Pacific Knight Ltd v. Golden Crown Restaurant Ltd and Another
Read the full judgment text of LDNT 208/2002 on BabelCite. This LDNT judgment was delivered on 24 June 2003.
1. The Applicant is the tenant and the Respondents the landlords of the subject premises known as House 31B, The Crown Villa, 29-31 Ching Sau Lane, Chung Hom Kok, Hong Kong ("the Premises", also known as "House 31B"). The Premises is situated in the same building lot with 3 other houses, House 29A ("Comparable 6"), House 29B ("Comparable 5") and House 31A. All four houses in The Crown Villa belong to the Respondents. The Premises is held under a tenancy for a term of 2 years commencing on 16 Nov
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LDNT000208/2000 LDNT208/2000 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION Application No.: LDNT 208 of 2002
Coram: Member W K LO Date of hearing: 17 January 2003, 27 March 2003 and 9 May 2003 Date of judgment: 24 June 2003 _____________ JUDGMENT _____________ Background 1.The Applicant is the tenant and the Respondents the landlords of the subject premises known as House 31B, The Crown Villa, 29-31 Ching Sau Lane, Chung Hom Kok, Hong Kong ("the Premises", also known as "House 31B"). The Premises is situated in the same building lot with 3 other houses, House 29A ("Comparable 6"), House 29B ("Comparable 5") and House 31A. All four houses in The Crown Villa belong to the Respondents. The Premises is held under a tenancy for a term of 2 years commencing on 16 November 2000 and terminating on 15 November 2002 at a monthly rent of $71,000 inclusive of rates and management fee ("the previous tenancy"). The break clause can be exercised by giving 3 months' prior notice after the expiration of 12 months. The rates and management fee for the Premises, on monthly basis, are $3,080 and $8,200 respectively. Therefore, the monthly rent on exclusive basis of the Premises under the previous tenancy is $59,720. 2.The parties agreed that the Tribunal should grant a new tenancy of the Premises for a term of 2 years commencing from 16 November 2002. The two outstanding issues were firstly, the amount of the prevailing market rent ("PMR") as at the relevant valuation date of 15 November 2002 and secondly, the condition of the break-clause in the new tenancy. The Applicant estimated the monthly rent to be $48,850 on inclusive basis (i.e. the PMR of $37,570 on exclusive basis) while the Respondents, relying on her expert's opinion, estimated the PMR to be in the sum of $66,594 per month. 3.Both parties were legally represented. They adopted the same comparison method of valuation using unit rental value per unit area of each comparable as their basis of valuation. Between the parties, a total of 6 comparables were considered. The Applicant called for the evidence of its director, Mr. Martin Lane, who and his family have been residing in the Premises since November 1998. Mr. Lane presented his calculations and adjustments in his report (Exhibit A1). The Applicant also called for the evidence of another factual witness, Mrs. Ferris C. Bye, the tenant of Comparable 6 but did not call for any expert witness. The Respondents called for two witnesses: Mr. Wong Kwok Ming, a representative of the Respondents and Mr. Wayne Lee, a surveyor who prepared a valuation report and a supplementary report (Exhibits R7 and R6 respectively) and gave expert evidence in the hearing. The substantial difference in the final assessment of the Premises by the two parties is caused by the following factors:
Choice of relevant comparables 4.There are a total of 6 comparables given by the Rating & Valuation Department for this case. Mr. Lee in his valuation report and oral evidence gave opinion that all 6 comparables should be used for the purpose of valuation of the Premises. The Respondents relied on the expert opinion of Mr. Lee in submitting that all 6 comparables should be adopted in assessing the PMR of the Premises. 5.However, it was the Applicant's case that Comparables 1, 2, 3 and 4 should be disregarded. The Applicant submitted that Comparable 1, albeit located close to The Crown Villa and is of similar age, was not directly comparable to the Premises as its rental package was of an exclusive basis. The rental information of Comparable 1 also caused a certain degree of speculation, submitted the Applicant, because "the adjusted unit rent for Comparable 1 is 10% higher than the adjusted unit rent of Comparable 5 & 6 even though Comparable 1 is of a smaller size." As for Comparables 2 & 3, the Applicant submitted that they were not within the same category as the Premises since they were of much more luxurious nature with better amenities (with a larger house area, more number of bedrooms, central heating and heated indoor pool, and for Comparable 3, a much larger lawn). Similarly, the Applicant submitted that Comparable 4 was not within the same category as the Premises. 6.The Applicant summarized in the final submission the basic principles in the choice of comparables that had been adopted by the Lands Tribunal in several cases in recent years. I do not find any particular reason in the present case that merits any departure from the basic principles which are summarized below:
7.I disagree with the Applicant that Comparable 1 should be disregarded just because it would be necessary to convert the rent passing on the exclusive basis to the rent on the inclusive basis. I do not agree to this reasoning because the Landlord and Tenant (Consolidation) Ordinance (Cap.7) ("the Ordinance") governing the present application requires the determination of the PMR for the Premises on an exclusive basis. Therefore, in theory, after adjusting all the differences between a particular comparables and the Premises, the unit rent of that comparable will be converted to the estimated unit rent for the Premises, on exclusive basis. Only at the very last stage that it is necessary to convert the estimated exclusive rent of the Premises to the estimated rent for the same Premises under the new tenancy, on an inclusive basis. In converting the estimated rent from exclusive basis to inclusive basis, it is obvious that only the current rates and management fee of the Premises, which are not in dispute, are relevant here. As to the difference of about 10% in the adjusted unit rent of Comparable 1 and those of other similar houses in The Crown Villa (i.e. Comparable 5 & 6), I find that the margin is far too small for one to draw any conclusion as to whether Comparable 1 should be excluded for being obviously out of line with the relevant comparables. Hence, I decide not to exclude Comparable 1 in the process of choosing the best comparables. 8.In addition, based on the evidence provided by the parties, I have no doubt that Comparable 2 and 3 are not suitable comparables for the Premises because, even though they are also situated nearby in Ching Sau Lane, which is a short street, they provide much bigger and better facilities. I find that according to the analysis of Mr. Lee (Appendix VI of his report, Exhibit R7), the net rents of Comparable 2 and 3 are about 67% and 95% above the average net rents of Comparable 5 and 6, the 2 comparable houses in The Crown Villa. Therefore, I find that since these Comparable 2 and 3 belong to different sub-market, they should be discarded. 9.The situation is not so clear cut for Comparable 4. The effective area of Comparable 4 is only about 11% larger than that of the houses in The Crown Villa but the net rent of Comparable 4 is about 44% above that of the average of Comparable 5 and 6. As a result, the net unit rent (before adjustment) of Comparable 4 is about 30% higher than that of the average of Comparable 5 and 6. Since there are already 2 good comparables (Comparable 5 and 6) in The Crown Villa, a small estate comprising only 4 houses and a third good comparable, Comparable 1, which is situated adjacent to Crown Villa, I find that Comparable 4, being not so good as the other 3 comparables, should be discarded. Next, I shall consider below the evidence of the parties for these 3 most relevant comparables. Analysis and adjustments of the Comparables 1, 5 and 6 10.Mr. Lane for the Applicant analyzed the comparables in his report dated 17 January 2003 (Exhibit A1). He applied the adjusted unit rate to the effective area of the Premises after which he adjusted for the factor of "noxious adjoining construction activities" (i.e. the nuisance of noise and air pollution as well adverse effects caused by the construction site situated in front of The Crown Villa. 11.On the other hand, Mr. Lee summarized his adjustments, in the table at Appendix II of his valuation report (Exhibit R7). He estimated the percentage of adjustment for every factor between each comparable and the Premises. He summed up the total percentage of adjustment for each comparable and applied that to the unadjusted net unit rent for that comparable before arriving at the appropriate adjusted unit rent. 12.The Respondents submitted that Mr. Lee's approach was the usual approach adopted by surveyors and since Mr. Lee was an experienced expert in this field whose evidence had also been accepted by the Tribunal in the past, his approach and indeed his evidence should be preferred than that of Mr. Lane, who was not a trained surveyor and had no experience in property valuation. Moreover, the Respondent submitted that Mr. Lane's approach unnecessarily made adjustments to the rates and management fee of the Premises, which should not be varied regardless of whether any adjustment should be made to reflect the factor of nuisance of noise, pollution and / or adverse visual effects caused by the construction taking place on the site adjacent to the Premises. 13.I agree with the Respondents and prefer to follow the approach of Mr. Lee. However, I refuse to accept entirely the evidence of Mr. Lee as to every adjustment simply on the ground that he was the only expert witness called by the parties. I am of the view that when there is no clear cut evidence of one way or another regarding whether a factor identified by a party should call for adjustment, the Tribunal should make its decision only after weighing the evidence produced between the parties, including those from the expert witness. However, when the Tribunal's task is simply to decide on, for instance, the magnitude of certain adjustments, the evidence of expert witness should normally be given more weight. The same approach is adopted in the present case. 14.Therefore, I adopt Mr. Lee's adjustments to Comparable 1, 5 and 6 for the factors of size and building age. As to the adjustments for time, view (or view, noise and pollution) and conditions and amenities, I shall consider these further below. Adjustment for time 15.Although Mr. Lane agreed that time adjustment should be made, he approached the matter differently from that of Mr. Lee. He relied on the market commentaries provided by two international firms of real estate consultants in arriving at an average rate per month before applying the same to the comparables. Mr. Lane and the Applicant further criticized Mr. Lee for adopted the "Average Rent by Class", but not the "Rental Indices" provided by the Rating & Valuation Department. The Applicant relied on the guideline stated in the "Technical Notes" of the rental statistics published by the Department. It stated that "Rental Indices are a better reflection of change of value than Average Rents by Class". The Applicant further cited the judgment given on 8 July 2002 in Personal Electronics Ltd and Pantai Investments Ltd. (unreported case of LDNT 22/2002) in which Deputy Judge Wong of the Lands Tribunal opined in paragraph 12, inter alia, that, "I find the Private Domestic Rental Indices by Class (...) being more accurate and reliable than the others. I will therefore adopt the figures therein to assess the time adjustment." 16.I agree with the Applicant that the Private Domestic Rental Indices by Class be adopted for the purpose of assessing the time adjustment. I also prefer to use the Respondent's basic methodology of adjusting the time differences by reference to the relevant valuation date for the Premises and the commencement date of tenancies of the comparables. Adjustment for the effects of having a construction site adjacent to The Crown Villa 17.Mr. Lane and Mrs. Bye gave evidence on the impacts of the adjacent construction site to the living environment of The Crown Villa. The Applicant summed up the impacts in the written submission, as follows:
It was the case of the Applicant that as the construction works would not complete until January 2005 and the extent of pollution and nuisance could not be predicted at any time, the entire period of the new tenancy of the Premises would be affected. 18.Mrs. Bye gave evidence that at the time of agreeing the tenancy of Comparable 6, she and her husband did not aware of the effects of the construction site next door. They did not even aware of the existence of the construction site. The tenant of Comparable 5 also wrote a letter testifying the same situation in his case. The said letter was produced by Mr. Lane. 19.The Applicant submitted that "if Mr. Lee, who is an experienced in buildings and lands valuation failed to notice the construction site when visiting the Premises on 29 November 2002 - about 2 months after the time when the tenant in Comparable 1 negotiated his tenancy - how could a lay tenant with naked eye spot such a site, especially when the whole area was still covered by trees?" Since some 200 trees covering the site were not cut down until December 2002, anyone, including the tenant of Comparable 1, when inspecting the said comparable property in mid October 2002, would still find the view from Comparable 1 towards the adjacent construction site to be a lush green view. Therefore, the Applicant submitted that the rent of Comparable 1 had not reflected any adverse impact of the construction site. 20.Mr. Lane therefore opined that the adjusted rents for the Comparable 1, 5 & 6 should at the end be further adjusted downwards by say 25% to reflect the nuisance factors in the form of noise, pollution and loss of view. 21.On the other hand, Mr. Lee gave evidence that when first inspecting the Premises on 29 November 2002, he did not even notice the existence of a construction site next to The Crown Villa. Mr. Lee further opined that the tenants of Comparable 1, 5 and 6 should have taken the existence and hence the effects of the said construction site into account when negotiating for their respective tenancies. As a result, Mr. Lee concluded that since the rents reserved of these comparables already reflected the impacts of the said construction site, no further downward adjustment to any of these comparables, as suggested by Mr. Lane, would be warranted. 22.I disagree with Mr. Lee but concur with the Applicant's submission. I accept the evidence of Mr. Lane and those of the tenants of Comparable 5 & 6 that during the time prior to December 2003, neither the occupants of the Premises nor those of either Comparable 5 or 6 knew of the existence of the said construction site. For the same reason, it is unlikely that any visitor, including any intending tenant of the Premises would be aware of the existence of the said construction site. This conclusion is supported by the evidence of Mr. Lee who, despite of his knowledge and experience and his understanding of the effects of a construction site towards the PMR for the Premises, did not aware of the construction site either when inspecting the Premises on 29 November 2002. However, since any visitor, including any intending tenant, did not aware of the existence of the construction site, then obviously, the site and its adverse effects, if any, should not be a factor of adjustment, in the minds of any intending tenant. For this reason, since the relevant valuation date of the Premises is 15 November 2003 and as the effects of the construction site were only apparent to the occupants of the premises and those of the comparables or any visitor after the felling of trees in early December 2002, I find that no downward adjustment to Comparable 1, 5 & 6 to reflect the effects of the site should be allowed. Adjustment for conditions and amenities 23.I agree to adopt Mr. Lee's adjustment of +3% for Comparable 1 to reflect the difference in amenities between Comparable 1 and the Premises. 24.I find that a downward adjustment of 2% should be allowed for Comparable 6 to reflect the obviously superior quality of the bathroom in that comparable. Adjustment to the rent of Comparable 6 25.Mrs. Bye of Comparable 6 gave evidence that before agreeing to take over the renting of the premises from the former tenant, the latter undertook to give them a sum of $144,000, being equivalent to 2 months' rent. Mr. Lane, in his calculations, suggested that a deduction to the rent passing of Comparable 6, in the sum of $6,000 per month, should be made before arriving at the net rent for analysis. On the other hand, the Respondents submitted that Mr. Lane's calculation was illogical because the sum of $6,000 per month was not an offer by the landlord, the Respondents and therefore, it should not be a factor in the calculation of the market rent for Comparable 6. The Respondent also submitted that Mrs. Lane would enter the tenancy in any event because of the reduction. 26.I find Mrs. Bye to be an honest witness. I have no reason to disbelieve what she said. Therefore, for Comparable 6, I find that on the one hand, the landlord agreed and received a monthly inclusive rent of $72,000 whilst on the other hand, the tenant, after taking into account the lump sum inducement from the former tenant, effectively paid a monthly inclusive rent of $66,000 only. Therefore, this comparable is not a good comparable. If this comparable is not located in the same estate as the Premises, I shall discard this comparable. However, since this comparable is very close to the Premises in terms of similarities in all physical respects and it is a transaction relatively not too far away in time from the relevant valuation date of the Premises, I decide to retain this comparable. Nevertheless, before this comparable is analyzed and adjusted, I find that an average of the two figures of $72,000 and $66,000 or $69,000 should be used since this is an attempt to find a figure closest to what the landlord was receiving and what the tenant was paying for the tenancy of the comparable. Determination of the adjusted unit rent for the Premises 27.Based on my findings as set out above, I calculate the adjusted unit rent for each comparable as follows:
28.From the above analysis, the adjusted unit rent for Comparable 1, 5 and 6 are found to be $275.9 per sq. m., $251.9 per sq. m. and $230.8 per sq. m. respectively. The average of the 3 adjusted unit rents is $252.9 per sq. m. Applying this average to the effective area of 240.8 sq. m. for the Premises gives a sum of $60,898 as to be the PMR for the Premises under the new tenancy. However, since the previous tenancy was on the basis of inclusive of rates and management fee, I agree with the parties that the rent under the new tenancy should be on the same inclusive basis. Adding this sum of $60,898 to the monthly rates and management fee of $3,080 and $8,200 respectively gives a figure of $72,178, which is rounded to $72,000. To conclude, the monthly rent under the new tenancy for the Premises, on the basis of inclusive of rates and management fee, is determined to be $72,000. Condition of the break clause in the new tenancy 29.Mr. Lane gave evidence that he was worried about the health of his children as he found that the Premises as well as the amenity areas outside the Premises had been very much adversely affected by the construction site next door. He requested for a break clause in the new tenancy allowing the Applicant to give a one month's notice to quit after the first 3 months of the new tenancy. The Applicant submitted that this request was not only reasonable, but understandable. 30.Also, since the new tenancy would have already lapsed for more than 7 months, the break clause of 1 month's notice to vacate after the first 3 months of the new tenancy became academic. The Applicant therefore submitted in the final written submission that the Tribunal should allow the Applicant to give 1 month's notice to vacate after it has completed the first 8 months of the new tenancy on 16 July 2003. In case the Tribunal should be of the view that 1 month's notice is not adequate, submitted the Applicant, the Tribunal could extend the period to 6 weeks or otherwise. 31.The Applicant further submitted that although the Applicant asked for a break clause after 8 months, the PMR for the Premises should not be affected. 32.The Respondents submitted that the usual break clause of 3 months' prior notice after the expiration of 12 months, same as that in the previous tenancy of the Premises and those of other houses in the same estate, should be adopted as a term of the new tenancy. 33.I find it unreasonable to grant a new tenancy with a break clause of 1 month's or 6 weeks' prior notice after the expiration of first 8 months of a 2 years tenancy. I fail to see why the usual break clause for new tenancies for properties similar to the Premises, including the previous tenancy of the Premises and those of other houses in the same estate, should not be used. Furthermore, now that the trees had been cut and the works in the construction site were in active progress for some months, it would be up to the Applicant to decide whether to accept the tenancy as granted by the Lands Tribunal. Under section 119M of the Ordinance, the Applicant has the option as to whether to take up the new tenancy on terms as determined by the Tribunal or to notify the landlord that it does not wish to accept the tenancy. The Applicant should make up his mind and take advantage of the said provision of the Ordinance. On the other hand, the Respondents simply do not have that similar option under the same Ordinance. Costs 34.As I do not find that either party has conducted this case in a frivolous or vexatious manner, I shall not make any order as to costs against any party. Orders
Representation: The Applicant, represented by Messrs. Lovells, Solicitors The Respondents, represented by Messrs. Albert Dan & Co., Solicitors | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under LDNT 208/2002