The Financial Secretary Incorporated v. Tai Cheong Finance Ltd

LDLA003717/1988

LANDLORD & TENANT - Landlord and Tenant (Consolidation) Ordinance (Cap.7) - Past IV - Application for determination of market rent furnished lettings renewals as comparables - "estate living" per se held as a neutral factor on rental unless proven as an advantage or a disadvantage - effect of existence of shopping centre on rental "bulk discount" held dependent on the market.

IN THE LANDS TRIBUNAL OF HONG KONG

Lands Tribunal Application No. 3717/88

BETWEEN

Coram: F.Y. KAN, Esq. Member

Date of judgment: 9th June 1989

_____________

D E C I S I O N

_____________

1. This is an application for the grant of a new tenancy under Section 117(1) of Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap.7 for Wilshire Towers, 200 Tin Hau Temple Road, Block B and C, 82 flats and 82 carparking spaces. The previous tenancy having been determined on 9th February 1989 by virtue of Form CR101 served on the applicant, Arm CR102 served on the respondent, CR105 served on the applicant and an application made by the applicant to the Lands Tribunal pursuant to Section 117(1), the Tribunal is to decide on the terms of a new tenancy to be granted. Prior to the hearing, however, the parties have come to an agreement on the now tenancy, being: for a term of three years from the 10th February 1989 at a rent to be determined by the Lands Tribunal and subject to other terms and conditions remaining unchanged as for the previous tenancy, save the option clauses for purchase of Block A and for renewal of the tenancy. Hence, only the rent is in dispute, as confirmed by counsels of both parties Mr. K.L. Yuen for the applicant and Mr. Geoffrey Ma for the respondent at the beginning of the hearing. Also, for the determination of the rent, the parties have agreed that the following formula be used to calculate the total monthly rent of the subject premises:

Total Monthly Rent = Monthly rent of a "standard flat" x 82 x(100-7)% x (100 - bulk discount)%_,

the monthly rent of a "standard flat" being the average monthly rental of 4 flats on the 18th floor.

2. Thanks to the efforts of the counsels in arriving at such an arriving, the Tribunal therefore needs to decide only en the average monthly rental of 4 flats en the 180 floor and the bulk discount; and the war of the Tribunal is very much simplified.

3. Mr. Chong Wan-Ki a professional associate of the Royal Institution of Chartered Surveyors and an associate member of the Hong Kong Institute of Surveyors gave export witness for the applicant and produced various comparable out of which only the comparable in Braemar Hill Mansions were relied upon by him with the root "all have been discounted". From the Braomar Hill Mansions comparables Mr. Chong adopted $24,000.00 as the monthly rental at the relevant date for a 4-bedroom flat in Braomar Hill Mansions with good sea view From this rental upward adjustments were made to reflect the better finishing and management and downward adjustments were made to reflect the disadvantages so far as open space, peacefulness, recreational and shopping facilities, size of flat and transport facilities are concerned, when Wilshire Towors were compared to Braemar Hill Mansiens. In the and, Mr. Cheng came to his valuation of the monthly rental of a "standard flat" in Wilshire Towers at $26,500.00. For the valuation of all the 82 flats, Mr. Cheng brought in a "bulk-discount" factor of 15% and arrived at a final figure of $26,500.00 x 82 less 7% (agreed by both parties) less 15% for "bulk discount" = $1.72 million per month.

4. Mr. Albert C.P. Tong, an associate member of the Royal Institution of Chartered Surveyors gave expert witness for the respondent and produced comparable also on Braemar Hill Mansions. Although Mr. Tong referred to Mid-levels lettings on his Rule 18 document or gave no details of these lettings whether on the Rule 18 document or on his oral evidence. On being asked by the Tribunal whether he intended to rely on Mid-levels letting as comparable his answer was that he had only used them as his own cross-check. From his Braemar Hill Mansions comparable Mr. Tong then case to his conclusion that $26,000.00 would fairly represent the monthly rental for a 4-bedroom flat with sea-view on Braemar Hill Mansions at the relevant date. From this rental Figure, adjustments worn made and Mr. Tong ultimately arrived at a rental of $32,000:00 per month for a "standard flat" on Wilshire Towers. On "bulk-discount", Mr. Tong gave his evidence that a 5% discount would be sufficient In the end Mr. Tong' s valuation was a figure of 2.3 million per month.

DECISION

5. A number of valuation principles have been raised by the experts in this case and I would like to deal with them at the sane time as I dea1 with the evidence.

Effect of Furnishing & Renewals

6. Mr. Cheng produced a total of 26 comparable for Braemar Hill Mansions out of which 15 were for 4 bed-room type of flats and 11 for the 3 boa-room typo which were said to have been useful only as a check. Of the 15 comparable Mr. Cheng chose to ignore all these furnished lettings and was loft with only 9 comparable to be considered. Of these 9 comparable, 7 here renewals and their use was objected to by Mr. Tong, as likely affected by "landlord's inertia" of Mr. Tong's 5 comparable in Braemar Hill Mansions, only 2 were for the 4 bed room type with 3 for the 3 bed-room type. Of the 2 comparable for the 4 bed-room types one was said to be furnished  and as for the other (i.e. Comparable 2) Mr. Cheng said that the Rating & Valuation Department had no record of such a letting. While it is agreed that the ideal comparable for a rent review would be new lettings with no furnishing, in view of the insufficient number of such ideal comparable having been supplied by both experts, I feel I have to consider as well those lettings with modest furnishings, and renewals despite both landlord's - inertia, and tenant's - inertia had been argued, so as to reach a finding on the rental value with a wider support. In fact, the Forms CR109 supplied did show that for some of the furnished lettings the furnishings were of such modest nature that they would net affect the rent substantially. Mr. Ma, Counsel for the respondent also suggested that furnished lettings might be taken into account.

7. Having considered the comparable I come to my opinion on the prevailing market rent for a Braemar Hill Mansions flat with good sea view as at $25,000.00 per month.

8. The next stop is, following; both experts, to consider various adjustments to be applicable to arrive at the prevailing market rent for a "standard flat" in Wilshire Towers.

Flat Size

9. Having arrived at the rental of a 4 bed-room flat with good harbour view in Braemar Hill Mansions as at $176/sq. m, one of the factors which Mr. Cheng had taken into account to arrive at his rental of $165/sq. m for a "standard flat" in Wilshire Towers was quantum reduction on its size of 161 sq. m, versus 136 sq. m for the Braemar Hill Mansiens comparable. He appeared to have supported such reduction on two grounds firstly, by establishing that 3 bed-room flats in Braomar Hill Mansiens had higher unit rental than 4 bed-room flats there and secondly by stating during cross-examination that if a prospective tenant was satisfied with the accommodation "he would not look at the size of an additional 10 sq. m" Indeed, in Mass Transit Railway Corporation and others and Hsu Suns Ltd. (1982) the Tribunal did find that a prospective tenant would net be concerned about small differences in area between flats in approximately similar size bands In the present case the difference is 25m. Further I cannot accept the conclusion drawn by Mr. Cheng from comparing unit rentals of 3 bed-room aid 4 bed-room flats which Insisted of different accommodation, as being applicable, to flats of similar I accommodation. Henceallow no quantum reduction in this case

"Estate Living" &. Facilities

10. When comparing Braemar Hill Mansiens to Wilshire Towers, Mr. Tong considered that the former is subject to disadvantage which he termed "estate living." By that he meant that in a large development, the facilities would be shared by a largo number of residents which amounted to disadvantage. Other disadvantages associated with "estate living" were according to Mr. Tong, lack of privacy, poor sense of belonging i.e. feeling of being with the mass and poorer stand of management and security. It is my opinion that "estate living" per se cannot be taken as necessarily having a effect on the valuation, unless the relative advantages or disadvantages are shown to be there. In this case, upon my visit to the two developments, there was no discernable signs to show there existed between the two developments any appreciable difference in the standard of management and security. So far as the environment is concerned, Mr. Tong conceded that although Braemar Hill Mansions has 9 times more units than Wilshiro Torers, the forger had a site area which is 12 times larger. Hence "estate living" as an adverse factor had not been proven in this case and no adjustment will be allowed by me. On the other hand however Mr. Cheng raised the points that Braemar Hill Mansions had better facilities in terms of none oven space, lamer swimming pool and provision of tennis courts, which I do accept as factors to be taken account of by way of adjustments.

Noise

11. The question of to what extent should the rental of Wilshire Towers be affected by the construction noise from the building site and noises from the school down below was another matter of dispute between the experts As to the progress of construction on the building site concerned, there was no disagreement between the experts that piling works which caused most noises had boon completed. On my inspection on the 4th May at 3 p.m., I heard no noise on the 18th Floor of Wilshire from the school when presumably classes were going on, although construction noises (probably from water-pumps) were indeed audible. However the same noises were audible only to a weaker extent when visit was made to the flat arranged for inspection by Mr. Chong On the 23rd Floor of block 21 which was situated at the remote end of Braemar Hill Mansions from the construction site. I therefore would allow only a nominal reduction on the rental to reflect the noise factor.

Maintenance & Finishes

12. The evidence from Mr. Tong was that, because Wilshire Towers were a relatively mcro recent development than Braemar Hill Mansions (the former completed in 1983 and the latter in 1978) they were in a bettor state of maintenance. He also listed the various aspects of finishes which had boon better provided in the case of Wilshire Towers, such as, aluminium windows of better quality, closets, ceremic tiles, full range of kitchen cupboard units etc.. As to the question on finishes Mr. Chong's only rebuttal was contained in his evidence that some of the kitchen cupboard units were in fact in a state whore repairs were badly needed. However, on my visit to the four flats en the 18th Floor of Wilshire Towers, I found only loose hinges for the doors of some of the cupboard units in one flat cut of the four. I therefore accept that account should be taken of the state of better maintenance and finishes for Wilshire Towers.

Existence of a Shopping Centre

13. The existence of a shopping centre in Baremar Hill Mansions was considered by Mr. Cheng as an advantage because it was an added facility, to which Mr. Tong contested by saying that: firstly, accepting it to be a facility, it was a facility to Wilshire Towers also because, it was accessible both by walking and by car; secondly because the shopping centre was also accessible to the general public it might jeopardize the exclusivity of the estate. On my inspection tour, I found that the positioning of the shopping contra has such that the risk of the public shoppers wandering into the estate thereby spoiling its exclusivity is rather slim. Short of stronger evidence having been produced by Mr. Cheng, I find the argument that the existence of a shopping centre in a particular development in a relatively high class residential area must necessarily enhance the value of the flats in the development not cenvineing. Indeed, if this argument was correct, Braemar Hill Mansions being such a large development, the developer should have positioned the shopping centre in the middle of the development rather than leaving it at one corner, in order to allow more units to be as near to the shopping centre as possible to enjoy the facility it offers. In the light of the above circumstances I regard the existence of a shopping centre in Braemar Hill Mansions as a neutral factor which does not affect the rent, whether favourably or unfaveurably.

14. Having thus considered all the factors of adjustment raised by both parties, I am of de opinion that the monthly rent of a "standard flat" in Vie Wilshire Towers is $29,500.00.

15. I new mova onto my next stage of diliberation en "bulk; effect". "Bulk Effect"

16. In this regard, I have been referred to two Lands Tribunal cases, namely tile Sentry Holdings (Asia) Ltd. v. Cali Entorprisos Ltd. (1983) and The Financial Treasury Incorporated v Wing On Cheong Investment Co. Ltd. (1985) Tie discount percentages found by the Tribunal for "bulk discount" in both cases were on facts of the cases and not as a matter of law, as Mr. Ma had suggested in his final submission that the amount allowed for "bulk discount" depended on the market. On this, besides relying on the Tribunal's findings as mentioned above for "bulk discount" to be allowed Mr. Cheng submitted as evidence for the hearing firstly, a letter from the letting agents of the Hong Kong Parkview which contained an offer to prospective tenants of discounts ranging from a minimum of 1% for 2 apartments to 10% for 26 flats (and over); secondly, his own analysed results for two bulk lettings, one for renewal of 42 flats at No. 3 Repulse Bay Road and another for renewal of 40 flats at 16-18 MacDonnell Road, showing "bulk discount" percentages of 14.3% for the former and 13.8% for the latter. On being queried by the Tribunal, he further clarified that those percentages had been calculated by way of comparison of the agreed rents to what he thought the rents would be had they not been affected by "bulk discount" and the parties involved in the negotiation had in fact not agreed on any percentages at all to reflect "bulk-discount". Thirdly, basing on an estimated letting period of 9 months for the subject 82 flats, and after working out the total rout loss and the saving of agency commission to the extent of $9,397,262.00, Mr. Cheng than proceeded to have the ''Bulk discount" calculated as at 15.4% In order to back up his estimated letting period of 9 months, he head also submitted a schedule of Leasing Progress for Baguio Villa Blocks 47 & 48 at an average of 6.7 unitsper month, Victoria Garden at 10.1 units per month. Mr. Tong however maintained that "theunits magnitude of bulk discount would depend not only on the market conditions at the relevant date but also factors personal to the landlord and tenant" While Mr. Tong had not stressed on what personal circumstances, ho was of the opinion that the prevailing rental market of largo sized flats was in general well sustained by a steady demand. He therefore considered that a letting period of 3½ months or 15 weeks was sufficient to fully lot the premises i.e., an average rate of 5.5 flats per wool., which was translated by way of a calculation into a "bulk discount" of 4.8% on a 3 year tenancy. Further, Mr. Tong conceded another 0.2% discount to take account of the gain in case of management when the whole block was let to one tenant. In conclusion, Mr. Ton considered a considered discount for a bulk letting of 82 units to be at 5%. In support of the letting rate, he submitted a schedule showing the take-up rate of Hong Kong Parkview for the 1st & 2nd phases being at 20 and 37.8 units per month respectively.

17. It was common ground that there ought to be a bulk-discount; the dispute was as to its magnitude only in this regard, I agree with both experts that the magnitude of the discount frill de depend on market conditions. In judging the market conditions, the general supply and demand situation of similar accommodation all ever the territory may be of significance, but what is of greater significance is the particular supply and demand situation of similar accommodation in the locality of the suit premises. So far as the developments offered as evidence by Mr. Cheng on the market conditions are concerned, besides their being not in same locality the accommodation they offered wore either mach smaller (in the case of Brentwood and Victoria Garden) or much larger (in the case of Baguio Villa) accommodation. So far as Mr. Tong's evidence on this issue was concerned, Hong Kong Parkviow, it also suffered from the same criticism on points of being in a, different location and consisting of dissimilar accommodation to the subject premises. In the circumstances the same rates for these four developments provide no more than a more guide to the Tribunal on the general supply and demand situation, with no specific reference to the supply end demand situation of the locality for the suit premises.

18. Taking into account the guide provided above and rejecting the presumption by Mr. Cheng that a bulk letting may invariably be done as a direct deal thereby resulting in a saving of agency commission, I am of the opinion that a suitable "bulk discount" is 10%

19. Hence, in accordance with the "Agreed Formula", the monthly rent of the suit remises is:

20. $29,500 x 82 x (100 - 7)% x (100 - 100)% = $2,024,700 to the nearest $10.

21. No order for costs is made as agreed by the parties.

Dated this 9th day of June 1989.