WONG HOI NUNG v. THE SECRETARY FOR TRANSPORT

CACV 521/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 521 OF 2001

(ON APPEAL FROM LANDS TRIBUNAL

APPLICATION NO. LDMR 1 OF 2000)

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J U D G M E N T

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Hon Le Pichon JA:

1. This appeal and cross appeal arise out of the determination by the Lands Tribunal ("the Tribunal") of the amount of compensation payable by the respondent to the applicant upon the resumption of Lot 1978 in Demarcation District 130 under the Railways Ordinance for the West Rail project. It is common ground that at the time of resumption, the applicant occupied a total area of 1375 square metres of land ("the property") for its business. This comprised:

(i) an area of 497 sq. m. within Lot 1978 ("Lot 1978P");

(ii) an area of 175 sq. m. within Lot 1980RP; and

(iii) an area of 703 sq. m. of government land.

2. The parties were able to reach agreement in relation to only one item of the claim. The disputed items determined by the Tribunal concerned:

(a) loss of profit rent;

(b) loss of goodwill; and

(c) loss of fixture and fittings, stock, chattels, plant and machinery.

The claim for professional fees, interests and costs was adjourned. By its determination dated 10 November 2000, the Tribunal rejected the claims for loss of profit rent and goodwill and awarded the sum of $279,782.50 in respect of loss on forced sale of furniture and fixtures, motor vehicles, and stock. It also rejected the claim in respect of construction and site improvement costs. The applicant applied for a review of the judgment and on 9 March 2001, the Tribunal granted a review of its Decision insofar as it related to the loss of profit rent in respect of which an award of $230,448.96 was granted.

3. The present appeal by the applicant relates to its claim for loss of goodwill which the Tribunal had rejected, the award made in respect of the losses suffered on forced sale of furniture and fittings, motor vehicles and stock and finally, the refusal of the Tribunal to make any award in respect of construction and site improvement costs. The respondent cross appeals on the award for compensation for loss of profit rent granted by the Tribunal in its Decision on Review.

4. It was common ground before the Tribunal that the applicant's claim for loss of disturbance should be assessed on a total extinguishment basis.

Preliminary objection

5. The respondent made a preliminary objection to the present appeal on the ground that it was out of time. The relevant chronology of events is as follows. Following the Tribunal's Decision on 10 November 2000, a summons for review was taken out on 6 December 2000. That summons was heard on 8 December 2000. An order was made on that day to the effect that the hearing of the review be adjourned to 24 February 2001. Counsel for the respondent submitted that the order did not accurately reflect what the parties appeared to have understood to be the order which was that the review was to be limited to the issue as to profit rent. Mr Lam referred to the skeleton submissions in February for the adjourned hearing which were limited to that point alone. But he frankly admitted that no issue was ever taken by his client as to the correctness of the order of 8 December which has been duly sealed.

6. It would neither be satisfactory nor appropriate for this court to proceed on the basis of the parties' understanding where this differs from the effect of the sealed order. If there was any error in the order as drawn up, the parties were under a duty to draw this to the court's attention and make the appropriate application. On the face of the order of 8 December, no decision was made refusing to exercise the discretion to review in respect of any of the issues raised. Accordingly, the appeal was not made out of time. I would add that had it not been made in time and it were necessary to consider whether or not time should be extended, I would have had no hesitation in granting the extension.

Background facts

7. The claim for compensation was lodged on behalf of the applicant as tenant of DD130 Lot No. 1978P (the Lot). For reasons not readily apparent, no claim was lodged in respect of Lot 1980RP. The applicant who from 1985 had traded under the name of Bailey Trading Company had carried on business as a wholesaler of foodstuff, farming medicine and feeds since 1981. He first began to rent and occupy some of the structures situated on the property occupied by Wong On and his family in September 1981 at $800 per month for storage purposes. In February 1982, the applicant paid a further deposit for the lease of a stone hut for warehousing purposes. As business expanded, more and more storage space was rented and in 1995, when Wong On and his family moved out of the property, Bailey occupied the whole of the property at a monthly rent of $5,000. In 1996, Wong On and Wong Yuen Tik, the applicant's agent, entered into a verbal agreement whereby Bailey agreed to pay a lump sum of $120,000 for rebuilding and improvement works in return for being able to occupy the property at a fixed monthly rental of $5,000 in perpetuity. The verbal agreement which was reduced into writing on 3 February 1996 ("the 1996 agreement") referred to three broken iron huts let to Bailey having to be repaired at the cost of $120,000 which Bailey undertook to pay. The agreement provided for the repair costs to be repaid if the property had to be re-possessed. If it was not to be so re-possessed, then the rent payable would remain at $5,000 per month and could not be increased.

The statutory provisions

8. When land is resumed by the government pursuant to Cap. 519, compensation is recoverable only under section 32 and Part II of the Schedule to which it refers. In summary, any person who would be entitled to claim compensation for land resumed under the Lands Resumption Ordinance, Cap. 124 ("the LRO") if the land had been resumed thereunder was entitled to claim compensation for resumption of land made under Cap. 519. Compensation is assessed as if the claim were made under Cap. 124 for land resumed under the LRO. The basis for determining compensation under the LRO is set out in section 10(2) the pertinent part of which reads:

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

...

(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 that land or building as a result of the resumption;

..."

With these provisions in mind, I now turn to consider the various issues which arise in this appeal.

Goodwill

9. For the purpose of determining the loss (if any) of goodwill, the Tribunal proceeded on the basis of certain agreed facts, namely:

"(1) Loss of goodwill ought to be assessed on a total extinguishment basis;

(2) The profit and loss figures for the Applicant's business as shown in the profit and loss accounts submitted to the Inland Revenue Department are:-

(i) Profit of $68,060 for 1995/1996;

(ii) Loss of $48,673 for 1996/1997;

(iii) Loss of $108,601 for 1997/1998.

(3) The profit for the year 1998/1999 in the sums of $31,150 ought to be disregarded.

(4) Loss of goodwill ought to be assessed by firstly ascertaining the profit trend of the business and then multiplying it by a certain number of year's purchase."

10. Given the basis upon which the Tribunal was invited to proceed, it is hardly surprising that it first sought to ascertain the profit trend of the business. Based on the profit and loss accounts submitted to the Inland Revenue for the years 1995 through 1998, the Tribunal concluded that the accounts did not show a profit trend and that no loss of goodwill was to be awarded.

11. In seeking to establish the profit trend, the applicant's accountant did not resort to the profit and loss accounts of the pre-resumption period; instead, he used the so-called "wages and salary cost" approach which had been adopted in Wong Sau Hing and others trading as Shing Kee Metal Dealers v Director of Lands [1996] HKDCLR 1. In that case, in ascertaining the loss of goodwill, having rejected the value of the trading stock of the business as the appropriate method, the Tribunal went on to consider three other approaches. The first was based on taxable profits per se over a five or three-year period. This produced a figure of $400,000 to $445,000. The second was by reference to the market rent for the premises, the Tribunal opining that "[a]s a rule of thumb, businessmen expect to make an amount of net profits equivalent to at least 100% of the market rent for the business premises." This produced a figure of $500,000. Third, having ascertained the annual salary and wages cost to be $1,626,000, the Tribunal, after opining that "every ounce of labour paid for by the business was expected to bring in profits", went on to consider the question "what is the rate return based on salary and wages cost." It opted for one-half but the basis for so doing is not apparent save that $800,000 would appear to be the amount that the Tribunal was 'minded' to award the applicant in that case. This is evident from its attempt to explain away and rationalize the shortfall between that sum and the annual taxable profits by the astonishing statement that "the business could well have masked up to $350,000 of its real annual profits for tax avoidance". Wong Sau Hing is an unsatisfactory decision not only because of the absence of any adequate reasoning to justify the valuation approach adopted, but also for its implicit condonation of irregular business practices in connection with the rendering of accounts to the Revenue.

12. For my part, I agree with the Tribunal's statement below that salary cost is not necessarily an indicator of profitability. Moreover, inasmuch as the figure produced by such an approach does not tally with the profits and loss accounts submitted for tax purposes, it should be disregarded unless the difference can be established by satisfactory evidence. The fact that the salary and wages approach in Wong Sau Hing was followed in Lai Yuet Ngao v Director of Lands, unreported, CLR 2/1995, 22 August 1996 and Tsang Ling Chu trading as Wrench Engineering Co. v Director of Lands, CLR 23/1994, unreported, 20 May 1996 does not take matters further. These were decisions by the Tribunal composed of the same members in a series of cases arising out of the same resumption of land in Ma Tau Kok.

13. Counsel for the applicant further invited the court to adopt an alternative to the wages and salary cost approach, namely, the rental value approach adopted in Wan Yiu Ling and Tsui Tan Fai trading as Lucky Money v Director of Lands, CLR 9/1995, unreported, 23 May 1996. This approach is based on the assumption that "as a rule of thumb the profit of a normal thriving business is at least equal to the rental value of the premises at which it was conducted." (emphasis added) See Wan Yiu Ling at paragraphs 16-17. This alternative approach is subject to the same criticisms as the wages and salary cost approach given the agreed basis of assessing the loss. That apart, the applicant faces a difficult hurdle, namely, that that rule (assuming without deciding that such a rule exists) only applies to "a normal thriving business". Given the losses suffered by the business, it is questionable if the rule could apply to the present case. I would add this observation. Whilst pre-resumption profits is commonly used to calculate the loss of future loss of profit, the so-called salary and wages cost approach and market rental approach do not appear to feature in the textbooks on the subject: see, for example, Cruden, Land Compensation and Valuation Law in Hong Kong, (1999 Edn) 133-134; and Lawrence, Rees, Britton, Modern Methods of Valuation (6th Edn) pp. 366-370. For my part, I am not persuaded that either of those two approaches is an accepted method for valuing goodwill.

14. For the foregoing reasons, I am of the view that the Tribunal's refusal to adopt either of those methods to value goodwill was entirely justified.

Forced sale of furniture and fittings, motor vehicles and stock

15. The total amount of loss sustained by the applicant in respect of the forced sale of furniture and fittings, motor vehicles and stock (aggregating $774,047.40) is not disputed. However, the Tribunal awarded the applicant only a percentage of that loss, determined by reference to the size of Lot 1978P as a percentage of the entire area of land upon which the applicant's business was conducted i.e. 497/1375 or 36.145%. On that basis, it awarded a total sum of $279,782.50. In so doing, the Tribunal refused to follow the case of Chan Kwok Lam v Director of Buildings and Land, CLR 1/1987, unreported, 17 December 1987. In that case, the applicant had occupied land under a tenancy agreement. In fact, unbeknownst to him, the leased premises encroached on Crown land which made up 26% of the area comprised in the lease. The question addressed in that case was whether the applicant should be compensated for that part of its business conducted on Crown land. The tribunal in Chan Kwok Lam noted (at p. 16) that the claim was not a claim for any interest in the resumed property but

"... a claim for damages to a business which results from the resumption of that interest, the value of which is not contested. The encroachment on the Crown land would certainly not be included in any assessment of any interest in the resumed land ..."

It went on to hold that:

"[t]he 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 all the particulars circumstances of this case I considered it reasonable to regard the total value of the business as being extinguished by virtual of the resumption and therefore subject to being compensated as a consequence of that resumption."

16. In declining to follow Chan Kwok Lam, the Tribunal in the present case felt itself compelled by the language of section 10(2) to confine compensation to loss or damage to a business conducted "on the land resumed". Some support for the Tribunal's stance can be found in Lee Chun v Director of Lands [1983-85] CPR 426. The facts were these. The applicant carried out freshwater fish farming on two ponds. Two-thirds of the first pond and a small portion of the second pond were situated on Crown land whilst the balance was on private land let to the applicant under a lease. The private land was resumed pursuant to a notice dated 7 October 1981 published in Hong Kong Government Gazette on 16 October 1981. The land reverted to the Crown on 20 January 1982. The applicant was not a squatter on Crown land but had occupied it with the permission granted by the District Office. The Crown land occupied by the applicant was not referred to in the notice published in the Gazette although the applicant's occupation was terminated simultaneously with the resumption of the private land. The Tribunal held (at 436F):

"The Crown land does not therefore form part of the resumption. In these proceedings, it follows, we have no jurisdiction to award any compensation for any loss or damage suffered as a consequence of his occupation of that Crown land being terminated simultaneously with the resumption of the private land. Any global calculations we may therefore make in respect of the two ponds will have to be subject to an appropriate deduction excluding that portion of each pond constructed on Crown land."

17. Seemingly, Lee Chun and Chan Kwok Lam are conflicting decisions of the Tribunal. It is to be noted that Mr Phillips who decided the Chan Kwok Lam case was a member of the Tribunal which heard the Lee Chun case some four years earlier.

18. Mr Lam on behalf of the respondent also submitted that the failure to specify Lot 1980RP in the claim was somehow fatal and, in any event, the government land could not have been so specified because, inter alia, that part of the property was not the subject matter of any resumption notice. Therefore loss suffered due to the closure of the business to the extent that it had been carried on outside Lot 1978P was not recoverable. It was also suggested that the respondent had been prejudiced through being 'misled' that the claim related only to Lot 1978P, but a perusal of the documents filed in support of the claim would immediately dispel any notion that the respondent had been 'misled' in any way.

19. I now turn to consider the effect of section 10 and recoverable loss. For compensation to be payable under paragraph (d) of section 10(2), first, there must be a business conducted by the applicant on the land resumed at the resumption date. Second, there has to be loss or damage to that business due to the removal of the business as a result of the resumption. This requires that the resumption be causative of the removal of the business which in turn results in loss or damage to the applicant. Where, as in this case, business is carried on not only on the land resumed but also on adjoining land, be it private land or government land, it is a question of fact whether the closure of the entire business was due to the resumption of the land specified in the notice i.e. Lot 1978P. In other words, the question is whether, as a matter of causation, the entire loss is attributable to the fact of resumption of Lot 1978P. There is nothing in section 10(2) that prohibits loss from being recoverable provided the causal connection between the loss and the removal of the business due to resumption is established. As a matter of principle, so long as the causative factor is made out, there is no reason why the whole of the loss should not be recoverable. Chan Kwok Lam and Lee Chun are reconciliable and explicable on this basis.

20. Access to Lot 1978P where the bulk of the structures for storage were situated was possible either over government land or Lot 1980RP. The only structures situated on government land used by the applicant were two containers used as offices, a private residence and two other structures used for storage in addition to about a third of another structure which straddles Lot 1978P and government land. According to the applicant's fallback position, and the respondent so concedes, 69.6% (by volume) of the structures used for the business fell within Lot 1978P. The nature of the applicant's business was such that it was entirely dependant on there being storage capacity. Without it, the business was simply not viable.

21. On the facts, it is clear that the Tribunal would have awarded compensation for the entire loss but for what it considered to be the effect of section 10(2). The Tribunal did not award compensation for the entire loss because it had misconstrued section 10 which, in turn, led to its refusal to follow Chan Kwok Lam. In these circumstances, in my judgment, the Tribunal's award dated 10 November 2000 in relation to the loss on the forced sale of furniture and fixtures, motor vehicles and stock cannot be upheld. It should be set aside and the following award substituted in its place (with consequential amendments to paragraph 3 of the order dated 9 March 2001):

(a)	loss on forced sale of furniture and fixtures	13,850.00
(b)	loss on forced sale of motor vehicles	9,300.00
(c)	loss on forced sale of stock	750,897.40
	Total	774,047.40

Construction and site improvement works

22. The loss relates to the $120,000 expended by the applicant pursuant to the 1996 Agreement in rebuilding certain of the structures as well as the road. The Tribunal made no award under this head on the basis that section 12(b) of the LRO applied. That provided that in the determination of the compensation to be paid, no compensation shall be given in respect of any use of the land which is not in accordance with the terms of government lease under which the land is held.

23. The Block Crown Lease governing Lot 1978 provided as follows:

"AND FURTHER that the Lessee or any other person or persons shall not, nor will, during the continuance of this demise, use, exercise or follow, in or upon the said premises, or any part thereof, any noisy, noisome, or offensive trade or business whatever, nor 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, signified in writing by the Governor of the said Colony of Hongkong, or other person duly authorized in that behalf: 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 thereto of the Surveyor to His said Majesty, His, Heirs, Successors or Assigns, or other person duly authorized by the Governor of the said Colony of Hongkong, in that behalf ..."

The passage quoted contains two negative covenants. The Tribunal concluded that the second negative covenant imposed a blanket prohibition on the construction of any kind of building on the land without prior approval and as no evidence of any such approval had been adduced, the construction carried out was contrary to the Block Crown Lease such that no compensation was payable pursuant to section 12(b). The Tribunal further held that these structures and improvements belonged to the landlord, the $120,000 being no more than a loan for the improvement of the property. On that basis also, the applicant was not entitled to any compensation.

24. Counsel for the applicant submitted that the Tribunal had erred in law, citing China Light and Power Company Limited v Chow Chi Keung [1983-1985] CPR 661 for the proposition that the restrictive covenants set out above do not apply to structures erected for agricultural purposes. However, the observations of Barker JA relied on were observations which pertained only to the first negative covenant. He did not express any opinion as to the construction of the second negative covenant. See page 665E. That decision therefore offers no assistance on the interpretation of the second negative covenant.

25. So far as the second negative covenant is concerned, it applies to the construction of "any building or structure of any description" on the property. There was no exception granted for buildings used purely for agricultural purposes. That being so, I fail to see that the Tribunal erred in its interpretation of the second negative covenant or in its refusal to award compensation pursuant to section 12(b).

26. Having reached this conclusion, it is unnecessary to consider the further argument that the arrangement evidenced by the 1996 agreement conferred on the applicant a proprietary or other interest in land. Suffice to say that I see little merit in that submission. At most, the 1996 arrangement contained personal covenants on the part of Wong On to repay the monies upon re-possession of the property. It did not have the effect of conferring any right or interest in the land or any part thereof on the applicant.

27. The validity of this head claim can also be tested from the causation point of view. The loss sustained was attributable to the failure of Wong On (or his estate) to honour the covenant: it was not attributable to the closure of the business as a result of the resumption. In my judgment, the Tribunal was plainly correct in rejecting this head of claim.

Profit rent

28. This is the issue which arises on the cross appeal. On review of its decision, the Tribunal found that the tenancy agreement between the applicant and Wong On covered not only Lot 1978P but also Lot 1980RP and Crown land. The total area of the leased premises was 1375 square metres. The Tribunal arrived at a unit rent of $3.636 per sq. m. per month by dividing the monthly rent by the area occupied. It awarded the applicant the difference between the agreed market rental of $7.5 per sq. m. and the unit rent computed as set out above. The respondent took issue with the assessment of the unit rent made by the Tribunal on the basis that the applicant had not shown that the landlord had title or authority to grant a lease of Lot 1980RP and could not have lawfully granted any lease of government land, and that, accordingly, the applicant must be treated as a trespasser on Lot 1980RP and also on government land. It was therefore wrong for the Tribunal to have assumed that the same unit rent was payable for the three separate parcels of land. In short, the submission was that the applicant knew that part of the land (in fact over 60%) did not belong to Wong On and that the rent was arrived at to reflect this fact.

29. The submission of the respondent is contrary to the evidence. This is apparent from the following passage taken from the cross-examination of Mr Wong Yuen Tik:

"Q: ... When Wong On rented the place to you, did he tell you explicitly which land lot was rented to you, which demarcation district was rented to you?

A: No, just within that area, I could use whatever I wanted to use, that's it.

Q; Did he tell you which Lot was his address, did he?

A: No.

Q: Also no?

A: (He) did not say that, only it was mentioned 1978, only one Lot was mentioned, a number was given to me, then letters were exchanged, that is to say,.. I told him we had to register and the address was needed, he had one Lot, he gave a number of Lot 1978 to me.

...

Q: In fact Mr. Wong, do you know, as for the place used by Bailey, only - that is, in that picture only the area, within a circle, by blue boundary, only that belongs to Lot 1978?

A: Because I do not know the inside.

Q: You do not know?

A: How big the inner platform is, how wide it is, what lot no. it is, what lot no. it is; I do not know all these, because at that time he .. that is our correspondences only mentioned one number, Lot 1978, that number was given to me for correspondence.

Q: You don't know that the place you used was of a huge size, occupying the government land, you don't know this either?

A: I don't know, completely - that is, as I have just said, before I went there it was already - already surrounded by iron fence, that area, belonged to an area for his use, that's it."

30. There was no evidence before the Tribunal that the applicant or his representative knew that the property rented to them by Wong On did not belong to Wong On. On the evidence adduced, the Tribunal was entitled to find that the rent was for the whole of the property formerly occupied by Wong On, the subject matter of the 1996 agreement. That being so, the Tribunal was entitled to adopt the approach which it did in ascertaining the unit rent.

Conclusion

31. For the foregoing reasons, I would allow the appeal but only in respect of the award made for loss arising on the forced sale of furniture and fittings, motor vehicles and stock. I would dismiss the cross-appeal. I would also make an order nisi that the costs here and below of the appeal and of the cross-appeal be to the applicant.

Hon Cheung JA:

32. I agree.

Hon Burrell J:

33. I also agree.