Sinofit (HK) Ltd v. Full Gain Investment Ltd and Another

LDBM000006/1996

Property law - new Part IV tenancy - building management - current tenancy agreement registered in Land Registry - alleged prior breaches by landlord of terms of current tenancy agreement - owner and manager interrelated as members of the henderson Land Group - whether increased management charges reasonable - extent to which under tenancy agreement owner could recover increase from tenant - whether owner as landlord had discharged its maintenance obligations to tenant - duration of new tenancy - new rent - whether abnormally high management charges relevant to determination of new rent - Held:

IN THE LANDS TRIBUNAL OF HONG KONG

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Coram: His Honour Judge Cruden, Presiding officer and N.T.Poon, Esq., Member.

Dates of Hearing: 18 and 19 February 1997

Dates of Judgment: 17 March 1997

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JUDGMENT

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1. These consolidated proceedings concern the grant of a new tenancy from 1st January 1996 of domestic premises under Part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 ("LTCO") and the incidence and quantum of management charges together with liability for maintenance since 1st August 1993. In relation to liability for management charges and maintenance under the tenancy agreement, submissions were also addressed to the Tribunal in respect of the Building Management Ordinance, Cap,. 344 ("BMO").

2. Before proceeding to consider these issues, it is necessary to record the historical relationship between the parties. The Applicant was granted a tenancy of Flat A, 23rd Floor, Suncrest Tower, 1-11 Monmouth Terrace, Hong Kong together with Covered Carparks Nos. 8 and 8A ("subject property") for a duration of 2 years from 1st August 1993 by the then owner, Suncrest Tower Limited, at a rent of $59,000 per month. When the tenancy was granted Suncrest Tower Limited, was the owner of all of the 46 flats in this 24 storey building ("the building").

3. During September 1993 the building was sold by Suncrest Tower Ltd to Acegood Development Ltd, who later on 31st December 1993, subject to existing tenancies, sold it to the 1st Respondent ("Full Gain"). At that date, presumably because the building had previously been in sole ownership, there was no Deed of Mutual Covenant ("DMC"). The first DMC affecting the building was later executed on 30th March 1994, when Full Gain sold Flat A on the 22nd Floor of the building, to Big Yanne Enterprises Ltd. The 2nd Respondent ("Hang Yick") was also a party to the DMC under which it was appointed manager of the building for an intial period of 2 years.

4. The undisputed evidence was that Full Gain and Hang Yick were members of what was generally described as the. Henderson Land Group. The Tribunal records that the same two Directors of Full Gain who witnessed the affixing of its Common Seal to the DMC, were also the directors who witnessed the affixing of the Common Seal by Hang Yick. A monthly rental invoice was produced, issued to the Applicant by Henderson Real Estate Agency Ltd., apparently as the rent collecting agent of Full Gain. The invoice stated that the Estate Agency, was a wholly owned subsidiary of Henderson Land Levelopment Co. Ltd.

5. The Form CR101 issued by Full Gain on 10th June 1995, statutorily continued the current tenancy beyond 31st July 1995 until 31st December 1995. The unopposed new tenancy will therefore be granted for a duration commencing or 1st January 1996. On 16th January 1996 the Applicant registered the tenancy agreement granted in 1993 by Suncrest Tower Ltd., in the Land Registry under Memorial No. 6497208. The Tribunal was reminded of the consequences of registration, which accrue under the Building Management Ordinance, adverted to in Dexter v. Retersham Limited [1995] HKDCLR 55.

6. The facts established in evidence, relevant to the issues of management charges and maintenance as well as the grant of a new tenancy, are in several respects interwoven. However, at this stage it may be helpful if we consider separately, the issues under the current tenancy and the new tenancy.

Current tenancy

7. The Applicant submitted that jurisdiction for the Tribunal to determine disputes under the current tenancy existed under both the LTCO and the BMO. Under the LTCO we were referred to Section 127A which empowers the Tribunal to determine any dispute or difference between a landlord and tenant. However, all Counsel overlooked the fact that Section 127A is expressly limited to Part V business premises. There is no equivalent provision in Part IV. We hold that under the LTCO, the Tribunal does not have jurisdiction, to determine the present disputes in relation to the current tenancy.

8. The Tribunal's jurisdiction is to be found in the BMO. The registration of the tenancy agreement in the Land Registry, enables proceeedings to be brought under certain paragraphs of the Tenth Schedule of the BMO. These include Paragraph 4 in relation to the calculation or apportionment of management expenses and other outgoings and Paragraph 8 relating to any question of law concerning any breach of any covenant, term or condition.

9. As to enforcement, under Paragraph 9 of the Tenth Schedule, the Applicant may seek declarations, damages and other remedies. Further Section 8(9) of the Lands Tribunal Ordinance empowers the Tribunal, in the exercise of its BMO jurisdiction, to grant the same remedies and reliefs, equitable or legal, as the High Court. Under these twofold statutory provisions, we hold that the Tribunal has jurisdiction to grant all of the relief claimed, in respect of the current tenancy.

Management charges:

10. The DMC provides that the owners are liable to pay management and other expenses to the management company. The Fourth Schedule sets out those original monthly amounts. The charges for the 44 flats on the lower floors were $3,605 per month. The subject property is one of two duplex units on the 23rd and 24th Floors, for which the original higher charges, were $6,225 per month. The Applicant's car park management expenses for its twin parking spaces were $300 per month. The single car park management expenses were $200 per month. Clause 10(d) of the DMC provides that any increases shall be in direct proportion to those Fourth Schedule amounts.

11. These DMC provisions only control the contractual rights of the management company with the owners. Where an owner elects to let his flat, any liability for management charges, between landlord and tenant, is a separate contractual matter to be agreed between those different parties. The landlord as owner remains liable under the DMC but the extent to which he may seek to impose an equivalent obligation on the tenant, is a matter for their agreement. In some cases a landlord may not seek to recover any of these charges from the tenant. In other cases he may be able to recover all of them.

12. We confirm that in this particular case, when the tenancy agreement was executed on 17th August 1993, there was no DMC. The DMC was only executed on 30th March 1994. In any event as between landlord and tenant, it will be the tenancy agreement and not any DMC, which will primarily determine their respective rights and obligations. In fact Clause 2(q) of the tenancy agreement anticipated the possible future creation of a DMC. It provides for the tenant to comply with the provisions of the DMC "if any" so far as they relate to the subject property. The Applicant was therefore liable to Full Gain, to comply with the provisions of the present DMC, from the date of its creation.

13. It is now necessary to turn to the tenancy agreement, to ascertain the contractual position between the Applicant and Full Gain. Clause 2(t) provides for the payment of "service charges" which broadly equate to the "management expenses" later provided for in the DMC. Under the tenancy agreement the tenant's share of these total charges are to be borne, in the same proportion as the rateable value of the subject property bears to the rateable value of the building.

14. Clause 2(t) also sets out the procedure where the budgetted sums paid, are insufficent to meet actual costs and also where it is sought to increase future charges. Clause 2(t)(ii) deals with shortfalls. The landlord, if it wishes to recover these from the tenant, must produce the relevant management accounts. Clause 2(t)(iii) deals with increases. The landlord is entitled to increase management charges on giving 1 month's notice in writing. However, that right is subject to certain conditions. The right only arises if at any time during the tenancy "the operating cost relative to management and maintenance charges shall have risen." The 1 month's notice must also "be accompanied by a written explanation as to the reasons for such increase."

15. Full Gain on 28th January 1994 wrote to the Applicant enclosing a copy of a letter from Hang Yick dated 26th January 1994. The latter letter required Full Gain to pay an increased monthly management fee of $8,290 for the subject property plus $300 for the two car parking spaces, commencing on 1st March 1994. The letter further stated that $700 of the increased fee would be reserved for the future repair and replacement of the air conditioning plants of the building. Full Gain's letter gave notice that it required the Applicant to pay the revised management fee, from 1st March 1994.

16. The Applicant asserted that it was not liable to pay this increase to Full Gain. It was submitted that as Full Gain had only purchased the building on 31st December 1993, that by 28 th January 1994 operating costs could not have risen, as required by Clause 2(t)(iii), as a precondition to any increase. This submission, wrongly based only on that short period of less than one month, is misconceived. The building was bought subject to existing tenancies. Under Clause 2(t)(iii), any increase in operating costs for the longer period from 1st August 1993 to 26th January 1994, were contractually relevant.

17. The evidence of Mr.K.K.Cheung, the Property. Manager of Hang Yick, was that from 31st December 1993 to 26th January 1994 there had been no increase in operating costs. The increase was clearly based on the first budget of Hang Yick, which introduced several management changes. These included the creation of the new air-conditioning reserve fund. The other more general reasons given, were rising material and labour costs and upgrading the standard of management.

18. We are satisfied that Full Gain was not entitled to increase the management charges to its tenant, in order to recover any increase payable as a consequence of the creation by Hang Yick, of the air conditioning reserve fund. Under Clause 8 of the tenancy agreement, Full Gain's liability for the central air conditioning plant, extends to an obligation for maintenance, repair and replacement. Fortunately, there is no difficulty in determining this excessive amount, as Hang Yick has quantified it at $1,200 per month. Under this head, we find that Full Gain has overcharged management charges from 1st March 1994, at the rate of $1,200 per month.

19. The Applicant further submitted that under the tenancy agreement, Full Gain was not entitled to increase management charges for central air-conditioning electricity costs. If Clause 8 were considered by itself it might be arguable that charges for central air conditioning electricity costs, were operating costs and therefore not recoverable by Full Gain. However, Clause 2 (t) (iv) expressly provides that the tenant shall pay for "electricity consumed by the Tenant, including the cost of electricity for the operation of the central air-conditioning system in the Premises."

20. The Applicant complained that it should at least be separately billed for the electricty. This occurs for its separately metered domestic supply. Clause 2 (t) (iv) is not well worded and is another example of the central air-conditioning plant leading to differences between the parties. We are satisfied that the tenancy agreement does empower Full Gain to recover from the tenant, reasonable electricity costs, properly apportioned for the subject property.

21. These electricity costs are not separately metered so apportionment, not excluded by the tenancy agreement, is the only practical alternative. If the Applicant wished to have secured a more verifiable charging mechanism, it should have so negotiated before the terms of the tenancy agreement were settled and executed. We are satisfied that while ideally the cost would be separately billed, Full Gain may accept its inclusion as an element in the monthly management charges, as a basis for recovery from the tenant. The tenant's right to contest the quantum of the charges as inaccurate or unreasonable remains.

22. The Applicant's more general attack on the management charges, were that they were unreasonable. Where a landlord under a tenancy agreement, is entitled to recover management charges the common law implies a term that they be fair and reasonable - 27 Halsbury's Laws of England (4th Edn) 281. The Applicant alleged the management was of poor quality and in comparison with the similar developments, the charges were unreasonably high. The Tribunal was invited to approach this issue, against the background that within a few days of Full Gain becoming the owner of all the flats in the building, its future manager purported to increase the management charges by over 100%.

23. The Applicant called two chartered surveyors, Mr. T.S.Chan, B.Sc., ARICS RPS(GP) and Mr. Charles Scragg, B.Sc., ARICS who gave evidence on management charges. Mr. Chan pointed out that on a unit rate basis, the increase was from $14.69 to $31.21 per square metre. After taking into account that the building had no swimming pool, sauna, club house or communual garden, he stated that the charges were much higher than the norm. He pointed out that other Mid-levels developments, such as Estoril Court, Goldwin Heights and Euston Court developments, had better facilities but their management charges ranged from $14.64 to $16.70 per square metre. If Suncrest Tower had similar facilities its comparable unit rate would have been about $15 per square metre. After making a 10% facilities deduction, he arrived at a unit rate of $13.50 producing a management charge of $3,600 per month.

24. Mr. Scragg followed a similar, if more general approach, to arrive at a unit rate of $12 per square metre. Mr. Chan in his calculations, had conventionally used saleable areas. The saleable area of the subject property was 265.60 square metres. Mr Scragg used the less reliable gross floor area, disclosed in the sales brochure, of 317.1 square metres. This produced a management charge of $3,800 per month. If Mr. Scragg had used the saleable area, he would have arrived at a lesser figure of $3,190 per month.

25. Full Gain called Mr.J.K.P.Leung, ARICS, AHKIS, ASVA, RPS, to give evidence on the management charges issue. Mr. Leung did not consider comparable evidence as, in his opinion, it was irrelevantly affected by market trends. His assessment of reasonable management charges was based on a different fourfold criteria. These were the DMC charges; quality of management; forseeable future expenses; and specfic needs of the development. Mr. Leung's wider approach was based on the assumption that the charges were not only for the management of the common areas but also to maintain the value of the development.

26. Mr. Leung first prepared a budget based on the DMC. After noting the major expense of operating the central air-conditioning plant, he stated that as it was now 10 years old, provision for considerable future repairs costs was necessary. Mr. Leung first arrived at a management fee for the subject property of $7,035 plus $300 for the two carparking spaces. Because of the ageing central air-conditioning plant, he added a monthly contribution of $1,200 to the DMC sinking fund for capital and non-recurring expenditure. This produced total management charges of $8,535 per month.

27. During their evidence both Mr. Chan and Mr. Scragg acknowledged that they had made no allowance for the central air conditioning, which was not provided in any of their comparables. In terms of the tenancy agreement, their calculations wrongly omitted the costs of electricity apportioned to the subject property. On the evidence the cost of electricity, would have been in the region of $1,700 per month.

28. Conversely, Mr. Leung's monthly sinking fund contribution of $1,200 requires to be deducted from his figure of $8,535. On other costs, there was a conflict between the experts whether the day staff of four should be reduced to three persons. In our view, a management company is entitled to exercise its discretion as to manning levels. They may only be attacked if they are unreasonably high. We are not satisfied that four persons on day shift is unreasonably high. However, Mr. Leung after hearing the evidence, accepted that the quality and standard of management, was below his assumed standard.

29. After adjustment, Mr. Chan's assessment of reasonable management charges was $5,300 per month and Mr. Scragg's was $5,500 per month. Mr. Leung's figure of $7,035 wrongly included air-conditioning repair and maintenance costs which are the responsibility of the landlord. After excluding these costs but adding back his missed car park sums, Mr. Leung's evidence would support total management charges of $6,700 per month. After considering all of the relevant evidence, we find that if a reasonable standard of management were provided, the proper management charges, would have been in the region of $6,000 per month.

30. We now turn to the lower charges appropriate to the poorer standard of management actually provided under the current tenancy. Mr. Leung's initial assessment had assumed a higher standard of management. At the hearing he accepted that a lower standard of management had been provided but did not quantify the difference. His adjusted calculation of $6,700 would at least require to be reduced to a sum in the region of $6,200 per month.

31. In the light of all the relevant evidence, we find that the reasonable management charges, for the lower standard of service provided during the balance of the current tenancy from 1st March 1994, would have been in the region of $5,500 per month.

Maintenance:

32. The Applicant further complained that Full Gain had failed to perform its maintenance obligations under Clause 3 of the tenancy agreement. It sought damages for breach of this covenant, during the duration of the current tenancy, equal to 15% of the rent of $59,000 per month. Full Gain denied that it had failed to carry out its contractual maintenance obligation.

33. Counsel for Full Gain pointed out that under the tenancy agreement, the landlord's obligation was expressed in the alternative. It could either carry out the maintenance itself or, in terms of Clause 3, "cause" the maintenance to be carried out by other persons including an independent contractor. Counsel submitted that Hang Yick had been employed as an independent contractor, to carry out all of those maintenance obligations. In those circumstances, it was submitted, Full Gain was not liable for any failure to perform the maintenance obligations in Clause 3.

34. Before considering the facts, we will deal with the law. Under the tenancy agreement Full Gain was clearly entitled to instruct third parties, including independent contractors, to carry out any work necessary to discharge its obligation under Clause 3. However, Counsel for Full Gain submitted, that as a matter of law, provided it reasonably exercised that election and selected a competent contractor, it could not be held liable for any subsequent default by the contractor.

35. This submission was couched in the language of tort rather than contract. As to election, it tended to echo principles relevant to the exercise of discretionary administrative and other powers. Counsel in response to an enquiry from the Tribunal, was unable to cite any authority for this novel proposition. Mr. Weir for the Applicant submitted, that even where a landlord arranges for performance by another person, it remains personally liable to the tenant.

36. We reject Full Gain's submission which was as unsound in law as it was erroneous on the facts. The Applicant referred the Tribunal to "Chitty on Contracts" (27th Edn) page 1024 which refers back to paragraph 19-046 where on page 987, the applicable law is set out:

37. Full Gain was entitled to delegate the performance of its maintenance obligations under Clause 3 to Hang Yick. However, we held that in that event, Full Gain continued to remain fully liable in contract to the Applicant, for the performance of that covenant. Counsel for Full Gain also ignored the factual acknowledgment on behalf of Full Gain, that the Applicant could also deal direct with the landlord.

38. This acknowledgment was contained in a letter from Henderson Real Estate Agency Ltd to the Applicant, dated 24th April 1996, in reply to prior complaints. This letter included these statements:

"As you are aware, Hang Yick Properties Management Limited, the building manager, is to carry out their duties in relation to the common areas and common facilities of the building as laid down in the Deed of Mutual Covenants." (sic) "It is their absolute discretion not to attend to matters concerning the interior of an individual unit. In future, you may contact the Landlord direct in relation to all building management services."

39. This letter contradicts the submission that Full Gain had delegated all its Clause 3 maintenance obligations to Hang Yick. So far as non-common area maintenance was concerned, Hang Yick only had a discretion, whether to carry out Full Gain's obligations. Further, Full Gain was willing to receive direct from the Applicant, common area and other building services complaints and presumably, in turn, convey these to Hang Yick.

40. This new procedure better accorded with the strict legal procedure of the tenant making any management complaints to the landlord, who would then refer them to the management company. In practice this was a far less tortuous procedure, because Full Gain, Hang Yick and the Henderson Real Estate Agency Ltd, were all part of the Henderson Group. Counsel's submissions which throughout the hearing, attempted to stress and rely upon the separate legal identity of those companies, also reflected the constant factual stance of the Respondents.

41. The executives of Full Gain and Hang Yick who gave evidence, acknowledged they were related companies within the Henderson Land Group. Yet both in pre-trial interlocutory applications and during evidence and submissions at the trial, each Respondent sought to stand in antiseptic isolation from the other. The Applicant, invited the Tribunal to lift the corporate veil and look at the factual reality that the building was owned and managed by related subsidiaries of the Henderson Land Group. Counsel for Full Gain expressly affirmed that it relied on its separate corporate legal identity from Hang Yick. This becomes an academic issue because on the present facts, we would arrive at the same conclusion, whether or not the corporate veil were lifted.

42. To return to the tenancy agreement, we find that the maintenance obligations of Full Gain in Clause 3(c) and (d) are largely limited to the structure and common areas and facilities. Under Clause 3(d), they expressly include the liability of Full Gain to maintain the central air-conditioning system. The Applicant's evidence relevant to Full Gain's standard of maintenance, included a series of complaints by letter, the evidence on affidavit of its director, Miss C. Wong and certain admissions by the Respondents employees, Mr. W.C.Wong and Mr. K.K.Cheng.

43. After Full Gain purchased the building on 31st December 1993, the Applicant commencing on 14th January 1994 and continuing down to 6th May 1996, wrote a series of 15 letters of complaint to Full Gain, its solicitors or other agents. The letters included the complaint that hot water at a constant temperature, was only available if all hot water taps were turned on, resulting in wastage and an excessively high metered electricity cost. Other complaints were repeated in the Applicant's continuing correspondence, including those mentioned in the January 1994 letters. These included leaking bathroom walls together with falling paintwork, non-working dryer and defective locks to balcony doors, which prevented the exterior of the subject property being secured.

44. The Applicant made numerous oral complaints and sent several letters to Full Gain during 1994, in relation to the hot water problem. It took Full Gain 2 years to rectify this complaint by carrying out repairs or alterations to the system, culminating in replacing a hot water heater in 1996. Mr. Cheng admitted that it took 2 years to rectify the hot water problem. He recollected that only on two occasions since 1st January 1994, had he taken action to deal with the complaints. The correspondence file indicated that the only written answer to these repeated oral and written complaints, was the letter dated 24th April 1996.

45. Oral and written complaints over damp and leaking walls continued after the January 1994 letters. Later complaints included written notice from the Applicant, that plaster was also falling from the roof and walls.

46. The adjoining duplex, which was vacant for more than two years, was refurbished during this period. When Henderson Real Estate Agency Ltd eventually replied in its letter dated 24th April 1996, it correctly stated that under the tenancy agreement, Full Gain was not obliged to carry out what it described as a similar "complete refit" of the subject property.

47. However, if by the termination of the current tenancy, Full Gain elected not to carry out sufficent refurbishment to remedy any Clause 2(b) fair, wear and tear or developed inherent defects, that would normally reduce the market rent, which might otherwise be achieved. During the current tenancy, Full Gain was not liable to remedy any depreciation merely caused by fair, wear and tear. However, the damp and leaking walls were defects it was Liable to repair, when these were made known.

48. After repeated written notice, Full Gain took considerable time to replace the dryer and a longer period of 2 years to remedy the hot water defects. Mr. K.K.Cheng admitted in evidence that no steps were ever taken to repair the defective balcony doors. The Applicant itself attempted to deal with the leaking walls and falling paintwork. This was not a case where a landlord from an original complaint, took immediate but unsuccessful steps to rectify a problem, before a solution was found. Full Gain took no immediate steps and for unduly long periods, ignored repeated complaints. The damp and leaking walls and the balcony defects, forming part of the main structure, were the responsibility of Full Gain.

49. We find that Full Gain for lengthy periods of up to two years, repeatedly ignored clear, written and reasonable maintenance complaints. The dryer, hot water and air conditioning defects, were only remedied after long and unreasonable delays. Full Gain failed to perform its contractual maintenance obligation, contained in Clause 3(c) and (d) of the tenancy agreement. The Applicant is clearly entitled to damages, for the landlord's serious breaches of the tenancy agreement.

50. As to damages, we will adopt a fair, if broad, approach. Although a complaint had been made to the prior landlord in September 1993, the first written complaint, after Full Gain became the owner, was during January 1994. We consider it reasonable that within one month remedial action should have been taken. We calculate damages at the rate of 7.5% per annum on the contractual rent payable from 1st February 1994 to 31st December 1995. These calculations produce a figure of $101,775. We propose to round this figure down and award $100,000 as general damages.

New tenancy

Duration:

51. We confirm that the current tenancy was granted for 2 years from 1st August 1993 and statutorily continued until 31st December 1995. The Applicant now applies for the duration of the new tenancy to be for 3 years. The 1st Respondent did not agree to any term longer than the current 2 years. Where the parties do not agree on duration, the Tribunal may, under Section 1191, fix the term for a period not exceeding 3 years.

52. The practice of the Tribunal, places the the burden on the party wishing to vary the prior duration, to establish that the different duration sought, is fair and reasonable. The Applicant principally based its application on the fact that a new 2 years tenancy from 1st January 1996 would expire at the end of this year. In view of the nature of the current prolonged proceedings and the animosity between the parties, it did not wish to face again this year, possible unpleasant negotiations and potential proceedings, for a further new tenancy.

53. We record that the present new tenancy application was exceptionally complicated by the parallel building management proceedings, with which it was eventually consolidated. This position is unlikely to reoccur while the judicial resolution of these present proceedings hopefully may remove past areas of friction. It may be that a further conventional 2 years, rather than an unagreed 3 years term, will contribute to better relations between the parties.

54. The prevailing market rent may not necessarily vary for 2 and 3 years durations. However, in view of the longer duration now sought, it is unfortunate that the Applicant failed to lead any evidence from its two surveyors or cross-examine the 1st Respondent's surveyor, on rents for 3 years duration. None of these matters is decisive but when we review the evidence we are not satisfied that the duration should be lengthened. We therefore fix the duration of the new tenancy for a term of 2 years from 1st January 1996.

Remaining terms other than rent:

55. Under Section 119I of the Ordinance, we have power to determine the remaining terms of the tenancy, other than rent. At this stage it may be useful to comment on the relevance of the amount of future management charges. The landlord as owner has statutory rights under the BMO. In some cases tenants or their representative, may have certain if more limited rights. Where abnormally high management charges exist they are likely, in the market, adversely to affect the level of rents obtained by a landlord. Similarly, comparatively very high management charges, may be a relevant factor to be considered when the Tribunal, under Part IV, determines the prevailing market rent for a new tenancy.

56. We confirm we have no power to vary the 1st Respondent's liability under the DMC for management charges. The extent of the Applicant's liability to pay those charges, is governed by the tenancy agreement. The Applicant under the tenancy agreement, contractually accepted liability for part of those charges. We decline for these reasons, to vary the management charges or any other remaining terms of the current tenancy agreement. However, the parties expressed varying concern on the future suitability of some of the current present terms. In view of their concern we will grant liberty to apply, in case they fail to agree, on the precise form of any of the other terms.

New rent:

57. In terms of Section 119K, the new rent is determined on the basis of the prevailing market rent as at 1st January 1996. All three surveyors considered comparables from within the Suncrest Tower development. Mr. Chan and Mr. Scragg also referred to management charges of other comparable properties. The Century Tower One decision was also cited for duplex size adjustments - LT No.1260/95. In view of the fact that the other Suncrest Tower duplex was vacant during the relevant period, all three surveyors were only able to consider the smaller single floor comparables in that development.

58. The saleable area of the single floor flats is 152.9 square metres compared with 265.6 square metres for each duplex. Mr. Chan adopted a unit rate of $255 per square metre for the duplex and added $2,000 for the twin car park to arrive at a rent for the subject property of $70,000. Mr. Scragg's unit rate of $257 for the whole of the subject property produced a rent of $68,000. Miss Yabsley after applying a gross rate of $365 per square metre reached a figure of $97,000 to which she added $3,000 for the higher value of a twin carpark. The resulting sum of $100,000 was then adjusted downwards by 7.5% for quantum and an allowance for the one month rent free period, to arrive at a new rent of $89,000.

59. During the hearing differences relating to time and floor levels, became of lesser relative importance, when it was discovered that Full Gain's surveyor, had previously been unaware of significant rent free periods, for several of the better comparables. Full Gain's Mr. Wong conceded that the landlord had not disclosed this important valuation information, available from its other lettings, to its own surveyor. Miss Yabsley was therefore obliged for the first time to give her views on this evidence, while in the witness box.

60. On the basis of this further evidence and adopting a floor level adjustment of 0.5% per floor, the Suncrest Tower comparables produce adjusted rents ranging from $47,170 to $55,120. They may be summarised as follows:

61. Several of the comparables, shared with the subject property, very similar valuation dates. The evidence also established that during the first six months of 1996 this sector of the rental market remained relatively stable. These Circumstances therefore render it unnecessary to make any time adjustments. We are satisfied that the Suncrest Tower comparables, strongly support a rent for a single floor flat, on a higher floor level, in the region of $52,000. This would produce a unit rate of $340 per square metre.

62. We are satisfied that for the duplex flats, a size or quantum deduction, requires to be made. The duplex subject property is 74% larger than the single floor comparables. Mr. Chan for this reason in his valuation, made a 10% quantum deduction. Mr. Scragg's higher 20% deduction was complicated by the fact that it also included an adjustment for poor layout. Miss Yabsley arrived at a lower 7.5% allowance for quantum. On the evidence, we find that for the subject property, a 10% quantum deduction is appropriate.

63. The subject property in comparison to the lower floor flats, was also of inferior interior design. We accept the criticisms by Mr. Chan and Mr. Scragg of the inefficent layout. These extended to the uneconomic and exaggerated size of the ancillary areas; poor arrangement and relationship of living room, dining room and kitchen; access to the large store room only from guests bedroom and games room; and a long but narrow balcony. These poor design and layout factors, require a separate 5% downward adjustment.

64. The subject property has not been refurbished since at least 1993. All of the Suncrest Tower comparables, except Flat 22B, were new lettings to new tenants. The evidence was that Full Gain carries out at least a degree of refurbishment before new tenants enter into possession. The Applicant under its tenancy agreement, is not liable for deterioration caused by fair, wear and tear since 1st August 1993 down to 31st December 1995. On the other hand, we are satisfied that such fair, wear and tear, would have had an adverse effect on the achieveable market rent as at 1st January 1996. We will allow for this factor by making a further 5% downward adjustment.

65. The surveyors gave considerable attention to the twin covered car park spaces. The two car parks only had single car access. The second parking space is situated immediately to the rear of the other. Miss Yabsley when arriving at her base rent of $97,000 per month, had added $3,000 per month for the second car park space. The single floor comparable tenancies included only one car parking space. Mr. Chan reduced the value of the rear carpark space, for the inferior access, down to $2,000. Mr. Scragg stated that the poor access would make the rear space difficult to let as separate unit and gave it a market value of $500 to $1,000 per month. The reality is that the twin car parks are let to one common user, as part of a duplex tenancy. We do not propose to make any adjustment for the rear car parking spaces.

66. On these findings, the single floor flats unit rate of $340 per square metre, requires to be adjusted downwards by 20% to $272 per square metre. This adjustment would produce a rent of $72,243 per month. It remains to consider whether any adjustment should be made for management charges.

67. The Suncrest Tower comparables all pay similarly calculated management charges. Where high management charges are levied over a reasonable period of time, it can normally safely be assumed, that fact will already be reflected in the existing rents. The quantum of management charges would not then affect the determination of the new rent. However, in this application, there are other factors which oblige the Tribunal, to give further consideration to the impact of the present management charges, on the prevailing market rent.

68. Since Full Gain purchased the building, it has kept from 10 to 11 of the 44 single flats, vacant. Full Gain has paid the management charges for the vacant flats, so they have not directly resulted in any increased charges for the occupied flats. The management charges are effectively fixed by the interrelated Respondents. This relationship, the rent collecting involvement of another member of the Henderson Group and the relatively high turnover of tenants, raises the question whether the tenants, when accepting the current rents, have fully taken into account the quantum of current management charges.

69. Another background factor to the management of the building, including the fixing of management charges, is that Full Gain purchased the building for resale. Although market conditions caused it to continue letting many of the flats, the resale policy remains. On the evidence, capital appreciation rather than rental income, appears to be the owner's primary motivation. In these circumstances it was not only prudent but highly desirable for the surveyors to check the level of management charges for other developments. Mr. Chan properly considered management charges in Estoril Court, Goldwin Heights, Euston Court, Grand Panorama and Robinson Place. Mr. Scragg referred to those comparables. These other comparables strongly supported their opinion, that the charges for Suncrest Tower, were abnormally high.

70. We confirm that in an informed market, abnormally high management charges may be expected to have an adverse effect on rents. The existing tenants both individually and collectively, would not have been as informed participants in the rental market, as the Henderson Land Group. The cumulative effect of all these relevant factors leads the Tribunal, if exceptionally, to take the abnormally high management charges into account, in determining the new rent.

71. We have already found that if a reasonable standard of management were provided, the current charges are $700 per month higher, than for comparable properties. The deduction of $700 for that difference, would reduce the earlier adjusted sum of $72,243 down to $71,543 per month. The latter sum more accurately reflects the prevailing market rent. We will round that sum down to determine the new rent at $71,500 per month.

Costs

72. The Applicant applied for the costs of the consolidated proceedings. The Tribunal has a discretion to award costs under Part IV of the LTCO, only where the other party has conducted its case in a frivolous and vexatious manner - Section 119R. We are not satisfied that has occurred in the present LTCO proceedings. However, under the BMO our costs discretion is unfettered. The Applicant succeeded on its BMO claim, including the award of $100,000 damages. We are satisfied that for the BMO claim costs, prima facie, should follow the event.

73. The issues and quantum involved in the BMO proceedings, in accordance with normal Tribunal practice, attract High Court costs. We have recently adverted to that practice in Million-Add Development Ltd v. Secretary for Transport LT MR 3/94. Since the LTCO and BMO applications were consolidated, at least one-half of the total costs, are arguably apportionable to the BMO application. On that basis it would be reasonable to allow High Court costs for the BMO application until consolidation and thereafter costs for one-half of the consolidated proceedings. There will be a costs order nisi in those terms.

Orders

74. Accordingly we now make the following orders:

Dated this 17th day of March 1997.

Representation:

Mr. Shane Weir of Messrs. Weir & Associates, Solicitors for the Applicant.

Mr. Simon Chiu instructed by Messrs. Yam & Co for the 1st Respondent.

Mr. Philip Tam instructed by Messrs. C.Y.Lam & Co for the 2nd Respondent.