THE HONG KONG INSTITUTE OF SURVEYORS

Transcription

1 THE HONG KONG INSTITUTE OF SURVEYORS GENERAL PRACTICE DIVISION ASSESSMENT OF PROFESSIONAL COMPETENCE FINAL ASSESSMENT 2006 NOTES TO ASSESSORS GENERAL These notes are for general guidance purpose only. The purpose of the written assessment is to test the candidate s knowledge in the respective areas and the ability to present his answer logically and sensibly in accordance with his own assumptions. QUESTION 1, a compulsory question Purpose of this question is to test the valuation technique of the candidates. It is expected that in analyzing the comparables for finding out the effective rent, zoning method will be used with adjustments on corner position of the subject shop, headroom, timing, length of the tenancy, exclusive right, R.C.C. cockloft. Since Shop A is a corner shop therefore the candidates could make their own assumptions that shop frontage abutting on Nathan Road has a better trading potential than the side street. Alternatively, the candidates could assume that the side street has a better trading potential than Nathan Road. If so, the zoning calculation should reflect this assumption. The calculation of the effective rent of Shop B is the gross rental income i.e. 32 months x $260, months x $280,000 = $17,840,000. After deduction of the landlord's contribution at the amount of $500,000, the net rent is $17,340,000. After dividing this net rent by 72 months, the monthly effective rent is $240,833 per month for Shop B

2 The calculation of the effective rent of Shop C is the gross rental income i.e. 35 months x $230,000 = $8,050,000. After dividing this net rent by 36 months, the monthly effective rent is $223,611 per month. For the exclusive clause and trade restriction clause of Shop A, the candidates should make their own assumptions as to whether these two factors are advantages or disadvantages to the rental level. For the shop C, the candidates should also make their own assumptions for the differences and relationship of the rental level between the ground floor shop and the R.C.C. cockloft for storage purposes. They should show the rental level of the ground floor shop and the cockloft. * * * End of Question 1 * * * - 2 -

3 QUESTION 2 (1) (a) Whereas the lot is resumed under Roads (Works, Use and Compensation) Ordinance (Cap. 370), it falls under Item 1 of Part II of the Schedule to this Ordinance so that compensation shall be assessed as if the claim were made under the Lands Resumption Ordinance (Cap 124) for land resumed under that Ordinance. (b) Based on the information above, i.e. a village environment not accessible by vehicles etc., the candidate can assume any development plot ratio of 0.2 to 0.4. (c) The candidate may also assume the erection of N.T. exempted houses (of not more than 3 storeys under the Buildings Ordinance (Application to the New Territories) Ordinance, Cap. 121) without specifying the exact plot ratio. (d) The candidate is entitled to make the above assumptions (a) or (b) because by virtue of section 12 (aa) of the Lands Resumption Ordinance, no account shall be taken of the fact that the land lies within or is affected by any area, zone or district reserved or set apart for the purposes specified in section 4(1)(a), (c), (d), (e), (f), (g), (h) or (i) of the Town Planning Ordinance (Cap 131) and Green Belt and Road are the zones specified under 4(1)g and 4(1)(a) respectively. However, the candidate is not required to state this particular section so long as he/she can present his/her argument in this regard. (e) Thus, Land compulsorily acquired must be valued not merely be reference to the use to which it is being put at the time at which its value has to be determined, but also by reference to the uses to which it is reasonably capable of being put in the future. (Raja Vyricherla Narauana Gajapatiraju v. The Revenue Divisional Officer, Vizagapatam [1939] AC 302.) the government never sought to challenge that principle in Director of Lands v. Yin Shuen Enterprises Limited and Nam Chun Investment Company Limited [2003] 6 HKCFAR 1, for instance

4 (f) However, section 12(c) of the Lands Resumption Ordinance should have no application in this instance on the intrinsic value of the building land. In para. 33 of the Court of Final Appeal judgment in Director of Lands v. Yin Shuen Enterprises Limited and Nam Chun Investment Company Limited (supra), for instance, The words "licence, permission, lease, or permit whatsoever" are not, however, altogether without limit. Where the grant or refusal of the licence or permission cannot affect the intrinsic value of the land, it is either outside the scope of the subsection or, if within it, without effect. Where the grant of the licence or permission is dependent on the personal qualifications of the particular applicant, its grant or refusal does not affect the value of the land, for a claimant who is unable to obtain it can realise the full value of the land's potential by selling it to a purchaser who can. So there must be some connection between the licence etc. in question and the claimant's interest in the land. In my opinion, the essential connection is an economic one. (g) More particularly, in para , the Court of Final Appeal also approved the decision of Niceboard Development Ltd v. China Light & Power Co. Ltd [1994] HKDCLR 69 where the Lands Tribunal held that the obligation to obtain approval for a particular building was not a licence etc. within the meaning of s.12(c) and did not affect the amount of compensation payable. The need to obtain building approval is directed to the suitability of the particular building which it is proposed to erect and non-contravention of approved or draft plans prepared under the Town Planning Ordinance, Cap (h) Further in para. 46 of the judgment, Plot ratio directly affects the potential of land for development and hence its value. It is governed by the Building (Planning) Regulations, Cap Generally the plot ratio for any given site is as fixed by those Regulations according to the physical attributes of the site and the type of building to be erected thereon. In the exceptional case where the site abuts on a street less than 4.5 metres wide or does not abut on a street, its plot ratio is determined by the Building Authority. So what falls to be valued is the land with the appropriate plot ratio. Such value does not include the speculative element which s.12(c) is designed to eliminate, and s.12(c) is not engaged

5 (i) The above (e) to (g) may not form part of the answer if the candidate does not refer (unnecessarily or wrongly) to section 12(c) of the Lands Resumption Ordinance. (2) Based on the information given, i.e. a village environ not accessible by vehicles etc., it is unlikely that the candidate can argue for the development potential of the 20-storey block of flats. He/she cannot make use of the proposed scheme of the Government to support his/her argument because of the application of the Pointe Gourde principle which obtains its modern nomenclature from the Privy Council decision in Pointe Gourde Quarrying and Transport Co. v. Sub-Intendent of Crown Lands [1947] AC 565. By virtue of this principle which has been consistently recognized and applied in Hong Kong, compensation for the compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying the acquisition or alternatively: Increase in value consequent on the execution of the undertaking for or in connexion with which the purchase is made must be disregarded. (Re South Eastern Railway Company and London County Council's Contract [1915] 1 Ch 252) (3) Like (1) above, the candidate shall disregard the planning restriction but by virtue of section 12 (c) of the Lands Resumption Ordinance, no account may be taken of any element in the open market value which reflects the prospect of a modification of the terms of the lease. This is confirmed by the Court of Final Appeal in Director of Lands v. Yin Shuen Enterprises Limited and Nam Chun Investment Company Limited (supra) which is more recently affirmed again by the Court of Final Appeal in Dragon House Investment Limited v. Secretary for Transport and Nam Chun Investment Company Limited v. Director of Lands [2005] 4 HKLRD 480. As a result, no development potential of the lot can be assumed notwithstanding the character of the surrounding and the highest and best use of the lot would probably be for open storage or other Melhado-based uses following the judgment of the Court of Appeal in Attorney General v Melhado Investment Ltd. [1983] HKLR 327. * * * End of Question 2 * * * - 5 -

6 QUESTION 3 (a) The rateable value of a tenement shall be an amount equal to the rent at which the tenement might reasonably be expected to let, from year to year, if- (i) the tenant undertook to pay all usual tenant's rates and taxes; and (ii) the landlord undertook to pay the Government rent, the costs of repairs and insurance and any other expenses necessary to maintain the tenement in a state to command that rent. (b) Based on the above definition, it is important to distinguish between landlord s and tenant s expenditures. In general, any item relating to the building structure of the property should be landlord s responsibility. (i) Capital expenditure not operating expense. (ii) Revenue from room rentals to be included in operating revenue. (iii) Restaurant income to be included in operating revenue. (iv) Cost of food and beverages to be included in operating expense. (v) Insurance for building structure, contents and third parties the portion related to building structure should not be included in operating expense. (vi) Repair and Maintenance for building structure, furniture and interior decorations the portion related to building structure should not be included in operating expense. (vii) Depreciation for building structure, furniture and interior decorations the portion related to building structure should not be included in operating expense. (viii) Staff salaries to be included in operating expense. (ix) Consumables to be included in operating expense. (x) Public utility and sundry expenses to be included in operating expense. The valuation should be presented in a tabular form, similar to the following Operating Revenue Less: Operating Expenses Divisible Balance - 6 -

7 Less: Tenant s share Rent and Rates Less: Rates Rent (Rateable Value) =================== The candidate is expected to explain that because the assignment is to estimate the amount of rates payable for the first 2 years of operation, i.e. November 2005 to October 2007, it is necessary to estimate 2005/06 rateable value for rates from November 2005 to March /07 rateable value for rates from April 2006 to March /08 rateable value for rates from April 2007 to October 2007 Because revenue figures are available for 9 months only, i.e. up to July 2006, care must be taken in making the projection of its annual revenue up to September 2006 for the 2006/07 rateable value (and then deriving the 2005/06 rateable value by comparing the 2005/06 and 2006/07 rateable values of the other hotels in the same chain), and then the annual revenue from October 2006 for the 2007/08 rateable value. In particular, the impact on the hotel industry because of the summer vacation months and the October 1 golden week should be mentioned and can be derived from the accounts of other hotels of the same chain, e.g. percentage increase in revenue in October than in September. As for tenant s share, in the absence of market information, the valuer can make use of the owner s accounts of the other hotels in the same chain to find out - (a) the percentage return on capital, and/or (b) the percentage on gross revenue, and/or (c) the percentage on divisible balance. * * * End of Question 3 * * * - 7 -

8 QUESTION 4 (1) No, the Code of Practice mentioned in the letter is not a rule of law and mandatory in nature. The management company appears to have a good excuse of not complying with the Code of Practice because firstly, the sum of repair was less than $100,000 and secondly the repair was needed in emergency. The following is the background on the Code of Practice which may not necessarily form part of the answer by the candidate but will assist the assessors to determine whether the candidate really knows the answer. The Code of Practice on Procurement of Supplies, Goods and Services is issued by the Home Affairs Department in July 1997 in pursuance of section 44 of the Building Management Ordinance (Cap. 344) (hereinafter referred to as BMO ), which states that:- Any supplies, goods or services the value of which exceeds or is likely to exceed the sum of $100, shall be procured by invitation to tender. Also, section 20A of the BMO stipulates that:- (1 ) The procurement of all supplies, goods or services required by a corporation in the exercise of its powers and the performance of its duties under the deed of mutual covenant (if any) or this Ordinance shall comply with such standards and guidelines as may be specified in a Code of Practice relating to such procurement. (2) Any supplies, goods or services the value of which exceeds or is likely to exceed- (a) the sum of $100,000 ; or (b) a sum which is equivalent to 20% of the annual budget of the corporation or such other percentage in substitution therefor as may be approved by the corporation by a resolution passed at a general meeting, whichever is the lesser, shall be procured by invitation to tender. (3) The procurement by invitation to tender. and the tender procedure in respect thereof shall comply with such standards and guidelines as may be specified in a Code of Practice relating to such - 8 -

9 procurement and tender procedures. However, the BMO does not expressly state the legal consequence of non-compliance of a Code of Practice. Section 44(2) only states that a failure on the part of any person to observe any Code of Practice shall not of itself render that person liable to criminal proceedings of any kind but any such failure may, in any proceedings whether civil or criminal including proceedings for an offence under the BMO, be relied upon as tending to establish or to negative any liability which is in question in those proceedings. The Code of Practice is only directory in nature (see Pokfulam Development Limited and others v. The incorporated Owners of Scenic Villas, LDBM 70 of 2000, as endorsed by the Court of First Instance in Incorporated Owners of Million Fortune Industrial Centre v. Jikan Development Ltd. & Another, [2001] 3 HKLRD 588 and the Court of Appeal in 麗 立 柳 CACA 1716 of 2001.). (2) No. The payment of management fees as stipulated in the DMC is a contractual liability owed to all other owners, not to the management company. According to Grace International Ltd. v. The Incorporated Owners of Fontana Gardens and Other [1996] 4 HKC 635 (which the candidates are not required to quote but are expected to give similar reasoning): Assuming that the Defendants have not discharged their duty to effect necessary repairs to the common parts of the Buildings, would this fact debar them from recovering management fees? Bearing in mind that effecting repairs was not the only duty of the Defendants and in respect of which management fees are paid, I am not prepared to hold that because of this breach they are not entitled to any management fees. Nor would it be either feasible or realistic to apportion the fees. In addition, if the management company is still able to provide the basic management services, it is hard to establish a fundamental breach that goes to the root of the contract that may entitle the owners not to pay management fees to the management company. See The Incorporated Owners of South Seas Centre, Mody Road v South Seas Centre Management Co. Ltd. and Others [1985] HKLR 457 and Holiday Resorts (Management) Co. Ltd. v. The Incorporated Owners of The Sea Ranch, HCA 4978 of

10 (3) No. By virtue of Para. 7 of the Seventh Schedule to the BMO, the manager s appointment can only be terminated by a resolution of the owners of not less than 50% of the shares at a general meeting convened for the purpose. It cannot be terminated by a management committee formed under the BMO or an Owners Committee formed according to the DMC. Furthermore, a resolution under subparagraph (1) shall have effect only if- (a) the notice of termination of appointment is in writing; (b) provision is made in the resolution for a period of not less than 3 months notice or, in lieu of notice, provision is made for an agreement to be made with the manager for the payment to him of a sum equal to the amount of remuneration which would have accrued to him during that period; (c) the notice is accompanied by a copy of the resolution terminating the manager's appointment. While the letter in the question above may be construed as the notice of termination in writing, it fails to give sufficient 3 months notice. Most probably, the letter appears not to be accompanied by a copy of the resolution terminating the manager's appointment. To make the answer complete, the candidate may add that, under subparagraph 5, a manager's appointment may not be terminated under Para. 7 of the Seventh Schedule: (a) if, within the previous 3 years, the appointment of a previous manager was terminated under this paragraph; or (b) if the manager was appointed by the corporation under subparagraph (6)(b) where the a notice to terminate a previous manager's appointment expires, the owners' corporation has appointed another manager in its place

11 (4) The covenant to pay management fees under the DMC runs with the land and the undivided shares held by the owners for the time being. If therefore the amount owing was a liability owed by the then existing owners as a whole, once the owners become incorporated, the prevailing owners are still obliged to pay. However, the owners are no longer liable to be sued for their liabilities in relation to the common parts under Section 16 of the BMO. The Owners Corporation has taken up the owners liability in relation to the common parts and becomes liable to pay. This is confirmed by the Court of Appeal in Hang Yick Properties Management Limited v The Incorporated Owners of Tuen Mun Kar Wah Building, CACV 355 of 2004 (which has been reported in: [2005] 2 HKLRD 499). This case has indeed overruled the earlier decisions on the same point in, for instance, Koo Sun-yiu v Victorison Delivery Ltd [1996] 4 HKC 152 and Hang Yick Properties Management Ltd. v The Incorporated Owners of Winner Building [1999] 3 HKC 574 which were cited in the book Building Management in Hong Kong, LexisNexis, 2002, by Paul Kent, Malcolm Merry and Megan Walters. However, once the appointment of management company has been terminated, i.e. they are no longer the manager under section 34D(1) of the BMO. See Universal Property Management Services Ltd. v. Incorporated Owners of Ying Ga Garden [1997] 4 HKC 349. As such, the Lands Tribunal has no jurisdiction to hear and determine the claim under section 45 of the BMO; the management company can only pursue its claim in the District Court or the Court of the First Instance as the case may be. * * * End of Question 4 * * *

12 QUESTION 5 Part A 5.4 In this question, candidates are expected to appreciate the risks attached to a particular form of development a ginza type. Developments of this kind can be found in busy shopping areas of CWB, Mongkok and more recently Kwun Tong. Admiralty is, however, traditionally not a shopping area as such. One has to convince targeted tenants that it is a desirable location. In terms of size, this is a sizable development (200,000 sq. m.), over 50% larger than the retail portion of Pacific Place. One will ask whether the development can be filled with targeted tenants. In terms of number of floors, no existing developments extending shopping facilities from ground to the 20 th floor can be identified. Whilst one cannot say it is not impossible, the difficulty of designing a proper tenant mix in order to drive the pedestrian flow up through 20 floors must be appreciated. Indeed, most retailers may decline taking up shop premises on high floors even though a low rental is proposed to them. As to the allocation of 30,000 square metres to international brands, one may appreciate that most of them can be found in Pacific Place. It is even more difficult to move them to a new development in close proximity with no guarantee of performance. More importantly, one has to propose an adequate number of targeted brands to fill up 30,000 square metres. Finally, the attitude of the competitive counterparts must also be considered. For example, special terms may be imposed on the existing retailers upon tenancy renewal or even early renewal (i.e. a new tenancy of say 4 years to supersede the existing tenancy with only one year un-expired)

13 Part B 5.5 This is a simple question. Candidates in their answers are expected to appreciate the need for office towers to have a proper high-class entrance of their own identity, separate from but easily assessable to the shopping area. Other features may include a directory counter for enquiry and a sitting area. 5.6 When the Developer has no experience in the local market, it will have to set up a new leasing team for the marketing program if there is no appointment of sole agency or joint sole agency. This is a cost factor to be considered, taking into consideration the possibility that the Government may exercise its right of purchase shortly after 5 years. The appointment of sole agency enables marketing professionals to have early involvement during the construction stage. Developer will benefit from their advice as to the changing market demands for the type of development that is expected in the market upon its completion. The appointed sole agent will act as the project coordinator so that the project will be more organized, with scheduled meetings to review the progress of construction and the marketing campaign. When all matters are directed to the sole agency, the Developer will not only save manpower for answering enquiries and/ or site-inspection but also be able to avoid miscommunication to external parties e.g. potential or committed tenants (who may ask for details of construction), the press or the general public. The appointment of the joint sole agency, apart from the same merits as in the case of sole agency, introduces competition between the joint sole agents who would be expected to do work harder through direct competition. It is not a common exercise in the marketing of a shopping mall. One must not neglect the introduction of other agents who may be helpful in their own individual dealing with prospective tenants with whom they

14 had special relationship. A proper system of recognizing introduction is necessary in the interests of all parties involved. As to the recommendations, unless the Developer has a long-term strategy of investments in Hong Kong, setting-up a special marketing team would mean added resource allocation on the part of the Developer. Also, as the Developer has no previous experience in the local market, the appointment of sole agency or joint sole agency may be more appropriate. In the case of office leasing that would involve a great deal of effort in making cold calls, joint sole agency may be more appropriate. In the case of retail letting that requires layout and tenant-mix planning, a sole agency appointment is suggested. 5.7 Before the issuance of occupation permit, the designated space for lease is not in existence and a formal lease cannot be entered into. Instead, the prospective tenants may be asked to sign the Agreement for Tenancy that contains the principal terms of tenancy and the procedures leading to the signing of the formal tenancy agreement and the handing-over of the premises. Often the standard tenancy agreement is enclosed with the Agreement for Tenancy so that the tenant in question cannot deny that he has not read the document he is asked to sign. Other documents include the fitting-out guide and the relevant architectural drawings for the purpose of fitting-out and design on the part of the tenant in question. 5.8 Gross floor area ( GFA ) is problematic. The prospective tenant is only concerned about the actual area of the premises. If he asks for an architectural plan, he should be given that relevant part of the architectural plan. If no such a plan is given to the prospective tenant, the latter would probably ask for the efficiency ratio. Any inaccurate information given by the Developer s own staff or its agent on this matter could result in allegation of misrepresentation by the committed tenant. Alternatively, a site inspection may be arranged. It should be appreciated that, even the conduct of the Developer s representative during the course of site

15 inspection could lead to allegations of misrepresentation by the committed tenant. 5.9 It is noted that there is a possibility of reversion to the Government in 5 years time at the then market value. It is therefore important to push the rental to the market level in about 5 years time. For office premises of 2,000 sq m, fitting-out costs may be substantial. Prospective tenants would probably demand a renewal term of two to three years. As such, a fixed term of two or three years plus an option to renew for a further term of 2 3 years at the then market rental may be appropriate. For offices of 50 to 150 sq m, a fixed term of two years may be appropriate. Apart from pushing rentals to the market value upon renewals or new lettings, these market rentals are good comparables, subject to adjustments, for independent valuation or arbitration in the event of dispute on the market rent upon lease renewals or rent reviews as well as reversion to the Government. For restaurant premises, fitting-out costs may be much more substantial. One fixed term plus two renewals may have to be granted. Sometimes, restaurants take the role of an anchor tenant. It is in this regard justified to offer a longer term as such. Conversely, restaurant operators would only be willing to spend more money on fitting-out if their lease term is long enough to allow amortization of the initial cost of fitting-out and decorations. * * * End of Question 5 * * *

16 QUESTION 6 (a) Time is of the essence is used to describe whether the time limits, as stated or inferred in the rent review clause are of the essence. It was held in the case of United Scientific Holdings Ltd. V. Burnley B.C. that prima facie time limits are not of the essence. In other words, even if one fails to observe a time limit, the review can still take place. However, there are three exceptions. Firstly, it may be expressly provided that time limits are to be of the essence. Secondly, time will be of the essence when there are contra-indications in the rent review clause. It all goes to the judicial interpretation of a particular rent review clause. Care must be taken in the drafting of the clause that a small difference in wording could lead to contrary results. Thirdly, the link between a rent review clause and other clauses, such as a break clause, could lead to the result that time will be of the essence. (b) Where it is provided in the option to renew clause that the tenant must exercise the option within a specific period of time before lease expiry. Such time limits must be strictly observed unless there is express provision to the contrary. (c) The landlord will seek to disregard the tenant s occupation, the rent-free period, or the existence of the rent review clause, etc. On the other hand, the tenant will probably seek to disregard improvements on his part, his goodwill, or an unusual term in the tenancy not in the tenant s favour. (d) (i) The landlord may have the following options. He may simply sue for the outstanding rental. He may take an action for distress under Part III of the Landlord and Tenant Consolidation Ordinance. This is on the basis that there are tenant s goods on the premises to be seized for the repayment of rent. Thirdly, the landlord may exercise the forfeiture

17 clause to recover possession of premises and to sue for damages including the arrears of rent up to the termination of lease and mesne profits from termination up to the delivery of vacant possession. Action for distress is to be proceeded in the District Court, not in the Lands Tribunal, irrespective of both the rateable value of the premises and the amount of the arrears of rent. Matters in relation to payment of rent and possession order can be dealt with in the Lands Tribunal. (ii) Even if there is no express forfeiture clause, section 126 of the Landlord and Tenant Consolidation Ordinance provides an implied term to pay rent. It has the same effect as an express forfeiture. * * * End of Question 6 * * *

18 QUESTION 7 (i) 80% of market value (ii) 10% of minimum price and subject to a maximum of $50 M. (iii) Candidates should be able to present a residue valuation properly with reasonable assumptions on the following items: (a) unit price for domestic flats (b) unit price for non-domestic units (c) unit rate of construction cost for domestic flats (d) unit rate of construction cost for non-domestic units (e) deferment time for construction (f) deferment time for GDV (g) return for builder (h) return for developer (i) optimum development or most appropriate type of development (j) property market conditions (iv) (v) Suggest a way to change the class of owner s site to a class C site. Suggest ways to lower construction costs, forgo some of the builder s and developer s return or make other reasonable assumptions/suggestions whereby the savings or benefit can be contributed to the bidding price. Give reasonable advice on whether or not to continue with the bid; and if yes, how much more his client can offer. * * * End of Question 7 * * * - END