Chan Kwok Lam v. Director of Buildings & Lands

LDLR000001/1987

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Reference No. 1/87

Coram: M.W. Phillips, Esq. Member

Date of judgment: 5th February 1988

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REVIEW DECISION

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1. The respondent has sought a review of my decision of 17th December 1987 with respect to an award of compensation for business disturbance under Section 10(2)(d) of the Crown Lands Resumption Ordinance Cap.124.

2. The application was on the following grounds :

(1)    The Tribunal erred in assessing the applicant's loss on sale of machinery, fixtures and fittings at HK$125,000.00 when the applicant himself only claimed a total loss of HK$113,254.00 in respect of these items;

(2)    The Tribunal in determining the interest on capital employed erred in failing to calculate the interest on the revalued amount of all tangible assets less liabilities to third parties; and

(3)    The Tribunal in the calculation of goodwill, having accepted that allowance for rent increase was to be deducted from the expected annual net profit erred in omitting to make a similar deduction in respect of the depreciation charge on the revalued amount of depreciable assets.

3. The first ground was not pursued by the respondent in the review. Mr Pang, who was the applicant's expert witness, originally submitted a list of amounts under various heads of claim including an amount of $113,254.00 for "loss of fixtures, machinery, equipment etc." However the evidence of the claimant Mr Chan together with that of Miss Them, a Senior Treasury Accountant in the Hong Kong Government, who gave evidence for the respondent, led to an amount of $125,000 being proved and awarded. As a consequence this increased the claim to $125,000.00. On the review, it was conceded by the respondent that the award of $125,000.00 under this head should stand.

4. Grounds 2 and 3 dealt with the Tribunal's assessment of the goodwill of the business which was extinguished by the resumption. On review, it was submitted by the respondent through Miss Tham, who appeared as a witness for the respondent, that interest on capital employed should be based on the revalued assets as determined for the purpose of assessing the loss on forced sale, as should any allowance for depreciation. Miss Tham also appeared as a witness for the respondent at the original hearing, but these points were not made then.

5. The claim came under Section 10(2)(d) of the Crown Lands Resumption Ordinance Cap.124. It has been held previously that Section 10(2)(d) is applicable where a business is totally, as well as partially extinguished by a resumption. Under Section 10(2)(d), the Tribunal considered itself bound to make an assessment of compensation based on the value to the owner. That is, it is the value to the dispossessed claimant which must be determined. In the words of Fletcher Moulton LJ in Lucas v. Chesterfield Gas and Water Board (1909) 10 16, 29, "The owner receives for the lands he gives up, their equivalent, i.e. that which they were worth to him in money. His property is therefore not diminished in amount but to that extent it is compulsorily changed in form. But the equivalent is estimated on the value to him, and not on the value to the purchaser." (Underlining added) Also in Pastoral Finance Association Ltd v. The Minister (1914) AC 1083 as Lord Moulton delivering judgment for the Privy Council, he said, "Probably the most practical form in which the matter can be put is that they were entitled to that which a prudent man in their position would have been willing to give for the land sooner than fail to obtain it."

6. The goodwill assessment is therefore an exercise is establishing what the business was worth to the claimant. It was assessed by the Tribunal from the agreed accounts. On pages 18 and 19 of its decision, the Tribunal pointed out that "Asset valuation in the context of assessing the loss suffered by the claimant in respect of various items of fixed assets is a separate head of compensation and the method adopted here for calculating goodwill is unrelated to the assessed sales of these assets at the time of the winding up of the business"; and then went on to explain that, "Because the calculations for the claimant's goodwill are primarily based on his trading results which takes into account, the depreciation charged therein, it follows that the actual capital employed as shown in the balance sheet comprising share capital and revenue reserves should be preferred". The Tribunal therefore expressly separated the value of the goodwill from the forced sale loss.

7. The history of the business showed that the machines and assets had been acquired when there were three partners. Two left and were paid for their interests in the business by the claimant. The machines and assets had been depreciated by the firm's accountant and the profits related directly to these adjustments. The actual investments made by the owner in his business and the profits derived from these investments were adequately reflected in the accounts.

8. While the accounts formed the basis of the goodwill assessment, the loss on the forced sale of the assets must be based on their worth to the owner at the time of the sale. Therefore it had to be made clear, and I believe it was that there could be no relationship between these two assessments. By going to the balance sheet, the directly related profits and assets were used for the purposes of the goodwill assessment.

9. With respect to the profit rent allowance, which Miss Them gives as her reason for now adopting a method of revaluing the assets and then deducting an appropriate depreciation rate on this reassessed amount, I can only draw attention to the reason why profit rent was considered relevant and why it was deducted by the lands Tribunal in its assessment of goodwill.

10. The valua of the goodwill was based principally on the latest trading figures which would not have allowed for the fixed rent, which was being paid at that time under a two year tenancy agreement, being lower than the general market level. Goodwill assessments relate only to the business on the land and are separate from the value of the real estate, be it the value of the land if the premises are owned by the proprietor of the business, or the value of the tenant's interest in the land, if the proprietor or his firm is also the tenant of the promises. The term "land" is used in its wider sense to include land and improvements.

11. The tenant by having an interest in the land has the initial right to claim under Sections 6 or 8 of the Crown Lands Resumption Ordinance, Cap124. The assessment of a tenant's interest is usually based on his profit rent, if arty, and the period he might expect it to continue under his lease or licence. In this case no claim came before the Tribunal for any value of any interest in the land. In fact I would have been surprised if a claim for the claimant's interest in the land had, as it would have only related to the two weeks remaining in the tenancy. However, the profits in the accounts included the profit rent, as only the rent actually paid was deducted. Therefore any assessment based on those profits including the profit rent would have wrongly included an amount representing a tenant's interest in the land. Hence a deduction had to be made, as there is little doubt, that in a rising market, the last year's trading profits would have included a rent advantage which could not be expected to continue in the future. Therefore while depreciation on assets was covered by reference to the balance sheet, the value of the profit rent or the tenant's interest in the property, was not.

12. The Tribunal sought, in this decision, to establish that the accounts were the best evidence in establishing the value of the goodwill to the owner, but were not helpful in assessing the loss associated with his having to dispose of the assets at prices less than their worth to him at that time. The two assessments were to be completely separate exercises. The original decision should stand.

13. The respondent is to pay the claimant's costs for this review, to be taxed if not agreed, in accordance with the Supreme Court Scale pursuant to Order 62 of the Rules of the Supreme Court. There is to be a certificate for counsel if required.

DATED this 5th February 1988

Representation:

Mr. H.Y. Wong instructed by Victor Ng & Co. for the applicant.

Mrs. A. Cabrelli, Senior Crown Counsel, for the respondent.