Chan Chaw-man and Others v. Director of Lands
Read the full judgment text of LDLR 1/1995 on BabelCite. This Lands Tribunal judgment was delivered on 20 November 1996.
2. Despite advice given by several members of the Tribunal at various stages, the Applicants decided not to engage legal representatives or valuers of any speciality to help them to prepare their case . The Tribunal has also repeatedly emphasized in open court that the burden was on the Applicants to prove each and every element of their claim. During the trial, Mr. Chan Chaw-man and his wife Madam Ching Suk-ming representing all three partners of the business were given ample opportunities to a
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LDLR000001/1995
Crown Lands Resumption Reference No. 1 of 1995 ----------------- HEADNOTE ----------------- Property law - Crown Lands Resumption - Restaurant Premises - Business Losses - Valuation of Goodwill - Valuation of Fixtures and Fittings - Crown Lands Resumption Ordinance, Cap. 124, s. 10(2)(d) - Compensation at $3.9 million. Two adjacent ground floor premises, one self-owned and one rented, used as general restaurant for many years when notice of resumption served. The title to the property reverted to the Crown on 3rd October 1992 but the restaurant was allowed to operate until April 1994. The applicant proprietors of the restaurant claim, inter alia, losses of goodwill, profit rent and recovery of the value of equipment, fixtures and fittings. The respondent disputes the calculation of goodwill for the restaurant which had no reliable profits record. The claim for equipment, fixtures and fittings is also challenged for being unjustifiably large. Held: (1) In accordance with s. 10(2)(d) of the Crown Lands Resumption Ordinance, the applicants are entitled to compensation that would restore them to the business position where it would be had there been no resumption, i.e. an amount of compensation so as to restore the applicants to the position where they were at the time of resumption. (2) Relying on latest figure of taxable profits, goodwill valued at $2.25 million. (3) The valuation by experts of the respondent of the equipment, fixtures and fittings accepted with minor adjustments (4) After adding other items allowed, total compensation determined at $3.9 million. IN THE LANDS TRIBUNAL OF HONG KONG Crown Lands Resumption Reference No. 1 of 1995
----------------- Coram: H.H. Judge Li, Presiding Officer and N.T. Poon, Esq., Member of Lands Tribunal. Date of Judgment: 20 November 1996. ----------------- JUDGMENT ----------------- The Applicants are the partners, in fact an elderly couple and their son, of a restaurant known as Kam Yuen Sea Food Hot Pots ("the business") at premises situated at Ground Floor, Nos. 46 and 48, Pak Tai Street, Kowloon ("the subject premises"). The subject premises were resumed by the Crown pursuant to section 3 of the Crown Lands Resumption Ordinance, Cap. 124 ("the Ordinance") under a Notice of Resumption dated 26th June 1992, published in Volume CXXXJV Hong Kong Government Gazette on 3rd July 1992 as G.N. No. 2264 of 1992 and reverted to the Crown on 3rd October, 1992. 2.Despite advice given by several members of the Tribunal at various stages, the Applicants decided not to engage legal representatives or valuers of any speciality to help them to prepare their case. The Tribunal has also repeatedly emphasized in open court that the burden was on the Applicants to prove each and every element of their claim. During the trial, Mr. Chan Chaw-man and his wife Madam Ching Suk-ming representing all three partners of the business were given ample opportunities to adduce more evidence, if any, and to canvass more effectively for the Applicants' case. 3.It is common ground that the Applicants are entitled to compensation for business loss calculated under section 10(2)(d) of the Ordinance as-
In practical terms, the Applicants are entitled to reimbursement that would restore them to the business position where it would be had there been no resumption. In this regard, they claim loss of goodwill, loss of equipment, fixtures and fittings, loss of profit rent and other miscellaneous items. The Applicants have not quite staked their claims in specified amounts but are content to leave assessment to the entire discretion of the Tribunal. 4.Mr Wu, counsel for the Respondent, agrees that compensation should be assessed on total extinguishment basis. But the quantum for major items claimed is in dispute. The Respondent's assessment of the losses suffered by the Applicants, assuming compensation is payable, has been revised several times during the course of these proceedings. By way of final submission, Mr. Wu suggests that the compensation due to the Applicants should be as follows:-
5.Before we proceed further, we should point out that the subject premises were part of a major resumption of more than one hundred properties for the Hong Kong Housing Society's Urban Improvement Scheme ("the Scheme"). In addition to Pak Tai Street, the Scheme covers Sui Lun Street, Wang Cheung Street, Ma Tau Kok Road, San Shan Road and Pau Chung Street in Ma Tau Kok. The present case is one of many applications by business operators and property owners affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement. Whilst each case must be decided on its own facts, an understanding of the background circumstances helps us to appreciate the differences between the parties on specific issues. With our experience from dealing these claims, we believe we now have a fairly good idea of the locality and the resumption process. 6.The area affected by the scheme was essentially an old residential area. Most buildings were constructed immediately after the Second World War. Most of the buildings we have had to consider were not higher than six storeys and did not have a lift. Nearly all ground floor units in the area were used as shops, restaurants or workshops and run by families who, as can be expected, are poor managers; business takings went straight to meeting family, personal and trading expenses. Few, if any, had an accounting system; single entry records at best. And because it was a run down area, landlords and local residents were more tolerant of environmental, building and land use abuse. Most, if not all, ground floor units in the area had some sort of cockloft and an open yard which might be covered and protected from the elements by some overhead structure. Retail and food businesses in the area would hardly be able to find elsewhere with comparable cheap rent or purchase price and the same storage or useful space. Moreover, the area has a significant number of factory buildings right outside the fringes of the plots affected by the Scheme. This means that the clientele for retailers and food businesses was not limited to local residents, but also workers who filled the streets in the area during lunch hour and for a period before and after work. 7.The Scheme was already in the winds well before the resumption notices were issued in July 1992. Earlier, the Housing Society had begun to buy out some of the landlords and tenants in the area. After the notice of resumption was gazetted in July 1992, the intention clearly was that all the owners, occupiers and business operators would clear out in October 1992. Some did. Apparently, the landlords and tenants on the upper floors were dealt with first. The business operators on the ground level were given several extensions of time for moving out. Eviction was postponed first to the end of 1992, then to the beginning of 1993, then to September 1993 and eventually to April 1994. During all this time, the tenants were allowed to occupy without having to pay rent and business operators permitted to trade. At first, claims for compensation were handled by the staff of the Housing Society which had a field office in situ. Later, processing of these claims was taken over by the Lands Department. It was in September 1993 that the Housing Society and the Lands Department sent staff to the ground floor businesses to take stock and inventory with the view to clearing them out then. Many of the claimants say that they handed over original documents and papers substantiating their claims to the Housing Society or the Lands Department during this period, hence they no longer have all the proof for their claims now. There is no doubt that a number of representatives of those affected by the Scheme had several meetings with officials of the Lands Department. They also sought help or mediation from local politicians and OMELCO. There were definitely letters passing between the parties, including offers of ex-gratia compensation. Some of the disputes were settled. Some claimants allege that they were given the impression that if they wanted to preserve their right to full compensation they had to cease trading, auction off their stock and not continue business in another locality. Others say that the ex-gratia payments they received on account from the Government were not enough to cover the costs of setting up elsewhere and the Government refused to lend them money, so that they were unable to re-locate. In any event, even if they could move to elsewhere, with higher rent, more restricted land use, different clientele and perhaps difficulties with labour supply, business would not be the same. But we hear from counsel for the Respondent that the Housing Society and the Lands Department had not advised the claimants to close their businesses altogether; we think there may be some misunderstanding there. In many cases, counsel for the Respondent say, the Housing Society and the Lands Department do not have the documents which the claimants allege they have handed over. We cannot determine who is right or wrong in fact in this respect; but, during the change over from a Housing Society operation to Lands Department processing, the possibility of some bureaucratic mix-up cannot be ruled out. In any event, it is pointless to argue and ponder over irretrievable papers now. 8.It was in April 1994 that the authorities managed to evict the remaining affected ones. Probably due to the confusion and urgency at the time to clear the remaining business operators, their stock and inventory were not checked again. Some operators were able to remove their stock as they planned, some were locked out first and then allowed to retrieve their possessions. Some claimants say that their business books and records were left and lost in the resumed premises as they left in a hurry or were forced out. Upon eviction, most of the business operators had their stock, plant and machinery transported to a place in the New Territories and auctioned off by one common auctioneer. It is now undisputed fact that there is no reliable inventory of the actual stock, plant and machinery sold by auction for each claimant. Divers counsel for the Respondent in these cases have explicitly or impliedly wondered whether the stock, plant and machinery sold by auction were the same as those recorded in September 1993. This is a problem we encounter in virtually every case before us. 9.We now consider each of the issues and items of claim under separate heading. Goodwill 10.The method we would adopt to determine goodwill is the one explained in Land Compensation and Valuation Law in Hong Kong by H.H. Judge Cruden at pp. 80-81 and which we have applied in related cases. First, we establish the normal profit trends of the business before resumption. The reported taxable profits of the business is the preferred basis for this purpose unless they appear to be inherently unreliable. Once the annual profit trend of the business has been arrived at, it must be related by multiplication to the anticipated future life of the business, had the business premises not been resumed. Then, where appropriate, the product is discounted for interest to take into account the fact that the business operator will have capitalized future profits immediately available for investment or other use. 11.Both parties in this case are content to rely on taxable profits which were $449,409 for 1991/92, $697,846 for 1992/93 and $908,882 for 1993/94. Mr. Sham, expert valuer for the Respondent, takes the average of the three figures, deducts therefrom interest on capital employed and profit rent, and reaches the base figure of $395,500 which is then multiplied by a factor of 3 for the value of goodwill. See p. 10 of Exhibit R6. 12.In view of the steady growing annual profits trend, we do not think it is fair to take an average figure. The latest 1993/94 figure of $908,882 is a good starting point. We have explained in previous related cases that it is not appropriate to make deduction for interest on capital employed in these cases. Since the profit rent would work out to be approximately $150,000 per annum, we decide to take a round figure of $750,000 for the purpose of calculating goodwill. In view of the fact that the subject premises comprise of two merged shop spaces one owned by the Applicants and the other rented for many years, we apply a multiplier of three, instead of two for businesses operated from wholly rented premises. Accordingly, we determine goodwill at $750,000 x 3 = $2,250,000. For the small multiplier and the already conservative base figure used, we do not think it is necessary to make a discount for capitalization. Profit Rent 13.The Applicants at first did not claim for any loss of profit rent. However, during the trial, they confirmed that they would seek compensation under this head and leave the assessment to the Tribunal. 14.Before the profit rent can be calculated, the full market rent of the subject premises has to be ascertained. The Respondent's expert suggests that the market rent for No. 46 Pak Tai Street should be $25,000 per month. This works out to a unit rate of $350 per sq. m. This is consistent with the advice we have received in previous related cases that a rate of $350 per sq. m. for the ground floor area for this part of Pak Tai Street irrespective of any yard or cockloft is acceptable. On this basis, the profit rent for Ground Floor, No. 46 Pak Tai Street with seven months remaining for the lease at the time should be $89,000. We have no reason to reject the opinion of the Respondent's expert. 15.Accordingly, we determine the Applicants' loss of profit rent at $89,000. Equipment, Fixtures and Fittings 16.The business, being a restaurant, had a large number of equipment, fixtures and fittings. A record of them was made by officers of the Lands Department in September 1993. See pp. 1-25 in Exhibit R3. This list is not disputed by the parties. However, some of the items in this list are not in the auctioneers' list of equipment, fixtures and fittings taken from the subject premises. See Exhibit R1 which also contains a detailed assessment of all equipment, fixtures and fittings. Mr. Chan senior has been cross-examined about the discrepancies. We are given to understand that some of the items in the list in R3 might well have been abandoned at the subject premises for they had no auction value. Regarding the other missing items, the Applicants say that they were too heart broken for the closure of the business at the time to keep track of every item to be removed for auction. We have no reason to disbelieve the Applicants. 17.The Applicants say that they have spent almost $5 million on equipment, fixtures and fittings including maintenance and repairs. We note that pp. 30-42 in Exhibit R3 are written quotations, two by Sun Hing Aircon. & Refrig. Service for $456,000 and $107,000 respectively, one by Lee Chau Kee Electrical Company for $385,160 and two by Polyfit for $232,374 and 1,649,585 respectively. Although nearly all of these are dated September 1993, we believe they actually relate to work done before, some even many years previously. The items of equipment, fixtures and fittings sold by auction in 1994 fetched $14,000. 18.If we go by the cost of the equipment, fixtures and fittings as supported by documents, a substantial discount has to be made for depreciation for use over many years. The resulting value by historical depreciation would be much less than that assessed by the Respondent's experts. The total, as valued by the Respondent's experts, is $1,496,915. We think the proper approach in this case, albeit a generous one for the Applicants, is to accept the Respondent's experts' valuation but deduct therefrom the value of items which we judge should have been but not included in the auction list. Having gone through each item in Exhibit R1 very carefully, we exclude the total value of $37,050 for items A6, A7 and B1 in p. 4, items C13, C15 and 12D in p. 5, item 10.3 in p. 7, item 18 in p. 13, items 3A and 3B in p. 16 and item 15 in p. 17 of the list. 19.Accordingly, we value the Applicants' equipment, fixtures and fittings at $1,496,915 - $37,050 - $14,000 = $1,445,865. Miscellaneous Items 20.The Applicants further claim transportation cost for auction purpose at $30,000, auction storage and security charges at $28,000 and auctioneers' charges at $13,000. See p. 1 of Exhibit A1. Mr. Wu for the Respondent quite properly accepts the claims for auction storage and security charges at $28,000 and auctioneer's charges at $13,425, but the transportation cost should arguably be reduced to $20,000. Considering the large number of items to be removed for auction, we think the claim for $30,000 as transportation charges is reasonable even though the Applicants cannot now produce the relevant receipt. 21.In summary, compensation for the following items is justified:-
The Order 22.Accordingly, we determine compensation for the Applicants at $3,900,000. Leave is reserved to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Ordinance. There is an order nisi that the Respondent shall pay the Applicants' expenses for prosecuting their claim which we assess at $12,000 to be made absolute unless application is made, within 21 days from the date of handing down of this judgment, to the contrary. Liberty to apply is also reserved for ancillary and consequential matters. 23.This judgment is delivered in both Chinese and English languages. Either language version may be used in aid of interpretation of the other. In the case of irreconcilable difference in meaning, that conveyed in the Chinese version shall prevail. Dated 20 NOV 1996.
Representation: The Applicants represented by Mr. Chan Chaw-man and Madam Ching Suk-ming in person. Mr. Gerald Wu, Crown Counsel, for the Respondent. |
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