Hon Mei Hing t/a Wing Tat Iron and Steel Engineering v. The Secretary for Transport

Read the full judgment text of LDMR 19/2000 on BabelCite. This LDMR judgment was delivered on 24 July 2001.

1. The Applicant used to trade under the name of Wing Tat Iron and Steel Engineering at the place known as No. 560 Shek Wu Tong, Tin Sam Tsuen, Kam Tsuen, Kam Tin, Yuen Long, New Territories ("the Site"). The Applicant operated the business as a contractor for assembling and electroplating iron and steel products.

Cites 1 case

Case No.LDMR 19/2000
Court
LDMR
Date24 Jul 2001
Judge
Case Document
100%Judiciary

LDMR000019/2000

LDMR 19 OF 2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 19 of 2000

_______________

Between
Hon Mei Hing trading as Wing Tat Iron And Steel Engineering Applicant
AND
The Secretary For Transport Respondent

_______________

Coram: H. H. Judge Chow, Presiding Officer of the Lands Tribunal
Mr. W. K. Lo, Member of the Lands Tribunal

Date of delivery of Judgment: 24 July 2001

________________

J U D G M E N T

________________

1.The Applicant used to trade under the name of Wing Tat Iron and Steel Engineering at the place known as No. 560 Shek Wu Tong, Tin Sam Tsuen, Kam Tsuen, Kam Tin, Yuen Long, New Territories ("the Site"). The Applicant operated the business as a contractor for assembling and electroplating iron and steel products.

2.On 16.1.1999, the land was resumed by the Government of the Hong Kong Special Administrative Region under the Railways Ordinance (Cap. 519), pursuant to a resumption notice dated 15.10.1998. The business ceased and the Site was cleared in April 1999.

3.The parties agreed that at the time of resumption, the Site occupied by the Applicant is the area within the bold continuous red line as shown on the Site plan on page 239 of the agreed bundle ("Exhibit A1"). Its area consists of the following portions of land: -

"(a) Portion of Lot No. 199 in D. D. 106, Pat Heung, Yuen Long, New Territories ("the Lot"), as coloured yellow in the site plan. This area in turn consists of:

(i) Half of a brick house (marked B in the plan) of an area of 96.5 sq. m. ("the half-house");

(ii) An open area of 371.5 sq. m. ("the open area"), on which was erected an open-sided structure of about 164 sq. m. (marked F in the Site plan).

(b) A stripe of Government land to the west of Lot No. 199 (marked G1 in the Site plan) of an area of 55 sq. m. and

(c) A stripe of Government land to the east of Lot No. 199 (marked G2 in the Site plan) of an area of 73.5 sq. m."

The total area occupied by the Applicant was 596.5 sq. m., of which 468 sq. m. fell within the Lot. As for the other half of the brick house, it was occupied by a Luen Cheong Co. for the storage of cloth.

4.According to section 32 of the Railways Ordinance, the Applicant's right to compensation in respect of the resumption of land is the right to recover from the Government a sum to be assessed on the basis as if the claim were made under the Lands Resumption Ordinance (Cap. 124) ("the Ordinance") for land resumed under that Ordinance. Section 10 of the Ordinance provides for the rules for determination by the Lands Tribunal of compensation payable by the Government. Section 10 reads: -

"(1) The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim.

(2) The Tribunal shall determine the compensation (if any) payable under subsection (1) on the basis of -

(a) .........................

(b) .........................

(c) .........................

(d) the amount of loss or damage to a business conducted by a claimant at the date of resumption on the land resumed or in any building erected thereon, due to the removal of the business from the land or building as a result of the resumption;

(e) ........................."

5.The Applicant's claims under section 10(2)(d) of the Ordinance are as follows: -

"(A) Loss of profit rent,

(B) Loss of goodwill,

(C) Loss of profits in shadow period (if any),

(D) Loss of fixtures, fittings, facilities, tools, plant, machinery and stock."

In respect of item (C), the Applicant's surveyor (Mr. Nam Chi Kwong) stated in paragraph 14 of his report that he did not think that "loss under this head can be assessed unless more information supporting such loss (if any) is available." The Applicant did not adduce any evidence to substantiate this item. Therefore it has to be dismissed.

6.Loss of profit rent

Under this head of claim, we have to find out the nature and the extent of the Applicant's "tenancy" of the Site, which can be determined according to the evidence given by the Applicant in the following paragraphs.

6.1In 1983, the Applicant leased the Site from a principal tenant on a 2 year-basis at an initial rental of $1,600 per month. A written tenancy was signed. But after the expiry of this tenancy, no more written tenancy was signed. In 1985, she rented the Site directly from the Landlord, Tang Cho Kwan, at a monthly rental of $1,800. She constructed on the open space a cover and the open space was used for placing machines and manufactured products as well as for doing work. This open space was open-sided and the people of Luen Cheong Co. could walk through it in order to go to the toilet. Therefore, the Applicant did not have exclusive possession of the open space. If there is no exclusive possession, there is no grant of an interest in the land and hence no tenancy: Lucky Shoe Repairing & Key Duplication Centre v. Best Sharp Development Ltd. [1988] HKC 286.

6.2We found that the landlord granted to the Applicant a tenancy in respect of the half-house and a licence in respect of the open space, and that the monthly payment of $2,880 made by the Applicant prior to resumption covered rent for the half-house and the license fee for the open space.

7.Length and nature of the lease

The Applicant's surveyor, Mr. Nam, assessed compensation payable to the Applicant on the basis that the lease in question is a perpetual lease. According to the evidence of the Applicant, the Landlord's son, Tang Ying Chai, once said to her that if they were to let out the Site, they would continue to let it to her. This mere statement is not a promise to lease the property to her perpetually. Further it is not supported by any consideration. The tenancy only covers the half-house, and it is only a monthly periodic tenancy.

7.1The Respondent's Counsel, Mr. Lam, submitted that no compensation is payable for the loss of the licence of the open area. He cited the case of Wing Hing Oil Co. Ltd. v. Director of Buildings and Lands [1988] HKDCLR 25 in support of his contention. In that case the Court held that the Applicant had no "estate or interest in land" within sections 6 or 8 of the Crown Lands Resumption Ordinance.

7.2The facts of that case were succinctly summarized in the headnote, which reads: -

"The applicant company was previously a partnership. The partnership had contracted in 1956 with the Shell Oil Co. of Hong Kong Ltd. to sell fuel at a Shell station in the New Territories. The 1956 contract was superseded by a 1964 agreement ("the agreement") which prohibited assignment without Shell's consent. In 1970 the partnership became the applicant company. The land on which the Shell station stood reverted to the Crown in 1985.

Under the Crown Lands Resumption Ordinance (Cap. 124)("the Ordinance") s. 6, the Crown was required to write to the owner and any person having "an estate or interest in the land" immediately before reversion, offering compensation. The applicant received no such offer, but claimed compensation under s. 8(1)(a) of the Ordinance on the basis it had an estate or interest in the land entitling it to compensation.

The Crown maintained that the applicant had no estate or interest. The Crown also cited the prohibition against assignment in the 1964 agreement, but the judge was prepared to assume that the relationship between Shell and the applicant was governed by that agreement. Shell had claimed compensation and did not wish to be heard on the application."

7.3The preliminary issue which the Court in that case had to decide was "Whether the Applicant has any estate or interest in the land resumed entitling the Applicant to claim compensation pursuant to s. 8(1) of Chapter 124." The Court held that the Applicant had no "estate or interest in land" within s. 6 or s. 8 of the Ordinance, on a technical or non-technical definition. The Applicant held under a licence, and not a tenancy.

7.4But in the present case, the compensation payable (if any) under the heading of "profit rent" is to be determined on the basis of s. 10(2)(d) of the Ordinance, under which the compensation is payable on the basis that the claimant suffered from a loss because the amount of money he paid for securing the use of the half-house and the open space by way of making a payment comprising a rental and a licence fee was lower than the money he had to pay for a notional similar comparable site, for the number of years the business could have continued, if not for the resumption of the land in question.

7.5The issue decided by the Court in Wing Hing Oil Co. Ltd. is different from the issue to be decided by the Tribunal. Therefore that case provides no assistance to the present case.

7.6In respect of "profit rent", Mr. Lam referred to section 12(d) of the Ordinance. He submitted that the compensation payable to the Applicant is the value of her leasehold interest which, in accordance with s. 12(d), is the amount which that interest "... if sold in the open market might be expected to realize." Section 12(d) reads: -

"12. In the determination of the compensation to be paid under this Ordinance -

............................

(d) subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize."

The word "land" is defined under section 2 to mean Government land of whatever description (whether held under Government lease or other title recognized by the Government), or any part or section thereof, in Hong Kong and the New Territories, and it includes buildings erected thereon. The Applicant's interest in the tenancy of the half-house is not covered by this definition. Therefore s. 12(d) has no application in the realm of profit rent.

7.7The area to be taken into account for the compensation payable comprises the half-house and the open area, namely, the area of the Lot in question. The 2 portions of the Government land G1 and G2 are not to be counted for the following reasons.

7.8Under section 10(2)(d) of the Ordinance, the Lands Tribunal is only empowered to determine the compensation payable on the basis of the amount of loss or damage to a business conducted by a claimant on the land resumed. Paragraph 1 of the Notice of Application specifies that the land resumed is Lot No. 199 in Demarcation District 106. The G1 and G2 portions were Government land, and they did not form part of the land resumed. The Tribunal has no power to award compensation in respect of loss to the part of the business operated on the portions G1 and G2. Therefore in the computation of the loss under "Profit rent", the areas of G1 and G2 must be disregarded.

8.Apportionment

The Applicant operated her business on the Lot and G1 and G2 portions. But G1 and G2 portions were Government land; therefore any compensation for loss ought to be reduced proportionally. The Applicant's Counsel argued that the Applicant should be awarded the total loss. He referred to the case of Chan Kwok Lam v. Director of Buildings and Lands [1986-88] CPR 447 in support of his contention. In that case the Tribunal stated at page 16 of the judgment: -

"The whole of the business has been affected by the resumption even though a portion of that business was carried on outside the resumed lot. The damage to the whole business follows directly from the resumption, and any business conducted outside the lot is still an inseparable part of that business. Any attempt at fragmentation must be unacceptable."

In that case the business carried on outside the resumed lot was operated on Government land and the Applicant was awarded compensation for the part of his business operated on Government land. Section 10(2) of the Ordinance expressly provides that the Tribunal shall determine the compensation on the basis of the amount of loss or damage to a business conducted on the land resumed. The land resumed is the land specified in the claim. In the present case, the land resumed is the land on Lot 199 (Portion). If the decision of Chan Kwok Lam is followed, and compensation is awarded for the entire business operated on the whole area of 596.5 sq. m. it is tantamount to awarding compensation covering Lot 199 and the portions G1 and G2. This would contravene section 10(2). In the Notice of Application, the claim was for compensation on business disturbance and loss caused by the resumption of Lot 199. No claim for compensation was instituted in respect of the portions G1 and G2. These 2 portions of land were not part of the land resumed. The Tribunal has no jurisdiction to award compensation for disturbance to a business conducted on a piece of land which was not resumed.

8.1The Tribunal in Chan Kwok Lam did not say that fragmentation was not possible. It merely said that it was unacceptable. Since the business was conducted on the whole area of 596.5 sq. m., in the absence of a better method, it would not be unreasonable to adopt the ratio between the area of land in respect of which a claim has been made and the larger area of land used for the entire business as the basis for the apportionment of compensation. This is because by operating her business on the entire area, her original business was expanded proportionally, in so far as the area is concerned.

9.Assessment of the unit market rent for the Lot

The experts for both parties adopted the direct comparison method in assessing the unit market rent for the Lot. It is also undisputed that the rent is to be assessed as at 16th January 1999. As is usually the case, the Tribunal has to determine firstly, what the appropriate comparables are and secondly, what adjustments ought to be made to these comparables before arriving at the unit market rent for the Lot.

9.1Both experts have considered the same five comparables in the course of their valuation. They were described as C1 to C5. In summary, the Applicant's expert, Mr. Nam, opined that the 3 comparables, C1, C2 and C3 were useful comparables while C4 and C5, the two short term tenancies in Ma Tso Lung, Yuen Long, should be disregarded because they were "in remote location with poor accessibility compared to the Applicant's site". On the other hand, Mr. Yip, the Respondent's expert was of the view that C3 ought to be disregarded while C4 and C5 were the better of the remaining 4 comparables since they were "not situated along a main trunk road but are adjoining to a village road". Mr. Yip considered that the comparable C3 should be disregarded because firstly, C3 at unit rate of $32.71 per sq. m. per month was out of range with the comparables C1 and C2, at $17.57 and $18.92 per sq. m. per month respectively; secondly, there was "tenant's inertia" for the tenant of C3 to remain on the site and thirdly, the site of C3 was classified as "existing use" under the Town Planning Ordinance.

9.2We decide that since we only have the benefit of considering three comparables in a certain locality such as the case of C1, C2 and C3, it is very difficult for us to conclude that a comparable is out of line when it is only compared with two other comparables. Therefore, rather than disregarding the relevance of C3 outright at the outset, we consider it appropriate to take into account all three comparables C1, C2 and C3.

9.3However, we find that Mr. Yip considered it appropriate to have adopted an overall adjustment of -60% for both Comparable C1 and C2 whilst, for Comparables C4 and C5, he decided that an overall adjustment of -5% was warranted. Therefore, in reality, in the opinion of Mr. Yip, only C4 and C5 are comparables for the subject lot because we cannot say that a comparable is truly a comparable if one has to adjust by as much as 60% when comparing the comparable with the subject.

9.4Regarding the choice of the best comparables, the Tribunal concurs with Mr. Nam, the Applicant's expert, that C1, C2 and C3 are located in closer proximity to the Lot while C4 and C5 are located quite some distance away, in an entirely differently district. Therefore, we agree with Mr. Nam that C1, C2 and C3 are much better comparables for the subject Lot and that C4 and C5 should be disregarded for the purpose of assessing the market rent for the Lot.

9.5In the final analysis, we decide to apply the following adjustments to the best comparables, C1, C2 and C3, as follows: -

Ref. Accessibility & Location Use Size Shape Zoning Lease Term Time Total Adjustments
C1 -20% -15% +5% +5% 0 +5% 0 -20%
C2 -25% -10% +5% +5% 0 +10% 0 -15%
C3 -20% -5% 0 0 0 +20% 0 -5%

Applying our adopted total adjustments to the unadjusted unit rates of these three comparables give the following adjusted unit rates: -

Ref. Unadjusted unit rate
(per sq.m. per month)
Total adjustments Adjusted unit rate
(per sq.m. per month)
C1 $17.57 -20% $!4.06
C2 $18.92 -15% $16.08
C3 $32.71 -5% $31.07

9.6Taking the average of the adjusted unit rates of these three comparables, we find that the appropriate unit market rental rate for the Lot is $20.40 per sq. m. per month. This we round off to $20 per sq. m. per month.

10.Analysis of the rent passing under the subject lease

In the earlier sections of this Judgment, we have summed up our findings of the nature of the existing lease of the Site. We have got no evidence regarding the possible ratio of the value of the leased area (i.e. the half house in the Site) and the value of the attached licensed area (i.e. the remaining Private Lot and the Government land). However, we are of the view that the unit value of the leased area should be at least twice the unit value of the licensed area. On this basis, in the absence of better evidence, we attempted to break down the rental and license value of the existing tenancy and license into two portions: a portion attributable to the leased area and a portion attributable to the licensed area, as follows: -

(a) Leased area (same area of the half house)

96.5 sq. m. @ $8.30 per sq. m.

= $800
(b) Licensed area (area of the remaining Private Lot
371.5 sq. m. and Government land 128.5 sq. m.)

total 500 sq. m. @$8.30 / 2 per sq .m.

= $2,080
Total rent and license fee of the existing tenancy and license = $2,880

11.Estimation of the full market "rental value" of the Site (excluding the Government land)

We have earlier estimated the unit market rent for the Lot using direct comparison method. Because in the analysis of the comparables, we have not been unable to know the area of the structures; we have carried out our analysis on the basis of the market rent per unit site area only.

11.1All the comparables we used are comparable short-term tenancies. They do not include any licenced areas. However, we consider it appropriate to assess the market rent of the Site using different unit rates for the leased area (covering the half house only) and the attached licence area (covering the remaining Private Lot and the Government land). We consider it appropriate to use the same ratio as when we analysed the rent payment of the existing lease of the Applicant. That is to say, we assume that the unit rent for the leased area to be twice the unit "fee" for the licensed area.

11.2Thus, we estimate the following rent/license fee for the following areas comprised in the Site: -

(a)

Leased area (half house) 96.5 sq. m. @ $20 per sq. m.

= $1,930

(b)

Licensed area of the remaining private lot
371.5 sq. m. @ $10 per sq. m. = $3,715

(c)

Licence area of the Government land
Total area 128.5 sq. m. @ $10 per sq. m. = $1,285
Estimated market rent and licence fee of the whole Site = $6,930

11.3However, on the basis of excluding the Government land, the estimated market rent and licence fee in respect of all the areas occupied by the Applicant will be $1,930 plus $3,715, or $5,645. This, we opine, is the sum that we should use in calculating the profit rent and licence fee enjoyed by the Applicant in the absence of a resumption. We cannot not include the market rent of any Government land since the latter does not form part of the claim of the Applicant.

12.Loss of profit rent & licence fee

Hence, the loss of profit rent and licence fee is calculated as follows: -

Estimated market rent and licence fee for the Site(excluding Government land) $5,645 p.m.
Less Rent reserved under the existing tenancy for the Site(including Government land) $2,880 p.m.
Profit rent and licence fee $2,765 p.m.

X

12
Annual profit rent and licence fee $33,180
Year's purchase 7 years @ 13% 4.4226
Estimated loss of profit rent and licence fee $146,742

12.1Mr. Nam adopted a capitalisation rate of 8%. He sought to justify the rate by analysing the sale of a piece of land in the vicinity of Comparable C2. This exercise was criticised by the Respondent as futile. On the other hand, Mr. Yip considered as a starting point the yield for flatted factories (12.9%) and added onto it 10% to take into account the risks associated with the fact that the structures on the Lot were unauthorised structures, and also the fact that the Lot could not be changed into another use without planning permission. Having regard to the evidence and the submission by the parties, we decide it appropriate to adopt the capitalisation rate of 13%, based on the yield for flatted factories.

13.Loss of goodwill

Mr. Lam for the Respondent submitted that "the basis of assessment of goodwill is the price that a reasonable purchaser is willing to pay to acquire the goodwill of the business, plus a modest adjustment to take into account that a prudent owner of a business may be prepared to pay more to keep his business" Director of Public Works v. Leung Sze [1977] LTLR 158; Director of Building and Lands v. Shun Fung Ironworks Ltd. [1995] 1 HKC 417.

13.1The parties were in agreement that: -

"(a) Loss of goodwill is to be assessed on a total extinguishment basis.

(b) Loss of goodwill ought to be assessed by firstly ascertaining the profit trend of the business and then multiplying it by a certain no. of year's purchase (after discount by a certain capitalisation rate).

(c) For the purpose of assessment of loss of goodwill, the annual profit of the Applicant's business is to be taken as $236, 814.

(d) Profit rent, if any, is to be deducted from the annual profit for the purpose of calculation of loss of goodwill."

13.2The parties were however in dispute on the following issues: -

"(a) Whether interest on capital ought to be deducted from the assessed annual profit;

(b) The year's purchase to be adopted; and

(c) The discount rate / capitalisation rate to be adopted."

14.Whether interest on capital ought to be deducted from the assessed annual profit?

The Applicant expert, Mr. Nam Chi Kong deducted interest at 9% on a capital of $30,000 in his first Rule 20 Report. He quoted the following passage by Judge Gordon Cruden in "Land Compensation and Valuation Law in Hong Kong, Second Edition, 1999", page 136: -

"... the owner could have invested the same capital in a gilt-edged investment without risk or his own labour received a return by way of interest. Current interest rates for bank term deposits are commonly adopted as the appropriate risk-free interest rate."

14.1However, Mr. Nam admitted that after discussing the matter with the Applicant and her accountant, he changed his stance in his second Rule 20 Report. According to Mr. Nam, the Applicant advised him that "her business was set up in 1982 and had been well established for 16 years. Her customers and suppliers had been her good trading partners over the years. She had good cash flow and reasonable profits. She did not need and did not have a fixed capital, nor did she have to arrange it from elsewhere to finance the business. The so-called 'capital' of $30,000 in the balance sheets was not capital, in the wider sense, actually invested. It was merely her accountant's way of presentation of accounts." Therefore, it was Mr. Nam's opinion and the Applicant's submission that the fixed sum of $30,000 shown in the balance sheet did not represent capital invested or locked up in the business. Consequently, since all the capital of the Applicant had been recouped in the course of carrying on the business over the past years, no deduction of the interest on the capital should be made to the assessed annual profit of the business.

14.2The Respondent rebutted this argument. The Respondent submitted that no matter how much profit the Applicant's business earned in the past years, it was still an undeniable fact that some capital money of the Applicant must have been locked up in the business. As a result, Mr. Yip's adoption, from the Applicant's accounts, of a capital sum of $30,000 for the purpose of calculation of interest on capital is most reasonable. The Tribunal concurs with this reasoning and accepts Mr. Yip's deduction of interest on capital of $30,000, calculated by using an interest rate of 5.82%, being the average interest rate in April 1999 for 1-year time deposits.

15.The year' purchase and the discount rate/capitalisation rate to be adopted

Mr. Nam opined that without the resumption, the business would run in perpetuity. His reasoning was that "the Applicant's business had been established for over 16 years. Her business in the name of Wing Tat Iron & Steel Engineering had been widely known in the trade. The personal goodwill of the business, which was capable of relocation and was not tied to the land, was overwhelming." Therefore, with no resumption, the Applicant's business would have continued for as long as she liked and then depending on the retirement of the Applicant or an attractive offer from the market, the business would either be passed on or sold on. In either case, the Applicant would have commanded a value for her business which was assessed by Mr. Nam to be around $1,500,000.

15.1Mr. Nam further elaborated that "even if one assumes an X number of years as the capitalisation period, a business will not terminate at a nil value at the end of that X number of years. At that final projection year, a business has a 'terminal value' which is to be received X number of years hence. The terminal value represents the estimated value of the sale of the company at that time. This sale value is based on the capitalised value of the company's future income stream from that point onward."

15.2Mr. Nam concluded that having regard to the judgment in Chum Hon-chi v. Director and Lands [1996] and Wan Yiu-ling v. Director of Lands (unreported Civil Appeals Nos. 122 & 124 respectively), a 9% discount rate would be appropriate having regard to what Mr. Nam listed out as some 13 factors relevant to the Applicant's business.

15.3The Respondent submitted that the adoption by Mr. Nam of a multiplier of 11.11, arrived at by applying a discount rate of 9% in perpetuity, was absurd for the following reasons: -

(a) The Applicant's lease was terminable upon 6 months' notice.

(b) The Applicant's business depended heavily on her "personal goodwill" and long-term relations with the customer. Therefore, upon sale of the business, that goodwill might not be able to be passed along to the purchaser.

(c) The Applicant's business comprised mainly of orders from one major customer, Sze Lee Iron Steel Engineering Metal. From the evidence of the Applicant, the business from Sze Lee amounted to 90% of the total business, for half a year prior to the resumption; and before that, for about 50%. This highlighted the dependency of the business on a single major customer. This is highly risky to any potential purchaser.

(d) The business of the Applicant relied heavily on the production skills of her husband. There was no established management system or skilled labour in the business which only employed casual labours. This was hardly a business which was capable of being "sold on" at all.

(e) The Applicant was 58 years old and her husband 64. It would be unlikely that they would carry on the business for long even without the resumption.

(f) The structures on the Lot were unauthorised structures liable to enforcement action by the Government.

15.4The Respondent submitted that Mr. Yip's adopted multiplier of 2 (based on years' purchase for 5 years at 43%, or 1.94) was reasonable because

(a) Mr. Yip adopted a period of 5 years for the goodwill calculation, in accordance with the case of Director of Public Works v. Dr. R Ching & Dr. M Feng [1978] HKLT 320.

(b) Mr. Yip cited that a risk premium of 26-30% was usually adopted for "small 'one man' businesses of a personal services nature, where the transferability of the income stream is in question" (Shun Fung Ironworks Ltd. v. Director of Buildings and Lands [1995] 2 HKLR 311, 388). After further taking into account inflation, investment return and the factors surrounding the business, Mr. Yip opined that a capitalisation rate of 43% was most reasonable.

15.5Despite the diligent attempts by the parties' experts to research the subject of valuation of goodwill from precedent cases in Hong Kong, the mass of information assembled by the parties are not too useful for the purpose of the present valuation exercise. The fundamental limitation is that in Hong Kong, we believe, virtually no market exists in the trading of small businesses. Even if there are isolated transactions, there is acute dearth of information relating to the sales, not to mention the availability of profit trends or other business data for the analysis of the year's purchase, etc. Therefore, there is simply no market evidence in Hong Kong as to what years' purchase a prospective purchaser is actually prepared to pay to the owner of a small business for the purchase of the goodwill of the latter's business. Nevertheless, the Tribunal has to tackle this problem and decide on the choice of years' purchase and capitalisation rate for the goodwill of the Applicant's business under consideration.

15.6Therefore, we decide that while the Tribunal or the Courts in the past might have reached a certain decision in their choice of the years' purchase or the capitalisation rate for the valuation of goodwill in some particular cases, that should not be applied indiscriminately in the present case, or indeed in any other case where valuation of business goodwill is required. Each case has to be decided on its own merit.

15.7In the present case, we decide, as explained before, that the lease of the lots secured/obtained by the Applicant was not a perpetual lease. Therefore, having regard to the nature of the lease, the nature and organisation of the business, the heavy elements of "personal" goodwill, the age of the Applicant and her husband, the relative dependence of the business on one major customer, and the dependence of the Applicant on her husband in running the business, we determine that the most reasonable period for the business to go on is 7 years, on the assumption that there were no resumption in January 1999. The Applicant's husband will be nearing 70 after 7 years (counting from the date of resumption), long past the normal retirement age for manual workers. Although the Applicant will only be in early 60's after 7 years, we do not think that the Applicant will be able to run the business on her own, without the full time assistance of her husband.

15.8Also, it would be most unlikely that the Applicant could find any prospective purchaser who would be interested to buy her business at the end of 7 years. Any prospective purchaser would have grave hesitation as to whether the business goodwill of the Applicant could be transferred to the purchaser (for example, whether the Applicant's few customers would still patronize the purchaser after the transfer), and whether the tenancy could be renewed by the land owner in the name of the prospective purchaser as the tenant. These uncertainties, coupled with the modest profits that the business had generated in recent years (agreed by the parties to be $236,814, before the deduction of profit rent and interest on capital employed; or a net figure of $201,888 after the deductions) suggest to us that, in reality, the business is unlikely to be worth anything in the market at the end of the 7th year, even if the Applicant wishes to sell it as a going-concern. This is even more evident if we remind ourselves that in arriving at the net annual profit figure of $201,888, the value of the sole proprietor's services had not been deducted beforehand.

15.9As regards the capitalisation rate, we decide that the Applicant's adopted percentage of 9% was obviously too low a percentage to be reasonable while the Respondent's suggested figure of 43% was unusually high with no proper justification for loading such a large additional risk factor, on top of the base of 30 to 35% as cited by Mr. Yip as to be the expected annual yields for small businesses in the case of Chan Kwok Lam. According to the Respondent, the actual figures cited in that judgment were those of 20% to 25% and the Tribunal only adopted a Years Purchase of 3 giving a yield of 33.33% because the business was "being somewhat erratic" and an additional risk allowance was made where businesses were inconsistent.

15.10In the absence of better evidence, the Tribunal decides to adopt a capitalisation rate of 20% for the purpose of capitalising the goodwill of the Applicant's business.

16.Determination of the loss of goodwill

Therefore, the loss of goodwill is assessed as follows: -

Agreed annual profit of the business $236,814
Less
Profit rent and licence fee (see para. 13)

$33,180
Interest on capital ($30,000 as Shown in the accounts @ 5.82%)

$1,746

$34,926
Adjusted annual profit

$201,888
Years Purchase 7 years at 20% x 3.6046
Loss of goodwill

$727,725

16.1For reasons stated in the paragraph 8 on apportionment, the Tribunal finds that the compensation for the loss of goodwill of the Applicant's business ought to be proportionately reduced by 21.54% (i.e. 1- (468/596.5)). The compensation amount becomes $570,973.

17.Construction and site improvement work

The parties agreed that the construction and site improvement work had a total market value for existing use of $101,250. This head of claim comprises of the following items: -

1. General site formation with levelling, compaction, laying of hard core and concrete paving,

2. Fencing along the perimeter of gate,

3. One gate,

4. The open structure F, the canopy,

5. Electricity/water supply.

The Tribunal held that no compensation is payable to the Applicant under item 4 because the construction of the structure (the canopy) was in contravention of the Block Government lease. The structure should never have been there.

17.1The Block Government Lease of the Lot provided that: -

"The Lessee or any other person or persons shall not, nor will, during the continuance of this demise, ........... convert any ground hereby expressed to be demised as agricultural or garden ground into use for building purposes other than for the proper occupation of the same ground as agricultural or garden ground without the previous Licence of His said Majesty, His Heirs, Successors or Assigns. ........... AND FURTHER that the Lessee or any other person or persons shall not nor will at any time during the said term erect or construct any building or structure of any description on the said demised premises or any part thereof whether demised as agricultural or garden ground or otherwise without first having obtained the approval thereof of the Surveyor to His said Majesty, His Heirs, Successors or Assigns ........"

(Underlines provided)

17.2The Block Government Lease imposed a covenant against the erection or construction of any building or structure on the Lot during the term of the lease, unless prior approval is obtained. The Applicant has not adduced any evidence that she had obtained any consent prior to the construction of the canopy. Such work was done in contravention of the Block Government lease, and therefore no compensation is payable.

17.3The next question the Tribunal has to consider is the ownership of the structures and improvements. In this regard, the general rule is that anything fixed to the land becomes part of the land, unless the tenant is entitled to remove them by agreement or by operation of law at the determination of the tenancy.

17.4The Applicant has not adduced any evidence that she is entitled to remove all the aforesaid items of work at any material time. The structure and improvements became the properties of the landowner and not those of the Applicant. She is therefore not entitled to any compensation.

18.Loss of plant and machinery, and furniture and fixtures

The parties were in agreement that the plant and machinery of the Applicant's business had a total market value on existing use basis of $118,851. Similarly, they agreed that the furniture and fixtures of the Applicant's business had a total market on existing use basis of $24,795.

18.1It was not disputed that the total market value of the plant and machinery, and furniture and fixtures were $143,646 (i.e. $118,851 + $24,795). It was further the undisputed evidence of Mr. Elmo L. Mella, the Respondent's witness (RW-2) that their total forced sale value was $15,900 (i.e. $11,800 + $4,100). This gives a net value of $127,746.

18.2For reasons stated in paragraph 8 above, this net value has to be proportionately reduced, by 21.54%. The compensation amount becomes $100,230.

19.Loss of stock

The value of the stocks have been agreed by the parties at $163,280, based on the stock taking exercise carried out on 23 March, 1999. The Applicant submitted that "the Tribunal should not pay any heed to the Respondent's surveyor's groundless stance that the value of the stock should be that shown in the profit and loss account of the Applicant." On the other hand, the Respondent submitted that the value of the stock obtained from the said stock taking exercise was unreliable and ought to be disregarded, for the following reasons: -

"(a) The Applicant has not been able to produce any proof of ownership of the stock, which, if genuine, would have been very easy for her to produce.

(c) The value of stock is at great variance with the figures shown in the balance sheet of the Applicant's:

(i) As at 31.3.1999: $35,220;

(ii) As at 31.3.1998: $27,390; and

(iii) As at 31.3.1997: $32,150."

19.1We agree with the Respondent's surveyor's opinion that it is reasonable to have adopted instead a stock figure of $35,220, based on the figure shown in the balance sheet of the Applicant's accounts as at 31.3.1999. We accept the Respondent's submission that to the Applicant's benefit, no forced sale value is deducted therefrom.

19.2For reasons stated earlier in paragraph 8 above, this stock figure of $35,220 has to proportionately reduced, by 21.54%. The compensation amount becomes $27,634.

20.Summary of compensation payable to the Applicant

The following compensation amounts are payable to the Applicant: -

(a) Profit rent and licence fee $146,742
(b) Goodwill $570,973
(c) Loss of construction/site improvement work Nil
(d) Loss on forced sale of plant and machinery,and furniture and fixtures $100,230
(e) Loss on forced sale of stock $27,634
Total compensation $845,579
Rounded to $846,000

21.Order

Accordingly, the Respondent is ordered to pay to the Applicant compensation in the sum of $846,000. The matter of professional fees, interest and costs be adjourned to a date to be fixed by the Deputy Registrar, after consultation with the Counsels' diaries. Liberty to apply is reserved for any other consequential matters.

(H.H. Judge Chow) (Mr. W. K. Lo)
Presiding Officer, Member,
Lands Tribunal Lands Tribunal

Representation:

The Applicant : represented by M/S Peter W. K. Lo & Co., Solicitors.

The Respondent : represented by Secretary for Justice.