Nordic Asia Ltd and Others v. Strawberry Hill Development Ltd and Another
Read the full judgment text of LDLA 44/1982 on BabelCite. This LDLA judgment was delivered on 30 October 1982.
1. This was a consolidated application in which the applicants, being the tenants of 14 domestic properties at Strawberry Hill, 8 Plunkett's Road,
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LDLA000044/1982 Landlord and tenant - new Part IV - fair market rent - whether reasonableness is a criteri - whether market rent should be discounted to allow for effect of package deal, tenant inertia and Part IV-onus where dispute in relation to terms other than rent - Sections 115, 117, 119I, 119K and 119M Landlord and Tenant (Ordinance) Cap. 7. IN THE LANDS TRIBUNAL OF HONG KONG
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Coram: TRIBUNAL: His Honour Judge Cruden, President and M.W. Phillips, Esq., Member. Date: 30 October 1982 ------------------ JUDGMENT ------------------ 1. This was a consolidated application in which the applicants, being the tenants of 14 domestic properties at Strawberry Hill, 8 Plunkett's Road, 2. The Peak, Hong Kong, applied for new tenancies pursuant to Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap.7. The respondents were the landlords of the respective suit premises. 3. When the hearing commenced we were informed that Applications Nos. 32,34 and 36 were in the process of being settled. Those applications were adjourned sine die to enable the terms of settlement to be perfected. The 1st, 3rd and 4th applicants thereafter took no further part in the proceedings. We went on to consider the following contested applications:
4. Strawberry Hill is a large residential complex, developed in two phases and completed in 1976. The complex includes 46 houses. Phase I consists of 7 houses and Phase II comprises 39 houses The development is generously sited on sloping ground on one of the higher points of The Peak. A large number of the original trees, shrubs and other natural surroundings have been preserved. In addition to communal lawns and paths, the 7 houses in Phase I have the exclusive use of a swimming pool. They also share with the 39 houses in Phase II a second and larger swimming pool which is part of a further recreational area, including two squash courts, barbecue area and a clubhouse. All 46 houses also share two tennis courts and a badminton court. Each house has its own central air-conditioning system and security alarm system. In addition, the complex is patrolled by security guards on a 24 hour basis. 5. The rateable values of the houses where the terms of the new tenancies are in dispute are as follows:
6. The rateable values of all the houses are therefore in excess of the statutory minimum of $80,000 and so all are subject to the provisions of Part IV of the Ordinance. The law is now well settled that the Tribunal should determine all the other terms of a new tenancy where the terms are disputed before fixing the fair market rent. (a) DURATION OF NEW TENANCIES 7. In the case of a number of houses agreement was reached on the date of commencement and duration of the new tenancies. We would record that the following particulars in respect of some of the new tenancies were agreed:
Similar agreement was not reached in respect of Houses 9, 18 and 34: (i) House 9 : 8. Both parties agreed to a new 3 year tenancy but the 2nd Applicant would not agree to the new tenancy commencing on the lst day of July 1982. In the absence of agreement on the date of commencement Mr. Chan, for the 2nd Applicant, submitted that the new date of commencement should be no earlier than the date of the Tribunal's determination Under Part IV the current tenancy is extended or continued, even though the initial contractual period may have expired, until immediately before the date of the new tenancy. Under Section 119I we have power in the absence of agreement, to fix the duration of the new tenancy which necessarily includes the date of commencement. The landlord makes no submission on the date of commencement. 9. The prior tenancy agreement was for a period of 3 years from the lst day of May 1979 so it expired on the 30th day of April, 1982. We give due consideration to the possibility of the new tenancy commencing on the 1st day of May, 1982. Neither party urged that upon us and it would require a longer back dating than would occur in the case of any of the other consolidated applications. However, a later date would not affect any saving in rent. For where the date of commencement of a new tenancy is later than the day following the expiration of the prior contractual tenancy, Section 119M (5) provides that for that intervening period:
10. On the particular facts of this application we order that the new tenancy of House 9 shall be fur a period of 3 years from the 1st day of November 1982 being the first day of the month next following the date of determination of this application. (ii) House 18: 11. No express agreement between the parties on the date of commencement of the agreed upon new 3 year tenancy was conveyed to the Tribunal. 12. However, in correspondence the landlord informed the tenant that it understood it was common ground that the new tenancy should commence on the 1st day of July, 1982. At the hearing that assumption was not disputed by the tenant. The position is therefore different to that which arose in the case of House 9. We order that the agreed new 3 year term for House 18 shall commence on the 1st day of July 1982. (iii) House34: 13. The last contractual tenancy between the parties was for a period of 2 years from the 1st day of May 1980 so that period expired on the 30th day of April, 1982. 14. The 5th applicant seeks a 1 year term. The 1st respondent offers a 2 year term. Both parties did not advance any particular submissions in support of these different durations but invited the Tribunal to resolve the dispute. Under Section 119I we are in these circumstances directed to fix a duration which is "reasonable in all the circumstances". Those circumstance, as we have held previously, include the duration agreed to by the parties under any prior tenancy agreement although the duration under the prior agreement will not necessarily be decisive if there is a dispute over the duration of the new tenancy. The prior agreement was for 2 years. The 1st respondent again offers 2 years. A 1 year duration is rather shorter than is customary. However, in Hong Kong there are circumstances where a 1 year term would be convenient and reasonable for both parties. We accept that 1 year terms exist. Yet no particular circumstances were advanced in favour of a 1 year duration in contrast to the existing and more common 2 year term. 15. On balance the circumstances favour a new tenancy for the sane duration of 2 years. In the exercise of our discretion we therefore order that the new tenancy shall be for 2 years commencing from the 1st day of July 1982 which was the agreed date of commencement. (b) OTHER TERMS (i) Rent instalments: 16. All tenants except the 2nd Applicant at present pay rent by consecutive monthly instalments. In ordering that provision for payment of rent by monthly instalments should be included in the other new tenancy agreements we merely reflect the parties agreement. 17. However the position in respect of House 9, of which the 2nd Applicant is the tenant, is different. The tenancy agreement between the parties executed on the 24th day of August, 1979 provided in Clause 2 that:
The landlord asks that the previous clause be preserved in the new tenancy agreement but the tenant wishes the new tenancy agreement to provide that rent shall be paid monthly in advance. Again the parties rested on their bare submissions. 18. We appreciate that in the remaining 13 of the original 14 applications, which were consolidated for the purpose of the present hearing, that rent is payable monthly. However, each individual application making up this consolidated hearing, is to be considered separately. The period for which rent instalments are payable under the other tenancies is, however, relevant as an indication of what may be the customary position. 19. In the prior agreement the parties expressly agreed that payment of rent during that 3 year term should be by annual instalments in advance. We note that the 2nd applicant is the Citi Bank N.A. While there may be economic advantages for the majority of tenants in being able to pay rent in monthly, rather than longer instalments, perhaps these advantages may have been of lesser importance to this particular tenant, when balanced against such administrative and other advantages as not having to approve and process monthly payments. Whatever the reasons, the parties in 1979 agreed to annual payments. Where we have to fix the issue of the instalment period under which rent is to be paid we do so under Section 119J. Here the statutory guidelines are a little different to those under Section 119I. For Section 119J provides that in determing these other terms we:
20. The terms of the current tenancy are therefore one of the circumstances to be considered. However, those terms are not decisive. The terms are to be fixed in our discretion having regard not only to the current terms but also to "all the relevant circumstances". In later calculating the new rent we have to do so in relation to the other terms of the new tenancy. Where rent is payable at intervals longer than customary monthly periods that may be a material factor in calculating the new rent. Certainly where rent is payable in advance by annual instalments we would have to measure the advantage to the landlord in obtaining the use of the rental income much earlier than is customary, as an element to be considered in fixing the new rent. 21. In theory the adjustment made because of earlier receipt of rental income should balance out the advantage the landlord would otherwise enjoy in receiving earlier payment. In pure cash terms the landlord would therefore gain no financial advantage from earlier payment. This fact tends to strengthen the tenant's submission that it would now be more reasonable for the new rent to be paid by customary monthly instalments. When we consider all these circumstances including the current annual instalments, we order that the new rent for House 9 will also be payable in advance by monthly instalments. (ii) Deposits : 22. Both the 1st and the 2nd respondents applied for the new tenancy agreements to provide that the tenants should pay deposit equal to two months of the fair market rent fixed by the Tribunal for those tenancies. 23. All the applicants agreed to pay deposits equal to 2 months of the new rent except the 9th applicant for House 31. Again we must exercise our discretion under Section 119J. There is no dispute that a deposit should be included in the new tenancy agreement. The only Dispute is limited to quantum. The 9th applicant offers 1 month's deposit. Should the deposit for House 31 equal 1 or 2 months rent? We consider that a deposit, for this particular Part IV property, equal to 2 months rent, is reasonable. We order that such a provision be included in the new tenancy greement for House 31. A similar provision, by agreement, is to be included in all the other tenancy agreements. (iii) Tenants fittings : 24. The 8th Applicant applied for the new tenancy agreement for House 26 to include a provision allowing the tenant to install its own television aerial and air-conditioners. The landlord made no response to that application. We are prepared to order that such a clause be included. The new clause will provide for the work to be done at the tenant's expense; the tenant being responsible to remove the same before yielding up possession; to make good any damage caused by the removal thereof; and such other provisions to protect the landlord as may be reasonable. (iv) Management and maintenance charges : 25. The 1st respondent itself developed the Strawberry Hill complex. Upon completion in 1977 some of the houses were sold and some were let. Where a house was sold the 1st respondent and the purchaser entered into a Deed of Mutual Covenant in terms of the deed registered in the Land office as Memorial No. 1461471. This Deed of Mutual Covenant, inter alia, provided that a purchaser held his property subject to the terms of a management agreement originally made between the 1st respondent and Jardine Matheson & Company Limited. 26. In 1978 that management agreement was replaced by a new agreement entered into by the lst respondent with Gammon Properties Limited (hereinafter called "Gammon") under which Gammon was appointed sole agent for letting and managing the houses owned by the 1st respondent. 27. Under the Deed of Mutual Covenant the owners of each house were liable to pay a monthly fee to the manager. The monthly fee represents the total of two separate charges. First, the management charges - being Gammon's own remuneration as manager - and secondly, maintenance charges, being the share of each house towards the upkeep of the communal and other facilities. Under the management agreement with Gammon the monthly management fee is currently $600. The maintenance charges are paid quarterly and recently have averaged from $1,000 to $1,500 per month. They are itemised in Exhibit R. 6. 28. Where the 1st respondent has not sold but instead leased a house the agreement with Gammon provides, in Clause (6) thereof, that the other remuneration received by Gammon for letting and collecting rents under the agreement shall be deemed to include payment of the management fee otherwise payable under the Deed of Mutual Covenant for that particular house. As a result Gammon receives a monthly management fee from the owners of all the Strawberry Hill houses except those owned by the lst respondent. In the initial tenancy agreements from the 1st respondent there is no provision for payment by the tenant of management charges. On the other hand, in the tenancy agreement from the 2nd respondent to the 14th Applicant there is a provision that the tenant shall pay all charges payable for House 15 under the Deed of Mutual Covenant which would include the current management fee of $600. However, as a matter of fact, the 2nd respondent and not the 14th applicant, has always paid the monthly management charge of $600 to Gammon. 29. The 1st respondent proposes that the new tenancy agreements should provide for the new rent to be exclusive of management charges and that such charges shall be the liability of the tenant. This would result in the 1st respondent not paying any management fees for any of the houses at Strawberry Hill whether let or sold by the 1st respondent. We appreciate that on grounds of administrative convenience and also by eliminating the risk of future increases in fees during the term of a tenancy - which at present fall wholly on the landlord - this variation would be attractive to the lst respondent. In the case of houses let by the 1st respondent the liability for payment of management charges therefore would be transferred from the landlord to the tenant. The 2nd, 5th, 6th, 7th, 8th, 9th, 10th, 11th, 12th and 13th Applicants all oppose this change. 30. So this is again a new term to be determined by the Tribunal under Section 119J where we are specifically directed to have "regard" to the terms of the current tenancies. Under the current tenancies from the 1st respondent there is no obligation on the tenants to pay the monthly management charges. 31. Miss Fok for the 6th Applicant, in opposing any change to the existing contractual position, cited the following extract from Hill and Redman's Law of Landlord and Tenant (16th Edn.) 735 as to the practice which has evolved under the comparable English provisions, being Section 35 of the Landlord and Tenant Act 1954:
32. The English Act relates, of course, only to non-residential tenancies. Tenancy agreements for non-residential tenancies are usually more complicated and subject to far greater variation than generally is the case with residential tenancy agreements. The potentially more drastic economic consequences of varying clauses of a non-residential tenancy, may well have been a factor in the development of the strict English practice in relation to the variation of terms. This may reasonably be inferred from the explanation given later by Hill and Redman at page 735:
33. The present variation sought does not involve user or any other major related covenants but affects the tenants monthly outgoings. We appreciate that it might therefore be argued that if the Tribunal treats the management charges as monthly cash outgoings it matters little whether the new rent is exclusive or inclusive of management charges. For depending on which alternative is chosen the new rent would vary by $600 whether the charges were to be paid by the landlord or the tenant; the tenants total monthly outgoings, whether either rent plus management charges or rent simpliciter being the same. However, if the rent is to be exclusive of management charges, any future increase in those charges would be borne by the tenant. 34. The onus is on the party seeking the variation to satisfy us that a variation should be ordered. That onus may not be quite as onerous as it is in England in relation to business tenancies. But where an issue is more or less evenly balanced the statutory requirement to have "regard" to the terms of the old tenancy will tend to support the continuation of the status quo. On this ground alone the variation sought is refused. The tenancy agreements from the 1st respondent shall therefore all provide that the monthly rent will be exclusive of the monthly management charges. Further they will also expressly provide that the management charges will be the liability of the landlord. 35. As to House 15 under the Deed of Mutual Covenant the 2nd respondent was liable to pay the management fee to Gammon. The 2nd respondent had, in turn, by virtue of Clause 4 of the tenancy agreement to the 14th Applicant, imposed the obligation to pay that management fee on the tenant. In fact the landlord, who in any event was primarily liable to pay the management charge as between landlord and 1st respondent, continued to pay that fee and has never enforced Clause 4 against the tenant. However, the tenant now seeks to vary the contractual position by having Clause 4 deleted. The landlord opposes any contractual change. On the evidence we see no reason to order any variation. In this respect the new tenancy agreement for House 15 will remain unchanged with Clause 4 being again included. (c) FAIR MARKET RENT (i) What does "fair market rent" mean? 36. In Mass Transit Railway Corporation & Ors. v. Hsu and Sons Ltd. , L.T Nos. 1, 2 and 3 82, we pointed out that once the Tribunal has ascertained the fair market rent, it has no discretion to impose any lesser or other new rent. We further pointed out that the limited purpose of Part IV is to empower the Tribunal to grant tenants increased security of tenure. Part IV contains no rent restriction provisions. If there is a dispute over the new rent the Tribunal has no power to fix a restricted or controlled rent. Indeed, not only does Part IV not impose any rent controls but under Section 119M it recognises that the fair market rent may not be a reasonable rent. 37. However, at this hearing a substantial conflict arose between the parties as to the meaning of "fair market rent". At least the applicants represented by Mr. Tong argued, that the fair market rent was not necessarily as high as the rent reached by parties freely negotiating in the market. In considering the meaning of "fair market rent" as defined in Section 115(1) of the ordinance we were referred in evidence to the decision of the Privy Council in Chang Lan-sheng v. Attorney General (1970) H.K.L.R. 483. In that case the Privy Council had to consider the right of renewal in a Crown lease where the new rent for the period of the renewal was expressed to be:
38. The relevant words in that case were "fair and reasonable rental value". The Privy Council agreed that the inclusion of the word "reasonable" required the rent under the renewal clause to be determined according to criteria other than the market rent. Whether a market rent is reasonable depends on the market. In some cases a fair and reasonable rent may be the same as the fair market rent but they are quite different criteria. To further encourage us to conclude that the fair market rent was usually something less than the open market rent we were referred to the House of Lords decision of Mason & ors. v. Skilling (1974) 1 W.L.R. 1437 which was concerned with the meaning of "fair rent" in Section 42(1) of the Rent (Scotland) Act 1971 which is identical to Section 46(1) of the English Rent Act 1968. In particular we were referred to page 1439 where Lord Reid stated that assessors could adopt any method in:
We were also directed to Lord Kilbrandon' s statement at page 1444 :
39. Finally, we were referred to the unreported decision of Hong Kong Land Co. Ltd. v. Mason Landlord and Tenant Appeal No. 4 of 1974. That was a case under Part II of the Landlord and Tenant (Consolidation) Ordinance where the Commissioner of Rating and Valuation pursuant to Section 58 had granted his Certificate of Increase of Rent. The landlord applied for a review of the Certificate and under Section 59 a tribunal was set up which, on the review, confirmed the Certificate. From that review the landlord appealed pursuant to Section 60 to the District Court. On appeal the definition of "fair market rent" in Section 49 was considered. 40. In considering that District Court decision we accept that there is no material difference between the words used in Section 49 and Section 115(1). Although there is a difference in the fair market rents thereunder as a consequence of the different effect Parts II and IV have on the market. That decision held that the fair market rent was the rent which hypothetically would be freely negotiated in the market but subject to the negotiations being conducted fairly and reasonably. 41. On the basis of those authorities it was submitted that the fair market rent was a very different concept to an open market rent. The applicants valuer, relying in particular on the Privy Council decision cited, was of the opinion that after he calculated what he described as the open market rent for the suit premises, he was then obliged to reduce that rent to allow for three additional factors, namely the package deal, tenant inertia and the effects of the Ordinance. Dealing with the so-called "package deal" it was submitted that while this was not a factor hitherto recognised in those terms it nevertheless existed as a real market factor. The applicants valuer described the ''package deal" thus :-
42. Tenant inertia, the valuer' s second factor, simply means the willingness of a sitting tenant to pay a higher yens than a new tenant to avoid the cost and inconvenience of relocating. The third factor arises from the definition of "fair market rent" in Section 115(1) which directs that the effect of the ordinance on rents must be disregarded in assessing the fair market rent. So if the effect of the ordinance is to artificially stimulate or restrict the market we must adjust the market rent by the amount of any such stimulation or restriction. 43. The respondents submitted that the Privy Council and Horse of Lords decisions were based on quite different terms and legislation. They were concerned with contractual terms and statutory definitions other than "fair market rent". They were therefore to be distinguished. As to Hong Kong Land Co. Ltd v. Mason Mr. Huggins pointed out that the definition in Section 49 related to the different provisions of Part II which include not only security of tenure but also, unlike Part IV, rent restriction provisions. We would observe that distinction would be more relevant to any different effect Part IV, compared with Part II, may have on the market. Counsel went on to submit that if the District Court judgment means that, although both parties are free to negotiate, that freedom is subject to both of them acting' reasonably, then the judgment is unsound. For, it was submitted "reasonably" is oily used in Section 115(1) in relation to the market. Counsel further submitted that the use of the word "fair" in Section 115 means that a fair market runt is one which fairly reflects the actual market. In ascertaining the actual market rent the word "fair", it was submitted, therefore requires the exclusion of those rents which, compared with the general characteristics of the market are - because of special or other factors extremely high or low. Accordingly, it was submitted, that the Tribunal in determining the fair market rent should not take into account abnormal or unusual rents. In terms of the definition in Section 115(1), it was submitted, those abnormal or unusual rents are not fair rents in the existing market and therefore should be disregarded in the search in a particular case for the fair market rent. Mr. Radcliffe for the 1st Respondent endorsed this approach and submitted that the package deal was neither a recognised nor proper discounting factor. 44. To turn to the definition of fair market rent in Section 115(1) we observe that it is defined as follows:
45. The first important characteristic of that definition is that by using the, word "means" the Legislature has provided an exhaustive definition of the term "fair market rent". It may be noted, for comparison, that other terms in Section 115 are not exhaustive for they are defined as merely including the statutory definition which follows. However, the Legislature, in the case of the "fair market rent" has assisted, if restricted, the Tribunal by providing its own exhaustive dictionary. Indeed, it is even arguable that it matters little what words have been used by the Legislature to constitute the term : what is crucial are the words the Legislature has used indefining that term. 46. Certainly the definition includes the word "reasonably". "Reasonably" and "reasonable" are frequently used in statutory rent definitions under restricted, controlled or fair rent legislation where the Courts are directed or given a discretion, for social or policy reasons, to fix a rent lower that the market rent. However, the use of the word "reasonably" in Section 115(1) may be misleading if it is presumed to serve a similar purpose. Indeed if the word "reasonably", by itself, is selected as the basis of a submission or even a judgment, declaring that the rent which the Tribunal fixes under Section 119K must be reasonable, it is not only misleading but dangerous. For words in any statutory definition must always be considered in their context. If the word "reasonably" is approached on that basis it will be seen at once that a fair market rent in terms of the definition is necessarily reasonable only to the extent that it must be a rent which might reasonably be expected to be obtained for the premises. The definition is entirely silent whether that rent is reasonable according to other criteria. The position would have been quite different if the word "reasonably" had been inserted not after the word "might" but before the word "let". For then the relevant part of the definition would have provided:
47. If that alternative had been adopted, the Tribunal would have been obliged to ensure that the amount of the new rent was reasonable, in accordance with the wider criteria, that at least some of the applicants pressed upon us. The cited Privy Council decision would then have been directly relevant. What is abundantly clear is that the Legislature did not adopt that alternative. Instead it merely required the Tribunal in fixing a new rent, to ensure that the amount of the now rent is reasonably related to the amount that could be obtained for the premises in the market. 48. We are also satisfied that the effect of the use of the word "fair" in the statutory term - but significantly not in the definition of that term - is that in assessing the market we must exclude those rents which are unfair because, owing to special circumstances or otherwise, they are not rents typical of the market. In reaching this conclusion we therefore accept the submissions on the meaning of "fair" put forward by the respondents. 49. In the absence of authority this would seem to us to be the clear meaning of "fair market rent" in Section 115(1). We will now consider the authorities cited to discover whether "fair market rent" should nevertheless be differently interpreted. 50. The Privy Council decision of Chang Lan-sheng v. Attorney General was concerned with the meaning of certain words in the renewable clause of a lease and not with an exhaustive statutory definition. Quite apart from that distinction the words in the lease, namely "the fair and reasonable rental" are significantly different to Section 115(1). Under the lease one of the express criteria of the new rent was that it had to reasonable. Nor is there any reference in the lease to market rents fair, open or otherwise. The new rent under the renewal clause expressly had to reasonable. There is no such requirement under Section 115(1). The Privy Council was therefore concerned with very different words to those now being considered by this Tribunal. 51. We have already emphasised in Mass Transit Railway Corporation Ors. v. Hsu and Sons Ltd., that the Legislature has expressly recognized that the fair market rent under Section 115(1) may not, according to other criteria be reasonable, by providing for the calculation of a different rent under Section 119M(4). The latter and different rent is described in Section 119M as a "reasonable rent". The Privy Council decision is therefore interesting but not directly relevant. Indeed to the extent that, by way of analogy, it supports either party, it tends to support the respondents submissions. 52. For similar reasons the House of Lords decision of Mason & Or. v. Skilling is of little assistance. In that case the House of Lords was concerned with the very different statutory concept of a "fair rent" under Scotland's Rent Acts legislation. The law is well settled that the "fair rent" under that type of legislation is a controlled rent generally much lower than any open market rent. In assessing "fair rents" under that type of legislation the criteria are also quite different. Reasonableness is a consideration and within the limits imposed by that type of restrictive legislation, the rent has to be "fair" to both parties. 53. Hon Kong Land Co. Ltd v. Mason is more relevant to the extent that the definition of "fair market rent" in Section 49 employs the same words as are used in Section 115(1). However, in approaching that decision a number of important factors have to be taken into account. First, Section 49 is limited to Part II which contains both security of tenure and rent restriction provisions. Secondly, that decision was probably the first appeal under what was then the new Section 60 of the Ordinance and the respondent neither appeared nor was he represented. The difficulties this aspect of the appeal caused are referred to in the judgment as follows:
54. In considering the meaning of "fair market rent" under Section 49 the judgment continued:
55. That part of the judgment corresponds with the view that the fair market rent to be ascertained in terms of Section 115(1) is also that fixed by the open market. It is only the next paragraph of the judgment which may appear to be contradictory or cause difficulty:
56. If the reference to one-sided bargains only meant the exclusion from consideration of rents which are not typical of the market, we would not quibble with that statement. But it seems to go further. For the judgment considered that one of the criteria under Section 49 was that the fair market rent in terms of an objective test had to be reasonable. With respect that interpretation would only have been open, as earlier explained in relation to Section 115(l), if the word "reasonably" had been inserted before the word "let" instead of after the word "might". The word "reasonably" in both Section 49 and 115(1) is clearly used not as a criteria in respect of the amount of the rent but simply to the relationship the fair market rent fixed by the Tribunal must bear to the rent currently existing in the market. 57. Whether the fair market rent is objective or subjective is largely a matter of semantics. It is not objective to the extent that it is not fixed by criteria independent of the vagaries of the market. It is subjective to the extent that it must reflect these vagaries. On the other hand, as the fair market rent does not take into account comparable rents where special circumstances exist such as the parties not being at arms length or the special value of the property to a particular tenant, it might be considered to be objective. It might also be regarded as objective because it is largely fixed merely by ascertaining comparable market rents, without regard to the personal circumstances or other subjective factors relating to a particular tenant or landlord. In these circumstances it seems to us that our task is little advanced by using the terms "objective" or "subjective" to describe the fair market rent. 58. After considering all these factors we reaffirm that in applications where we have to fix a new rent under Section 119k the "fair market rent" thereunder is the fair rent existing in the market. The Tribunal can be assisted in determing that particular rent, by considering current marekt rents for comparable properties after excluding, for the reasons already given, those rents which are for special, personal, exceptional or other reasons, not typical of that market. 59. On this basis the reasonableness of the rent itself is not a statutory criteria. However, the fair market rent in he result may well also be reasonable according to the varying criteria put forward at this hearing. But that will merely be a fortunate coincidence. For reasonableness as to actual quantum cannot, because of the wording of Section 115(1), ever be a factor the Tribunal may take into account in fixing the fair market rent. 60. Against this background have we then the power to discount a market rent, so ascertained, by an amount equal to the effect of the package deal. To justify a discount for the package deal the applicants very strongly rely on the submission that, according to them, the rent under Section 115(2) must be fair to both landlord and tenant. However, their valuer agrees that the most difficult task in to quantify the discount. He was emphatic, however, that the corporate market does pay and is willing to pay a higher rent than the market would otherwise pay. He further stated that if the open market rents were higher because of the package deal factor, then an individual non-corporate tenant, seeking a property, would nevertheless have to pay whatever the open market rent was at a particular time. In other words in the actual market both the corporate and the non-corporate tenant pay the same rent. 61. We accept that the major participation of corporations in tenancies at this end of the market has no doubt been a factor in rents for Part IV properties reaching their present high levels. It is undisputed that probably the majority of Part IV tenants are corporate bodies. All Counsel seemed to agree that it was also largely only corporations who could afford the high rents paid for Part IV properties. 62. We are well satisfied, however, that if we were to discount the market rent because of the package deal factor, we would be applying criteria other than those prescribed by Section 115(1). Whether it would be "reasonable" to do so is, in terms of Section 115(1), irrelevant. Mary factors make up the market. No doubt the existence of corporations competing for Part IV tenancies as homes for their senior executives has long been a factor in causing Part IV rents to reach their present heights. But that is a fact of the market. The corporate presence can only be employed as a discounting factor, if in the case of a particular property, a corporation paid a price in excess of the general trend of the market. Such a rental would certainly be rejected as a sound comparable. However, it would not be rejected because the tenant was a corporation or because of the package deal factor. It would more simply be rejected on the quite distinct and different ground that it was not a normal market transaction. The special factors which produced that high rent would cause it to be eliminated as a comparable for the same reasons as, in the reverse situation, a low rent would be rejected as a satisfactory comparable, if that low rent arose from the parties not being at arms length. However, where corporate tenants are paying no more than the market rent the fact that they are corporate tenants is irrelevant. For all these reasons the package deal concept is rejected as a factor to be taken into account in fixing the fair market rent. 63. Tenant inertia was accepted as a factor of the market by all three valuers although a different value was placed on it by each valuer. The extent to which it may be relevant in this application depends on whether it was an element in the rent of any of the comparables. Where all the comparables are new lettings then by definition tenant inertia cannot be a relevant factor. In this application some of the comparables were new lettings and some were re-lettings. We will consider the affect, if any, of tenant inertia in respect of those comparables when we come to consider them. 64. As to the affect of Part IV of the Ordinance, Section 115(1) expressly directs that the effect of the Ordinance is to be disregarded in ascertaining the fair market rent. We repeat that compared with the effect of Part II we would expect the effect of Part IV to be very much less. For Part II expressly restricts rents. Part IV does not. However, we appreciate that Part IV's security of tenure protection may have an indirect effect upon Part IV rents as may the fact that parties in dispute over the new rent can now come to the Tribunal to have the dispute resolved. So there is now an alternative to such a dispute otherwise only being resolved by the greater bargaining power of one party over the other. In this particular application the applicants valuer, in the event, made no deduction for the effect of the ordinance so that is not a factor we will have to take into account in relation to his particular valuations. We will of course take it into account when we turn to determine the fair market rents in the light of the whole of the evidence: (ii) The determination of the fair market rents: 65. The determination of the fair market rents in this application was complicated by two factors. First, the applicants submitted that in determining the fair market rents we should take e into account what was described as "tenant inertia". Secondly, it was implicit in those submissions that the monthly rent would vary depending whether the duration of the new tenancy was 2 or 3 years. 66. All three valuers agreed that tenant inertia, which we have already noted, is the willingness of a sitting tenant to pay a higher rent then a near tenant to avoid the cost mad inconvenience of relocating, is a market factor. In considering comparable, they agreed it was necessary to ascertain whether a comparable letting was a new letting or a renewal of an existing tenancy. If the latter, then at least the applicants valuer was of the opinion, that a downward adjustment had to be made to that comparable rent to eliminate tenant inertia. 67. There was a dispute between the valuers as to the amount that might be allowed for tenant inertia. The applicants valuer quite properly referred to the comparables, we will have to consider in more detail later, to make his calculations. However, for this type of market analysis it is usually necessary to have a larger number of comparables than were available in this case to arrive at any reliable distinctive pattern. From the comparables this valuer compared Houses 22 and 24 and Houses 30 and 32. He concluded there was evidence that Strawberry Hill rents rose by about 16% for the 9 months period between the letting of Houses 22 and 24 and by 15.3% for the 8½ months between the letting of Houses 30 and 32. Those figures interpolated showed an annual increase of 21%. 68. From this base he went on to analyse the 5 year letting of House 21 allowing for a rise in rent of 21% per annum. This produced an equivalent first year rent of $42,688 per month for House 21. By the same process he concluded that the equivalent first year rent for House 22, which was renewed for 2 years, was $51,900 per month. He concluded that the difference between the $51,900 and $42,688 of say $9,200, represented tenant inertia. He 1st respondent's valuer arrived at a very much lower figure. In his view it normally takes about half of a month to move into new domestic premises. Tenant inertia would therefore be equal to one-half of a month's rent. He declined to make any allowance for redecoration, moving and other costs. In his view both a sitting and a new tenant would he faced with similar redecoration costs. The costs of moving would already be a factor affecting the negotiating position of a new tenant when he agreed to the rent. The valuer for the 2nd Respondent adopted a different approach. He considered the applicant's valuer s estimate of tenant inertia excessive. In his view a sitting tenant need only outbid a prospective tenant by "one bid" to retain possession. The amount of that bid would vary in the circumstances but it would clearly be very much less than the additional $9,200 per month cited in the applicants example. This seems a more realistic approach but we recognise the sitting tenant's difficulty that it will usually be necessary for him to make the initial bid. 69. However, the danger of theorising in this area is highlighted by two factors. First, it is desirable that any theory be tasted against the realities of the market. Secondly, even if tenant inertia does exist and can accurately be quantified, it would only be relevant if some of the comparables were re-lettings. If all the comparables are new lettings then no adjustment for tenant inertia need be made. 70. Turning to the position in the market, we are obliged to the applicant's valuer for referring us to a recent statement of the Commissioner of Rating and Valuation who in referring to the forthcoming increased jurisdiction under Part IV and the expected vacancies of 57,000 flats, with the release from Part II rent control on the 19th day of December 1982, of those domestic premises having a rateable value of $60,000 or ever, stated:
71. We infer that the Commissioner was suggesting that it might be in the landlord's interest to relet a tenancy to an satisfactory existing tenant, rather than risk obtaining a new tenant who might not be as satisfactory even though he is willing to pay a higher rent than she sitting tenant. We are unconcerned whether that is a consideration which should actuate landlords. What we are concerned with is what is happening at present in the market. The evidence we have does not support tenant inertia but is, if anything, to the contrary and suggests that the Commissioner's hopes are at least to some extent being realised. From the applicants summary of the landlords first asking prices, produced as Exhibit A2, no allowance is made by the landlords for tenant inertia. We remind ourselves too that in our recent decision Mass Transit Railway v. Hsu & Sons Ltd. L.T.Nos. 1, 2 & 3/82 that in the case of a comparable, a new letting was for $40,000 per month but just 4 months later two renewals for identical flats in the same block wore for only $33,500. In the case of the Strawberry Hill comparables 4 are new lettings and 2 are renewals.So even if tenant inertia were a factor this is not a case where all the comparables are renewals and we would be obliged to make a downward adjustment to each. Having considered all 6 comparables, we are satisfied that in arriving t the fair market rents of the applicants premises that on the facts of this particular application, no substantial allowance need be made for tenant inertia: 72. We will now consider whether any distinction or adjustment is required for rent under a 2 year tenancy compared with a 3 year tenancy. He accept that in a rising market longer durations will tend to attract higher rents. All values were agreed that the rents for domestic premises have been falling. The respondents valuers were of the that rents for Part 1V properties in recent months have, however, stabilised Paradoxically, the applicants valuer was of the opinion that because of the special characteristics of Strawberry Hill, it was an exception to recent general trends and that rents for houses within this complex have in fact risen in recent months: 73. On the assumption that rents have stabilised the 1st Respondent's valuer analysed inflation trends over the past 10 years which he calculated at an average of 9.67% per annum. This produced a factor of 1.0577 to be applied to a monthly rent for a 2 year tenancy to arrive at an equivalent monthly rent for a 3 tenancy. This led him to make a final adjustment of a little over 5%. However, while that is an interesting approach and not without merit, the limited amount of the adjustment is well within the limit of accuracy of any valuation not including such an adjustment. Inflation is also only ore factor affecting the property market and it is dangerous to base a valuation on only one factor without testing that factor against the market. 74. We recognise that in longer term tenancies or in comparing a long term tenancy with a short term tenancy, the duration of a tenancy will be a factor in determining the rent. We also recognise that in those circumstances inflation would be one of the factors to be taken into account. In this application, however, we are considering 2 and 3 year tenancies which are relatively short term tenancies with little relative difference in duration. We have had evidence that market rates for 1 year tenancies are the same as for 2 year tenancies. There is also evidence that in many oases the rent charged for identical premises is the same the duration of the tenancy is 2 or 3 years. In the light of these factors, the present uncertainty of the market and the small deduction proposed, reinforces our view, that we should not make any allowance for the difference between 2 and 3 year tenancies. We will therefore calculate fair market rents for the purpose of this application irrespective of whether the duration of the new tenancy is 2 or 3 years. 75. It remains to fix the fair market rents of the 11 houses whose new rents are in dispute. We have already observed that Strawberry Hill is divided into Phase I and Phase II. Phase I is the highest part of the development, is more secluded has its own more private swimming pool and enjoys the best views. Houses 7 and 9 are in Phase I. They and the other 5 townhouses in Phase I eash have a floor area of 3,588 square feet and are larger than those in Phase II. All valuers agreed these 7 houses are the most valuable in the estate. 76. Phase II comprises 39 houses of which some are described as Type A and others as Type B/C. The applicant's valuer made no distinction between Types A and Types B/C for valuation purposes His view being that any differences which created advantages or disadvantages balanced each other out. Both the respondents valuers considered in considerable detail the relativity of rent values for Phase II houses to each other as well as to the celparatles They were emphatic that differences within Strawberry Hill of location, view, relative size, privacy, and possession of a private garden, created differences in relative rent values. 77. In our view there are substantial physical differences. Type A have 3 bedrooms and small gardens opening off the main living rooms. Type B/C are not designed to have direct access to private gardens. However, two Type B/C houses have private gardens. Access from those houses to the gardens has been obtained by constructing spiral staircases from the first floor living rooms down to their respective gardens. On the other hand, the living areas of Type B/C are larger than Type A. In some Type B/C houses the very large main bedroom has been reduced to provide a third bedroom. The impression we gained from our inspection of the premises was that Type A were particularly suitable for family use and occupation while in Type B/C the emphasis was given to large areas for formal entertaining. Undoubtedly Type B/C were more suitable than Type A for the requirements of company executives who entertain regularly. We note that although Type B/C were designed with only 2 bedrooms they comprise 3,240 square feet while the 3 bedroomed Type A comprise 2,920 square feet. This is an accurate indication of the very large entertaining areas included in Type. B/C. 78. The applicants produced a number of recent newspaper advertisements indicating the asking rents for a number of similar properties on The Peak and elsewhere. This evidence was helpful in giving an overall picture of the current market but it was generally agreed that Strawberry Hill is a rather unique development. For example, it was undisputed that Houses on becoming vacant were re-let without having to be advertised. There seemed to be a waiting list of persons wanting to live in Strawberry Hill. The respondents valuers were of the view that Strawberry Hill had been little affected by recent downturns in the domestic property market. Indeed, the applicant tenants valuer even went so far as to state that contrary to trends elsewhere, rents within Strawberry Hill, far from falling, were increasing. 79. All three valuers relied on up to 6 comparables within Strawberry Hill while the 1st respondent's valuer also referred us to a letting at 7 Pollocks Path, The Peak. However, he included the latter letting only as a guide and agreed that the best evidence was from within Strawberry Hill itself. The Strawberry Hill comparables cited to us were:
80. When considering comparables it is desirable to give greater weight to properties of the same type as the suit premises. Comparisions should where possible be made between properties which exhibit the least differences in use, size, physical characteristics, date when new rents were agreed and such other relevant factors as help determine value. The more adjustments required to relate the comparable to the suit premises, the greater the liability to error. 81. The applicants valuer did not distinguish in his valuations of Phase II Houses between Types A and B/C. While he pointed out that Type A Houses were smaller than Type B/C, they had 3 bedrooms and their own gardens which made them more attractive to families. We did notice that where Type B/C Houses had been modified to produce a third bedroom the modifications were inexpensive but the resulting layout was inferior to the smaller Type A Houses. The applicants valuer went on to state that the different and generally attractive views to be obtained from the Houses were unimportant. In his opinion prospective tenants placed little importance on the view from an individual house. The position of Strawberry Hill on The Peak and its overall garden setting were more important. It was sufficient for the houses to be within Strawberry Hill and it was of little relevance to compare the location of each house within the estate. 82. Similarly the applicants valuer made no allowance for those Houses with gardens. The private gardens were in his opinion, too small to be of any significant added value. He also criticised aspects of management, security arrangements and the apparent under utilisation of the swimming pools and recreation area. However, these latter criticisms, if valid, would equally apply to the 6 comparables as all are within Strawberry Hill. The same position arises in respect of his criticism of the open-plan layout of the Houses limiting privacy, as well as producing inefficient and-expensive central air-conditioning and heating. These criticisms are not relevant when relating the comparables for they would suffer from the same alleged disadvantages. 83. Our attention was also drawn to dampness associated with the Type B/C designs built into the hillside. Generally we must assume that where there is defective or deferred maintenance for which the landlord is contractually responsible, the tenant will enforce his contractual rights and normally we will not make any allowance for noncompliance with contractual rights whether in favour of landlord or tenant. However, dampness of the kind referred to in evidence and seen by us on our inspection is unfortunately difficult, if not in practical terms impossible, to overcome. We accept the applicants valuer' s evidence that dampness of this kind, whatever the contractual position, is a detrimental factor we should take into account in the tenant's favour. House 31 certainly suffers from such a dampness problem. However, because it is the end unit of that particular block it enjoys a most pleasant outlook over the greenery on the hillside-and-has more privacy than its immediate neighbours 84. The applicants valuer largely rejected any application of an analysed unit rate to the area of the suit premises in order to arrive at his rentall value. We agree that where as here, size of each House is adequate convenience and efficiency of design are more important. 85. Although the 2nd respondent' s valuer basically shares this view, he does analyse to show the rate per square metre paid in relation to each of his comparables. This enables him to determine if any adjustment for size is required when comparing House 15, which is Type A, with Type B/C comparables which are larger. For these he made minor adjustments but usually coupled them with other adjustments for House 15 having a garden, differences in view and location within the estate. His series of base figures gave a pattern within what he termed an upper limit and lower limit of value for House 15. He rejected as suspect the rent for House 24, which was Comparable 2, and said he took very little notice of that paid for House 21 being Comparable 5 but he did arbitrarily reduce it by 15% to allow for the 5 year duration. He also rejected the rent for House 32 being Comparable 4 as being too low and out of line. 86. The 2nd respondent's valuer, after allowing for the tenant paying the management fees, concluded that the rent for House 15 would be between his base values of $54,350 and $58,000 per month. The former rental was analysed from Comparable 5 which required adjustment as that was a 5 year letting. ln his Report he was of the opinion that the fair market rent for House 15 was $56,000 per month. In arriving at that rent he placed considerable weight on Comparable 3 and also made an adjustment for the falling market. We find little to fault in this approach except that we do note that House 15 is a Type A House and Comparable 1, House 22, could be considered the better comparable as it is also a Type A House being let in July 1982 for $58,000. On the other hand in spite of evidence of tenant inertia. in Strawberry Hill being minimal, perhaps the valuer considered that as House 22 was a re-letting to an existing tenant, House 30 had the advantage of being a new letting. In evidence it appeared that this valuer had not previously taken into account that the landlord of House 15 was paying the management fees although contractually it had imposed that responsibility on the tenant. If the practical, rather than the legal position, was relevant this valuer stated he would revise his valuation upwards towards $60,000 per month. We have already held that the legal obligation to pay management fees for House 15 will remain on the tenant. The fair market rent must be determined on that basis. 87. The 2nd Respondent's valuation at $56,000 per month for House 15 was on the basis that it was unfurnished. However, House 15 alone among the suit premises, was let furnished. This valuer added a further $3000 per month for the furniture. The furniture was substantial and was itemised in the schedule to the prior tenancy agreement which was produced in evidence as Exhibit A4 (a). It was also inspected by us when we viewed the premises. The applicants valuer did not merely disagree with the amount of the allowance for furniture. He was emphatic that at this top end of the domestic market furnished premises would have no added value. There is merit in this view. The furniture let with House 15 although of good quality and condition is already 5 years old. It is unlikely that an incoming tenant would be willing to pay more than a nominal amount for such furniture. The majority of new tenants would wish to decorate and furnish the House to their own taste. The convenience of having the furniture will certainly tend to place the House more towards the top end of the range for such houses but in our opinion, will not result in a substantially higher rent. 88. The 1st respondent's valuer gave his evidence last and applied the comparables in a more technical fashion, deciding which factors influenced the rent paid and making adjustments for other quite minor differences between the suit promises and the comparables. He preferred in the case of Houses 9, 16 and 34, which were the subject of separate reports, to adjust the comparables in relation to the suit premises. For the other premises, on which he was instructed later, he adjusted the comparables to determine the value of a typical house in Strawberry Hill having an average view but no garden. For this exercise he cited House 30 as his best comparable and made no distinction in his assessment between the various types of design. 89. This exercise lad him to the conclusion that the rental value of a typical house was about $200 per square metre calculated on the gross floor area. He adjusted the comparables under the headings of location, orientation and view, garden, and the time difference between the comparable and the valuation date. He also made an adjustment based on half a months rent to all the comparables which were renewals for tenant inertia. Finally he adjusted the value of the typical house to allow for the differences of each suit premises to that house. Here his adjustments were much the same, but location was omitted end only in the case of House 7 was an additional minor adjustment of 1% made for dampness. The 1st respondent' s valuer on this basis, for 2 year tenancies, arrived at the following monthly rents with his rate per square metre being given in brackets in each case House: 7 - $70,000 ($212); House 9 - $72,000 ($218); House 16 - $56,000 ($206); House 18 - $56,000 ($208); House 26 -$57,500 ($212); House 31 - $58,500 ($194); House 34 - $59,000 ($196); House 35 -$60,500 ($200); House 46 - $57,500 ($190); House 48 - $57,500 ($190). Although we consider that the 1st Respondent' s valuer may have restricted himself in arriving at his final assessments and his double application may have lead to an accumulation of errors, we have looked critically at his approach. 90. If we follow this approach without distinguishing between Type A and Type B/C House designs the cited comparables support a rate in the region of $200 per square metre for a typical Type A House inclusive of garden. We make no distinction for minor differences in area between gardens. On the same basis for Type B/C Houses we arrive at a rate in the region of $190 per square metre. On the whole of the evidence we favour the approach. adopted by the applicants and 2nd respondents valuers which is to look at each of the houses in relation to each other, rather than make small percentage adjustments for only some of the intangibles which affect the market. We also are of the opinion that the difference between the two designs in Phase II is sufficient to produce different final rentals. As well as the evidence of the other two valuers, the differences shown in the list of the landlords asking rents in Exhibit A2 - support this conclusion. 91. We also accept the view expressed by the two valuers for the respondents that, for Strawberry Hill at least, the market has tended to stabilise in recent months. This is to be reasonably expected, as in a rising market the affects are cumulative and accentuate the trend but in a falling market, particularly for more valuable properties, a measure of stabilization usually results. 92. In determining the fair market rents there are two houses for which individual adjustments not relevant to the other houses have to be made. For House 15 we make an upward allowance for the fact that it is furnished. Conversely for the same House, we are obliged to make a downward allowance for the fact that exceptionally the liability for management fees is imposed on the applicant tenant. In the case of this particular House we are of the view that the appropriate twofold contrary adjustments are of similar amounts and therefore cancel each other out. In the case of House 31, which was the property most seriously affected by dampness, we propose to reduce the rent by $1000 per month compared with the rent we would otherwise fix for Type B/C Houses. 93. After taking all these factors into account we determine the fair market rents of the suit premises as follows:-
94. DATED this 30th day of October, 1982.
Representation: Mr. A. Bready, by leave, of Coward Chance for 1st Applicant Mr. Warren Chan and Mr. Philip Lee instructed by Wilkinson & Grist for 2nd Applicant Mr. H.R.A. Anderson of Herbert Smith & Co. for 3rd Applicant Mr. N.P. Pearson of Baker & McKenzie for 4th Applicant Mr. R. Tong instructed by Johnson, Stokes & Master for 5th, 7th 8th, 9th, 10th, 11th, 12th, 13th and 14th Applicants Mrs. M.J. Fok of Slaughter & May for 6th Applicant Mr. E.W.D. Radcliffe of Deacons for 1st Respondent Mr. Adrian Huggins instructed by Stephenson, Harwood & Lo for 2nd Respondent. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||