William Turnbull & Cecilia Turnbull v. Commissioner of Rating & Valuation

LDRA000022/1985

Rating - rateable value of a large three storey residence on the Peak - question of suitability of assessment based on analysed unit rate - acceptability of certain comparables, particularly one based on agreement in U.S. dollars at the time the Hong Kong dollar was experiencing a rapid loss in value against other currencies - question as to whether subject house was the wrong design for the site: - Strawberry Hill houses held to be the best comparables but the Strawberry Hill site was superior and more suitable for this type of development - U.S. dollar agreement not reliable evidence due to too many uncertainties - recognition of difficulties in allowing for all the factors influencing value at this level of the market - comparison of houses in relation to each other preferred to adjustments for only some of the intangibles which effect this level of the market - but for the larger garden and private pool of the subject promises Strawberry Hill Phase I terraced house held to be worth about the same or a little less. Sections 7 and 7A Rating Ordinance Cap. 116.

IN THE LANDS TRIBUNAL OF HONG KONG

(Appellate Jurisdiction)

Rating Appeal No. 22 of 1985

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

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DECISION

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1. The appellants are the owner occupiers of a three storey house located at 14 Mt. Kellet Road on the Peak. The location is a residential area known as Jardine's Corner and the site is bounded by Mt. Kellet Rd., just before it divides to circuit Mt. Kellet, and Homestead Road which is closed to vehicular traffic.

2. The development in which the subject house No. A4 is located on the Mt. Kellet Road side, comprises six large houses, five of which are similar in design to the subject house. Each of the five has a garden and a swimming pool. The sixth house which is even larger than the others was specifically built for the Society of Mission Etrangeres in Hong Kong. The development was completed in 1975. The Commissioner of Rating and Valuation has assessed the rateable value of the subject premises at $888,000 in conjunction with the general revaluation which came into effect from 1st April 1984. Under section 11(1) of the Rating Ordinance Cap. 116, the relevant date of assessment is 1st July 1983 (GN 2412 of 1983).

3. The appellants consider the assessment under the provisions of section 7 should be based on a monthly rent of $45,000 giving a rateable value of $540,000. Mr. William Turnbull who is a solicitor of both England and Hong Kong represented himself and his wife, Cecilia Turnbull, and gave evidence in support of his submission. He also called Mr. Alexander Lam Tsan Wing, an Associate of the Royal Institution of Chartered Surveyors and an Associate of the Chartered Institute of Arbitrators who submitted a valuation and report under Rule 18 of the lands Tribunal Rules supporting a rateable value assessment of $588,000 based on a monthly rent of $49,000.

4. The respondent called Mr. Michael Rowland Price who is an Associate of Royal Institution of Chartered Surveyors and an Associate of the Hong Kong Institute of Surveyors. He has been a Rating & Valuation Surveyor in the Rating and Valuation Department since November 1981. Mr. Price submitted a valuation and report under Rule 18 supporting the assessment of $888,000 based on a monthly rent of $74,000. His statement included assessments of four of the other houses in the same development. Appeals have been lodged in respect of each of them. It was agreed that the appeal in respect of House A4 should be heard separately and the other cases were adjourned pending the decision in this case.

5. Rateable Value is defined in section 7(2) as "an amount equal to the rent at which the tenement might reasonably be expected to let from year to year if -

6. Section 7A(4) provides that, for a tenement in respect of which a proposal has been made -

"the rateable value ...shall be the value which would have been ascribed thereto on the relevant date on the assumption that at that date -3

7. The 1st April referred to in section 7A(4)(a)(b) and (c) is 1st April 1984.

8. Mr. Turnbull said he purchased his house in December 1975 at a price well below that originally envisaged by the developer. He said his three storey house which has a net area of 563.47 square metres was originally designed as a diplomatic residence. That is, "For an ambassador or a high commissioner". As there was no market at that time for such premises, the developer, Hong Kong land, according to Mr. Turnbull, had been forced, after about twelve months of trying to sell, to reduce, quite substantially, their original prices for these houses. He said it came as something of a surprise to him to find himself in a position to be able to afford to purchase one. Mr. Turnbull said the houses were the "wrong shape, the wrong size, the wrong design, incorrectly fitted out, and in the wrong place with the wrong amenities." Three of the other houses were also sold about the same time, but the fifth, which is next door to his, was leased with an option to purchase to Lloyds Bank International Ltd. at a rent of $14,000 per month. Apparently, Lloyds did not go through with the sale and the house was subsequently sold to its present owner at a price similar to that paid by Mr. Turnbull. Mr. Tunbull said that the rent paid by Lloyds at that time was about the same or less than rentals for the houses in the Strawberry Hill development nearby.

9. Strawberry Hill is a prestigous development close by, but on other side of Peak Road, which is the only arterial road to the Peak District. Strawberry Hill was cited by both valuers as being comparable to the subject premises.

10. Mr. Turnbull described the design of his three storey house as being impractical. The main rooms are on the first floor with the ground floor comprising only an entrance hall, maids' quarters and utility rooms. He mentioned that to answer the front door the maid was required to climb the steps to the first floor and then go down the main stairs to the entrance hall. The main living room and dining room are on the first floor, and were described as being designed as formal entertaining rooms. There is a breakfast room to the rear adjoining the exceptionally large kitchen. The second floor is the main residential part of the house comprising a family sitting room, four bedrooms with attached bathrooms and a small study. Outside the entrance there are two covered car parks. The garden which is surrounded by a high wall includes a fish pond and a swimming pool. The swimming pool and a covered terrace are located adjacent to the entrance. Off the terrace there is a changing room as well as a plant room, both of which are within the main building. The house is centrally air conditioned with two air conditioning units on the roof. Because the site is on much the same level as the road and there is a high garden wall, the view can not be soon at ground floor level. The view from the upper floors, which Mr. Turnbull described as "good but not spectacular", is to the east overlooking Aberdeen and the Lama Channel.

11. Mr. Turnhull, whose evidence included a lot of background information, drew attention to the considerable cost associated with furnishing and maintaining such a residence. He said that the cost of security arrangements was probably the same for his small estate as that for a large estate like Strawberry Hill where the cost could he distributed over a greater number of units. As these costs would have to be borne by a prospective tenant they must he taken into account in any valuation.

12. Mr. Turnbull considered that because his swimming pool was on the windy side of house and, for most of the day, was shaded from the sun, it was usually too cold to he used. He also believed that the prospect of maintaining the fish pond in which he kept carp, would act as a deterrent to a prospective tenant rather than an attraction. This is not perhaps particularly relevant as any prospective tenant should not be assumed to he under any obligation to undertake to maintain a fish pond.

13. Mr. Turnbull considered that, at the relevant date there was an ever supply of luxury accommodation and as a result it was difficult to either sell or lease such property at that particular time. I can accept that such property would have a very limited market, at any time. The Commissioner's valuation, in Mr. Turnbull's submission, was based on too technical an approach particularly in relation to size, when the rents obtained for a number of terraced houses at 51 Mt. Kellet Road showed, contrary to the Commissioner's approach, that larger houses could actually let for less than smaller houses in the same development. He believed the Commissioner had sought to justify his assessment by reference to unusually high rents rather than taking the more reasonable middle of the range rents.

14. One house in the subject estate has been let. This is house A3 opposite. The rent of US$8,000 agreed in September 1983, for a tenancy to commence on 1st January 1984, would have equated to somewhere in the region of $60,000 in Hong Kong currency at the time the rent was agreed. However, this was at the time when the Hong Kong dollar was falling dramatically against the American dollar and other currencies and just before it was pegged against the American dollar. There was a great deal of uncertainty concerning the local currency at that time. House A3 is let furnished, but at this level of the market it is very difficult to decide just what value may be attributable to the furniture. Large firms usually have a set figure which they are prepared to spend on furniture in respect of such lettings, and it is very doubtful, in the case of corporate tenants, if any extra value is really placed on furniture or carpets. The case of Nordic Asia Limited and Others v. Strawberry Hill Development and Another L.T. 32-38, 41-45 and 52-54 of 1982 dealt with the determination of the rents applicable to a number of Strawberry Hill houses under the very similar provision for assessment of rental values in section 115 of Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7. Here the Tribunal gave little weight to House 15 being 1et together with furniture and ascribed much the same rent to it as to the other houses in the estate. The Tribunal considered it to be unlikely that, at this level of the market, an incoming tenant would be willing to pay more than a nominal amount for furniture and that the majority of now tenants would wish to decorate and furnish to their own taste. House A3 was let from January 1983 at $52,000 to the same tenant. Mr. Turnbull submitted that I should base my decision on this particular rent, and by deducting $7,000 for furniture arrive at a figure of $45,000 per month. Unfortunately the rant of $52,000 does not accord with the rent roughly equivalent to $60,000 agreed in September 1983. Rents were considered to be falling over that period as illustrated by the graph submitted by Mr. Turnbull. They were certainly not rising. Because of all these uncertainties, I am unable to gain much assistance from these lettings. It is also pertinent that the two experts called by the parties chose not to rely on either of these rents.

15. Mr. Lam, the expert called by the appellant based his valuation mainly on comparables in the Strawberry Hill estate, as well as a pre-war house at 28 Middle Gap Road and another built about 1947 at No. 1 Peak Road. The two older houses were useful as a guide as to the level of such rents but they were really in a different locality. The rents for two large flats at 29 and 31 Plantation Road on the Peak were also included in his list but it was agreed that these were not truely comparable as the building was of a somewhat unusual design, and could not be compared with houses.

16. Mr. Lam made a $4,000 deduction to each of the Strawberry Hill comparables for what he considered were the "country club" type facilities enjoyed by the residents in this estate. These facilities included a club house, large swimming pool, tennis court, squash courts and a grass badminton court. He considered that the houses in Phase II of the Strawberry Hill development were better in design and had better views than the subject premises. His analysis of his comparables led him to apply a unit rate of $100 per square metre to the first 370 square metros of the subject premises, as this was, in his opinion, the optimum size for large houses, and $50 per square metre to the remaining 193.47 square metres. He allowed $5 per square metre for the garden, basing it on rents obtained by the Crown for garden extensions to certain houses in Hong Kong, and $1,000 for the swimming pool to arrive at approximately $49,000 per month and a Rateable Value assessment of $588,000 which is the annual equivalent.

17. Mr. Price, the Commissioner's expert, applied a rate of $150 per square metre to the first 300 square metres and $75 per square metre to the remaining 263.47 square metres. He allowed $4,000 for the garden compared to Mr. Jan's figure of $1,350 and $2,000 for the pool compared to Mr. Lam's $1,000. Mr. Price's final figure was rounded down to $74,000 per month or $888,000 per annum.

18. Mr. Lam said he had no objection to the adoption of 300 square metres as the optimum size which according to Mr. Price favoured the appellant in any case.

19. Mr. Price, also based his assessment mainly on Strawberry Hill houses which, he considered, contrary to Mr. Lam's opinion, to be inferior to the subject premises, as many had no gardens, were sometimes affected by traffic noise and some of the views were blocked by other houses on the estate. He also cited a rent of $55,000 for one of the terraced houses at 51 Mt. Kellett Road. This rent for House G was for a 3 year tenancy commencing on the relevant date of 1st July 1983. His analysis of the rent produced a unit rate of $188.08 per square metre while most of his Strawberry Hill comparables, on his analysis showed rates ranging from about $134 per square metre to $148 per square metre. Mr. Price allowed $1,000 for the estate's facilities compared to the $4,000 allowed by Mr. Lam and depending on size, between $2,000 and $3,000 for private gardens. Most of the houses in Strawberry Hill had net areas in the region of 300 square metres hence his adoption of that area as the basis for his assessment.

20. Both the valuers must be complimented on their attempts to base their findings on analysis. Mr. Price considered there were many discrepancies in Mr. Lam's analysis, but those differences of opinion highlight what might reasonably be expected in an exercise as subjective as this. I agreed with some, but not all of Mr. Price's observations. For example, I can not accept that the very arbitrary rate adopted by the Land's Department for all temporary licences over Crown Land for garden proposes can be used to value the garden of the subject premises. It hardly, reflects the added value of an established garden in the open market.

21. To be able to cover the many and varied facets such properties as these possess through analysis is extremely difficult, and that Mr. Lam in particular attempted to produce analysis to explain the reasons for his adcption of certain figures must be to his credit. In this valuation, the difficulty lies in being able to identify the factors which will have greater or lesser importance to a prospective tenant and, for that matter, a hypothetical landlord. What is essential is a feel for the market in which the hypothetical tenant and landlord arc required to be dealing. Reference was made to this in this Tribunal's decision in Chan Kwai Sim v. Commissioner of Rating and Valuation Rating Appeal No. 1 of 1983, p.8, when it was stated that the valuer, "must be able to place himself in the respective positions of the well informed purchaser and vendor, or lessor and lessee, dealing in that level of the market for the appropriate type of property, fully cognizant of the advantages and disadvantages on which such parties would place most importance In the end it is a matter of the degree of weight which should be placed on each of the many facets of information available to him." In this respect the appellant was perhaps better informed than either of the experts having dealt in this type of market as both a purchaser and a seller as wall as a solicitor for prominent developers.

22. In his analysis, Mr. Lam put considerable weight on the club like facilities available St Strawberry Hill. Mr. Price did not. Mr. Lam considered the Strawberry Hill houses to be better designs. Mr. Price considered the Strawberry Hill houses to be inferior in design and lacking in views. Mr. Turnbull considered Strawberry Hill was better and that the houses there, although smaller, wore able to attract rent similar or higher than that for his or any of the similar houses in his estate. He based this on the rents obtained at Strawberry Hill at the time one of the houses in his estate was let.

23. In the case of Union Carbide Asia Ltd. v. The Hong Kong Land Company Ltd. (1982) HKLTLR 75, at page 90 it was pointed out that, "It is well established that comparison should be made between premises which are reasonably alike and even analysis should be avoided if more direct evidence is available" and in Nordic Asia Limited and Others v. Strawberry Hill Development Ltd. and Another, at page 35.

"When considering comparables it is desirable to give greater weight to properties of the same type as the suit premises. Comparisons 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."

24. In this same case concerning houses at Strawberry Hill the Tribunal also stated, on page 37 of that decision, "The applicant's valuer largely rejected any application of an analysed unit rate of the area of the suit premises to arrive at his rental value. We agree that where, as here, the size of each house is adequate, convenience and efficiency of design were more important" and at page 40. "On the whole of the evidence we favour the approach adopted by the applicant's and second respondent's 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." Having had the opportunity to inspect the subject premises and most of the comparables, I am satisfied that there is greater efficiency in the design of the Strawberry Hill houses compared to that of the subject premises.

25. Compared to the subject property, Strawberry Hill is a very different site, even though it is only a quarter of a mile or so away. Being set in what was already established grounds with many attractive mature trees, the rents differ little for those houses with private gardens compared to those without. The whole estate is set within a very attractive garden. Even though some of the houses may be close together, the estate as a whole has a measure of seclusion. The club like facilities must add value but I am unable, on the evidence available, to determine exactly what this might be. The subject site has a similar view but lacks the seclusion of Strawberry Hill. It does not have an established garden setting with established large trees. The subject site is quite prominent and is overlooked by the flats at Vivian Court on the opposite side of the road. Overall the Strawberry Hill site seems considerably more suited to the type of development with which we are concerned.

26. The twin houses at No. 1 and No. 2 Strawberry Hill were referred to in evidence as, in many respects, they are fairly similar to the houses on the subject site. These two houses are in Phase I of the estate. They each have a private garden, although smaller, and a private swimming pool. They have areas of about 520 square metres compared to the subject premises' area of 565 square metres. Apparently, House No. 2 let recently at $86,900 exclusive of rates and management charges on 1st July 1985. Its rateable value was assessed, at $864,000 or the equivalent of $72,000 per month. Although very different in design, they in turn maybe compared as superior to Houses No. 7 and No. 9 which are also in Phase I of Strawberry Hill, and are in a group of large terraced houses having areas of about 365 square metres. No. 7 let at $56,400 per month in April 1983 (its rateable value is the equivalent of $50,000 per month), while No. 9 let much later at $60,000 per month in April 1985. All these rents are exclusive of rates. Houses 7 and 9 are larger than any of the houses in Phase II. They have small gardens, and being in Phase I, are higher up the hill and overlook the bulk of the estate in Phase II. Phase I has its own pool but shares the other pool and club facilities with Phase II. The view is similar to that obtained from the twin houses No. 1 and No. 2 and is better than that from Phase II or the subject site. Without allowing for the larger garden and private pool of the subject property I am satisfied that the Phase I houses No. 7 and No. 9 are marginly superior to the subject premises mostly due to the site and the view and partly due the facilities and the efficiency of design. Their size is more than adequate even for this level of the market. They are perhaps not quite as suitable for entertaining as the subject house.

27. In this respect, Mr. Turnbull's house is similar to houses type B and C in Strawberry Hill Phase II which place more emphasis on this aspect of the design of the main living rooms than the type A houses do. In the previously mentioned case of Nordic Asia Limited and Others v. Strawberry Hill Development and Another or the Strawberry Hill Case as it is perhaps better known, this Tribunal found little difference in the rents paid for the two different types. The comparables listed by each of the valuers in this case similarly show this to be so. The B and C type houses are usually without gardens and are larger than type A. With the rents being much the same the result is a slightly lower rate per unit area being paid for the B and C type houses, but it is not significant. Phase II houses lot at between $40,000 and $45,000 around the relevant date.

28. Strawberry Hill Phase I houses have areas of 520 square metres for Houses 1 and 2 and about 365 square metres for Houses 7 and 9, compared to the area of the subject premises which is some 565 square metres. Houses 7 and 9 are terraced houses but they are riot overlooked. They may have smaller gardens but the vie is superior and the site and the setting are decidedly superior. They share a small but reasonably secluded pool rather than the individual but overlooked pool of the subject property. The rents for these houses are well supported by the rents for the other houses in the development, which in turn agree closely with the rateable values which have been assessed.

29. On the other hand the rent of $55,000 which was cited by Mr. Price and was agreed for a tenancy commencing on 1st July 1983 for 51G Mt. Kellett Road is not supported by the rents obtained for most of the other houses in that development. It is higher than all but one of them and is well above its assessed rateable value of $456,000 which is the equivalent of $38,000 per month. It was mentioned in the recent case Hong Kong Aircraft Engineering Co. Ltd. v. Commissioner of Rating and Valuation Rating Appeal 53 of 1985, on page 15, that "It seems to us to be common sense that if there is a marked discrepancy between the actual rent on the basis of a letting on or about the relevant date on the one hand, and the rateable value on the other, then the Commissioner of Rating and Valuation has seen fit to regard the rent as being out of line in relation to the market." As Mr. Turnbull pointed out on the list of lettings for this development, which he submitted as Exhibit A7, the rents obtained from 1980 to 1985 have been erratic and not in line with the general rises and falls in the market as demonstrated in both his graph, Exhibit A9, and Mr. Price's graph at Appendix I of Exhibit R2. I consider that the rent for House G, 51 Mt. Kellet Road was out of line with the market at that time.

30. Having regard to all the evidence before me, I find that for this type of development, the site at 14 Mt. Kellett Road is inferior to that at Strawberry Hill. The rent for the Phase I House No. 7 of $56,400 is well supported by those rents obtained in Phase II. Given that, while there are many similarities, there are also factors which differ appreciably such as the site and the view as well as size and efficiency of design; but taking a broad approach, I would regard the subject Kellet Road house to be worth only marginly more than the Phase I Strawberry Hill house and about the same, or a little less if it were not for the larger garden and the private pool. Adopting Mr. Price's differential of about $3,000 between the gardens and about $1,000 for the provision of a private pool opposed to the shared two at Strawberry Hill, I would determine the monthly rent for the subject premises to be in the region of $60,000. This is equivalent to an annual rent of $720,000 at which figure I determine the rateable value.

31. The Collector of Rates is ordered to amend the valuation list effective from 1st April 1984 to record a rateable value of $720,000 and to make any refund of rates which may be necessary in consequence of this decision. Liberty to apply is reserved to both parties.

Dated this 28th July 1986.

Representation:

Mr. W. Turnbull, by leave, for applicants

Mr. J. Burdett, Senior Crown Counsel, for respondent