Cathay Pacific Airways Ltd v. Wharf Properties Ltd

LDLA000045/1985

Landlord and tenant - Part IV - grant of new -tenancies - determination of prevailing market rents on the same basis as other lettings in the sane development preferred - no deduction required for detracting factors also common to the comparables - Sections 115 and 119K Landlord and Tenant (Consolidation) Ordinance Cap. 7

IN THE LANDS TRIBUNAL OF HONG KONG

Application Nos. L.T. 45, 46, 47, 48, 49 50, and 51 of 1985

Coram: TRIBUNAL: M.W. Phillips, Esq., Member

Date: 15th day of May 1985.

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JUDGMENT

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1. These seven applications for new tenancies under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 relate to domestic premises in the Harbour City Development, Canton Road, Kowloon which is owned and managed by the respondents Wharf Properties Limited. The applicant Cathay Pacific Airways Limited is the tenant of the seven separate Harbour City flats which are all located in the adjoining blocks of Craigie Court and Barnton Court. Harbour City was completed in several stages between 1981 and 1984 and now comprises a large shopping complex together with five apartment blocks, four office blocks and two hotels. The shopping complex is below the podium level and includes restaurants and cinemas. Car parking for the occupants is provided in the basement. This large scale development adjoins and is connected to the Ocean Centre which is a similar commercial development and which in turn adjoins and connects with the Hong Kong Hotel and the Ocean Terminal. Barnton Court is the apartment block adjoining Ocean Centre. Both Barnton Court and Craigie Court were completed in 1981 and were part of the first phase of the development. All the apartment blocks face the harbour to the West and are similar in appearance. Each semi circular block is 15 storeys high with 6 flats on each floor. There are two types of units, one having 3 bedrooms and the other 2 bedrooms. All the flats in Barnton Court arc the three bedroom type while the middle two units (apartments C and D) of Craigie Court are the smaller 2 bedroom units.

2. All the tenancies expired on 31st January 1985, with the exception of the tenancy for Apartment 8D Barnton Court which expired on 28th February 1985. Therefore the new tenancies, the granting of which is not opposed by the respondent, will commence on 1st February 1985 for all but 8D Barnton Court which will commence on 1st March 1985. It has been agreed by the parties that the terms and conditions of the former tenancies are to be retained except that the new tenancies will be for 2 years rather than the previous duration of 3 years. Only the rent for the new tenancies is disputed. The Tribunal then has only to determine the prevailing market rent for each of the premises as at the date the new tenancies are to commence.

3. The rents under the tenancy agreements are inclusive of management and airconditioning and water heating charges. Because there is provision under Clause 1(b) of Section II of the tenancy agreement to increase these charges should the cost of airconditioning and water heating rise by 5% or more during the duration of the tenancy, it was submitted that the Tribunal should determine the rents exclusive of these charges. At present these charges, which are based on the area of the flats, are fixed at $3 per square foot. $2.50 per square foot is for the airconditioning and water heating and $0.50 per square foot is for management. The comparables cited by each of the valuers called by the parties, are all for rents of apartments within Harbour City. These apartments are not only let inclusive of these charges, but are also let so as to include the provision of electrical appliances such as refrigerators and dishwashers. It would appear to me to be preferable to follow the basis of the lettings which are inclusive of a number of amenities as well as the associated charges, and determine the new rents on the same basis as the flats are offered to prospective tenants.

4. The applicant called a number of the actual occupiers of each of the suit premises to give evidence as to the general state of finish and the maintenance problems associated with these flats. What emerges is that Harbour City was apparently handed over to the owners and offered for rent before many of the defects regarding finish were made good by the contractors. It is understood from the evidence of some of the occupiers that this matter is associated with continuing litigation. However this is not something on which this Tribunal has to speculate.

5. The occupants also drew attention to the need to regularly seek the management's agreement to rectify these many defects and they drew attention to the associated inconvenience in having to arrange for workmen to enter the flats to effect repairs. Here it was agreed that the management was not unreasonable in its efforts to rectify those items for which it considered it was responsible. The problem follows from the initial state of the apartments in this phase of the development and was common to all. They also criticised the security arrangements as well as the layout and design of the common areas and the various entrances.

6. In Union Carbide Asia Limited v. The Hong Kong Land Company Limited (1982) H.K.D.C.L.R. 75 this Tribunal held that the owner can be expected to have to make good any defects before agreeing to rent to a prospective tenant. In this case the tiled wall of one bathroom was in need of repair and it was debated whether it was the responsibility of the tenant or the landlord to effect repairs. The obligation depended on the interpretation of the tenancy agreement and in either event the Tribunal held that the valuation would not be affected. However in Isacco Aronne Neumann v. Gain Field Limited, Lim Chin Beng and Lim Chin Joo L.T. 105 of 1983 this Tribunal dealt with another flat in the same development as that of the Union Carbide case. Here it was noted that major renovations would be necessary to the kitchen in particular if a landlord were to obtain the rent the principal rooms of the premises might otherwise be expected to command. Structural work was also required elsewhere in these premises. As the flats used as comparables were not similarly affected a deduction was made in this case and the rent fixed on the basis that the flat was offered for rent in the state evident on the Tribunal's inspection. Here as in that case I am obliged to regard the premises, with the exception of the need for minor repairs and decoration, as being offered for rent in basically the state noted on my inspection.

7. However if it were only the suit premises which were affected by particular defects and the comparables were not then some deduction would be necessary. It would be aiming at an unrealistic degree of accuracy to attempt to put a price on the inconvenience of having to wait some minutes for hot water with respect to one flat when another, less affected in that aspect, alternatively suffered from an electrical conduit which had been corroded or a drainage problem created through drain holes on the balcony being clogged with concrete. Gradually these defects wee being corrected by the management and the inconvenience in having to arrange for repairs was becoming less frequent. Nevertheless it is still something every tenant in this phase of the development has to live with.

8. It is not that these many defects are to be ignored but rather that it is unnecessary to consider each separately when the comparables are similarly affected and the defects are reflected in the rents obtained for these comparable flats.

9. The applicant called. Mr. Albert Tong, a chartered surveyor with the firm Richard Ellis. He considered that the prevailing market rents for each of the apartments should be as follows:

These rents are exclusive of the airconditioning, water heating and management charges. For convenience the valuer for the respondent, Mr. Francis Choi of the firm Jones Lang Wootton listed his valuations exclusive of the charges although in his original report he included the charges in the rents proposed by him. Mr. Choi's prevailing market rent assessments on the "not rent" basis were as follows:-

In his original list, the prevailing market rent assessments, inclusive of the charges and the management fees, were:-

Both the valuers are within a range of only 10% to 15% of each other. This is very close to what might be considered a reasonable margin of error in any valuation exercise.

10. Harbour City is a unique development without any similar development with which it might be compared save perhaps for the New World Development which is also in Tsim Sha Tsui. New World is also a large complex on the harbour comprising 2 hotels, a shopping complex together with residential apartments. However the apartments in New World are considerably smaller and the outlook is different being towards the South rather than the West as is the case with Harbour City. However each of the valuers chose not to attempt any comparison with the apartments in New World.

11. Vacancies in Harbour City are few indicating that the rents obtained are reasonably indicative of the market for these flats together with both the positive and negative factors which were listed by Mr. Tong in his report. He regarded that on the positive side Harbour City was conveniently located; it enjoyed full harbour views and the accommodation was commensurate with Hong Kong luxury residential standards.

12. On the negative side Mr. Tong reiterated the observations of the various occupiers and drew attention to inconvenience associated with the various entrances which required the use of escalators to reach the lifts and the sharing of the vehicular access with goods vehicles and cars using the office or public car parks. Just as the occupant witnesses had done, he listed these and other factors such as the tendency for the flats to be dark even during the day as well as the numerous defects associated with the finish. Mr. Tong made no attempt to differentiate between each of the suit premises on the state of repair.

13. More significant perhaps was the evidence of the use of the piers immediately on the harbour frontage of Harbour City. The pier to the South between Barnton Court and Craigie Court is used for the loading and unloading of lighters. This work creates a high noise level during the day and affects the flats on the lower floors more than the flats higher in the blocks. Of the two blocks, it would appear that Barnton Court is slightly more affected than Craigie Court. It is also closer to the Ocean Terminal. The second pier which is between Craigie Court and Dean Court, the block adjoining to the North, is used as a public car park. Craigie Court is perhaps more affected by the resultant traffic from this facility than Barnton Court but this does not appear to generate any excessive noise or create any continuous traffic flow which would have any appreciable affect on value. Having inspected the premises I consider Craigie Court to be marginally superior to Barnton Court due mainly to the noise generated by the cargo handling facilities on the pier and the Ocean Terminal.

14. Both the valuers agreed that the higher floors were more attractive and should command higher rents than the lower floors. This was evident in the listed comparable lettings.

15. Mr. Tong drew attention to the fact that with reference to his comparables, the new leases negotiated by the sitting tenants were generally at a level of about 10% below the lettings to incoming tenants. Usually lettings to new tenants are the best evidence of value being more in keeping with the definition of "prevailing market rent" in Section 115 of the Ordinance. The rent at which the premises "might reasonably be expected to let" assumes the situation of a flat being offered for rent by a hypothetical landlord to a hypothetical incoming tenant with both willing to reach an agreement while being fully cognisant of any and all the factors which may influence the figure at which they might be expected to agree. In this instance I cannot easily dismiss the renewed tenancies for here, although there may be something of the element of value associated with a sitting tenant's reluctance to relocate himself, there is also the almost full knowledge of the unusual problems associated with the original state of finish of this phase of the development.

16. Mr. Choi was critical of Mr. Tong's observation and included amore recent list of comparables which did not support the theory that the renewals were generally 10% below the new lettings. He thought the reason for the difference shown in Mr. Tong's list was due to the time at which the rents were actually negotiated. Mr. Tong's comparables were rents which had been agreed some Months earlier irrespective of the dates on which the tenancies were to commence. Mr. Choi believed the market was improving and his supplementary list of comparables supported this.

17. Mr. Tong's observation is interesting. The full knowledge of the sitting tenants should provide better evidence of value. But Mr. Choi's list of more recent lettings is to be preferred with regard to the relevant dates and unfortunately for Mr. Tong's theory Mr. Choi's comparables showed little difference in the level of the new tenancies compared with the renewals.

18. The valuations submitted by Mr. Tong and Mr. Choi are within an acceptable margin of each other and I am quite unable to say that either list of assessments is an incorrect reflection of the market. However I have had the benefit of hearing the arguments of both aides and I have also had the opportunity to inspect each of the suit premises and the common areas of the Harbour City development. I also inspected premises which were vacant and in a state in which they might be expected to be offered to a prospective tenant. Also, I have concluded that Craigie Court is marginally superior to Barnton Court. I therefore consider that as at the relevant dates, and on the net basis adopted b by each of the valuers the following Unit rates should apply:

Another $3.00 per square foot has to be added to arrive at the rents inclusive of the airconditioning and water heating charges and the management fee.

19. As I stated previously, the prevailing market rents for the suit premises should be fixed on the same basis as the other rents in the Harbour City Development. Accordingly the following awards are made on the basis that the rents are inclusive of airconditioning and water heating charges and management fees but exclusive of rates. As agreed, the tenancies are to be for a duration of 2 years from the dates stated hereunder and be on the same terms and conditions as the previous tenancies save for any amendments to clauses which may be based on the amount of rent.

20. Taking account of all these and any other relevant factors I determine the prevailing market rents of the suit premises as follows:-

21. There will be no order as to costs.

Dated this 15th day of May 1985.

Representation:

Miss Audrey Eu instructed by Johnson, Stokes and Master for the applicant.

Mr. Michael Hwang of Deacons for the respondent.