Advisory Council on Food and Environmental Hygiene

Alignment of Market Rental Adjustment Mechanism

Purpose

This paper informs Members of the Administration's proposal and the progress of consultation regarding the alignment of the market rental adjustment mechanisms and other practices relating to the letting of public market stalls.

Background

Before the reorganisation of the provision of municipal services, the Provisional Urban Council ("PUC") and the Provisional Regional Council ("ProRC") were responsible for public markets in the urban area and the New Territories respectively. The two Councils adopted different market rental adjustment mechanisms and practices relating to the letting of market stalls.

In brief, both PUC and ProRC used the Open Market Rent ("OMR") assessed by the Rating and Valuation Department ("RVD") as a basis for assessment of the renewal rent and then adjusted it according to some pre-set formula in determining the new rent. In the case of the former PUC, rental adjustment was made with reference to the difference between the contractual rent (i.e. the last rent specified in the tenancy agreement) and the prevailing OMR. The increase would be capped by the prevailing increase in consumer price index (A) ("CPI(A)") plus a pre-set percentage. For market stalls under the former ProRC which were acquired through open auctions, tenants were required to pay the OMR upon tenancy renewal if the current rent was lower than the OMR. For market stalls acquired through restricted auctions where tenants were mostly former licensed hawkers or market tenants affected by clearance and redevelopment, rental adjustment would be made with reference to the difference between the contractual rent and OMR. The rent would be increased gradually by phase to achieve a certain pre-set percentage of OMR. However, unlike PUC's practice, there was no cap for the increases. Details of the rental adjustment mechanisms of the former PUC and ProRC are at Annex A.

Review

During the reorganisation of the provision of municipal services, the Administration undertook to review and align the different market rental adjustment mechanisms and practices within two years. An inter-departmental working group was set up under the Food and Environmental Hygiene Department in July 2000 to review and align the different market rental adjustment mechanisms and practices of the two former Provisional Municipal Councils (PMCs). The review has been completed. The working group considers that the letting and operation of market stalls are basically commercial activities. As a general principle, rental should be set at the open market level. However, in view of the fact that the current rental of a considerable number of market stalls, particularly those in the markets of the former PUC area, are significantly below the open market level, it would be desirable to bring up the current rental to the market level gradually by phase so as to minimise the impact of any rental adjustments on the tenants.

Proposed aligned rental adjustment mechanism

After careful deliberation, the working group proposes to align the rental adjustment mechanisms as follows:

  • For new tenants signing up tenancies after the alignment mechanism is in place, they will be charged the market rent (i.e. the rent they offer in open auctions with the prevailing OMR as the upset price). Adjustments at future renewals will be in line with the prevailing OMR. This is on a par with the former ProRC's practice.

  • For existing tenants who are paying a rent (current rent - ("CR"))1 higher than the OMR as assessed by RVD, the new rent for the new tenancy will be the OMR. This compares favourably with the former PMCs' practices where ProRC would still charge CR upon renewal even if the prevailing OMR was lower than CR. For the PUC, they would only reduce the rent by a certain percentage as determined by the rental adjustment formula.

  • For existing tenants, if the CR is lower than the OMR, the rent will only be increased according to a phased schedule in order to minimise its impact on the tenants. The rent level will be gradually brought up by equal increments over each 3-year tenancy period such that the rent will reach a specific "target percentage" of OMR by the last year of each tenancy. The "target percentage" will be determined having regard to the difference between CR and OMR. Details of the proposed formula and the respective "target percentages" are provided in Annex B.

  • We also propose to impose a cap of 20% as the maximum possible annual increase rate. This will further contain the impact on the tenants and avoid any sudden steep increase in rent.

Assessment of the impact on tenants

Our preliminary assessment is that our proposed rental adjustment mechanism will have a small to moderate impact on the tenants. In fact, tenants in the New Territories will experience a lower increase when compared with that under the former ProRC formula. As for tenants in the urban area, they will only experience an increase which is marginally higher than that under the former PUC formula. A table comparing the percentage increase under our proposed new formula, the former PUC formula and ProRC formula is at Annex C.

We have also analysed the actual impact on the tenants based on a sample of about 20% of the tenants in the urban area and another sample of about 10% of the tenants in the New Territories. The findings are summarised in Annex D. In brief, for the urban area, about 70% of the tenants will experience an annual increase of under $200 or a decrease in rent. Another 25% will face an increase between $201 and $500. For the New Territories, about 75% of the tenants will experience an annual increase of under $200 or a decrease in rent. Another 23% will face an increase between $201 and $500.

Other related matters

The working group has also taken the opportunity to examine other practices of the former two PMCs relating to the letting of market stalls for the purpose of alignment. The major proposals include aligning the duration of tenancy to three years, factoring in rates and management fees in the future OMR, aligning the requirement for rental deposit to two months, collecting rental on a monthly basis etc. A table setting out the working group's recommendations is at Annex E.

Public consultation

The proposals as set out above were presented to the LegCo Panel on Food Safety and Environmental Hygiene on 28 May 2001. Members considered that the proposed formula for alignment of rental adjustment would result in rental increase to tenants. Instead of discussing the proposals, Members called for a rental freeze and reduction. The Administration went on to consult the 18 District Councils, five trade associations and stall tenants through the 77 Market Management Consultative Committees.

Of the 18 District Councils, six generally accepted the proposed alignment mechanism. Others mostly objected to using the OMR as the basis for assessment. They also considered it inopportune in the present economic climate to propose measures that would result in an increase in rental. The trade associations unanimously shared this view. Of the 30 Market Management Consultative Committees consulted so far, only two supported the proposed adjustment formula.

Way Forward

Consultation with the remaining Market Management Consultative Committees will be completed in September 2001. The Administration will consider the way forward and report back to the LegCo Panel in October 2001.

Advice sought

Members are invited to give their views on the proposed aligned market rental adjustment mechanism and other related practices.

Environment and Food Bureau
Food and Environmental Hygiene Department
August 2001



1 Current rent is the rent currently paid by the tenants just before tenancy renewal, as specified in the tenancy agreements. However, due to the rental freeze/reduction extension, the rent paid by most tenants are in fact a reduced/frozen rent approximately 30% lower than the rent specified in the tenancy agreements. In adopting the new aligned formula, we will use the actual rent paid by the tenant instead.

 

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