Sentry Holdings Ltd v. Cali Enterprises Ltd

LDLA000011A/1983

Landlord and Tenant Part IV - prevailing market rent - best evidence of comparable rents - affect on rent for bulk letting, tenant inertia, provision of early termination ("break") clause - additional rental value of garden flat - Section 115 Landlord and Tenant (Consolidation) Ordinance, Cap. 7.

IN THE LANDS TRIBUNAL OF HONG KONG

Application No. L.T. 11 of 1983

Application No. L.T. 43 of 1983

Coram: TRIBUNAL: Sir Denys Roberts, President, M.W. Phillips, Esq., Member

Date: 16th day of August, 1983

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JUDGMENT

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1. These two applications, which both relate to premises in Manhattan Tower, 63 Repulse Bay Road, were consolidated with the consent of the parties.

2. In application 11/83, the applicant is the tenant of ground floor flat G-B in Manhattan Tower. This tenant entered a lease for a term of two years from 4th August 1980 at a rent of $13,000, which has since been increased $20,449, exclusive of rates and management charges.

3. In application 43/83, the tenant occupies flats A10, B4 and B6 to B19 inclusive at a total rent of $158,000 (or $9,875 per flat) exclusive of rates but inclusive of management charges, for a term of 2 years from 4th August, 1978.  The rent has since been increased to a total of $251,331 per month (or $15,720 per fiat).

The premises

4. The premises which are the subject of these applications are all in a modern twenty-storey block of flats, called Manhattan Tower at 63 Repulse Bay Road.  There is a communal swimming pool and each of the flats within these applications is let together with two covered carparks.

5. The block was completed in 1978 to a  good standard and seems to have been generally well maintained by the respondent, although diffi-culties have been experienced with rain seepage and damp in some of the flats, probably as a result of a severe typhoon in 1979.

6. However, it was conceded by the applicant that the state of repair of the building is not in issue, and should not influence our assessment of the prevailing market rent.

7. Each of the flats concerned is of the same size, namely 190.5 m² net area, with the exception of the garden flat (G-B).  In the latter case, because there is no balcony, the net area is 183.95 m², with an additional 271.5 m² of patio and garden.  The layout of all flats is the same, and all have the same view over Deep Water Bay and Middle Island.

8. Thus the rent for all flats should be much the same, save that adjustment will have to be made in the case of flat GB for the presence of a patio and a garden instead of a balcony.

Other lettings in Manhattan Tower

9. In the valuer's report, put in evidence by the second applicant, there are references to two recent lettings in this block -

10. Since his report was prepared, agreements have been reached (in the past week) between the respondent and other tenants of premises in the same block in five cases, all of which were renewals of existing tenancies.

(a)    Flat 12A. A two year term from 1st July, 1983 at a rent of $29,000 per month, the tenant to pay rates and a fixed maintenance charge of $1,500 per month.   There was provision for termination by the tenant on 3 months' notice after 12 months (a "break clause").

(b)    Flat 9A. A two year term from 1st July, 1983 at a rent of $27,500 per month, on the same other terms as that of 12A.

(c)    Flat 11A. A two month term from 1st July to 31st August, 1983 at a rent of $27,500 per month exclusive, the tenant to pay rates and a fixed maintenance charge of $1,500 per month.

(d)    Flat 14A. A two year term from 1st July, 1983, at a rent of $28,000 per month, on the same other terms as Flat 12A.

(e)    Flat 16A. A two year term from 1st July, 1983 at a rent, exclusive of rates and management charges, of $29,500 per month until 31st October, 1983 and thereafter at a rent of $28,500 per month.  The tenant may end the lease on or before 31st October by giving 1 month's notice.  Thereafter there is no further option available to terminate the tenancy; otherwise on the same terms as Flat 12A.

Assessment of rent

11. Where recent comparable lettings in the same property are available in sufficient numbers to enable a reasonable assessment to be made of the prevailing market rent, there is no need to rely on com-parisons with premises in other buildings, save to the extent necessary to show that rents in the same property do not diverge sharply from the general market level.

12. Save for this limited purpose, outside comparison would be necessary in such circumstances only if it is suggested that there are special factors which have influenced rents in the subject premises - e.g.  that another landlord in the same block let well below the market level because of some relationship with tenants, or if a large number of vacancies suggests that the landlord has set his price too high.

13. No such special circumstances are suggested here.   There are seven recent lettings in Manhattan Tower of other flats which are identical in size and design with those in the second application, and the level of rents for the newer nearby premises at Pine Crest and Somerset confirm that these lettings are in accordance with the general level of the market.

14. The rents agreed in the seven cases range from $30,000 per month (Flats 8A and 15A) to $27,2500 per month (Flats 9A and 11A) exclusive - i.e. the tenant paying rates and maintenance charges.

15. The two valuers who gave evidence agreed that there had been a decline in market rents since April.  One thought about 3%  though he would not have opposed an assessment of 5%, which was the other valuer's estimate.  No analysis was given to support either of these estimates.

16. If a decline of 5% is applied, this reduces the current appropriate rent of Flat 15A to $28,500.

17. The respondent's valuer argued that, having regard to all these rentals, a reasonable rent for each flat for a two year term would be about $29,000 per month exclusive. This is a reduction from the estimate in his report of $30,375 for each flat.

18. The valuer called by the first applicant put forward an estimate of $26,900 per month, inclusive of management charges (or the equivalent of $25,400 if the management charges of $1,500 were to be paid by the tenant).

19. In respect of rental evidence, he based his report primarily on a comparison of the subject premises with the nearby premises at Pine Crest and Somerset.  Only the rents for Flats 8A and 15A, Manhattan Tower, were known to him when he Prepared his report.   He did not consider that the evidence of the five additional lettings listed above required him to adjust his valuation.

20. There is, in our view, no evidence to support a figure of $25,400 exclusive of maintenance charges (or $26,900 with the landlord being responsible for maintenance). The various lettings lead us to the conclusion that the prevailing market rent per month is $28,500 per flat, if the tenant pays rates and $1,500 per month in maintenance charges.

Tenant inertia

21. It was suggested that there should be some deduction for what has been called tenant inertia - i.e. the willingness of a sitting tenant to pay a higher rent than a new tenant, to avoid the disruption and expense of moving.

22. We note, however in this instance, that the rents for the new tenancies are $30,000 for Flat 8A and, for Flat 15A, with a reduction for a decline in the market, $28,500. Compared with the rents obtained for most of the five reserved tenancies, these figures suggest, if anything, a degree of "landlord inertia" - i.e. the willingness of a landlord, particularly in a declining market, to accept a somewhat lower rent to keep a reliable tenant.

23. We therefore, do not consider that any deduction for tenant inertia should be made in this case.

Bulk discount

24. It was argued for the second applicant that there should be a "bulk discount" - i.e. that there should be a reduction in rent because of the convenience to the landlord of being able to let a large number of his flats together, at a time when there are many flats of this kind empty.

25. The respondent's valuer put in evidence a list of bulk lettings, in which the discount varied between 5% and 34%. The nearest comparable letting was in June 1983, of 18 flats, where there was a discount of 15%. It is noted that in the latter letting the tenant (the Colonial Treasurer) was to pay rates and maintenance charges.

26. We think that the second applicant has sufficiently established that such discounts are given in other premises and should be in this.

27. The figure of 15% seems reasonable and we adopt it.

Maintenance Charges

28. The second applicant wishes, for his internal accounting reasons, to pay an inclusive rent. The respondent has no objection, so long as the inclusive rent contains a figure of $1,500 per month for maintenance charges.

29. The charges for maintenance in nearby buildings suggest that a figure of $1,500 per month is high, but not unreasonably so. Other tenants have agreed to pay this sum and it is noted that, in the cases referred to us, the sum is fixed for the duration of these tenancies.

30. We therefore add to the exclusive rent which we think applicable a figure of $1,500 per month in the case of the second applicant.

31. The $1,500 is intended to meet the costs incurred in maintenance by the landlord and is usually derived by apportioning the total estimated cost equally between the number of flats on a monthly basis. We do not think that the bulk discount should apply to these charges, as the cost of maintenance of each flat to the landlord is the same, whether he has the same tenant for several of them or not.

Break Clause

32. In six of the seven lettings in the building there was a break clause. The second applicant argued that this was of value to a tenant, particularly in a falling market, because he could get out sooner if he wishes to rent another comparable property more cheaply.

33. The second applicant does not want such a clause, but argues that the tenants in the six comparables have paid a higher rent because such a clause appears in the lease.

34. We are persuaded that this is so, though it is largely a matter of speculation as to what this advantage to the tenant represents in money terms. Perhaps some indication can be found in the rent for Flat 16A, in which the tenant pays $29,500 while he has an option to end the tenancy and $28,500 thereafter.

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

Garden Flat

36. The respondent conceded that there should be, as compared with the appropriate rent for the flats in the second application, deductions in the case of the ground floor flat by reason of its smaller net area and of its location on the ground floor.

37. This flat has a net area of 183.95 m² with no balcony as compared with that of 190.45. m² including the balcony in the other cases. We have inspected some of the flats and noted that the balconies are very narrow. Notwithstanding the concession of the respondent, we will not reduce the rent of G-B merely because it has no balcony since a small area of the ground floor patio compensates for the lack of balcony.

38. Each of the flats in Manhattan Tower enjoys the same view. Save in the case of a penthouse flat, or perhaps some of the lower stories if the view is obviously inferior, we are reluctant to make deductions or additions to rents by reason only of the height of the floor on which a flat is to be found, particularly in the absence of any evidence that such differences in rent are common.

Addition for garden

39. The garden and patio area is about 271 m², partly at the back, though mainly at the front where there is a lawn area.

40. This flat was let in 1978 at $13,000 compared with a rent of $9,000 for the flat above it. This appears to represent an increase of 44% for the garden. .

41. We were told that a garden flat at Somerset, 67 Repulse Bay Road, was let in January 1983 for $54,000 per month, as compared with a flat some floors above it of the same area let at about the same time for $35,000 per month. This represents an increase of 54% for the garden flat.

42. The evidence given in other cases is to the effect that this is far too large a difference. Generally, at this level of the market, there seems to be more like a $2,000 to $3,000 increase for a garden. This represents somewhere in the region of 10%   Indeed, the respondent's valuer, very fairly, did not feel that, in spite of the examples he found, he could suggest more than a 30% increase.

43. The first applicant did not assist its case by calling no evidence to establish comparable figures. However, we feel that we ought to give effect to the knowledge acquired by the Tribunal in other applications.

44. In Nordic Asia Limited and Others v. Strawberry Hill Development Limited and Another L.T. 32-38, 41-45 and 52-54 of 1982, there was evidence of a house renting for $62,000 included an addition of $2,000 for a small garden. At Headland Road, in Mass Transit Railway Corporation and Others v. Hsu and Sons Limited L.T. 1, 2 & 3 of 1982, the Tribunal awarded $3,000 additional rent for gardens in the case of flats which would otherwise have let at $35,000 per month, which is the same basic rent for the upper floor flats in Somerset.

45. The latter award was based on rental evidence of garden flats at an Stanley and verified by a comparison of rents of similar garden flats at Headland Road.

46. Also, evidence in the Headland Road case supported the opinion that the relative added value of a garden has decreased over the years, probably due to the growth of townhouse developments, providing an increasing supply of houses or flats with gardens.

47. We consider the examples given by the respondent's valuer to be out of date in one instance and out of line in the other. While we have little on which to base an assessment, we cannot bring ourselves to believe that the additional value for a garden flat in Repulse Bay Road should be much higher than in Headland Road or Stanley. Therefore, we propose to award an additional $3,500 per month for the patio and garden of flat G-B.

Conclusion

First application L.T. 11/83_ Flat G-B

48. There shall be a tenancy for 2 years from 1st July 1983, with the tenant paying the rates and a fixed maintenance charge of $1,500 per month.

49. There will be a break clause, entitling the tenant to end the tenancy on giving 3 months' notice, at any time after the expiry of the first twelve months of the tenancy.

50. Based on our earlier determinations of $28,500 for the flat, plus $3,500 for the patio and garden, we determine the prevailing market rent at $32,000 per month exclusive.

Second application L.T. 43/83 Flats A10, B4 and B6 to B19

51. There shall be a tenancy of the sixteen flats for a term of 2 years from 1st July, 1983 at a monthly rent of $398,000 (or $24,875 per flat) exclusive of rates but inclusive of maintenance charges.

52. There is no break clause.

53. The prevailing market rent is calculated as follows:

DATED this 16th day of August, 1983.

Representation:

Miss E. Chow of D.W. Ling & Co. for the applicant in L.T. 11/83.

Mr. J.P. Burdett, Crown Counsel, for the applicant in L.T. 43/83.

Mr. D. Fung instructed by Sit, Fung, Kwong & Co. for the respondent.