DOO YUEN SUN WILBR SONNY v. CHANG YOK FONG

bjbj LDNT 85/2003 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION Application No.: LDNT No. 85 of 2003 BETWEEN Doo Yuen Sun Wilber Sonny Applicant Chang Yok Fong Respondent Coram: Member W K LO Date of hearing: 1 August 2003 Date of judgment: 14 August 2003 JUDGMENT Background The Applicant is the tenant and the Respondent the landlord of the subject premises known as 2nd Floor, Penthouse and one Car Parking Space, 34G Braga Circuit ( the Premises ), located in the Kadoorie Hill area of Homatin, Kowloon. The Premises is the second floor apartment unit together with the penthouse of No. 34G Braga Circuit, a 5-storey domestic building sharing a common staircase with No. 34F Braga Circuit. The Car Parking Space of the Premises is one of the covered car parking spaces at the garages of Nos. 34F to 34L Braga Cirucit located between these buildings and Braga Circuit. The subject building was completed in 1956; the neighbouring buildings along Braga Circuit and Kadoorie Avenue were of similar age. The Premises was subject to a monthly tenancy at a rental of $20,000 per month, on inclusive of rates basis. According to the information provided by the Applicant, he has been occupying the Premises for more than 20 years although there was no written tenancy agreement between the two parties. The latest monthly rental was agreed between the parties in October 2001. The parties agreed that the Tribunal should grant a new tenancy of the Premises for a term of 2 years commencing from 1 August 2003, on the same terms as before. The only outstanding issue was the amount of the Prevailing Market Rent for the Premises. Based on the valuation of their respective expert surveyors, the Applicant estimated the monthly rent to be $22,500 on the basis of exclusive of rates and management fee but inclusive of one car parking space whilst the Respondent estimated it, on the same basis, in the sum of $17,700. Both parties were legally represented. They adopted the same comparison method of valuation using unit rental value per unit area of the comparables as their basis of valuation. Between the parties, a total of 6 common comparables (with the same reference number) were considered. The Applicant called for the evidence of Mr. Andy Chan, an expert surveyor working in the firm of Debenham Tie Leung, International Property Advisors whilst the Respondent called for the evidence of another expert surveyor, Mr. G.J. Cattermoul of Prudential Surveyors International Limited. The differences in the final assessments of the Premises by the two experts were caused by the following factors: the inclusion or otherwise of Comparable No. 7; the differences in the adjustments of the comparables due to (i) minor differences in the analysis of the ancillary accommodation of some of the Comparables; (ii) the time adjustments, in particular, the choice and/or projection of the time index for the months of May, June and July 2003; and (iii) whether adjustments were warranted for the various factors of location, view/aspect, traffic noise, construction disturbance, size, lease type, provision of domestic appliance and water penetration; and the calculation of the effective area for the Premises. Choice of relevant comparables Mr. Chan said he had received two rental schedules from the Rating & Valuation Department. The schedules show a total of seven rental transactions, including six from several buildings located in Braga Ciruit and Kadoorie Avenue and one from a building at 95 Waterloo Road, which was adjacent to 32C Braga Ciruit, a building next to 32B Braga Ciruit (where Comparables 1, 4 and 6 were found). Mr. Chan considered that on the whole, the said transaction at 95 Waterloo Road (i.e. Comparable 7) was a relevant comparable although in terms of adjustments, he subsequently made allowance of 10% for location and another 10% for traffic noise. On the other hand, Mr. Cattermoul said that the fact that Comparable 7 only appeared in the rental schedule of 20 June 2003 but not in a later rental schedule of 3 July 2003 suggested that the Rating & Valuation Department had considered Comparable 7 to be not that relevant. Therefore, when there was sufficient number of six comparables, all from Braga Ciruit and Kadoorie Avenue, the schedule dated 3 July 2003 did not contain Comparable 7. Mr. Chan disputed this reasoning, saying that the Rating & Valuation Department, whilst providing rental information to the parties of a new tenancy application, could not have decided whether the comparables were suitable or not. It should be a matter to be considered by the valuation surveyors who were instructed to appraise the Premises. I agree with Mr. Chan on the role played by the Rating & Valuation Department when providing the list of rental transactions that might be of assistance to the parties of a tenancy proceedings. The footnotes of these schedules set out the basis under which the Department was compiling the schedule of comparable transactions: The tenancy particulars quoted are rents reported to this office and are selected by reference to their proximity to the renewal date and similarity to the subject premises in terms of location, age and size. This office has not investigated the completeness and correctness of such information and the recipients are advised to verify it themselves. Other particulars are extracted from the records of this office. Therefore, I do not agree with the Respondent that the difference in the comparables shown in two lists of about 2 weeks apart necessarily mean that the comparables in the latter schedule were better comparables than those in the earlier schedule. The question of whether Comparable 7 should be included as one of the comparables for the valuation of the Premises should instead be based on the facts surrounding the said comparable and the Premises. It has been agreed by Mr. Chan that Comparable 7, although situated geographically very close to three of the remaining six comparables, was facing Waterloo Road, a busy thoroughfare in this part of Homantin, Kowloon. On the other hand, the Premises as well as the remaining six comparables are all apartment units in low-rise aged buildings situated in Braga Circuit and Kadoorie Avenue, the two residential side streets in this high-class residential neighbourhood known as Kadoorie Hill. The Premises as well as the remaining six comparables are all facing towards other buildings in the neighbourhood or the said two local residential streets whilst Comparable 7 was facing towards the busy and much nosier Waterloo road. Even Mr. Chan himself did accede that two adjustments to reflect the unique location of Comparable 7 to the total extent of 20% were warranted. Therefore, for this difference in location, I find that Comparable 7 should be discarded since we have a sufficient number of comparables of a much similar character. Calculation of the effective area of the Premises and the Comparables Mr. Chan stated in his valuation report (Exhibit A1) that he had adopted a discount approach to discount the areas of the ancillary accommodation by applying different factors to arrive at the effective area of the entire premises. For penthouses, he applied a ratio of 0.2 whilst for yard/extension and open roof he applied a ratio of 0.1. As a result, Mr. Chan calculated the effective area of the Premises to be: - 138 sq. m. + (13.5 x 0.2) sq. m. = 140.7 sq. m. He also calculated the effective areas of Comparables 1, 3, 5 to be 157.9 sq. m., 138.7 sq. m. and 171.78 sq. m. respectively. In respect of Comparable 3, Mr. Chan said that although the penthouse of Comparable 3 was not included as part of the description of that comparable property in its assignment deed (Exhibit R2), the area of the penthouse should be taken into consideration when the rental transaction of that comparable was analyzed. Generally speaking, tenants and landlords took into account the area of a penthouse regardless of its status in assignment deed when negotiating for the rent of a property that includes a penthouse. Therefore, Mr. Chan adopted a similar ratio of 0.2 to the area of the penthouse of Comparable 3 in arriving at its effective area. On the other hand, in the valuation report (Exhibit R3) and the revised valuation schedule (Exhibit R4) of Mr. Cattermoul, he did not calculate the effective area of the Premises and the comparables in the same manner as Mr. Chan. Instead, Mr. Cattermoul assigned a lump sum figure of $1,000 for the penthouse of the Premises, a lump sum figure of $800 for the yard of Comparable 1, $800 for the penthouse of Comparable 3. Similarly, he assigned sums of $3,400 and $600 for the penthouse and top roof of Comparable 5 respectively. Also, for a car parking space, he assigned a lump sum figure of $1,500 in the devaluation of his comparables and in the valuation of the Premises. Notwithstanding that both experts agreed to assign certain values for the penthouse of Comparable 3 in their analysis, the Respondent submitted that the penthouse of Comparable 3 should not be taken into account in the calculation of the effective area for that comparable because the legal status of that penthouse was in question as the description of that comparable in the assignment deed did not include that penthouse. I find that Mr. Chan s approach is preferred as it is more reasonable to relate the value of the ancillary accommodation to the value of the flat proper. I calculate that Mr. Cattermoul s assigned unit values for the ancillary accommodation of yard and top roof are respectively about 1/8 and 1/10 of the unit values of the main areas of the comparables, whilst his assigned unit values for the penthouses of the comparables and the Premises are about of the values of their main areas. Having regard to the estimated ratios of the two experts, I decide that for the yard/extension and open roof, a ratio of 0.1 as adopted by Mr. Chan should be used; and for the penthouse, a ratio of 0.4 should be used instead of Mr. Chan s ratio of 0.2. Using these ratios, I have recalculated the effective area of the Premises to be 143.4 sq. m. Similarly, I have recalculated the effective areas of Comparables 3 and 5 to be 141.4 sq. m. and 178.9 sq. m. respectively. For the other comparables, I adopt the effective areas as calculated by Mr. Chan. Calculation of the effective monthly rent of the Comparables Mr. Chan calculated the effective monthly rent of each comparable, on the basis of exclusive of rates and management fee but inclusive of one car parking space. He gave evidence that based on the rental information shown on the Rating & Valuation Department schedules, he had made enquiries with the property management companies of the buildings that contain the comparables. He made adjustments to reflect the information provided to him regarding the provision of car parking space for some comparables. Mr. Cattermoul in his revised valuation schedule accepted the evidence of Mr. Chan and his adjustments. However, Mr. Cattermoul analyzed the effective rent of each comparable on the basis of exclusive of car parking space and ancillary accommodation. At the end, to reflect the provision of car parking space and the penthouse for the Premises, he added back lump sums of $1,500 and $1,000 respectively. I have already decided above that for the ancillary accommodation, the effective area approach of Mr. Chan should be used. As to the value of the car parking space, I decide that Mr. Chan s approach should be used too. Adjustments to the comparables Mr. Chan adjusted his seven comparables on the basis of various factors of adjustments. His adjustment calculations are shown in Appendix 5 of Exhibit A1. On the other hand, Mr. Cattermoul opined that the only adjustment warranted for his six comparables was time. I have considered the experts opinion for these adjustments and have set out in the table below my adopted figures for various adjustments that are warranted: Comparable Premises 32B Braga Circuit, G/F 44A Kadoorie Ave., 1/F 34F Braga Circuit, 2/F 32B Braga Circuit, 1/F 34K Braga Circuit, & 3/F Penthouse 32B Braga Circuit, 3/F Effective Area (sq. m) 157.9 165.0 141.4 154.0 178.9 154.0 Effective Monthly Rent ($) 27,275 29,113 18,960 22,500 34,000 23,313 Effective Unit rate ($/sq.m) 172.7 176.4 134.1 146.1 190.1 151.4 Adjustments Time -7.7% -7.6% -9.8% -11.0% -11.7% Construction disturbance 0.0% -3.0% -3.0% -3.0% Size 0.0% 1.0% 3.0% 1.0% Lease Type 0.0% 0.0% 0.0% -2.0% Provision of Dom. Appliances 0.0% 0.0% -1.0% -1.0% Total adjustment -10.7 -7.6% -11.8% -12.0% -16.7% Adjusted Unit Rate ($/sq.m) 167.5 157.5 123.9 128.9 167.3 126.1 Avg. of Adjusted Unit Rate ($/sq. m.) 145.2 Adjustment for location and traffic noise Since I have decided not to include Comparable 7 for this valuation exercise, these two factors of adjustment are irrelevant. Adjustment for time In making time adjustments both experts agree to make reference to the same index, i.e. the Rental Index for Class D Domestic Property (with saleable area of between 100 sq. m. and 159.9 sq. m.) prepared and published by the Rating and Valuation Department. However, the problem arises because firstly, the index gave figures up to the month of May 2003 only and secondly, the two experts had different projections based on the historical data, which included the abrupt drop of 5 percent for the month of April to May 2003 (commonly agreed to be caused by the outbreak of SARS). Mr Chan reported that, taking into account the continuing impact of SARS, I opine that a rental drop of 3% is reasonable to reflect the rental movement from May to June and the drop then narrowed down to 1.5% (which equals the average rate of percentage drop in Domestic Rent from November 2002 to May 2003) from June to July and thus the indices in June and July 2003 are estimated to be 73.9 and 72.8 respectively. On the other hand, Mr Cattermoul stated in his report the following, The rental statistics are only compiled up to April 2003. And, since the commencement date of the new tenancy for the subject premises is 1st August 2003, it has been necessary to project forward the rental index up to July 2003. In order to do this we have assumed that the decline in rents since November 2002 has continued. We calculate from the indices that rents of class premises have declined 0.9% per month on average over the period November 2002 to April 2003. Therefore, the Rating & Valuation Department s published indices figures, and the experts, estimated/projected figures for the months of May, June and July are summarized below:- R & V Index visional figures (in Hong Kong Property Review Monthly Supplement of July 2003) N/A not available yet I agree with Mr. Chan that since the Rating & Valuation Department s index for May 2003 is available, it should be used. However, I decide that for the subsequent months of June 2003 and July 2003, an average rate of 1.5% (based on the figures from Nov. 2002 to May 2003) should be adopted for the projection of the index. As a result, I estimate the indices to be 75.1 and 74.0 for June 2003 and July 2003 respectively. Adjustment for view/aspect Mr. Chan opined that the Premises suffered from being located behind a site where construction was in progress and an adjacent building under renovation, where scaffolding was found. On the other hand, Mr. Cattermoul opined that there was no difference between the Premises and the comparables, which were all facing other buildings or side streets. I agree with Mr. Cattermoul s opinion and decide that no adjustment for view/ aspect is required. Adjustments for construction disturbance, size, lease type, provision of domestic appliance I agree with Mr. Chan that adjustments for these factors are warranted. I also accept his suggested percentages of adjustments which are considered to be reasonable in the circumstances. Adjustment for water penetration Mr. Chan reported that during his inspection, he had observed signs of dampess and water penetration on the ceiling, column and floor at a corner of the living area. Mr. Chan opined that since the Applicant fixed the defects annually at his costs, a nominal adjustment of 1% to all comparables was made to reflect the structural nature of this defect. Mr. Cattermoul disagreed, saying that this adjustment were unnecessary. The Respondent submitted that there was no proof that the said signs of dampress were due to any structural defect. I agree with the Respondent and hold that no adjustment is warranted. Estimation of the Prevailing Market Rent of the Premises From the analysis and adjustments of the comparables in the above table, I find that the adjusted unit rates per sq. m. of Comparables 1 to 6 are in the order of $167.5, $157.5, $123.9, $128.9, $167.3 and $126.1 respectively. The average of these unit rates is $145.2 per sq. m. I decide that this should be adopted for use in the estimation of the monthly Prevailing Market Rent of the Premises, as follows: Effective Area of the Premises 143.4 sq. m. Adopted average unit rate of the comparables $145.2 per sq. m. Estimated Prevailing Market Rent of the Premises $20,822 Rounded to $21,000 Orders Accordingly, I make the following orders:- New Tenancy for two years commencing from 1 August 2003; New rent at $21,000 per month (exclusive of rates and management fee); leave to the Respondent to pay the Applicant over-payment of rent, if any, within one month; Deposit to be decreased pro rata in accordance with the new rent; leave to the Respondent to pay the Applicant the adjustment within one month; Other terms of new tenancy same as previous tenancy agreement; There be no order as to costs. (W. K. LO) Member, Lands Tribunal The Applicant, represented by Mr. Jeff TSE of Messrs. Winston Chu & Co. The Respondent, represented by Mr. Kenny CHAN of Messrs. Wat & Co. 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