Au-yeung Ping Ki t/a Clear Optical v. The Director of Lands
Read the full judgment text of LDLR 2/2010 on BabelCite. This Lands Tribunal judgment was delivered on 19 June 2012.
1. Originally this case was set down for hearing before a presiding officer, Deputy Judge Kot and a member of the Tribunal. On the first day of the hearing, Mr Yuen, counsel for the applicant submitted that since the legal issue on profit rent was no longer an issue between the applicant and the respondent, he asked for direction that the hearing would be heard by a member sitting alone. Deputy Judge Kot agreed that it was no longer necessary for her to attend and gave direction that the case b
Cited by 1 case · Cites 3 cases
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LDLR 2/2010 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION Lands Resumption Application No. 2 of 2010 ________________ BETWEEN
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_______________ JUDGMENT _______________ 1.Originally this case was set down for hearing before a presiding officer, Deputy Judge Kot and a member of the Tribunal. On the first day of the hearing, Mr Yuen, counsel for the applicant submitted that since the legal issue on profit rent was no longer an issue between the applicant and the respondent, he asked for direction that the hearing would be heard by a member sitting alone. Deputy Judge Kot agreed that it was no longer necessary for her to attend and gave direction that the case be heard by a member sitting alone. BACKGROUND 2.By notice of resumption dated 16 February 2005 and published in Gazette Notice No. 851, the property known as “the Ground Floor of No. 315 Shau Kei Wan Road, Hong Kong” (“the Property”), together with other land lots were to be resumed for the implementation of Development Proposal H21 by the Urban Renewal Authority in association with the Hong Kong Housing Society at Shau Kei Wan Road/Nam On Street, Shau Kei Wan, Hong Kong pursuant to the provisions of the Lands Resumption Ordinance, Cap. 124 (“the Ordinance”) upon expiry of 3 months from the date of the affixing the said Notice. 3.Most of the facts in this case are not in dispute and are set out in the Joint Statement prepared by the valuation experts, Mr Lee Wing Kwan, Wayne (“Mr Lee”) of Wayne Lee & Associates Limited for the applicant, and Mr Chan Yat Hei Jack (“Mr Chan”) of Landscope Surveyor Limited, on 4 October 2011 for the respondent, as follows:
4.During the site inspection with the parties in November 2011, I found that the area covered by the development proposal H21 (which encompassed the Property) had become a development site. The characters of the site of the Property and the New Property today must be very different to those in 2005. Hence, I have to rely on the evidence adduced by the experts to ascertain the situation back in 2005. 5.According to the evidence given by the applicant:
6.On 22 June 2005，the respondent offered to the applicant a sum of $513,000 in full and final settlement of all claims arising out of the provisions of the Ordinance or otherwise arising out of the resumption of the Property. This offer was not accepted and no agreement between the parties could be reached. 7.On 27 April 2010 the applicant made the present application for determination of the amount of compensation to be paid in respect of the resumption because an offer made under Section 6(l)(a) of the Ordinance has been rejected. 8.In the Notice of Application, the applicant claims for compensation of $1,900,000, which is the applicant’s estimate of the following:
9.In support of the application, Mr Lee produces a valuation report dated 27 November 2010, in which Mr Lee assesses the claims as follows:-
10.In the Notice of Opposition dated 18 May 2010, the respondent contends that the applicant is not entitled to compensation for the resumption of the Property and the applicant is put to strict proof. The respondent also considers the applicant’s claim to be excessive. 11.Mr Chan, in his report dated 9 November 2010, summarizes the amount of compensation payable to the applicant for the resumption of the Property under the Ordinance as follows:
12.Thus, although Mr Lee and Mr Chan both agree that the compensation should be based on the Ordinance, they seem to have different interpretations on the basis of assessment for the compensation payable to the applicant. RELEVANT STATUTORY PROVISIONS 13.Section 10 of the Ordinance provides that:- “(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-
14.”Section 11 of the Ordinance provides that:- “(1) When any property is resumed, the Lands Tribunal in determining the compensation to be paid and in estimating the value of the land resumed and of any buildings thereon, may-
Provided that, in the case of any interest acquired after the date of such publication, no separate estimate of the value thereof shall be made so as to increase the amount of compensation. (2) The Lands Tribunal may also receive evidence to prove-
(3) If the Lands Tribunal is satisfied by such evidence, then the compensation-
BASIS OF ASSESSMENT 15.From the above statutory provisions, it is clear to me that the applicant should be compensated on the basis of “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 that land or building as a result of the resumption” (section 10(2)(d) of the Ordinance); and “the amount of any expenses reasonably incurred by him in moving from any premises owned or occupied by him on the land resumed to, or in connection with the acquisition of, alternative land or land and buildings” (section 10(2)(e) (i) of the Ordinance); plus “the amount of any costs or remuneration” (section 10(2)(e) (ii) of the Ordinance). 16.Ms Wu, counsel for the respondent, submits that the burden of proof lies upon the party who substantially asserts the affirmative of the issue: Phipson on Evidence (17th ed., Sweet Maxwell), at paragraph 6-06. This principle equally applies to claims for compensation assessed as if the disturbance were a tort. In a claim of compensation for land resumed or occupied by the Government, the legal burden rests with the claimant to make good what he claims. The Court of Appeal in View Point Development Limited v. Secretary for Transport and Busy CACV 439/2002 and Firm Investment Limited v. Secretary for Transport CACV 64/2003 (unreported, judgment dated 24 December 2003) stated (in a passage cited with approval by the Court of Appeal in Nam Chun Investment Co Ltd v. The Director of Lands [2005] 1 HKC 390，at 405H-406H) that the respondent has the evidential burden of making good its challenge and once that evidential burden is discharged it would then be for the claimant to resolve the challenge on a balance of probabilities. 17.In Director of Buildings and Lands v Shun Fung Ironworks Limited [1995] 2 AC 111, Lord Nicholls of Birkenhead at 125C-D said that:
I shall examine whether the applicant may claim compensation for his relocation by applying these tests. 18.On the evidence, there is no dispute that the applicant has relocated his Business to the New Property. I am satisfied that the answers to both principal questions (1) and (2) in Shun Fung (supra) are in the affirmative. The applicant gives evidence that the Business has been operating all along at the Property since about 1989. He has invested $600,000 in the Business by April 2004 and further injected more than $300,000 in the Business by March 2005. The applicant's expert Mr Lee gives evidence that the adjusted net profits of the Business for year ended 31 October 2004 and for the 5 months ended 31 March 2005 are respectively $405,286.12 and $99,618.44. Taking into account this factual evidence, I am also satisfied that the answer to principal question (3) is also in the affirmative. 19.I find the applicant has satisfied the 3 principal questions in Shun Fung (supra) and may claim compensation due to the relocation of his Business to the New Property as a result of the resumption of the Property. The respondent’s expert, Mr Chan in his Report dated 9 November 2010 also agrees that the business loss should be assessed on a relocation basis as a result. I shall examine the applicant’s claims below. THE ISSUES 20.Mr Yuen, counsel for the applicant, in his closing submission, identifies the following 5 main issues in this case:-
21.At the end of the hearing, the two experts, Mr Lee and Mr Chan revised their valuation as follows:
22.I shall deal with all these issues below. SUFFICIENT ACCOUNTING RECORDSAND ITS ACCURACY 23.Mr Yuen submits that the accounting records provided by the applicant as set out below are well sufficient to afford a reasonable and fair assessment of pre-resumption loss of profit and partial loss of goodwill:
24.Mr Yuen submits that the applicant is not required by any statues or practice directions to provide audited profit and loss accounts, tax return, or notice of assessment for the present application. Audited accounts are not required for the purpose of tax return of a sole proprietor, such as the applicant. In relation to the tax record for the year 2003/2004, apparently it is not in the applicant’s control or possession as the business was then owned by the former owner. 25.Mr Yuen also submits that if the issue is accuracy, given sufficient accounts records are provided by the applicant，the burden of proof lies upon the respondent who asserts they are inaccurate or unreliable. The fact that the accounts records are not audited has nothing to do with their accuracy. 26.Mr Yuen further submits that the respondent fails to point out any irregularities in the accounts records by reference to any ratio analysis. During cross-examination, the respondent's expert Mr Chan has fully accepted the accounting records for those years supported by Notice of Assessments, i.e.: 2005/2006; 2006/2007; and 2008/2009; and Mr Chan has also accepted 50% of the accounting records for those years supported by Tax Return, i.e.: 5 months from 1 November 2004 to 31 March 2005; and 2007/2008. 27.Based on the accounting records, Mr Lee has determined the adjusted net profit (loss) of the Business as follows:
28.On the other hand, Ms Wu submits that the applicant has failed to provide reliable accounting information, in particular for the crucial pre-resumption period (for the years ended 31 October 2004 and 31 March 2005), in substantiation of his claim for the partial loss of goodwill. Inconsistencies 29.Ms Wu submits that the applicant has made altogether three submissions to the respondent during the period of 2006 to 2009, which contain inconsistent figures. 30.Mr Yuen submits that it is important to note that the first two submissions are made by the previous expert of the applicant. The 3rd submission made by Mr Lee includes only the following accounts records:
31.Mr Yuen submits that it is not the case that the applicant provides a new set of accounts which are inconsistent with the previous submission. The inconsistencies in the 3rd submission as compared to the previous ones are only caused by the adjustments made by Mr Lee which turns out to be unnecessary. 32.Mr Yuen further submits that the three inconsistencies have been fully explained by Mr Lee:
33.Ms Wu considers that the confirmation from the applicant's previous accountant is not reliable and should not be accepted because Mr Lee does not even know the full name of the accountant. Mr Lee does not have the accountant’s name card for identification purpose. Mr Lee only takes the accountant’s words that the opening stocks should be excluded without sight of the supporting accounting information. Mr Lee has met the accountant for 5 to 6 times and the first meeting took place prior to the 3rd Submission on 5 August 2009. It follows that the 3rd Submission must have been made after clarification with the accountant. The applicant’s previous accountant is not tendered as a witness for cross-examination despite the respondent’s serious objection in this respect all along. Discussion 34.I agree with Mr Yuen’s submission that aedited accounts are not required for a sole proprietor, such as the applicant. I also agree with Mr Yuen that if the respondent asserts that the accounts are inaccurate or unreliable, the respondent should identify the complaints. In my view, a blanket assertion that the applicant has failed to provide reliable accounting information to substantiate his claim does not avail the respondent. 35.For the inconsistencies, I find Mr Lee’s explanation credible. I accept the opening stocks are added by Mr Lee himself without seeking clarification from the applicant's previous accountant. Since there is no evidence that Mr Lee is changing the remainder of the accounts, it is not necessary for Mr Lee to see the supporting accounting information to negate Mr Lee’s own adjustment which is proved to be unnecessary. 36.I shall deal with the application of the accounts later. PRE-RESUMPTION LOSS OF PROFIT 37.In Mr Lee’s valuation report dated 27 November 2010 and revised by his supplementary statement dated 28 January 2011, he assesses the claims under the heading “Loss of profit during the period prior to removal” to be $69,250.70. The loss is represented by the difference between the adjusted net profit of the year ended 31 October 2004 and the extrapolated adjusted net profit for the period from 1 November 2004 to 31 March 2005. According to Mr Lee, since the profit (or loss) after 1 April 2005 has been taken into account in the calculation of loss of goodwill, to avoid duplication, the period from 1 November 2004 to 31 March 2005 is used. As the Property reverts to the Government on 25 May 2005, Mr Yuen refers the claim as pre-resumption loss of profit. 38.The applicant claims pre-resumption loss of profit of $69,250.78 for the period from 1 November 2004 to 31 March 2005 according to the following calculation made by Mr Lee:
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Proportion in one year for the period from 1/11/2004 to 31/3/2005 |
5/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Extrapolated Adjusted Net Profit of the period from 1/11/2004 to 31/3/2005 |
$168,869.22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Less: Adjusted Net Profit of the Period from 1/11/2004 to 31/3/2005 |
$99,618.44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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$69,250.78 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
39.Mr Yuen submits that the best evidence that the applicant did suffer pre-resumption loss of profit is the fact that the actual profit is less than the extrapolated profit in the said period. There are sufficient accounts records for assessing pre-resumption of loss of profits. There is loss of profit during the period of November 2004 to March 2005 as reflected from the accounting records. The loss of profit is caused by the resumption.
40.The Privy Council in Shun Fung (supra) has confirmed that compensation is payable for loss due to resumption during the shadow period, which is the period between an owner becomes aware of the resumption scheme and its later formal notification, as well as during the period after resumption. Lord Nicholls of Birkenhead at 137H-138B said that:-
“losses incurred in anticipation of resumption and because of the threat which resumption presented are to be regarded as losses caused by the resumption as much as losses arising after resumption. This involves giving the concept of causal connection an extended meaning, wide enough to embrace all such losses. To qualify for compensation a loss suffered post-resumption must satisfy the three conditions of being causally connected, not too remote, and not a loss which a reasonable person would have avoided. A loss sustained post-scheme and pre-resumption will not fail for lack of causal connection by reason only that the loss arose before resumption, provided it arose in anticipation of resumption and because of the threat which resumption presented. In the terms of the Resumption Ordinance, a pre-resumption loss which satisfies these criteria is as much "due to" the resumption of the land as a post-resumption loss.”
41.In my view, the applicant is entitled to pre-resumption loss of profit if the three conditions of “being causally connected, not too remote and not a loss which a reasonable person would have avoided” are satisfied.
42.With respect, I reject Mr Yuen’s submission that the best evidence that the applicant did suffer pre-resumption loss of profit is the fact that the actual profit is less than the extrapolated profit in the said period. A loss in profit could be due to many different factors. The applicant has to prove that the loss satisfies the three conditions. I shall examine the claims of the applicant to see if they are entirely causally connected to the resumption.
43.In Mr Yuen’s submission，the loss can be attributed to the following different factors:
Interruption caused by the inspections/repetitive surveys
44.Mr Yuen submits that the numerous inspections made by the acquiring authorities have caused interruption to the business of the applicant. The applicant gives evidence that there are some 10 to 20 odd inspections by the acquiring authorities. It is nothing unusual given that the respondent’s expert Mr Chan himself also has conducted around five inspections to the Property just within a few months from the date of resumption of 25 May 2005 to November 2005 when the applicant vacates. The applicant also gives evidence that the surveyors would come as often as every 3 to 5 days. During the period of such high frequency, it would inevitably cause interruption to the business.
45.In Mr Yuen’s opinion, it is nothing unusual for the applicant not to record the number of inspections and not knowing their exact purpose. The applicant is just a layman. He is not in a position to know exactly what the surveyors are doing. He cannot resist. The purpose of the inspections are viewing, taking photos, making measurements, taking stocks, interviewing, making enquiries, and even verbally urging the applicant to relocate earlier.
46.According to Mr Yuen, the respondent’s expert, Mr Chan gives evidence that there is no advance notice given to the applicant for those inspections made by him. These “surprise” inspections are enough to cause disruption to the business. Though Mr Chan says that the acquiring authorities would accommodate upon requests to postpone the inspection, the whole process of making of such“surprise inspection” then asking for permission to survey, coupled with negotiating another day is itself an interruption to the business, not to mention there would be another chance of interruption caused by the postponed visit. Given the limited size of the Property，even an inspection made by two to three surveyors is enough to cram the whole Property. When there is more surveyors，they need to gather on the pavement right at the front of the Property, thus blocking pedestrian flow including potential customers flow.
47.Mr Yuen submits that all these have caused considerable nuisance and disruptions to normal business operation and arousing suspicion from clients，suppliers and passers-by. It is not uncommon that clients seeing the scene adjourn or postpone their purchases.
48.I agree with Ms Wu’s submission that the acquiring authorities have not made surveys and visits to such an extent as to interrupt the applicant’s business. Ms Wu identifies the following evidence to support her submission, which I accept:
(a) The applicant accepts that he has not recorded the number of surveys and visits. He further accepts that he is not present in each and every survey and visit. It is only the applicant’s speculation that there should be altogether 10 to 20 odd numbers of surveys and visits.
(b) In any event, by spreading 10 to 20 odd number of surveys and visits (inclusive of those made to the new premises) over the period of November 2003 (when the public was notified of the resumption) and November 2005 (when the applicant removed his business from the Property), it can be seen that the interval is not frequent.
(c) The acquiring authorities only come during office hours. The surveys and visits are not made during what the applicant would classify as the “peak hours”, i.e. in the evenings and over weekends.
(d) Mr Chan participates in the pre-resumption surveys and visits. His evidence is that the acquiring authorities are generally prepared to postpone the surveys and visits upon the occupiers’ requests.
49.I also observe that Mr Lee’s claim is for the period from 1 November 2004 to 31 March 2005. Many of these visits are outside this period. In my view, the applicant’s claim under this heading fails because it is too remote.
Doomsday effect
50.Mr Yuen submits that thwarted by the doomsday scene of the area and worried about the prospect of obtaining a continual proper service (including the usual after-sale service) from the applicant, potential clients hesitate to place new orders. The hesitation of the customers is understandable. Even Mr Chan accepts in cross-examination that it takes longer time for a customer to decide as to whether to patronize an optician than to patronize a bakery and the continuity of the business is a relevant factor in making such decision. Mr Yuen further submits that it is not only the worry about after sale service that wards off the customers, but the general atmosphere in the doomsday scenario.
51.I agree with Ms Wu’s submission that the applicant’s allegation of doomsday effect cannot be substantiated because:
(a) Mr Chan confirms that all the shops in the Development Proposal H21, save and except two shops which he is not entirely sure, remain open and are in active operation like the applicant’s well after March 2005.
(b) The applicant continues to carry on his business at the Property until 9 November 2005 despite that it has been reverted to the Government on 25 May 2005.
(c) It only takes the applicant about a week’s time to deliver orders.
(d) The applicant also faces difficulty in particularizing the after-sale service, the concern for which puts potential clients off according to the applicant.
52.In my opinion and finding, the doomsday scenario, if any, only occurs towards the end of the applicant’s occupation of the Property but not during the period of 1 November 2004 to 31 March 2005. In my view, the applicant’s claim under this heading fails because it is too remote.
Cash flow pressure
53.Mr Yuen submits that the Applicant’s suppliers are getting more cautious and demand for shorter payment periods or even transactions be done on cash on delivery basis . The applicant also gives evidence that due to the stringent cash flow, he cannot order as much stock as he wants. It leads to limitation of choice of spectacle frames to potential customers, thus affecting the business.
54.According to Mr Yuen, the required cash on delivery during cash flow problem has been manifested by the increase of the applicant’s lending to the business. It increases by $312,149.82 from $478,107.88 as of 31 October 2004 to $790,257.70 as of 31 March 2005. It is unnecessary to give a breakdown of the lending or how the increase lending to the business is spent. It includes rent, salary, or stocks as stated by the applicant during re-examination. The point is, it is only necessary to inject funds into the business when there is a shortfall of funds; and the funds injected in such circumstances would be spent on whatever bills become due. The Tribunal is not dealing with a tracing exercise.
55.I agree with Ms Wu’s contention that none of the applicant’s documents is able to show that his suppliers demand shorter payment periods or cash on delivery. The applicant confirms that the additional invoices, delivery notes and records are disclosed to show that the goods he sold are not up-market. But the Tribunal would not be able to tell to where the money owed to the applicant are spent unless with supporting evidence. The applicant’s expert Mr Lee accepts that he would not be able to give evidence on the breakdown of either $478,107.88 or $790,257.70. He has not gone through the source documents to verify these figures. He only accepts the accuracy of the financial statements provided by the applicant and carries out the assessment on this basis.
56.I also set out below the Director Account in the Current Liabilities of the Balance Sheet of the accounts of the Business:
Period Director Account For year ended 31 October 2004 $478,107.88 For 5 months ended 31 March 2005 $790,257.70 For year ended 31 March 2006 $917,711.98 For year ended 31 March 2007 $897,135.05 For year ended 31 March 2008 $916,400.06 For year ended 31 March 2009 $1,037,868.00
I find that the applicant has been injecting capital into the Business, but the applicant has not provided any details. Based on the evidence, I am not satisfied that the shortfall of funds is because of the resumption. In my view, the applicant’s claim under this heading fails because it is too remote.
Discount sale and selling of less profitable items
57.Mr Yuen submits that in view of the difficulty faced by the Business, the applicant cuts the price of the spectacles frame by 30%. The applicant also explains that due to the uncertainty of the continuity of the Business, he also wants to unload the stocks. Moreover, the applicant also increases the sale of less profitable items including optical solution, sun glasses and contact lens. Such sales only amount to a few percentage of the total sales at the Property but increase to about 20% in the New Property. The discount sales explain the decline in profit margin and lead to the pre-resumption loss of profit.
58.In my view, the applicant has not provided details of the timing of the discounts. For the selling of less profitable items, according to the applicant, this continues at the New Shop. I find that the applicant’s claim under this heading is too remote and must fail.
Staff problem
59.Mr Yuen submits that given the uncertainty in the continuity of the business, two qualified opticians resign. When this factor and all the other factors come in at the same time, it is big enough to distract the applicant from business management leading to the pre-resumption loss of profit.
60.The applicant is unable to quantify the loss under this heading. In my view, the applicant’s claim fails because it is too remote.
Relocation decision
61.Mr Yuen submits that it is reasonable for the applicant to wait until May 2005 when the provisional compensation is confirmed before looking for new premises because:
(a) the applicant has invested $600,000 in the business by April 2004.
(b) the applicant further injects more than $300,000 in the business due to cash flow problem by 31 March 2005.
(c) the applicant could enjoy the goodwill of the business at the Property if he continues to stay there while he needs to face uncertainty at relocation.
62.Ms Wu contends that the applicant is or ought to be aware of the resumption as early as in November 2003 when on 29 November 2003，the Hong Kong Housing Society announces the launch of its urban renewal project in Shau Kei Wan. The site is located between Shau Kei Wan Road and Nam On Street (inclusive of the site of the Property). There is a task force deployed for a three-day occupancy survey starting from 29 November 2003 to visit each of the 250 or so affected households (inclusive of the Property) to record their occupancy status. The Hong Kong Housing Society holds a series of briefing sessions for the affected residents during the period of 3 December 2003 to 5 December 2003.
63.Ms Wu submits that the applicant must be aware of the urban renewal project when there is express reference in the second sale and purchase agreement concluded between the applicant and Mr. Wong Ho Yin on 1 June 2004 to “external benefit obtained by the Company”. The Government Notice G.N. 851 is dated 16 February 2005.
64.The applicant is also unable to quantify the loss under this heading. In my view, the applicant’s claim fails because it is too remote.
Business is really bad or not that bad
65.Mr Yuen submits that in re-examination, the applicant explains that the business is not that bad when he takes over the Business in April 2004 and the situation is however really bad by the end of 2004 which triggers the discount sale.
66.Mr Yuen accepts that it is true that the business is not that bad in terms of turnover in the said period. However, the turnover is maintained at the expense of discount sale which drags down the net profit.
67.According to the evidence of the applicant, the business becomes really bad when the restaurants, in particular the Chinese restaurant closees down. Mr Chan’s evidence is except two shops which he cannot confirm, all the shops in H21 are operating as at the date of resumption, which is outside the period. I reject the applicant’s claim that there is a loss of profit for the five months ended 31 March 2005 caused by the resumption. In my view, the applicant’s claim under this heading fails because it is too remote.
Conclusion
68.The applicant fails to provide the details of any loss caused by the resumption or the threat of resumption. He is unable to demonstrate the actual impacts on the profit of the Business during the relevant period. In my view, the applicant’s claim is too remote. I reject the applicant’s blanket claim because he cannot provide any detailed breakdown. My finding of the applicant’s claim under this heading is nil.
PARTIAL LOSS OF GOODWILL
69.The applicant claims for partial loss of goodwill as calculated by Mr Lee below:
Adjusted Net Profit of year ended 31.10.2004 $405,286.12 Years’ Purchase at discount rate of 20% for 15 years 4.68 Value of goodwill of the Business before removal $1,894,904.17 Adjusted Net Profit of the year ended 31.3.2006 $175,986.50 Adjusted Net Profit of the year ended 31.3.2007 $91,926.40 Adjusted Net Profit of the year ended 31.3.2008 $12,022.18 Average Adjusted Net Profit after removal $93,311.69 Year’s Purchase at discount rate of 35% for 15 years 2.83 Value of goodwill of the Business after removal $263,647.77 Loss of goodwill $1,631,256.40
70.Mr Yuen explains that the figure of $405,286.12 in Adjusted Net Profit of year ended 31 October 2004 is the sum of net profit of $225,286.12 and the salary of the applicant of $180,000. Mr Yuen submits that the respondent's expert Mr Chan never challenges the treatment of the salary until the last minute of his re-examination that the salary should not be added back.
71.On the other hand, Ms Wu submits that the applicant’s calculation for partial loss of goodwill is flawed because $405,286.12 should not be adopted. According to the 3rd Submission dated 5 August 2009，the net profit should be $185,286.12. Proprietor’s salaries and other expenses like tax should be deducted.
72.I agree with Mr Yuen’s submission that the applicant is not a qualified optician and he operates the Business through employing qualified persons and that the applicant just plays an overall supervision over the Business. I also agree with Mr. Yuen that it is not necessary to deduct tax because the applicant pays personal tax. I accept the applicant’s adjustment.
73.Mr Yuen submits that there is loss of goodwill as supported by the following:
Higher spending capacity on the “old side”
74.Mr Yuen submits that:
(a) The applicant's expert Mr Lee has demonstrated that the pedestrian flow on the “old side” has higher spending/earning capacity which is conducive to the business. It is not disputed that the “new side” commands a higher pedestrian flow.
(b) The difference in the spending/earning capacity of the pedestrian flow is reflected by the difference in trade mix on both sides. On the “old side”, there is a Chinese restaurant which is the only one of such big scale (running its business with three floors) in the area. It hosts evening banquets and operates late in the night. There are two other special eateries, namely a vegetarian restaurant and a snake shop. There are two hair salons and there is also the Bank of East Asia with ATM machine.
(c) Mr Lee is of the view that it is the above shops that amass the same type of people who have higher propensity to consume on the “old side” which creates the effect of agglomeration.
(d) The “new side” is however full of shops providing goods or services of daily lives like dispensary, convenient stores, or bakery.
(e) Though Mr Lee agrees that the “old side” has also shops of similar nature to the new side, it is a question of degree and the specialty shops on the “old side” stand out as compared to the “new side”.
(f) The shops on the “old side” also have longer operating hours in the night which coincide with the peak hour of the Business.
(g) The pedestrians on the “new side” are mostly passerby, while the pedestrians on the “old side” are people ready to spend.
The publicity effect on the “old side”
75.Mr Yuen submits that Mr Lee has also demonstrated that the Property enjoys higher publicity than the New Property as follows:
(a) The Property is able to attract the sight of people on board or those who are waiting for buses at the stops right in front of the Property or along the “old side”. The respondent's expert Mr Chan also admits the passengers on the bus would more likely to look on their left.
(b) There is only one bus stop on the “new side” which is not right in front of the New Property.
(c) Though there is a light box at the New Property, it is partly blocked by the trees in front of the New Property.
(d) It is impossible for the people on board or those who are waiting for buses at the stops on the “old side” to look inside the New Property (some 40 m away).
(e) Mr Chan also admits that the pedestrian flow on the “old side” is relatively static (due to waiting for buses).
Market rent
76.Mr Yuen submits that the rents fetched by two shops on the “new side” at the time of resumption are lower than the market rent of the Property as assessed by Mr Chan. The applicant relies on such fact to support the contention that the retail potential on the “new side” is not that good as put by the respondent.
Higher rent at the New Property
77.Mr Yuen submits that after the relocation, the applicant has to bear higher rent ($29,500 exclusive of rates and management fee as opposed to $18,000 inclusive of rates) and higher depreciation due to the renovation at the New Property.
Selling more less-profitable items
78.Mr Yuen submits that the sale of less-profitable items increases from a few percentages to about 20% after relocation. An example of such item is optical solution. The retail price is $43 as opposed to $40 of wholesale price. This also explains the drop of profit margin after relocation.
No loss of site goodwill
79.On the other hand, Ms Wu submits that there is no loss of site goodwill considering the proximity of the New Property with the Property. Alternatively the applicant has failed to provide reliable accounting information for assessment of the partial loss of goodwill. The calculation for the partial loss of goodwill is flawed in any event.
80.Ms Wu submits that goodwill is defined as “the intangible value of a business arising from the situation of the business and the personal reputation of the owner”. For compensation purposes, it is usually necessary to consider separately site goodwill and personal goodwill. Relevant to this case，site goodwill is that part of the value of the business which arises from the location of the business. Where there is partial extinguishment but the business is moved to a new unrelated location, there may also be a total loss of site goodwill.
81.Ms Wu also submits that Mr Lee fails to explain how site goodwill has been lost in the resumption when the New Property is located opposite to the Property on the other side of Shau Kei Wan Road according to the following factors:
(a) The public housing estate and the private residential complexes in the vicinity generate pedestrian flow for both sides. They are all the applicant’s potential clients as “first category patronage”, as classified by Mr Lee.
(b) Both the applicant and Mr Lee accept that the “new” side commands a busier pedestrian flow than the “old” side. The applicant is familiar with the vicinity and has decided to relocate to the New Property for this reason.
(c) The Property and the New Property are only a few minutes away from each other. Pedestrians can get from one side to the other side easily by making use of the zebra crossing around.
(d) The New Property is equally close to the traditional Shau Kei Wan market place, supermarkets and notable shops and restaurants to the south and east or along Shau Kei Wan Road, a factor which Mr Lee believes contributes to the “second category of patronage” , as classified by Mr Lee.
(e) By comparison of the shops on both sides, it is obvious that there is no difference in trade mix. The suggestion by Mr Lee that there are more “daily necessity shops” on the “new side” cannot be right. Shops of this kind can be equally found on the “old side”. Applying the definition of Mr Lee for “specialty trade”, i.e. a trade for which “the clients go there for a special purpose”, shops on both sides carry on specialty trade. Absent such difference, on the applicant’s own case, pedestrians on both sides cannot be distinguished in terms of their spending/earning capacity, and hence their quality.
(f) There is no reason why the New Property cannot equally enjoy the publicity advantage as the Property. The applicant erects advertisement light box, etc. (and claims for the same) at the New Property.
(g) The New Property is close to the Shaukeiwan MTR station like the Property.
(h) There are bus stops at the front of the New Property, e.g. express buses to Admiralty as pointed out by the respondent’s expert, Mr Chan. Passengers waiting at the bus stops on the “old side” should have no difficulty in spotting the New Property. The trees referred to by Mr Lee would not block their entire view.
(i) The applicant confirms to have called his existing clients to notify them about the New Property.
Discussion
82.I have found that the applicant’s relocation to the New Property satisfies the three principal questions as laid down in Shun Fung (supra). Any reasonable loss which is not too remote of the applicant in the relocation which is caused by the resumption also satisfies the three conditions in Shun Fung. Accordingly, with respect, I reject Ms Wu’s arguments. I shall examine the claim of the applicant under this heading.
83.In London County Council v. Tobin [1959] 1 WLR 354, the valuation of the English Lands Tribunal of the compensation payable to the resumption of the property of an elderly optician is upheld by the Court of Appeal. After moving to new premises, the optician’s net profit actually increases. Nevertheless, the Lands Tribunal finds that there is a loss of goodwill. Compensation for the loss is held by the Lands Tribunal to be payable.
84.In my view, applying the decisions in Shun Fung and Tobin, if there is any loss to the applicant as a result of the relocation caused by resumption, the applicant should be compensated.
85.In assessing the claim for partial loss of goodwill, Mr Lee uses the Adjusted Net Profit of the year ended 31 October 2004 to value the goodwill of the Business before removal. I have found that the Adjusted Net Profit of the five months ended 31 March 2005 is not affected by resumption or the threat of resumption. I agree partly with Ms Wu’s submission that the period of 1 November 2004 to 31 March 2005 should not be excluded because it is a material period. The applicant has taken over the remaining half of the business since 1 June 2004. As such, in my view, in valuing the goodwill of the Business before removal, the Adjusted Net Profit of the year ended 31 October 2004 as well as the Adjusted Net Profit of the 5 months ended 31 March 2005 should be used.
86.In valuing the goodwill of the Business after removal, Mr Lee uses the Adjusted Net Profit of the three years ended 31 March 2008 as follows:
For year ended 31 March 2006 $175,986.50 For year ended 31 March 2007 $91,926.40 For year ended 31 March 2008 $12,022.18
In my opinion, the Adjusted Net Profit of the year ended 31 October 2008 is very substantially less than the other two years and should be discarded in a prudent valuation exercise. Using the profits of just two years is also in line with the before situation where only 17 months’ profits are used.
87.Mr Lee relies on Hon Mei Hing trading as Wing Tat Iron and Steel Engineering v The Secretary o f Transport LDMR 19 of 2000 (unreported), where the Tribunal, after examining a host of court cases adduced by the parties, summarises in paragraph 15.7 onwards of the judgement the relevant factors that should be having regard to in the selection of the suitable years’ purchase to be adopted in the goodwill valuation. These factors include the nature of the tenure, the nature and organisation of the business, the heavy elements of "personal" goodwill, the age of the business operator, the relative dependence of the business on major customers and the riskiness of the business. Having considered these factors, Mr Lee opines that years’ purchases for 15 years at capitalising rates of 20% and 35% respectively are appropriate for calculating the values of the Business’ goodwill before and after removal.
88.However, Mr Lee has not provided any explanation to his adoption of the period of 15 years nor his rates of 20% and 35%.
89.In Hon Mei Hing (supra), the Tribunal said at para. 15.5 that:
“Despite 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.”
I agree with the observation. Care should be taken by adopting the capitalisation rate of earlier Lands Tribunal decisions. Each case must be based on its own merits. In fact, at the review hearing of Hon Mei Hing, the Tribunal said at para. 15.5 that:
“Therefore, having regard to the rates adopted in Shun Fung and Chan Kwok Lam, the judgment of Chum Hon-Chi and in the absence of more and better evidence, we decide to maintain our original decision of using a capitalization rate of 20%, even it may be slightly to the benefit of the Applicant.”
90.According to the evidence of the applicant, in November 2003, he has paid $300,000 to the former owner of the Business to acquire a half interest in the Business, including stocks, goodwill, interest in the tenancy and fittings of the shop. The applicant pays another $300,000 in June 2004 to acquire the remaining half interest in the Business. Unfortunately, the applicant has not produced any breakdown of the value of the stocks and fittings. I am unable to assess the price the applicant pays for the goodwill.
91.In Shun Fung (supra), Lord Nicholls of Birkenhead said at 132C-E that:
“In this calculation the discount rate, or capitalisation rate, comprises the rate at which an amount of money payable at a future date should be reduced to arrive at its present value. Its present value is the price a person would pay now for the right or prospect of receiving the amount of money in question at the future date. Three ingredients can be identified in the discount rate. One is the rate of return the potential purchaser would expect on his money, assuming that the payment to him at the future date is free of risk. A second ingredient is the allowance the potential purchaser would make because of the likely impact of inflation. He is buying today, in today's currency, the right to be paid at a future date an amount of money which, when paid, will be paid in tomorrow's depreciated currency. The third ingredient is the risk factor. The greater the risk that the purchaser may not receive in due course the future payments he is buying, the higher the rate of return he will require.”
92.In my opinion, since Mr Lee has not provided detailed analysis on his choice of capitalization rate along the same line asShun Fung, I must reject the years’ purchase he uses.
93.In Tobin (supra), the Tribunal awarded damage to goodwill by comparing the capital value of the successful and long-established business at the old premises (calculated by multiplying by three years’ purchase the average net profits for the three years prior to the move) with the capital value of the business at the new premises (calculated by multiplying by one and a half years’ purchase the average of the net profits for two years).
94.In my opinion, since I have rejected Mr Lee’s choice of years’ purchase and in the absence of any submission from Mr Chan, it is appropriate to adopt the years’ purchase in Tobin (supra), which, to me, in many ways is similar to the present case.
95.In Hon Mei Hing (supra), the Tribunal also decided that interest on capital ought to be deducted from the assessed annual profit. Unfortunately I am not assisted by either expert in this regard since there is no submission from them. Doing the best I can, I rely on the director account in the balance sheet of the accounts and determine that the capital before removal is $500,000 and after removal, $900,000. In Hon Mei Hing, an interest rate of 5.82%, being the average interest rate in April 1999 for 1-year time deposits was used. I take judicial notice that interest rate has since fallen and adopt a modest rate of 2%, which I consider to be appropriate in the present case.
96.Taking into account the above, my assessment of the partial loss of goodwill is as follows:
Adjusted Net Profit for year ended 31 October 2004 $405,286 Adjusted Net Profit for 5 months ended 31 March 2005 $99,618 Sub-total $504,904 12/17 Annual Profit $356,403 Less: interest on capital $500,000 @ 2% $10,000 Net Profit before removal $346,403 Y.P. 3 Goodwill before removal $1,039,209 Adjusted Net Profit for year ended 31 March 2006 $175,986 Adjusted Net Profit for year ended 31 March 2007 $91,926 Sub-total $267,912 2 Annual Profit $133,956 Less: interest on capital $900,000 @ 2% $18,000 Net Profit after removal $115,956 Y.P. 1.5 Goodwill after removal $173,934 Partial Loss of Goodwill $865,275
RENOVATION COSTS
97.Mr Lee and Mr Chan both agree that the date of valuation is 9 November 2005 and the assessment method is on actual expenses basis. Mr Lee relies on the total expenditure spent based on the contractor quotations, invoices or payments receipts.
98.Mr Yuen submits that the items disputed by Mr Chan are reasonably spent by the applicant and are compensable. My findings are:
(a) Although floor tiles are more durable than plastic flooring and althoughMr Chan admits that disruption would cause to the Business in replacing worn out plastic flooring, I find that this is an unnecessary improvement.
(b) Although the steel skirting is more consistent with the new renovation at the New Property and give a good look at the New Property to ensure success, I find that this is an unnecessary improvement.
(c) I do not agree that the aluminium door is a security must.
(d) I agree the light box is a replacement of the one at the Property.
(e) Although an additional ceiling air-conditioner is necessary in case the other is out of order, given the risk of relocation, the applicant could not afford disruption to the Business by any controlled cause, I find that this is an unnecessary improvement.
(f) The shop front at the New Property is wider and there is only one glass cabinet thereat. Mr Yuen submits that two air-curtains are therefore necessary. I agree this is reasonable.
(g) The applicant gives evidence that it is unreasonable to use the old chairs which do not fit in the new renovation at the New Property. I do not agree it is reasonable to include it in the claim.
99.My determination of the renovation costs is:
Amount claimed by the applicant $234,680 Less: floor tiles $4,750 steel skirting $2,000 aluminium door $1,100 air-conditioner $9,400 chairs $1,200 Renovation and adaption costs $216,230
REMOVAL COSTS
100.Mr Lee and Mr Chan both agree that that the date of valuation is 9 November 2005 and the assessment method is on actual expenses basis. Mr Lee relies on the total expenditure spent based on the contractor quotations, invoices or payments receipts.
101.Mr Yuen submits that the items disputed by Mr Chanare reasonably spent by the applicant and are compensable. My findings are:
(a) I agree with the applicant that the stationery includes replenishment. Removal notices are given prior to the relocation which inevitably incurs higher stationery expenses.
(b) I do not agree that the new cash machine should be included in the claim even though the applicant has to deal with cash flow management during the pre-resumption period.
(c) I do not agree that the new water machine is a reasonable item even though by serving the customers, it ensures success at the New Property.
102.My determination of the removal costs is:
Amount claimed by the applicant $28,789.50 Less: cash machine $1,100.00 water machine $1,998.00 $25,691.50 Removal Costs, say $25,691
LOSS OF FIXTURES AND FITTINGS
103.I agree with the applicant’s claim that this item is nil and do not accept Ms Wu’s contention.
CONCLUSION
104.Based on the above discussions, my finding of the compensation payable to the applicant is:
Pre-resumption loss of profits 0 Partial loss of goodwill $865,275 Loss of fixtures and fittings 0 Renovation and adaption costs $216,230 Removal costs $25,691 Total $1,107,196 which I round off to $1,107,000
ORDER
I therefore order that:-
(1) The amount of compensation payable to the applicant is in the sum of $1,107,000.
(2) All the consequential and ancillary matters, including professional fees, interest and costs, be adjourned to a date to be fixed by the listing officer at the request of the parties.
| (Kenneth Kwok) Temporary Member Lands Tribunal |
Mr Ross M. Y. YUEN, instructed by Messrs Cheung, Chan & Chung for the applicant
Ms Teresa WU, instructed by the Department of Justice, for the respondent
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