SUPREME HONOUR DEVELOPMENT LTD v. THE DIRECTOR OF LANDS

Between

Coram: Mr. W.K. LO,  Member of the Lands Tribunal

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D E C I S I O N

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Background

1.  The Applicant filed an application to the Lands Tribunal (“the Tribunal”) on 1 March 2007 for determination of compensation caused by the closure or substantial alteration of Connaught Road Central or part thereof (“the roadwork”) from 17 December 1994 so as to facilitate the airport railway construction works described in the Government Notification No. 4361 dated 18 November 1994.  The compensation claim was in respect of various floors/unit of Fung House located at Nos. 19-20 Connaught Road Central, Central, Hong Kong (“the Properties”) owned by the Applicant.

2.  At the beginning of the hearing in November 2007, there was no longer any dispute from the Respondent that the disturbance due to the roadwork was over 6 months and that the Applicant was entitled to claim compensation under the Ordinance.  The only dispute was in the quantum of compensation.  During the hearing, the parties’ experts still had substantial differences in their valuation for the compensation sums payable to the Applicant by the Respondent: -

The Judgment of 10 March 2008

3.  On 10 March 2008, this Tribunal handed down the Judgment for the Applicant’s claim (“the Judgment”) in the total sum of $3,657,634.  The breakdown of the compensation amount, on individual floor or unit basis (where appropriate) is reproduced below: -

4.  The Tribunal issued a corrigendum on 10 April 2008.  At line 4 to line 6 of paragraph 56 of Page 23 of the Judgment, the sentence was corrected to read, “As such, the time adjustment for the rental values of offices in Fung House in the present exercise should be based on RVD’s Grade B Office Rental Index instead of Grade A Index”.

Summary of Review

5.  On 3 April 2008, the Applicant filed to this Tribunal a Notice of Review.  Soon afterwards, on 8 April 2008, the Respondent also filed a Notice of Cross Review.

6.  In consultation with the counsel’s diary, the matter of Review and Cross Review was heard on 24 November 2008.  The parties did not find it necessary to recall the witnesses or to adduce new evidence but simply proceed to submissions. 

7.  Counsel for the Applicant helpfully prepared a table summarizing the differences for each floor or unit in question between the Tribunal’s awarded amount and the effects of the Applicant’s Review (if successful), on the basis that either Grade A Office Rental Index or Grade B Office Rental Index be adopted by the Tribunal.  For simplicity, I set down in Table 1 below, for each floor or unit, the Tribunal’s awarded amounts and the Applicant’s estimates on review, only on the assumption that Grade B Office Rental Index will be adopted by the Tribunal (as originally decided by the Tribunal but an issue that has to be decided in this Review): 

Table 1

Summary of Tribunal’s awarded amounts and the Applicant’s estimates on review

Floor/Unit	Claim Period	Type of claim	Tribunal’s Award	Applicant’s Estimate
G/F	15.8.1997 –14.8.2000(36 months)	Loss at renewal	$0	$2,116,000 (alternatively,$2,200,000)
1/F	1.1.1997 –31.8.19978(8 months)	Reduction during the term	$0	$0
2/F	1.8.1996 –31.7.1998(24 months)	Reductionduring the term	$3,912	$0
3/F	1.3.1997 –31.3.1997(1 month)	Vacancy	$0(see 22/F)	$137,804 (adopting 2/F as base rental)
	1.4.1997 –31.3.1997(24 months)	Reductionat re-letting	$367,980(adopting 4/F as base rental)	$311,136 (adopting 2/F as base rental)
4/F	20.2.1997 –19.2.1999(24 months)	Reductionat re-letting	$202,713	$231,672
6/F	22.9.1995 –15.5.1996(7.8 months)	Vacancy(early surrender)	$0(see 22/F)	$923,551
	16.6.1996 –30.9.1996(3.5 months)	Vacancy	$0(see 22/F)	$97,726
7/F	20.2.1997 –19.2.1999(24 months)	Reduction atre-letting	$270,543	$309,192
10/F	1.3.1996 –19.9.1996(6.6 months)	Reduction atrenewal	$23,694	$23,694
	20.9.1996 –31.1.1997(4.4 months)	Vacancy(early surrender)	$0(see 22/F)	$389,541
13/F	1.2.1996 –30.9.1996(8 months)	Reductionduring the term	$133,220	$133,220
17/F	22.9.1996 –21.9.1998(24 months)	Reductionat renewal	$0	$0
18/F	1.9.1995 –31.8.1997(24 months)	Reductionat renewal	$0	$0
	1.7.1998 –21.11.2998(4.7 months)	Reductionduring the term	$0	$0
	22.11.1998 –31.12.1998(1.3 months)	Vacancy(early surrender)	$0(see 22/F)	$107,442
20/F	1.8.1995 –31.5.1996(10 months)	Reduction during term	$0	$184,040
	1.7.1996 –31.3.1997(9 months)	Vacancy	$0	$1,046,977
22/F	26.3.1995 –18.8.1997(28.8 months)	Vacancy	$1,505,265(reflecting vacancy claims in respect of the office floors/ unit of the Properties and forfeiture of deposits for 10/F and 18/F)	$2,892,953

8.  This Decision will first summarize the issues and the grounds of the Applicant’s Review, set out this Tribunal’s decisions in respect of each and every issue and then, the Respondent’s Cross-Review, the conclusions and the Orders.

Issues of the Review

9.  The Notice of Review by the Applicant consists of 11 pages.  It is convenient to summarize the proposed estimates of the Applicant’s Review under various floors or unit of the Properties in question, as in Table 1 above.  Below I will cover each of the grounds of Review taken by the Applicant in the order as those shown in Table 1 and the Applicant’s Written Submission.  This will be followed by the grounds of Cross Review by the Respondent.

Compensation for the Ground Floor

(Paragraph 3 to 13 of Applicant’s Submission)

10.  In his Notice of Review and the Submission for Review Hearing, the Applicant submitted that “the Tribunal had failed to consider sufficiently or at all that the RVD’s Private Retail Rental Index (“PRRI”) was a general index … and therefore erred in fact and/or in valuation principle in accepting the use of PRRI on the earlier Ground Floor’s tenancy to arrive at the assessed full market rent (“FMR”) of the Ground Floor.  The Tribunal ought to have relied on the comparison method.”

11.  In his submission on the inappropriateness and undesirability of using the PRRI, the Applicant cited a passage of the Technical Notes issued by the RVD which said,

“Average rents and prices are analysed for general reference only.  Their levels at a certain period depend to a large extent on the special characteristics, including quality and location, of the premises which are leased or sold during the period.  Thus changes between different periods may be due to variations in the characteristics of the different properties being analysed, and should not be taken as necessarily indicating a general change in value over the period… The indices, especially the rental indices, will tend to understate market trends.  Although all rents are analysed on a net basis, allowances will not be made for the “valuation equivalent” of other contractual terms that are unknown to the Department… If rents were adjusted to reflect standard terms of agreement, the rents as adjusted would tend to be lower than the quoted rents when the index is moving downwards and vice versa.”

12.  The Respondent reminded the Tribunal the last sentence in the quote shown above.  In this regard, however, the Respondent added, “the Index in the present case had moved upwards, albeit only by 6.1%.  So according to the Technical Notes, if one were to adjust the rents according to the Index (i.e. +6.1%), this is likely to be higher than the quoted (actual) rents.”  Therefore, since it is common ground that the renewed rental agreement represented a 25% increase over the earlier rental, the quoted rents should have been less than +6.1%.  

13.  I think this Tribunal do not need to be reminded the limitations of RVD’s PRRI or indeed any property price or rental index prepared by any institution and made available in the market.  However, more often than not, the real issue facing any Tribunal is that despite some of the limitations and shortcomings of using any one or more of these indices, would their uses tend to improve or adversely affecting the quality of the valuation?  In the alternative, without using these indices as guidance to changes in values over time, one would have to rely solely on the experience and opinion of the expert valuation surveyor (and also in turn, of the Tribunal) undertaking the valuation because almost invariably, there are no paired sales of comparable properties in the market which would enable any analyst to compare two otherwise identical sales in order to derive the effects of the differences in timing.   For the same reason, therefore, in the present case, I do not find that the remarks in the Technical Notes would mean that the RVD’s PPRI should not be used at all.  It could still assist experts in the course of valuation, if properly done.

14.  The Applicant further submitted that the Tribunal failed to consider sufficiently or at all the “dog-legged” layout of the comparable at Queen’s Plaza and therefore erred in fact and/or in valuation principle in accepting that comparable as the best comparable without explaining in the Judgment the basis upon which it was decided; or in the alternative, the Tribunal failed to consider and apply suitable adjustment to that comparable.

15.  The Applicant’s submission on the choice and adjustment of comparables for the Ground Floor is not a fair reading of the Judgment.  It was clearly stated in paragraph 36 of the Judgment that the two other comparables put forward by Mr. Lau, the Applicant’s expert were not good comparables.

16.  It was also clear from paragraphs 35 to 36 of the Judgment that I arrived at the conclusion of the estimated FMR of the Ground Floor using Comparison Approach as well.  Therefore, I do not follow the Applicant’s Ground of Review that I had as if solely relied on the PRRI and applied that to the actual rent of the Ground Floor in 1994 in arriving at the estimated FMR in 1997.  I actually considered and accepted the opinion and analysis put forward by Mr. Pendleton, the Respondent’s expert as well as the Final Written Submission of the Respondent.  After finding that the other two comparables (located at Takshing House and Luk Hoi Tung Building) put forward by Mr. Lau were not good comparables for different reasons, I found it appropriate to compare the result of my adopted adjustment for the remaining third comparable at Queen’s Plaza and the eventual unit rate for the Ground Floor (i.e. at $177 psf (N), see paragraph 38 of the Judgment) with the result one might obtain by interpolating the actual rent of the same premises in 1994 with the RVD’s PRRI (i.e. at $151 psf (N), see paragraph 37 of the Judgment).

17.  Also, I have stated in paragraph 36 of the Judgment that although Mr. Lau attempted to use 3 comparables, his 2 other comparables apart from the comparable at Queen’s Plaza were nearly 2 years away from the relevant valuation date.  In this regard, Mr. Lau had used the RVD’s PRRI himself as the basis for making his “time adjustments”.  It is exactly for this reason that the Respondent submitted that “there seemed to be no logical reason why the same approach could not be used to make adjustment for another comparable, i.e. the subject shop’s earlier tenancy dated 15 August 1994 that was 3 years old” (see paragraph 36 of the Judgment).  I agree with this submission particularly when the valuation was also carried out using the Comparison Method in the first instant, albeit using only one comparable but that was due to the shortage of market evidence of good comparables, nothing this Tribunal or any other Court could overcome.

18.  As rightly pointed out by the Respondent in the original Final Submission and the Submission for the Review, the Applicant criticized the Tribunal for accepting the comparable at Queen’s Plaza but had never directly answered the questions of “why is the Queen’s Plaza Comparable not a suitable comparable when their previous expert had considered it suitable for use as comparable”, and “what is wrong with adopting the percentage adjustment of +20% for layout, as suggested by their previous expert?”

19.  The Applicant submitted that since the Tribunal decided to adopt an adjustment figure of +25% instead of Mr. Lau’s estimated adjustment of +40%, the Tribunal’s total adjustment of +37% in the Judgment would clearly be inadequate.  I could only add that as regards this type of dispute, it is common place that different experts (or the Tribunal) might have different opinion as to the degree of similarities or dis-similarities between any comparable and the property that is the subject matter of valuation and litigation.  Indeed, the direction and the quantum of adjustments to the comparables could be very much in disputes, sometimes even more so than the adoption of suitable comparables in many of the Tribunal’s cases involving valuation by comparison approach.  In the present case, I have reviewed my decision and find no reason to change my adopted adjustments of the Queen’s Plaza comparable as stated in the Judgment.

20.  In the Submission for Review, the Applicant complained that no sufficient regard had been given for the phenomenon of “Tenant’s Inertia”.  In paragraph 17 of his written Submission for the Review hearing, the Applicant submitted that since the FMR (assessed at $170 psf (N) or $177 psf (N)) was only marginally lower than the rent passing ($178 psf (N)) and that the increase to the Option Rent (at $188 psf (N)) under the previous tenancy was only a moderate sum, it would be reasonable for the Tribunal to conclude that, but for the roadwork outside the subject building, the tenant would have exercised the option.  This was because the tenant in reaching such a decision would have taken into account a major factor, the “Tenant’s Inertia”, i.e., the costs and trouble of moving to a different premises.  However, submitted the Applicant, “since the disruption was right in front of the bank, it would tip the balance, and caused the bank to think otherwise.”

21.  In response to this submission, the Respondent said that the exact quantum of “Tenant’s Inertia” was impossible to quantify with any precision.  The Respondent suggested that sometimes, if a landlord would demand too high a price for renewal with a sitting tenant, the landlord could end up finding that the sitting tenant would move away, and that the tenancy was eventually rented out to a new tenant not only after a period of vacancy but at a rent without reflecting any benefit of “Tenant’s Inertia”.  The Respondent quoted the example of the basement of the subject building when the previous tenant had moved out instead of taking up the option in 1994, before any roadwork had commenced.  This show that despite of the existence of the “Tenant’s Inertia”, an existing tenant might not take up the option if the FMR was over the rent reserved under the option even when there was no roadwork.  Finally, the Respondent submitted that the eventual agreement of renewed rent at $500,000 per month, representing a 25% increment over the previous rent of $400,000 per month, could already embody a substantial element of “Tenant’s Inertia”.

22.  I note that this issue of “Tenant’s Inertia” was not actually stated in the Notice of Review as one of the grounds.  Nevertheless, since the Respondent did not object to this, I will still consider this as one of the grounds raised by the Applicant in this Review.  Having considered the submissions of the parties, I agree with that of the Respondent.  I do not find it appropriate to make any change in the compensation estimate for the Ground Floor.

23.  Summing up, having considered all the issues raised by the Applicant for the Ground Floor of the subject building, his submission as well as the Respondent’s submission in the Review, all the evidence adduced in the original hearing, as well as the findings and the reasons I have given in the Judgment, I decide that the Applicant failed to persuade me to amend my findings with respect to the assessment of the FMR for the Ground Floor at the relevant time as given in the Judgment.  I dismiss the Applicant’s review in this regard.

Adoption of Grade B Office Rental Index

(Paragraphs 14 to 18 of the Applicant’s Submission)

24.  The Applicant alleged that the Tribunal erred in law in deciding to adopt the Grade B Index when the use of Grade A Central Office Rental Index was “accepted by both parties and/or not disputed by the Respondent for the valuation of the FMR of the Office Floors”.  The Applicant cited the authority of Brewarranna Pyt Ltd v Commissioner of Highway (No. 2) (1973) 6 SASR 541 in support of this.

25.  The Respondent in his written Submission for the Review hearing submitted that this challenge was mis-conceived as the Respondent had all along not accepted that the subject building was a Grade A Office Building.  The Tribunal clearly noted in paragraph 55 of the Judgment the view taken by the Respondent’s expert. 

26.  The Respondent further explained that although Counsel had used Grade A Index for computation in submissions, it was only because it would be extremely confusing and time consuming to make two different sets of computations for every office or unit, one using the Grade A Office Rental Index and the other using the Grade B Office Rental Index.  However, the Respondent pointed out that even in the written Closing Submission for the original hearing, when dealing with the topic of vacancy claims, references had been made to the vacancy ratios for both Grade A and B office buildings.

27.  The Applicant clarified this point in the Review hearing.  The Applicant agreed that there was no error in law, all he meant was simply to ask the Tribunal for re-consideration of the decision to adopt Grade B Office Rental Index.

28.  Having re-considered the issue, all the evidence heard in the original hearing and the Judgment, I have decided that the Applicant failed to persuade me to accept his view that Grade A Central Office Rental Index should be adopted and used in the present valuation exercise.  I maintain the reasons I have given in the Judgment for deciding to adopt the Grade B Office Rental Index instead.

Concession during the term where tenancy commenced after roadwork

(Paragraphs 19 to 22 of the Applicant’s Submission)

1^st Floor

29.  The Applicant sought to review the decision of the Tribunal in respect of the concession granted to the tenant of the 1^st Floor for the period from 1 January 1996 to 31 December 1996 on the grounds that (i) the Tribunal failed to consider that the exact effect and impact of the roadwork (as demonstrated by the photographs taken at the relevant time) was materially deteriorated between the time when the tenancy was negotiated in mid 1995 and when the concession of the reduced rent was actually given by the Applicant to the tenant in January 1996; (ii) the Tribunal erred in holding that the tenant should have been fully aware of the impact of the roadwork before taking up the tenancy ; and/or (iii) the Tribunal failed to have regard to the high costs of legal proceedings to recover damages from defaulting tenants as a result of which the Applicant would have the commercial pressure to give such concession.

30.  The Respondent submitted that when negotiating for the rental, the tenant of the 1^st Floor already knew that there was and would continue to be roadwork for sometime to come.  Therefore, any reasonable tenant should be able to foresee that the roadwork would become more extensive than what it was in the initial stages, and could also have found out in advance the extent of disturbance caused by the roadwork.

31.  In the Judgment, paragraphs 70 and 71 set out my analysis and the reasons for not accepting the Applicant’s submission for the claim.  In this Review, having re-considered the issue, all the evidence adduced in the original Hearing, I have decided to maintain my decision in the Judgment and reject the Applicant’s Review in respect of the 1^st Floor.

20^th Floor

32.  The Applicant submitted in this Review that the Tribunal was wrong in holding that the first tenancy between the Applicant and the tenant Full Country Development Ltd. was entered into after the commencement of the roadwork, similar to the tenancy of the 1^st Floor (see paragraph 114 of the Judgment).  The said tenancy actually commenced from 1 April 1994, before the commencement date of the affected period of the roadwork (i.e. 20 February 1995).  Therefore, the Applicant submitted that the Tribunal, having found that it was reasonable for the Applicant to grant concession during the terms of the tenancies where they were concluded in ignorance of the roadwork, should award compensation in respect of the concession for the said tenancy and the extension for the period of 10 months, from 1 August 1995 to 31 May 1996, as follows:

33.  The Respondent accepted as a fact that the said tenancy did commence before the roadwork had commenced. Therefore, the Respondent agreed that the said tenancy was made when the roadwork might not have been known to the tenant.  However, the Respondent submitted that although the Respondent had contended that there was absolutely no justification in granting a rental concession where the tenancy had commenced after the roadwork (as for the 1^st Floor), the Respondent had never conceded that it was reasonable to grant concession for tenancies that started before the roadwork commenced.  The Responsible said that it was just less unreasonable when compared with the former case. 

34.  Having reviewed the matter, I agree with the Applicant’s submission.  In accordance with the reasons I gave in the Judgment for compensation for concessions given to the tenants of various tenancies that had commenced before the roadwork commenced, I therefore allow the compensation as computed by the Applicant, in the sum of $184,040.

Rent Review Clause

(Paragraphs 23 and 24 of the Applicant’s Submission)

35.  In paragraphs 79, 83 and 93 of the Judgment, the Tribunal was of the view that it would be reasonable for the Applicant to insert a “rent review clause” in the letters of concession to the tenants to the effect that any such concession would only last for the duration of the roadwork.  The Applicant submitted that, in the then circumstance of the Properties which was adversely affected by the roadwork, it would be impracticable for the Applicant to insert such a “rent review clause” because (i) no certain date of completion of roadwork was ever given to the Applicant by the Respondent, (ii) the Applicant was then obviously not at “arm’s length” when negotiating with the potential tenants and (iii) the commercial reality was that no potential tenant would have accepted the insertion of such a rent review clause in the short term nature of the Properties’ tenancies.

36.  On the other hand, the Respondent submitted that the suggestion of a “rent review clause” was not the kind of rent review clauses commonly found but simply a clause inserted to the effect that any discount expressly granted by the Applicant because of the inconvenience caused by the roadwork should cease, should the roadwork came to an end before the tenancy period expired.  The Respondent further submitted that it would be irrelevant that no notice of certain date of completion of the roadwork might have been given in advance to the Applicant since both the Applicant and the tenant would know when the roadwork finally ceased.  The parties could then make the adjustments afterwards, had such a clause been included in the tenancy.

37.  Having considered this issue in this Review, I agree to maintain my reasons and my decisions in the Judgment.  I reject the Applicant’s review in this subject matter.

Vacancy

(Paragraphs 25 to 44 of the Applicant’s Submission)

38.  This was the most important issue taken up by the Applicant in this Review.  It was broken down into various sub-issues.  The Applicant sought to review the Tribunal’s Judgment in the estimation of compensation for vacancy in various floors and/or unit in the Properties which in turn very much depended on the Tribunal’s finding that it was reasonable to assume that, in the absence of the roadwork, the Properties would still have sustained a “natural vacancy” of 5% in line with the general vacancy rate (see paragraphs 116 to 121 of the Judgment).  The Applicant submitted the following:

(i)                the Tribunal failed to consider the actual vacancy rate achieved before and after the roadwork and therefore erred in holding that there would still be natural vacancy equivalent to average vacancy;

(ii)              the Tribunal erred in holding that the high occupancy rates could only be achieved at the expense of offering rental that were slightly below the FMR;

(iii)            the Tribunal erred in holding that the Applicant failed to show that it had conducted reasonably to mitigate the loss but on the contrary, the Tribunal failed to consider that the Applicant had in fact adduced evidence to substantiate its efforts to mitigate the loss;  and

(iv)            the Tribunal failed to consider the Applicant’s duty to mitigate did not oblige the Applicant to take up the risk of starting an uncertain litigation against a third party.

Natural vacancy

(Paragraphs 25 to 28 of the Applicant’s Submission)

39.  Firstly, the Applicant submitted that the Tribunal failed to take into sufficient consideration the vacancy rate of the Premises actually obtained before and after the roadwork.  The Applicant pointed out that the figures adduced by the Applicant in Exhibits A1 and A5 had already clearly demonstrated that the Premises as a whole did achieve 0% vacancy before the roadwork commenced on 20 February 1995 (1995, 1^st Quarter), and achieve 0% vacancy rate again when the adverse effects of the roadwork began to disappear from 1997, 4^th Quarter to 1998, 2^nd Quarter.

40.  Secondly, the Applicant submitted that according to the evidence of the Applicant’s expert, Mr. C K Lau, the Premises could have achieved very low to nil vacancy rate when compared with the market in general.  This was mainly due to 2 reasons:  (i) the building’s unique location in Central and (ii) the nature of the Building and the ownership of most of the floors by the Applicant resulting that there would be no “structural vacancy” as that found in other larger portfolio of office buildings, such as those owned by the Hong Kong Land group.

41.  Therefore, the Applicant submitted that “the vacancy rate of 9.5% suffered in 1995, 4^th Quarter and up to the highest of 17.6% in 1997, 1^st Quarter, which were at least 3 times higher than the corresponding average vacancy rate in Grade A office buildings during the material time, was caused by the roadwork, but not the average vacancy rate as was found by the Tribunal”.

42.  In response to the Applicant’s Submission, the Respondent pointed out that the subject building also managed to achieve a 0% vacancy rate even during the period of roadwork, from September 1997 to October 1998 so that it was meaningless to talk of what the subject building had once achieved for a limited period of time, in terms of 0% vacancy rate.

43.  The Respondent recalled that Mr. Lau did claim in evidence that the subject building could have achieved very low to nil vacancy rate.  That was why the Respondent then asked for actual figures for previous 3 to 4 years after which Mr. Lau produced more Exhibits showing the vacancy figures in those years.  The figure of 5% later adopted by the Tribunal was in fact derived from those actual occupancy figures.  The Applicant submitted that although the Tribunal adopted the figure of 5%, it was still low when compared with the average vacancy rates for Grade A or Grade B office buildings during the same period.

44.  The Respondent also submitted that Mr. Lau’s assertion that the subject building could have achieved very low to nil vacancy rate could not be sustained by the actual figures adduced by Mr. Lau.  The Respondent, citing the figures in Exhibit A5, said, “in 4 of 12 quarters, SB (subject building) had experienced vacancy rates of over 5% (once as high as 18.6%).  The location was the same, and the building was then even newer.”

45.  Having review this issue of natural vacancy, all the evidence previously adduced in the original hearing, and the submissions of the parties, I do not consider appropriate to change my decisions as contained in the Judgment.  I reject the Applicant’s submission in this matter.

Lower rental could not achieve a higher occupancy

(Paragraph 29 to 30 of the Applicant’s Submission)

46.  The Applicant submitted that “it was wrong for the Tribunal to accept the submission that a higher occupancy rate could be achieved by offering rental slightly below the prevailing FMR” (Judgment, paragraph 116) for the reasons that (i) “there was no evidence in the hearing suggesting that the Applicant was unwilling to reduce its rent to attract (or to retain) tenants and in fact there was ample evidence to the contrary”; and (ii) “there was in fact evidence, despite a reduced monthly rent, the tenant still decided to quite the premises.”

47.  The Respondent took serious issue with the Applicant and submitted that it was not wrong for the Tribunal to accept the submission that a higher occupancy rate could be achieved by offering rental slightly below the prevailing FMR.  This proposition was put to Mr. Cheuk, the factual witness/ manager of the Applicant, and was accepted by him, as the Tribunal noted.  To assist the Tribunal, the Respondent extracted the relevant parts of the transcript evidence, at pages 15R to 16F, as follows: -

“Q.    Now, the proposition is, if you charge market rental, you would expect a vacancy that would be average in the market.  If you charge higher than market rentals, you would expect a lower occupancy or higher vacancy.  And conversely, if you charge lower than market rental, you will be able to get lower vacancy.  Do you understand?  Firstly, do you understand this proposition?

A.    Of course.

Q.    Okay.  So, therefore, we say that if you – if you look at a building and you found that its vacancy is less than what one would expect to find based on market indices, one possible conclusion is that it has been charging lower than market rental.  Do you agree?

A.    Can I have the question again?

Q.    Now, if you look at a building and you found that it has a lower than average vacancy, one possible conclusion is that the owner has been charging less than market rental.  And we are talking about generally, not roadworks.  I think this follows from what you just agreed a moment ago.  Right?  Agree?

A.    Correct.”

48.  The Respondent also gave submissions on the tenancies of 10/F and 18/F and submitted that in both instances, it was difficult to see how this could support the Applicant’s contention.  The submissions are reproduced below:

“24.    The reason that the tenant on the 10/F (Cornwick Investment) terminated early and left despite the reduction in rental had nothing to do with the road works.  The tribunal had heard in evidence that this is the unit where the Applicant had stopped the supply of air-conditioning on 11 September 1996 because the tenant was late with rental payment.  Eventually an agreement was reached whereby the tenant was allowed to leave immediately (or kicked out) on 19 September 1996

25.    The tenant on 18/F, Lord Energy Ltd, surrendered the premises on 21 November 1998, two weeks after all road works had ceased.  Again the early surrender must be for reasons which had no connection with the road works.  It had remained in the premises for 6 years, endured the road works for nearly four years, and moved out two weeks after all work had ceased…”

49.  Having reviewed this issue, all the evidence adduced in the original hearing, and the submissions of the parties, particularly the submissions quoted above, I decide to uphold my decisions as contained in the Judgment and, reject the Applicant’s submissions in this regard.

Vacancy loss for 22/F

 (Paragraphs 32 to 40 of the Applicant’s Submission)

50.  This was the most important issue raised by the Applicant in this Review.  In addition to what the Tribunal has awarded in the Judgment (in the sum of $1,505,265), the Applicant sought an additional compensation of $1,387,688 (see table of summary of awards and claims in paragraph 6 above).

51.  The Applicant submitted that it was wrong in both law and fact for the Tribunal to decide that the Applicant had failed to show that it had conducted reasonably to mitigate the loss in light of the prolonged period of vacancy. 

52.  The Applicant gave the following reasons in support of the above submission:

(1)                “It is well established principle that the onus of proof on the issue of mitigation was on the defendant.  If he fails to show that the Applicant ought to have taken certain mitigating steps, then the normal measure of damages will apply.  (See: McGregor on Damages 17^th Ed., para. 7-075 – 7-076; Lindon Print Ltd. v West Midlands County Council [1987] 283 EG 70)”.

(2)              In the present case, the Respondent had not adduced evidence to prove that what steps, if any, the Applicant should have taken to mitigate its loss but the Applicant did not take those steps.  On the contrary, the Applicant had in fact adduced evidence to substantiate its efforts to market the various floors including, inter alia, the 22^nd Floor during the vacant period by means of (i) putting “for lease” advertisement in a reputable local newspaper on various dates and (ii) appointing two estate agency companies to handle the market activities of those vacant units.

(3)              The Tribunal was therefore wrong in fact in holding that (i) the Applicant had adduced no evidence (apart from the oral evidence of Mr. Cheuk) to substantiate its efforts to market the 22^nd Floor and (ii) it was not satisfied that the evidence adduced was sufficient in light of the prolonged period of vacancy and the large sum of claimed amount involved (see Judgment, paragraph 122).

(4)              In Banco de Portugal v Watlerlow and Sons [1932] AC452, it was held that the innocent party is only required to act reasonably and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer.  Lord Macmillan stated that:

“…where the sufferer from a breach  of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighted in nice scales at the instance of the party whose breach of contract has occasioned the difficulty.  It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency.  The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.”

53.  Summing up, the Applicant submitted that the Applicant, as an ordinary prudent landlord, had already conducted reasonably to mitigate its vacancy loss of various floors, including, inter alia, the 22^nd Floor during the vacant period in order to minimize its rental loss.  Otherwise, the Applicant submitted, it would not have re-let several other vacant units of the Properties within the vacant period of the 22^nd Floor, namely 3^rd Floor, 4^th Floor, 6^th Floor, 7^th Floor and 20^th Floor.

54.  The Respondent at the outset of the submission in the Review reminded the Tribunal that Unit 2201 on 22/F had been vacant for nearly 8 months since 1994, before the roadwork first commenced on 20 February 2005.  Therefore, the Respondent said that although this vacancy situation was apparent from Exhibit A1, it only became clear that about half of the top floor, 22/F had been vacant for a long period of time, even before the roadwork had began, only when the Exhibit A5 was produced by Mr. Lau, the Applicant’s expert.  The Respondent claimed that, however, since Exhibit A5 was only produced after Mr. Cheuk had given evidence, there was no opportunity to ask him why that unit had remained vacant for so long in the absence of the roadwork.  The Respondent further submitted that this fact suggested that “there may be something intrinsic about the top floor that made it difficult to market/let”, or “that the landlord might have demanded a premium in rental for the penthouse unit which the average tenant was not prepared to pay”.  In any event, the Respondent concluded, given the long period of vacancy for unit 2201 before the commencement of the roadwork, it raised real doubt as to how much of the later vacancy was caused by the roadwork.

55.  The Respondent also challenged the Applicant’s submission that it had already adduced sufficient evidence to satisfy the Tribunal that it had done all that was necessary to mitigate the loss.  This included the placement of advertisements in the newspaper and the appointment of 2 estate agents for leasing of the premises.  Simply put, the Respondent submitted that the Applicant had not even given any important information as to, for example,(i) what had been the Applicant’s asking rental for the 22/F; (ii) how many enquiries it had received.  These two pieces of information were considered to be important since “if the Applicant’s asking rental for the 22/F had been above the FMR (Full Market Rent) – which could easily be the case if the penthouse was the only unit left vacant – then it would not be surprising that it had remained unlet.”

56.  The Respondent reminded the Tribunal that the Applicant had made no claim that the rental for the 22/F, when it was finally let out in August 1997, was below the FMR level as a result of which it had sustained any loss for which the Applicant ought to receive compensation

57.  The Respondent suggested that for the owner of a building owning many floors and units (such as the Applicant who owned the Properties in the subject building, Fung House), he would be more concerned to lower the asking rentals to attract tenants if many of those units had remained vacant.  However, as the empty floors and units were filled, it is just common sense that the owner would not wish to let out the last unit at “a lower price than what he thought he could possibly achieve.  So, he might tend to err on the high side so far as this unit is concerned.  Airlines and hotels operate on the same system…. So one rarely find 100% occupancy in a hotel.”  Therefore, it is more probable than not that as 22/F was the last unit, the Applicant might take a “strategy of waiting” for a prospective tenant who was prepared to pay a premium for renting the premises.  The Respondent added that the strongest evidence of this proposition was that the 22/F was let out in August 1997 at a rent that the Applicant could not complain about and did not make any claim for compensation in this application, when the roadwork were then still in full swing.

58.  Finally, in this connection, the Respondent submitted that it was inappropriate to consider the compensation for vacancy for the 22/F without reference to the issue of an overall natural vacancy rate for the building as a whole.  The Respondent submitted that it simply could not be said that there was no need to assume a certain level of natural vacancy for an office building such as the subject building.  Hence, the Respondent submitted that the Tribunal was right in finding that the Applicant had not adduced sufficient evidence to prove that the whole of its vacancy period of 27.9 months of the 22/F should be attributable to the roadwork.

59.  I have considered the grounds raised by the Applicant and the responses put up by the Respondent.  I find that the Tribunal did not err either in law or in fact in arriving at the findings under the heading of “loss for 22/F” as set out in the Judgment. 

 Whether mitigation extended to suing the Tenants

(Paragraphs 41 to 43 of the Applicant’s Submission)

60.  The Applicant submitted that it was not wrong for the Applicant to have allowed tenants to simply “walk away” and then claimed compensation for vacancy from the Respondent (see Judgment, paragraphs 116 & 123) because mitigation did not oblige the Applicant “to take the risk of starting an uncertain litigation” against the tenants in question, as was decided in Pilkington v Wood [1953] Ch 770:

“the so-called duty to mitigate does not go so far as to oblige the injured person, even under an indemnity, to embark on a complicated and difficult piece of litigation against a third party.”

61.    Also, it was claimed that the Applicant could have been met with a defence of breach of covenant of quiet enjoyment.  Therefore, the Applicant submitted that the Tribunal erred in law in deciding that no compensation should be awarded in respect of those floors and/or unit where the existing tenants vacated the premise without completing the original terms of the existing tenancies. 

62.  In response to those submissions, the Respondent gave the following written reply:

“(a) The defence of breach of covenant of quiet enjoyment was patently bad, because any breach would not have been committed by the Applicant but by the Respondent.

(b)     The Applicant could at least have made a demand through its solicitors.  If it were met with a reply that the Applicant was guilty of breach of covenant of quiet enjoyment and backed off, that would have been more excusable.

(c)      Nor had the Applicant produced any evidence (e.g. Counsel’s Advice) that it would be in a weak position vis-à-vis the tenants who just walked away from a legally binding tenancy agreement.  If it had been so advised, again it might have been more excusable for not going after the tenants.”

63.  Having considered the submissions of the parties, I agree with the Respondent and uphold my decision in the Judgment.  I do not agree that it was right for the Applicant to have allowed the tenants to simply walk away and then to claim compensation from the Respondent for the vacancy loss due to early termination of existing tenancies by those tenants.  Therefore, I dismiss the review in this matter by the Applicant.

64.  Having re-considered all the evidence regarding the issue of vacancy in the Properties of the subject building, and the submissions by the parties, I decide to maintain my decisions on vacancy loss as set out in the Judgment.  I dismiss the Applicant’s review in these matters.

The Respondent’s Cross-Review

65.  The Respondent had filed a Notice of Cross-Review on 8 April 2009.  The Respondent agreed that Point (a) of it Notice had already been dealt with by the Corrigendum issued by the Tribunal on 10 April 2008.

66.  Point (b) of the Cross-Review was that the Tribunal had proceeded in the Judgment “to apply Grade B Office Rental Index for making time adjustments in the computation of losses for various units, save and except for the 10/F (for the period from 1.12.1995 to 29.2.1996) and 22/F (the vacancy claim), for which the Tribunal adopted the computations of the Respondent, which computation however had used the Grade A Office A Office Rental Index for time adjustment computations.” 

67.  The Respondent therefore invited the Tribunal to consider using/adopting Grade B Office Rental Index in all time adjustments.  The Respondent submitted, “If the Grade B Office Rental Index is adopted, the loss of $20,592 under paragraph 98 (of the Judgment, for the 10/F) will become zero or nil, and the vacancy loss of $1,420,945 in paragraph 119 (of the Judgment, for the 22/F) will become $1,124,652.  The total compensation payable to the Applicant (in respect of 10/F and 22/F) would accordingly be reduced by $316,885.”

68.  The Applicant of course did not agree with the above submission by the Respondent as the Applicant sought to review the Tribunal’s decision on the adoption of Grade B Office Rental Index for office premises in all time adjustments in the present case.  However, I have already covered this issue in an earlier section of this Decision.  I have decided in paragraph 28 of this Decision to maintain my original decisions in the Judgment in adopting the Grade B Office Rental Index and reject the Applicant’s review in this matter.

69.  On the basis that the Grade B Office Rental Index should be adopted for all time adjustments, the Applicant did not dispute the figures as submitted by the Respondent and summarized above.  In the circumstances, I decide to allow the cross-review by the Respondent in this matter and substitute the revised compensation sums for the 10/F (see paragraphs 97 to 101 in the Judgment) and 22/F (see paragraphs 115 to 124 in the Judgment), as follows:

Conclusions

70.  For reasons stated above, I have dismissed all the grounds of review as shown in the Notice of Review by the Applicant, with the exception of the Review for the compensation in respect of 20/F for which I have allowed an additional compensation sum of $184,040.  As to the grounds of review as shown in the Notice of Cross-Review by the Respondent, I have given my decision in paragraph 69 above for accepting point (b) for the compensation in respect of 10/F and 20/F for which I have estimated a total reduction of compensation in the sum of $316,885.

Orders

71.  As a result of the Review by the Applicant and the Cross-review by the Respondent, I order that the order as set out in paragraph 125 of the Judgment be revised in that the Respondent do pay the Applicant compensation in the revised total sum of $3,524,789 (a reduction of $132,845 from the previous estimated sum of $3,657,634), the breakdown of which is as follows: -

72.  The order as set out in paragraph 126 of the Judgment remains unchanged.  The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Registrar, with liberty to apply for any other ancillary and consequential matters.

73.  The costs of the Review (including the Cross-Review) be reserved.