Mass Transit Railway Corporation and Others v. Hsu and Sons Ltd

LDNT000003/1982

Landlord and tenant-new Part IV-grant of new tenancy - limited role of Lands Tribunal - fair market rent - Section 119K, Landlord and Tenant (Consolidation) Ordinance, Cap. 7.

IN THE LANDS TRIBUNAL OF HONG KONG

Coram: TRIBUNAL: His Honour Judge Cruden, President and M.W. Phillips Esq, Member.

Date: 27 August 1982

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JUDGMENT

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1. In 1979 the Respondent constructed a new block of six domestic flats at No. 5 Headland Road, Hong Kong. Upon completion three of those flats, which are the subject of this consolidated application, were let from the 1st day of May 1979 for a period of 2 years to the following tenants:

2. Units No.1 and No.2 are ground floor flats with their own private gardens. Unit No.5 is a duplex apartment forming part of the first and second floors of the premises together with its own private rooftop area.

3. Those initial leases having expired on the 30th day of April 1981 and the statutory periods under the notices served pursuant to part IV of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 having elapsed, the three applicants, as tenants, have now applied to the Tribunal, pursuant to Section 117(1) of the Ordinance, for the grant of new tenancies.

4. The parties were all agreed that the new tenancies should each be for a duration of 2 years commencing on the 1st day of July 1982. The parties further agreed that the new tenancy agreements should contain the same terms as the prior agreements, except for the exclusion of Clause 8 thereof - being the former option to renew - but were unable to agree upon the new rent.

5. The sole issue in dispute is the new rent. We must therefore, pursuant to Section 119K determine the fair market rent, as at the 1st day of July, 1982, for each flat let in accordance with those agreed upon new terms.

The role of the Tribunal in determining the new rent

7. Before proceeding to consider the evidence, it may be helpfu1 if we set out the statutory role of the Tribunal, in determining the new rent.

8. Where new legislation is enacted to give domestic tenants greater protection than they contractually or at common law enjoy, it may deal with two different aspects of a landlord and tenant relationship. First, it may protect the tenants right to remain in possession, by giving them security of tenure longer than the contractual period under a tenancy agreement. Secondly, it may by rent restriction provisions, protect the tenants from the risk of major market or other increases in rent.

9. If the legislation includes rent restriction provisions then a court of Tribunal maybe empowered to fix rents lower than the rents which, but for those provisions, might be charged for the same premises if the rent was freely negotiated. Where rent controls exist the old rent may also be used as a proper basis for calculating the new rent. For the rent control legislation may require the new rent to bear a reasonable relation to the old rent. Indeed, statutory maxima may be prescribed, controlling any increases, using the original or the prior rent as a base. A variant of the latter type of legislation already exists in Part II of our Ordinance - Section 54 et. seq.

10. However, under Part IV the position is quite different. The Tribunal has been given only the first mentioned power to grant tenants some security of tenure. The Tribunal has not been given the second mentioned power to impose rent restrictions or otherwise exercise control over rents. Part IV clearly provides only security of tenure protection. We would emphasise, because this is an area where misconceptions can easily arise, that Part IV does not include any provisions under which the Tribunal can control or directly influence rents.

11. The Tribunal has a discretion to grant a new tenancy and also a discretion, subject only to very general guidelines, to determine the various new terms relating to duration and otherwise. But it does not have an unfettered discretion to fix the new rent. In place of a general discretion, the Tribunal is instead, under Section 119K directed to determine the "fair market rent". Once that fair market rent" has been ascertained the Tribunal is obliged to fix that amount as the new rent. The Tribunal has no discretion to use the old rent as a base and then make allowances for subjective but no doubt very real factors; such as how long the tenant has been in possession, the percentage of any increase; any goodwill flowing from the fact that he may have been an exemplary tenant by promptness in paying rent and upkeep of the premises.

12. For example, in our previous judgment Union Carbide Asia Ltd. v. The Hong Kong Land Co. Ltd. L.T. No. 17/82, we had to determine the new rent of a very large domestic flat of three floors with a net area of 295.8 square metres (3184 square feet). The old rent, negotiated in 1978, was $10,500 Per month and commenced on 1st January 1979. On 19th July, 1982 we fixed the new rent, exclusive of rate, at $32,000 per month. In determining the new rent the rate of the old rent and the percentage increase of the new rent over the old rent were therefore not directly relevant. Nor was it relevant to find out whether in 1979 the fair market rent was $10,500. Nor was it open to us in fixing the new rent to add a percentage to the old rent of $10,500 to allow for subsequent inflation or a reasonable return on the land Lord's investment in the light of current interest rates; or an allowance for the other subjective factors we have earlier mentioned or any similar formula making like allowances or adjustments. We recognise at once that under different legislation a cogent case might be created for fixing a rent after taking these factors, or some of them, into account.

13. However, this Tribunal has a very different and much simpler statutory role. Our role is merely to ascertain what the fair market rent is for these premises as at the lst day of July 1982 and fix that amount as the new rent. This is certainly the accepted view of the Court's task under the similarly drafted English landlord and Tenant Act 1954. In relation to business premises under the English Act, 'Hill and Redman's Law of Landlord and Tenant' (16th Edn.) page 715 comments:-

"The broad philosophy behind the Act is that a business tenant shall have a degree of security of tenure but that, in contrast to statutory control of residential tenancies, the rent payable shall be a full market rent. Thus there is no restriction under the Act on the level of rent which a landlord may charge and when the court has to fix a rent it does so ... on the basis of a full open market rental''

14. Those comments equally apply to Hong Kong domestic tenancies under our Part IV. The new rent fixed under Part IV is, in reality, as precise a reflection as the Tribunal can discern, of the current fair rents fixed by the market. It is therefore arguable that it is the market and not the Tribunal which really fixes the new rent. Part IV will therefore not, by itself, result in any spectacular change in domestic rent levels. If spectacular changes develop they will first have to occur in the market before they can be reflected in the decisions of the Tribunal.

15. A recognition that Part IV is not a species of rent restriction legislation but only concerned with security of tenure, is essential to an understanding of our limited power. If the Tribunal under Section 119K were to affect or directly influence the level of new rents it would clearly be acting beyond its jurisdiction. For it would then no longer be reflecting market rates by fixing the "fait market rent". Instead the Tribunal would be fixing a non-market rent. We have no authority, no matter how inviting the prospect, to embark upon an exercise of that kind. We are a creature of statute and it is to our statutory powers and in particular, in this instance, to Section 119K, that we must look. Under those powers our duty is to reflect, but not precipitate, stimulate or restrict market changes.

16. The only limited qualification to that observation is that we recognise that the very existence of the Tribunal, including its powers under Section 119K, means that the ordinance may have an indirect effect on the market. For the new Part IV has certainly added another element to the totality of competing forces the market represents. Landlords and tenants who previously negotiated free of legally imposed restraints, now do so with the knowledge that if either attempts to secure agreement to prima facie unreasonable demands, the other may have recourse to the Tribunal which, as to rent, has the limited power to fix a fair market rent.

17. Before the new Part IV was enacted a landlord in a strong position might have negotiated a rent higher than the fair market rent; a tenant in a strong position might have obtained a rent lower than the fair market rent. But we suspect this indirect influence of Part IV on the market will be mininal. Or as we have seen neither party can invite the Tribunal under Part IV to fix a new rent to take into account subjective, personal or other circumstances except those which exist in the market. We appreciate that some of those factors may be among the array of constitutent elements which operate in the market. If so, they will already be among the elements making up the fair market rent and cannot separately or additionally be taken into account by the Tribunal. The parties can only ask the Tribunal to fix what in any event would have been the rent agreed to by parties after fairly negotiating in the market.

18. It may well be that some critics will comment that fair market rents fixed under Section 119K are unreasonable! While that must always be a subjective assessment it is one clearly anticipated by the legislature. For the legislation does not claim that the fair market rent under Section 119K is necessarily, according to all criteria, a reasonable rent under Section 115(1) it is only expressly reasonable to the extent that it is the rent which may "reasonably be expected'' to be obtained for the suit promises. In other words it only has to be reasonable in relation to the market. Market rates under different criteria may be quite unreasonable. That statutory reasonableness does not therefore relate to the amount of the rent considered in isolation but solely whether it is the current fair rent in the market. The fact that the new fair market rent fixed under Section 119K may not necessarily be considered, under all criteria, reasonable is indicated by the proviso to Section 119M(4). Section 119M provides that where a tenant does not accept the terms of the new tenancy he shall, until he vacates, pay the new fair market rent.

19. However, where the now terms, apart from rent, are materially different to the old terms either party may apply to the Tribunal for a different rent to be fixed for that short period. Where a different rent is fixed it is defined as a "reasonable rent" as distinct from the other statutory concept of a "fair market rent. This is an indication that the Legislature recognises that in the broadest sense - particularly if subjective factors are taken into account - there may be times when the statutory "fair market rent" will not correspond with a "reasonable rent'". Although for completeness it should be emphasised that a "reasonable rent" for that limited period can only be fixed where the new terms, are materially different to the old terms. Clearly the proviso was enacted to allow the Tribunal to take personal and other subjective factors' into account, which it may not take into account when fixing the fair market rent for the full duration of a new tenancy.

The fair market rent of the suit premises

20. In this application we have had the benefit of very detailed and comprehensive valuation reports by three different valuation surveyors.

21. In relation to valuation reports we would make two general observations. First, it would be very helpful if these are formally, produced to the Tribunal in triplicate. For normally the Tribunal will consist of at least two persons and it is desirable that each should have his own separate copy. Secondly, we were pleased to find that where Lists of comparables were produced they generally formed part of the bound valuation report. Where a report includes a list of comparables, plans or other information as appendices or otherwise, it would also be helpful if all the pages were consecutively paginated. In some reports the narrative portion was paginated but the plans, appendices and other pages unnumbered. It makes for easy reference if each page is numbered.

22. Before going on to consider the evidence of the valuation surveyors, including their written valuation reports, it may be helpful to tabulate the position of the three suit premises as follows:-

23. These valuations were all arrived at by qualified chartered surveyors of some experiance after considerable research. The monthly rents under the valuations reveal not only substantial differences between the valuer for the landlord and the valuers for the tenants but also, at least initially, considerable differences between the tenants valuers in relation to Units 1 and 2 which were directly comparable properties. These differences confirm our earlier observations in Union Carbide Asia Ltd v. The Hong Kong Land Co. Ltd. (supra) of the undesirability of the Tribunal delegating, at this stage, our rent fixing powers to a sole valuation surveyor under the alternative procedure presecribed in Section 119K.

24. The evidence of the valuers was particularly interesting for while they used settled principles each adopted a different approach. Mr. G.H. Moffoot, Chartered Surveyor, gave evidence for the tenant of Unit 1. He followed the traditional approach relying on analysed unit rates of recent rents, not only in Headland Road, but of comparable properties in the same locality and elsewhere. He cited 10 other properties variously situate in Headland Road, Chung Hom Kok, Repulse Bay, Stanley, Tai Tam and The Peak. In oval evidence he classified the comparables in Chung Hom Kok and Headland Road as the more valuable and the other more distant properties as being useful but of lesser importance. Mr. Choi, Chartered Surveyor, who gave evidence for the tenants of Units 2 and 5 basically adopted the method of direct comparison of unit rates. Rather than surveying comparable properties over a wider area he selected two properties at No. 3 Headland Road and two properties at No. 4 Headland Road and related them to his two suit, premises at No. 5 Headland Road: Mr. R. G. Williams, Chartered Surveyor, who gave evidence for the owners, first referred to 17 comparable properties drawn from Headland Road, Chung Hom Kok, Stanley and Tai Tam. After considering that very substantial number of properties he then rejected the employment by itself of a unit rate approach as the soundest basis of valuing these particular suit premises. Instead, he adopted a relativity approach comparing flat with flat. He also compared the rents of the Stanley Knoll properties in 1979 with their present rentals in order to establish a basis of relativity. He then applied the same proportionate increase in Stanley Knoll rentals between 1979 and 1982 to the 1979 rents of the suit premises at No. 5 Headland Road. He concluded that the same relative increase to the 1979 Headland Road rents would result in a 1982 rent which would be higher than the fair market rent. He then discounted that rental so that it more reasonably related to current rentals of another Headland Road property and to the Stanley Knoll properties he used for his relativity exercise.

25. Before going on to consider the valuers evidence in relation to each of the suit premises we would observe that again there seemed at least some initial confusion as to precisely the type of valuation which is appropriate under Part IV. Mr. Choi was the only valuer who in his two reports expressly stated that the value he calculated was in his "opinion the fair market rent" of the premises. Mr. Moffoot in his valuation report stated that his instructions were to calculate "the current open market rental value" which he defined as "the best rent at which the subject property might reasonably be expected to be let" in accordance with certain assumptions he then lists. When giving oral evidence he stated that the written report had not been prepared for the purpose of ascertaining the fair market rent under Part IV. For the purpose of Part Iv he then made some reductions to his initial valuation which was as at the 1st day of May 1982. As a result his valuation in the written report of $39,500 was reduced to $37,300. Mr. Williams calculated what he described as "a reasonable rental which the property could command" in accordance with certain assumptions which he also listed.

26. We would repeat that all rent valuations prepared for the purposes of Section 119K should be of the "fair market rent" as defined in Section 115(1). There is no reference in that statutory definition to "open market rental", "best rent" or "reasonable rental" although at times all those descriptions may be taken into account by a valuer in assessing the fair market rent. Some of those other descriptions do form part of the English definition in Section 34 of the Landlord and Tenant Act 1954 but they do not form part of the Hong Kong statutory definition.

27. The Tribunal's task in determining the fair market rent of suit premises would be assisted if valuers reports have one common object, namely to calculate the fair market rent. If other definitions are used they may lead to confusion, even if it is merely an alternative way in which to describe the same or a similar exercise.

28. All valuers had personally inspected the properties they valued. In addition to the evidence of the three valuers the Tribunal, together with representatives of all parties, inspected the three suit premises and also some of the comparable properties referred to in evidence. The suit premises at No. 5 Headland Road are within a modern concrete building of three stories built in 1979. There is a large paved driveway and each unit has a covered carport. The suit premises include the following features:

29. Unit No, 1 and Unit No. 2 were identical except that the existing tenants had put some of the rooms to different uses, Unit No. 1 was let in 1979 for $21,500 and Unit No. 2 for $21,00 but we propose to make no distinction between them for the purpose of fixing the fair market rent.

30. Mr. Moffoot, for the tenant of Unit No, 1 considered the fair market rent as at the 1st day of July 1982 to be $37,300 exclusive of rates calculated at $15 per square foot or about $160 per square metre. He arrived at this assessment after considering comparable lettings. Having made certain deductions he arrived at what he considered to be the correct unit rate to apply to the suit premises. The majority of his 10 comparables were town houses with small gardens. The town houses were in developments comprising twelve or more houses usually with communal swimming pools. Three of the comparables were let in 1981 and are of interest as a guide to the movement of the market but as comparables are somewhat out date The most relevant of his comparables was Flat C, 2nd floor, No. 4 Headland Road, This flat is in a block immediately adjoining the suit premises and was built in 1959. It is in good condition and appears to have been very well maintained. Flat C was let from 1st January 1982 at $33,500 per month exclusive of rates. That letting was a renewal of an existing tenancy, The flat is very much larger than the suit premises being 3,300 square feet while Units No. 1 and 2 are 2,440 square feet. Mr. Moffoot calculated the unit rate for Flat C at $109.27 per square metre ($10.15 per square foot). His calculations result in Unit No. 1 having a vlue of $5 per square foot more than Flat C.

31. This difference is in part arrived at after taking into account the age of the two properties; a comparison of the private garden of Unit No. 1 with the large elevated balcony of Flat C and use of a communal garden; comparable size, design and layout; and sea views. It was Mr. Moffoot who pointed out that while Flat C and Unit 5 enjoy similar seaviews from their balconies and within the front rooms of the premises, the ground floor Unit No. 1 has no seaview from within the premises. This is only obtained from the front garden, The same position applies to Unit No. 2.

32. Mr. Choi relied on the direct comparison of 4 lettings in Headland Road. Two of those properties were ground floor garden flats at No. 3 Headland Road in a building completed in 1966. The other two were upper floor flats at No. 4 Headland Road being Flats D and E which are in the same block as Flat C which we are satisfied was the best evidence of value in Mr. Moffoot's list. Mr. Choi emphasised that the suit premises and his four comparables were all within three adjoining buildings in Headland Road; each building was on the same side of Headland Road all had similar views and amenities. Because of the nature of his comparables he did not consider lettings of other houses or town houses in other localities was necessary, in his view the Headland Road comparables were more relevant and also had the advantage that little further analysis and fewer adjustments were necessary.

33. Mr. Choi recognised that No. 3 and No. 4 Headland Road were older buildings than No. 5 Headland Road but commented that both the older buildings were substantially constructed and very well maintained. He stated that the layout of the flats in No. 3 and No. 4 Headland Road were similar to Unit No. 2. All these factors justified, in his opinion, a unit rate approach within this limited group. However, he allowed about 10% for age difference between the comparables and the suit premises. On this basis Mr. Choi adopted a unit rate of $12.50 per square foot ($134.50 per square metre) and allowed an additional 10% for the garden. No analysis was produced to support the allowance for the garden. An allowance of $500 per month was made for electrical appliances and central air-conditioning. Under cross-examination Mr Choi explained some minor discrepancies in his calculations by stating that for flats of this kind small differences in area of up to even 200 square feet would make little or no difference to the rent paid. In addition, parties when negotiating usually deal in rounded off figures. In his valuation of Unit No. 2 he rounded up his final calculations to produce a rental valuation of $34,500 per month exclusive of rates.

34. Unit No. 5 was one of the 4 duplex apartments situated above the ground floor units. Mr. Choi was examined on the similarity of townhouses and duplex flats. Unit No. 5 is without the small private garden usually provided with a town house. However, its separate entrance, by a short flight of external stairs, is similar to the entrances of some of the other town house developments cited to us as comparables. Mr. Choi stated that the differences in rates per unit value for duplex flats and town houses was minimal provided each floor had an area of at least 800 square feet (75 square metres approx.). Anything less, however, would cause a considerable decrease in rate per unit value. For Unit No. 5 Mr. Choi again applied the rate of $12.50 per square foot ($134.50 per square metre). This rate was applied to the total floor area of Unit No. 5 but excluding the open roof area for which he added the sum of $1,500. A further $500 was added for electrical appliances and central air-conditioning. After some rounding down Mr. Choi assessed the rental at $33,500 per month, exclusive of rates, for Unit No. 5.

35. Mr. Williams very comprehensive report included the rental details of 17 comparables. However, he considered that they were of little use as a basis on which to construct a rate per unit value for application to the suit premises. In his view the rental value of any property at this top end of the residential market is not necessarily mathematically influenced by actual floor areas, provided the total area is sufficient. Given an acceptable total floor area, design, layout, number of bedrooms, finishes facilities and location become more important factors. He stated that the suit premises appeared larger than they actually were due to the high standard of design. In these circumstances it would be wrong, in his opinion, to adhere rigidly to a comparison on a strict unit rate basis.

36. Mr. Williams approach on this basis was to compare flat with flat attempting to allow for intangible factors which would probably influence a prospective tenant in this section of the residential market. In addition to relying on current comparables he went on to develop his relativity concept. Going back to the initial lettings of No. 5 Headland Road in 1979 he noted that Units Nos. 1, 2 and 5 were then let for $21,500, $21,000 and $17,000 respectively. In 1979 Units C3 and C5 at Stanley Knol1 were let for $10,000. Those differences, he submitted, indicated that in 1979, No. 5 Headland Road was considered to be superior, to the comparable Town houses at Stanley Knoll. Mr. Williams claimed that Headland Road was still a superior locality to Stanley Knoll but he agreed that since 1979 the difference had narrowed. However, he pointed out that Unit C6 at Stanley Knoll was let in March 1982 for $40,000 per month and Unit C3 in June 1982 also for $40,000. Mr. Williams conceded that if his relativity approach was applied without qualification then his resulting valuations for Headland Road would be extremely high and above the fair market rental, He therefore paused and tested those calculations based on relativitiy, against the comparables available from other Headland Road lettings. In particular he considered the letting of House No. 3, at No. 13 Headland Road. This property was built in 1971, is on the opposite side of Headland Road and does not have as goad a view as the suit premises. On the other hand it has a small garden and is some 100 square metres or roughly 1,100 square feet larger than the suit premises. Mr. Williams considered that No, 13 Headland Road should have a higher value than the base figure of the suit premises. The rent of $44,000 per month for No, 13 Headland Road epuates to $132.20 per square metre ($12.30 per square foot) for a covered area of 3,580 square feet (332.9 square metres). He also took into account Flat D at 4 Headland Road, which was one of Mr. Choi's comparables, let in September 1981 for $40,000 per month.

37. Mr. Williams concluded that disregarding the garden and roof top area, each of the suit promises should be let at $40,000 to $44,000 per month, For Units Nos. 1 and 2 he selected a base figure of $40,500 but inclusive of air-conditioning. To that he added $500 for electrical appliances and $6,000 for the garden, The latter figure represents 15% of the base figure of $40,000 presumably exclusive of air-conditioning. This resulted in a final valuation for Units Nos. 1 and 2 of $47,000 per month.

38. For Unit No. 5, the duplex flat, Mr. Williams selected a base figure of $40,000 but inclusive of air-conditioning and then added the same $500 for electrical appliances. Unit 5 has an exclusive roof area and $1,500, being 4% of the base figure of $40,000, was also added. Mr. Williams valuation for Unit 5 then totalled $43,000 per month exclusive of rates.

39. Mr. Williams explained in his Report the basis on which he had allowed 15% for the gardens. First, he had in respect of the comparable at Stanley Beach Gardens compared the rents paid for the garden flats at that property with those in the same development which did not have gardens. Secondly, his evidence drew attention to the differences in the 1979 rents of the suit premises where the garden flats had been let at $21,500, $21,000 and the duplex at $17,000. The 1979 difference was $4,000 per month and in his view a 50% increase to allow for inflation was reasonable producing a figure of $6,000 for the added value of a garden in 1982. No explanation was given of how the 4% was selected as the value of the roof top area.

40. The different approaches of the three valuers was most useful in highlighting the many different factors the Tribunal has to take into account in determining the fair market rent. The contrast between those parts of their evidence where their approach differed was also helpful. On the other hand there were areas where they were in common agreement.

41. We agree with all three valuers that under Part IV where we are only concerned with domestic premises having a rateable value of $80,000 or more, the unit rate per square foot is a less useful unqualified basis of calculation, than it may be for smaller domestic or commercial premises where the area  is of sreater importance to the prospective tenant or purchaser. Once a flat at the top end of the market reaches over 2,500 square feet, design, layout, finishes, number of bedrooms, and any special features or facilities are of more importance than merely greater square footage simpliciter. On the other hand, where differences in area are far greater than, for example, Mr. Williams extra ten-square metres increased size will still remain an important element in calculating rent.

42. We also accept the valuers evidence, on which they were agreed, that where other factors are similar, single units houses will usually command higher rents than town houses and town houses, in turn, will usually command higher rentals than flats. Further, while it is true many town house gardens are overlooked by flats on higher floors, they still have more privacy than flats sharing communal gardens. Single unit houses, of course, enjoy the most privacy and exclusiveness.

43. When valuing a property which includes a garden a number of different approaches may be adopted. On one hand the garden may be valued separately. On the other hard, if a direct comparison with other properties also having gardens is available, a unit rate approach may be appropriate.

44. Mr. Williams noted the difference in 1979 between the rents of Units No. 1 and No. 2 with gardens compared with Unit No. 5 without a garden. As we have noted he then added 50% to the 1979 differential to allow for inflation between 1979 and 1982, Even if that were a proper approach, it overlooks the fact that while Unit 5 did not have a garden it did have an exclusive roof top area which was an amenity not enjoyed by Unit No, 1 and No, 2. A more serious objection is that his approach ignores the fact that the real estate market is affected by more influences than merely inflation, Any approach which ignores all but one factor is probably arbitrary and certainly suspect.

45. We have taken note of Mr. Williams comparisons at Stanley Beach Gardens where he records that in April 1982 Flat D1, with a garden, was let at $43,000 per month while in the same month, Flat D2 without a garden was let at $38,000 giving an added value for the garden of 13% on the rent paid for Flat D2. In the same development, in July 1982, Flat A1 with a garden was let at $45,000 per month while in the same month Flat A2 without a garden was let at $41,500 per month giving an added value for the garden of 8.5% on the rent paid for Flat A2. We are given to understand that Flats D1 and D2 are similar in size and design, so the difference in the rents may reasonably be attributable to the provision of a garden. The same inference may be drawn in respect of Flats A1 and A2. The added value seems to be a little inconsistent being 8.5% in one case and 13% in the other but this is not unusual where individual taste at this top end of the market may play a large part in the bargaining process, However, in neither of the examples cited by Mr. Williams has the added value been as much as the 15% allowed in his assessment.

46. Perhaps he considers the gardens for the suit premises superior to those at Stanley Beach Gardens. Our analysis of these calculations tends to support Mr. Choi's allowance of 10% for the garden. The arbitrary addition to 1979 rents of an allowance for inflation is also unsound for, on the evidence adduced, the relative added value of a garden has decreased over the years. This may be due to the recent growth of town house developments providing an increasing number of small gardens. This trend may have been a factor in reducing the premium the market was, previously prepared to pay for this additional amenity. Mr. Moffoot stated he allowed $5,600 per month for the garden of Unit No. 1. But it was not clear from his oral evidence whether this sum related to his initial report or to his revised valuation as at the 1st day of July 1982.

47. In considering the added value of a garden we have found it useful to look at Mr. Choi's figures for the premises at No. 3 and No. 4 Headland Road. If we accept Mr. Williams approach that flats in this section of the market of 2,500 square feet and over let at much the same rent, it would appear that in January 1982, a garden at No. 3 Headland Road added something in the region of $3,000 to whet would otherwise have been the rent.

48. On the other hand, it is possible to apply a unit rate approach, after making some adjustment for size and age, to No. 4 Headland Road. If we apply $120 per square metre to Flat A, No. 3 Headland Road, the rent per month, without a garden, would equate to about $31,500, and the added value for the garden to about $3,500 per month. The gardens at No. 3 Headland Road are better established and landscaped than those at No. 5 Headland Road and also include a small back garden. On this basis we could allow $3,000 per month as the additional value of the gardens for the suit premises at Units No. 1 and No. 2.

49. Our inspection of the suit premises confirmed Mr. Williams evidence that, at least in one respect, the suit premises, due to their design, gave the impression that they were larger than their measurments might suggest. We remind ourselves that the 2,440 square feet area of Units 1 and 2 and the 2,550 square feet of Unit 5 are less than many of the comparables. For example No. 3 Headland Road includes Flat A of 2,777 square feet and Flat B of 2,850 square feet. No. 4 Headland Road has Flat E. with 3,406 square feet and Flat D also of 3,406 square feet. No. 13 Headland Road is even larger with an area of 3,580 square feet which is 1,140 square feet more than Units No. Land No. 2. We cannot ignore these substantial differences.

50. The impression of spaciousness had been achieved by careful design and emphasis on living areas. On the other hand, there were areas which were cramped and inadequate. There simply was not sufficient storage space for average family requirements of flats of this size. Furthermore there was no backyard, drying or storage areas in the vicinity of the kitchen. A small utility area just large enough to accommodate a washing machine and a dryer placed one on top of the other, was provided in place of a separate laundry. At the rear of the kitchen a narrow passage connected an equally small single servant's room to a combined toilet and bathroom. The passage way was too small to be used effectively for anything other than access. Unit 5, the duplex flat, was slightly larger than Units 1 and 2 but again the apparent spaciousness of the living areas contrasted with the inadequate storage and minimal service areas.

51. In considering the values placed on the suit premises in relation to the rents paid in respect of the comparables perhaps the best evidence was given by Mr. Choi. The other properties he cited were all flats rather than town houses or single unit dwellings. In addition, they were all in adjoining, if older properties, to No. 5 Headland Road. However, these older properties all appear to have been very well maintained and are in good condition. Their layout is similar to the suit premises. Any obsolescence is minimal.

52. The two comparables at No. 3 Headland Road were both garden flats having areas of 2,777 square feet (258 square metres) and 2,850 square feet (264.8 square metres). Their unit rates, inclusive of garden, are $135.65 per square metre and $132.17 per square metre respectively. They are each let at rentals of $35,000 per month. It appears that what one lacks in area the other gains in having the better view. The comparable with the better view is on the same side and similar to the suit premises.

53. However, the areas of the suit premises are smaller than all the Headland Road comparables. After considering the whole of the evidence we consider that a rent of $150 per square metre, inclusive of garden, is appropriate. If we accept Mr. Choi's approach by allowing 10% as an allowance to cover the difference in age that increases the rate to $165 per square metre. Units Nos. 1 and 2, inclusive of gardens, have an area of 228 square metres and at the rate of $165 per square metre produces a rental of $37,600 per month.

54. As to the Stanley Knoll comparables some of these rentals are higher than current Headland Road rentals. We are satisfied there is no longer the difference between Stanley Knoll and Headland Road which Mr.Williams 1979 figures suggested. These figures indicated that No. 5 Headland Road's rental value was 70% higher than Stanley Knoll. In 1979 Headland Road in relative terms was probably more prestigious than in 1982. For the former exclusiveness of Headland Road has decreased with the gradual re-development of single dwellings to blocks of town houses and flats. Conversely, in 1979 Stanley Knoll was a new major development of generally a higher standard than other developments in the Stanley locality. Stanley Knoll also has a swimming pool and tennis courts. No. 5 Headland Road has none of these facilities. We agree with Mr. Moffoot that any earlier difference between these two areas is now not so apparent. Indeed, on the evidence at this hearing we could not make any general statement as to which area, if any, is now superior.

55. All the valuers were agreed that an allowance should be made for electrical appliances. This arises from the fact that the suit premises are different from most similar flats in that not only do they have individual central air-conditioning units but each is also supplied by the landlord with electrical appliances including a refrigerator, dishwasher, washing machine, drying machine and also cooker. Each unit is also supplied with electric water heaters but it is usual for water heaters of some sort to be supplied by the landlord and no separate allowance is therefore necessary if comparisons are made with flats having similar facilities. We recognise that in supplying these appliances, the owner may have gained in other respects. In particular it was noted on inspection that the areas usually given for a laundry and a drying area have been dispensed with in the suit premises.

56. Two of the expert witnesses allowed an additional $500 per month to the rent for the provision of these electrical appliances. Mr. Choi also allowed $500 but included the provision of the central air-conditioning in this allowance. Mr. Moffoot and Mr. Williams had already included air-conditioning in their base figure. $500 per month would in our view be the maximum provision for the electrical appliances supplied by the landlord.

57. To the base figure on Mr. Choi's calculation of $37,600 a sum not exceeding $500 must be added for electrical appliances. If $500 is added, the monthly rental would be $38,100. After taking into account Mr. Choi's lower assessment for electrical appliances that sum could be rounded down to $38,000 per month, exclusive of rates and management charges.

58. Alternatively, if we give the most weight to the comparable lettings at No. 4 headland Road which are for even larger flats, the appropriate equivalent rate for size as well as the more modern design finish, air conditioning and the extra. room would be approximately $140 per square metre. Again allowing 10% for age the rate is adjusted to about $155 per square metre which equates to $35,350. Adding $500 for the appliances and $3,000 for the garden would give a total rental value of $38,850 per month.

59. Another alternative would be to follow Mr. Williams approach. However his base rate of $40,000 per month, on the evidence now available to us, would need to be reduced to $35,000 per month. In making this reduction we are particularly influenced by the comparable lettings at No. 3 and No. 4 Headland Road which were not expressly considered, by Mr. Williams. We must in addition take into account the generally accepted superiority of town houses over flat. We also are not convinced that the earlier, superiority of Headland Road over Stanley Knoll still exists. Two of the latest lettings at Stanley Knoll were House D8 in July 1982 for $35,000 per month while another town house in the same development, C2, was under offer by the landlord at $35,000 per month. These lower rentals compare with higher rents of $38,000 per month and $40,000 per month for townhouses B6 and C6 in the same development a few months earlier namely in February and March 1982. Although for, completeness we also take into account that C3 was let later in July 1982 for the higher rental of $40,000. However, these rental movements for Stanley Knoll are evidence which tends to confirm the unanimous opinion of all three valuers that rents for Part IV properties are falling. In particular, current market rents as at 1st July 1982 were lower than they were earlier in 1982. None of the valuers quantified the extent of the fall in market rates. However, we are satisfied there has been a fall and take that into account together with the other factors we have mentioned in reducing Mr. Williams base rate of $40,000 per month to $35,000 per month.

A base rate of $35,000 produces the following rental:

60. Turning to Unit No. 5, the duplex suit premises, the most appropriate comparables are at No. 4 Headland Road. We give the greatest weight to those comparables and apply a unit rate of $140 per square metre but again allow 10% for age giving a rate of $155 per square metre $155 per square metre for an area of 220 square metre equates to $34,000. We add $1,000 for the exclusive use of the roof area. This is a little less than Mr. Williams's allowance of 4%. However, the roof area partly compensates for the loss of the usual drying area. In addition it houses the noise and heat generating air-conditioning plant. To these amounts we again add $500 for the appliances giving a total of $35,500 per month, exclusive of rates and management charges.

61. Under these alternative approaches differing rentals for Units No. 1 and No. 2 of $38,000, $38,850 and $38,500 are reached. We are satisfied that the present market can accurately if colloquially, be described as a "buyer's" market. Compared with previous patterns the market now tends to favour prospective tenants rather than landlords. In this kind of market the inadequate storage facilities and minimal service areas of all three of the suit premises are the very type of deficiencies which a prospective tenant would have increased regard to when negotiating with a landlord. The absence of facilities such as swimming pools, tennis courts, squash courts and play grounds, which are increasingly common at this end of the market, would also constitute a detriment to a prospective tenant.

62. Having regard to these and the other relevant factors we have mentioned, we determine the fair market rent of the three suit premises, each exclusive of rates and management charges, as follows:

63. Liberty to apply is reserved in respect of any consequential matters.

DATED this 27th day of August 1982.

Representation:

Mr. R.A. Payne, by leave, of Mass Transit Railway Corporation, 1st Applicant

Mr. R. Chow of Gallant Y. T. Ho & Co. for 2nd Applicant.

Mr. W. Chan instructed by Johnson, Stokes & Master for 3rd Applicant

Mr. Y.C. Mok instructed by P.H. Sin & Co. for Respondent