Lee Edith (Edith Lo) v. Commissioner of Rating Valuation

LDRA000069/1984

Rating - definition of rateable value imports agreement between a hypothetical landlord and tenantacting  reasonably - while defects which are readily remediable are the responsibility of the hypothetical landlord, only minimal repairs may be assumed if possible outlay unreasonably outweighs the expected rental return - comparables should be properly analysed to support substantial deductions - deduction for some additional detrimental factors allowed - no regard to be given to premises being subject to rent control - Section 7 Rating Ordinance, Cap. 116.

IN THE LANDS TRIBUNAL OF HONG KONG

(Appellate Jurisdiction)

Rating Appeal No. 69 of 1984

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

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DECISION

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1. The appellant is the owner of a two storey semi detached, pre-war village type stone house at Shau Kei Wan. The address is No. 21 Shan Pin Terrace, which is a back street, one removed from Shau Kei Wan Main Street East. There is no vehicular access to Shan Pin Terrace. Nos. 21 and 22, are one building which is located separately from, but at the end of a row of some twelve similar village type houses. A hillside squatter area adjoins the subject tenement.

2. The appellant, Mrs. Edith Lee, considered that the rateable value assessment was excessive and that insufficient regard had been given to the general state of repair of the premises. She said the roof leaked and that repair would necessitate the replacement of the Chinese roof tiles. The tribunal's inspection revealed a tarpaulin erected inside the leaking roof as a means of effecting some protection. Because only a low rent was possible due, as she said, to the provisions of Part I of Landlord and Tenant (Consolidated) Ordinance, Cap. 7, Mrs. Lee believed it was uneconomical to carry out any substantial repairs such as the replacement of the roof. Apart from this and the requirement for some minor repair to the window frames, the premises are in a fair condition. The premises are also without any mains water connection and there is no bathroom or toilet. Water in obtainable from a well at the rear of the premises or a nearby stand pipe outside No. 23. It was not really disputed that connection to the mains water supply would cost a little over $500 and a further $500 would be required for internal plumbing. The appellant said that the total cost would be "$1,000 or more."

3. The subject tenement includes a front court yard and a storage shed. It was noted that the yard is used as thoroughfare to the adjoining hillside squatter area. Also next door to the storage shed there is a but which, according to the appellant, is used for the manufacture of fish balls which are sold at the nearby cooked food stall in the adjoining street. This manufacture takes place every day, commencing from about four o'clock in the afternoon and continuing throughout the night. She said the smell of fish from this establishment is quite strong.

4. The Commissioner of Rating and Valuation assessed the rateable value at $20,400. Rateable value is defined under section 7(2) of the Rating Ordinance as the, "amount equal to the rent at which the tenement might reasonably be expected to let from year to year, if -

(a)	the tenant undertook to pay all usual tenants rates and taxes and
(b)	the landlord undertook to pay the Crown rent, the costs of repairs and insurance and any other expenses necessary to maintain the tenement in a state to command that rent."

Under section 12 the designated date of assessment is 1st July 1983 (the Hong Kong Government Gazette GN 2412 of 1983). The Commissioner's assessment equates to a rent of $1,700 per month exclusive of rates.

5. The appellant considered that the assessment should be based on the rent of $400 per month which was the rent received at the relevant date and, in her opinion, the most the premises could be expected to realise if offered for rent at the relevant date. In saying this she confirmed that she was aware that no regard could be given to any rent restriction due to the premises being subject to the provisions of Part I of the Landlord and Tenant (Consolidation) Ordinance. It appears, from the evidence, that the rent of $400 per month inclusive of rates is net that permitted under the provisions of Part I; but rather it was a rent determined by the Tenancy Tribunal in 1977 in a decision which seems to have ignored the provision in Part I defining a "permitted rent". Rather than fixing the rent at that permitted under the ordinance, the Tenancy Tribunal fixed the rent at the equivalent of the then rateable the assessment of which had disregarded, quite correctly, the statutory provisions for rent control. Nevertheless, it would appear that the premises should fall within Part I, but this is a factor to be disregarded when assessing rateable value.

6. The tribunal dealt with the question of premises in a state of disrepair relative to the meaning of section 7(2)(b) in Warren Chow v Commissioner of Rating and Valuation (1977) HKLTLR 277 and held that defects which were readily remediably were the responsibility of the hypothetical landlord. Otherwise it was up to the appellant to show that the cost of remedying any particular defect was so high that a reasonable landlord would let the promises in their defective condition.

7. In this case the appellant has not proved either that there is a need to replace the roof completely, or that the cost would be of the order of $50,000 as alleged. There is no doubt that the roof is in need of repair but I am left in some doubt as to whether it is readily romediable or not. The relevant definition of "rateable value" in the Hong Kong Rating Ordinance is identical, for all practical purposes to that of "gross value" in the General Rate Act of 1967 in the United Kingdom which also refers to the rent at which the tenement might reasonably be expected to let and as stated in the case of Wexler v Playle (Valuation Officer) (1960) 1. B 217, p.239, "imports the notion of a reasonable landlord and a reasonable tenant, behaving reasonably and making a reasonable arrangement." Ignoring any provision for rent control, as must be the case in this exercise, the rent for premises of this type, due to ago and obsolescence alone, could not be expected to give a reasonable return relative to the possible outlay needed to replace the roof. I am therefore persuaded that a hypothetical landlord acting reasonably would only make such minimal repairs as would provent serious leaking. The likelihood of intermittent problems with a leaking reef may be taken as being inherent in premises of this age and general condition. On that basis it would be reasonable to expect that such premises would let for considerably less than those unlikely to suffer similarly.

8. The other village houses in the street are similar in age, appearance and state of repair. The appellant said she had visited some of owners of the adjoining houses and they had told her that they had experioneod difficulty in letting them. These premises are usually owner occupied but some individual rooms or floors have been separately let. She said that the owner of No. 26 had let two rooms at $20 per month each and had received $40 per month for another room. She said the whole of No. 28 is presently let at $350 per month to a tenant who has lived there since before the war. What is perhaps more interesting is that the owner of the premises neat door at No. 22 has let the ground floor of this almost identical house at $1,000 per month apparently without regard to any restriction which may apply under Part I. He has retained the first floor for his own use. Those premises which are larger and connected to mains water, were renovated about 4 years ago. They seem to have been let in January 1985, as two separate cubicles, each at $500 per month. The appellant understood that this ground floor portion was also let at $1,000 in 1983, but this did net agree with the Rating and Valuation Department's records, which showed a very low rent, most likely restricted, passing at that time. Although the appellant believed that about half of the houses in the row were vacant because they were difficult to let, it seems that a development company has actually purchased six of them with a view, in due course, to redeveloping the whole row. Another, No. 23, has been vacant since the Crown licence, on which it was held, expired.

9. The appellant considered that the comparables relied on by the respondent's valuer were all very much superior to her premises. In fact the appellant had taken the trouble to visit each of the comparables and submitted photographs of each of them.

10. The comparables relied on by Mr. Lam Hok Wai, a Rating and Valuation Surveyor who gave evidence for the respondent, were rents relative to mid 1983 and were mostly for early post-war flats in the Shau Kei Wan district. Two pre-war premises situated at Stanley Village and Second Street, Sai Ying Pun, Central, were also included. The subject premises are larger than any of these comparable premises which reflected rents of between $50.50 to $33.00 per square metre.

11. From this evidence Mr. Lam concluded that early post-war tenements having areas of between 40 square metres and 50 square metres in the Shau Kei Wen area, were letting at or about the relevant date, from between $45 to $50 per square metre. The subject premises have an area of 74.5 square metres.

12. As they were in different localities Mr. Lam did not rely on the pre-war comparables but rather he used the early post-war evidence as his basis. After making a substantial overall deduction of 50% for age, obsolescence, environment and size, he only referred back to the two pre-war comparables as a check. He said he made no deduction for the proximity of the squatter area or for the lack of mains water. The cost of connecting to the water supply was small and therefore insignificant. The stand pipe was close by and the water was free. He considered that with respect to the workshop manufacturing fish balls there was only a slight fishy smell. He did not agree that the premises were located in a poor environment but agreed they were inferior to his comparables.

13. Mr. Lau explained that from a base of $45 per square metre for a standard early post-war premises, he allowed 5% for the difference in size of the subject premises compared to his comparables He further allowed 15% for age and construction as well as another 15% for environment. He made no analysis in order to arrive at these deductions. Counsel for the Commissioner submitted that these allowances wore very generous and were the maximum which might be reasonably allowed.

14. Unfortunately, in almost every such case to come before this tribunal, the valuer giving evidence for the Commissioner has not been the same as the one who made the original assessment for the valuation list. Rather it is the valuer who dealt with the proposal to alter the list. I say this is unfortunate only because, where rental evidence is scarce as in this case, the tribunal is given no indication as to what information led to the original assessment. Mr. Lam obviously considered the assessment to be reasonable on the evidence he was able to find, when dealing with the proposal, but there was no basis for the 50% deduction he made. He had made no analysis of the comparative value between early post-war premises and pre-war village houses. He said no such analysis had been made within the Rating & Valuation Department. With so much rental evidence available to the Department, it would seem reasonable for some sort of analysis to have been attempted. An arbitary deduction of as much as 50% is hardly conclusive, particularly when no rents of inferior premises can be cited to show what the lower rental limit might be. Too often has the tribunal been left in this predicament.  While there is no doubt that the onus is on the appellant to show the Commissioner's assessment is wrong, it is still, as a matter of valuation practice, necessary to base any assessment on supporting analysis of valuation evidence. This was emphasized in Cheung Lai-wan and Others v Director of Public Works (1977) HKLTLR 14, p.20:- "The tribunal wishes to make it quite clear that it considers that valuations arrived at by the use of comparables are very much preferable to those arrived at by other methods. Any such comparables however, should be fully analysed in the evidence of the valuer as the tribunal cannot otherwise be satisfied as to their usefulness and applicability. Further we feel that where comparables in the area concerned are lacking in either numbers or suitability, then other similar areas should be examined and analysed in addition." While analysis may be lacking in this instance Mr. Lam has taken the trouble to look at other locations such as Stanley and Central.

15. In Chan Kwai Sim v Commissioner of Rating and Valuation Appeal No. 1 of 1983 (not reported) this tribunal was faced with the similar problem of having rents for only very superior premises and no analysis to support the large deduction which had to be made as a result of this superiority. However the Commissioner's valuer, at the request of the tribunal, was able to furnish some rents of inferior, premises as well as the rateable values of these and other comparable premises. The combination of this information allowed some comparison to be effected. While there are no rents of inferior premises available in this instance, the rateable values of the other houses in the street have been submitted and show that, as Mr. Lam said, no deductions have been made for the proximity to the fish ball factory and the squatter area, or for there being no mains water connection.

16. The tribunal has gained little assistance from any of the comparables save perhaps the one in Stanley Village supported to some extent by the other pre-war comparable in the Central area. The Stanley comparable is for the first floor flat of a pre-war two storey village type house, which let in August 1983 at $1,200 per month, or $33 per square metre, exclusive of rates. There is no mains water. Nor are there any toilet facilities. As it is held that the hypothetical landlord must be assumed to have carried out minimal repairs to the subject tenement, these comparable premises may be regarded as being in a similar state of repair as the subject tenement. The ground floor is occupied by a shop selling clothing. Over the last decade, Stanley Village has become a thriving retail area, popular with tourists. This is not the case at Shau Kei Wan. Although both the premises are domestic, there could well be added value due to a dwelling being associated with a superior retail area.

17. There is usually a fairly static ratio between the value of the domestic and commercial portions of buildings in Hong Kong. Again there is no evidence of this before me, but I suspect that the superior retailing potential would also lead to higher values in adjoining domestic premises. All that can be gained from this comparable is that it might reasonably be expected to let for substantially more on a unit rate basis than the subject premises. The Stanley premises have an area of 36.4 square metres plus 11.1 square metres of wooden cockloft. There is also a small balcony included in this area.

18. I cannot agree that the proximity of the squatter area as well as the inconvenience of having the front yard used as a thoroughfare does not reduce the rental value. Also the close proximity of the hut used for fish ball manufacture would undoubtly have a detrimental affect. I have had the opportunity to inspect the other houses in the row and notice that they are not as detrimentally affected as the subject premises. All but two of these other houses in the row have been assessed at the same rateable value of $20,400 or the equivalent of $1,700 per month. Compared to Stanley this appears to be a little too high. Also I must assume that, No. 24 which is assessed at the equivalent of $1,800 per month and No. 22 for which no assessment has been listed, are the only properties to have mains water connection and therefore no allowance for this factor is required. Taking into account all these factors and doing the best I can with all the other evidence before me, I find that, as at the relevant date, the subject premises might reasonably be expected to let at $1,400 per month exclusive of rates, and accordingly determine the rateable value at $16,800.

I therefore make the following order :-

The rateable value of No. 21 Shan Pin Terrace is to be reduced from $20,400 to $16,800. Accordingly the Collector of Rates is directed to amend the valuation list, effective from lst April 1984 and to make any refund of rates which may be necessary as a consequence of the rateable value being decreased.

I make no order as to coats.

Dated this 13th day of December, 1985.

Representation:

Appellant : Mrs. Edith Lee in person

Mr. Davis Hui, Crown Counsel for the respondent