordance with the concept of statutory continuance.

20. We are therefore satisfied that there is no similarity between a new tenancy agreement with the break clause sought and the terms of the prior tenancy agreement. Nor are we satisfied that the applicant has established cogent reasons why, in the light of the respondent's opposition, we should exercise our admittedly very wide discretion, to grant the break clause sought nor one with longer notice.

21. Having come to that conclusion it follows that we do not need to determine the affect of a break clause on the prevailing market rent or consider further the evidence on that interesting issue.

22. Returning to the question of the new rent for 2 years duration We hold, in the light of the new rent for the primary comparable having been agreed to in about May 1983 together with the balance of the evidence adduced, that Flat B7 might reasonably be expected to be let at $23,000 per calendar month exclusive of rates.

23. We therefore order the grant of a new tenancy at that new rent of $23,000 per calendar month exclusive of rates for a duration of 2 years from the 1st day of July 1983 and otherwise in accordance with the same terms and conditions as are contained in the prior tenancy agreement dated the 9th day of June 1977.

24. There will be no order as to costs. Liberty to apply is reserved.

DATED this 6th day of September, 1983.

Representation:

Mr. Joseph Chan of Gallant Y.T. Ho & Co. for the applicant.

Miss Betty Kwan instructed by Johnson, Stokes & Master for the respondent