LEE Lam and Another v. Director of Lands

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 11 of 1995

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JUDGMENT

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The Applicants used to be the partners of a laundry known as Yue Yi Steam Laundry Factory ("the business") at three rented premises known as No. 21, Ground Floor, San Shan Road, Ma Tau Kok ("the subject premises"), No. 3, Ground Floor, Sui Lun Street, Ma Tau Kok and No. 23, Ground Floor, San Shan Road, Ma Tau Kok ("the two associated 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 CXXXIV Hong Kong Government Gazette on 3rd July 1992 as G.N. No. 2264 of 1992 and reverted to the Crown on 3rd October, 1992. Prior to that, the two associated premises were purchased by the Housing Society also for the same resumption purpose. The Applicants continued to operate at the subject premises and the two associated premises until March 1993 when the Applicants were, according to them, forced to vacate all three premises. Thereupon, it is conceded by the Respondent, there was total extinguishment of the business.

2. Despite advice given by several members of the Tribunal at various stages, the Applicants did not engage legal representatives or valuers of any speciality to help them to prepare their case. Instead, they authorized Mr. LEE Lam as their representative. 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. LEE was given ample opportunities to adduce evidence 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 -

"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 resumption."

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. During the course of trial, Mr. LEE on behalf of the Applicants alleged the following business losses:-

4. The Respondent's assessment of the Applicants' losses was revised several times during the course of these proceedings. Eventually, as apparent from final submission, the Respondent contends that the compensation due to the Applicants should be as follows:-

5. We now consider each of the items of claim under separate headings.

Compensatable Business

6. Mr. Wu for the Respondent contends that only losses relating to the subject premises at No. 21, Ground Floor, San Shan Road are compensatable. Losses of business at the two associated premises which were not resumed by the Crown should be left out of account. Mr. LEE on behalf of the Applicants says that the business was carried on at all three premises and so compensation should cover losses relating to the two associated premises as well.

7. The wording "on the land resumed or in any building erected thereon" in section 10(2)(d) of the Ordinance is clear enough. In any event, according to Mr. LEE's own evidence, the business started and continued for a number of years at only one shop at No. 23, Ground Floor, San Shan Road. It was only much later that the Applicants rented the Ground Floor of No. 3 Sui Lun Street by way of expansion. The subject premises at No. 21, Ground Floor, San Shan Road was the last addition in 1990. Mr. LEE says, in effect, that each shop premises had the same complete range of machinery and equipment, i.e. boiler, washing machines, drying machines and ironing machines. He further says that all the employees of the business could be moved from one shop to another as work required. In the circumstances, we believe each shop premises could operate independently of the others and compensation should be limited to losses suffered by that part of the business carried on at the subject premises, losses relating to the two associated premises which were not resumed should be left out of account.

8. Limiting compensation to that part of the business carried on at the subject premises presents problems of apportionment because the Applicants did not keep separate trading accounts for each shop premises. Arguably, the part of the business carried on at the subject premises was the smallest because there only 5 of the 30 machines of the business were installed at the subject premises. On the other hand, it may be said that the addition of the subject premises probably enabled the business to take on more and bigger orders. We believe that although the subject premises did not provide increased processing capacity proportional to the added working space, there were extra marginal profits brought about by economy of scale that put the contribution of the subject premises to the business at a par with each of the other two associated premises. Hence, unless the value for a particular item of claim can be determined as specifically attributable to the subject premises, we will generally take a value associated with the subject premises as being one-third of the total assessed for the business as a whole.

Goodwill

9. The approach for determining goodwill we apply here is the same as we have adopted for related cases. First, we endeavour to ascertain the normal profit trends of the business before resumption. Conceivably, the reported profits of the business, the rental value of the premises at which the business is conducted or the wages and salary costs of the business may be used as basis for this purpose because each of them may somewhat relate to the profitability of the business. Once the annual profit trend of the business has been worked out, it must be translated by multiplication to the anticipated future life of the business, had the there been no resumption. Then, if appropriate, the product is discounted for interest for the fact that the business operator will have capitalized future profits immediately available for investment or other use.

10. The business did not trade on goods or materials. According to Mr. LEE, the business depended on long term laundry work orders from small to medium catering businesses all over Hong Kong and off the street domestic customers from the neighbourhood. The Applicants have not produced any trading account of the business. We do have records of tax assessment of the business for the years 1992-93 and 1993-94 as Exhibits A10 and A4 respectively. Since both parties regard reported taxable profits as unreliable, we shall not look into them. We also have two bundles of bank statements relating to the business as Exhibits A5 and A6. But, as an expert for the Respondent has observed, not much sense can be made of bare figures in these statements. Nor do the Applicants explain how the bank statements can assist us to determine the goodwill of the business. Miss Lee from Collier Jardines for the Respondent demonstrates several methods of calculating goodwill for this case in her expert report. See pp. 4-6 of Exhibit R6. Based on her assessment of the market rental of the subject premises, Miss Lee obtains the highest figure of $240,000 for annual profitability of the business carried on at the subject premises.

11. Mr. LEE in his evidence estimated that the business carried on at all three shop premises turned in total profits of $110,000 to $120,000 per month. On the assumption that the subject premises and the two associated premises contributed equally to the profits of the business, the subject premises yielded approximately $40,000 x 12 = $480,000 per annum profits. If we go by the salaries and wages cost approach, relying on data from a schedule of salaries and wages outgoings showing payments of approximately $220,000 per month to 36 workers in early 1993 in Exhibit A9, the annual profitability of the business can be calculated as $220,000 x 1.2 x 12 = $3,168,000; this should then be reduced to one-third, i.e. $1,056,000, as the portion of profitability attributable to the subject premises. We take the view that the rental outgoings approach in general shows the minimum expected return only. The salaries and wages cost approach may be a better one because very few business operators would hire surplus workers; but the ratio of salaries and wages cost bears to the profits may vary from business to business. The Applicants' estimate of $480,000 per annum profits for the subject premises leans towards the lower value obtained by the rental outgoings approach. We think it is safe to use that as the base figure. As in previous related cases, we adopt a multiplier of 2 for the Applicants' tenancy had less than two years to run at the time of resumption.

12. Accordingly, we determine the goodwill of the business at $0.48 million x 2 = $960,000.

Profit Rent

13. Before the profit rent can be calculated, the full market rent of the subject premises has to be ascertained. Miss Lee for the Respondent suggests a unit rate of $350 per square metre and one-eighth for the yard. See p. 10 of her expert report Exhibit R6. We find the assessment by Miss Lee unassailable. In the premises, we determine the profit rent at $57,500 as calculated by Miss Lee.

Machinery and equipment

14. The Applicants had a separate complete line of laundry machinery and equipment installed at the subject premises. Mr. LEE has confirmed that these were one "Girbau" HS-2110 fully automatic washing machine, one "Chicago" Model 24GX 120 ironing machine and 3 "Sut Lick" SD100 drying machine. There should also be some minor accessories. According to Mr. LEE, the market was at that time saturated with second hand laundry machines due to the collapse of a laundry chain. Hence, all of the machines used by the Applicants were abandoned upon eviction. Mr. Wu for the Respondent contends that since the machines had no second hand value due to market conditions, the Applicants were not entitled to any compensation in this regard. We accept that there is no disposal value for the machinery and equipment in question, but they were valuable to the Applicants as tools of the trade, not as second hand goods. We hold that the loss on the machinery and equipment at the subject premises should be their purchase and installation costs less depreciation for wear and tear and the proceeds of sale upon disposal of the same.

15. We gather from Exhibit A3d that the respective purchase cost of the 5 machines is as follows:-

16. Mr. Shadbolt of Chesterton Petty for the Respondent in Exhibit R4 states that all the said machines have a useful life of 15 years. Since the machines were acquired in early 1991 and discarded in early 1993, applying the standard depreciation factor of 0.74 taken from the Reducing Balance Depreciation Table relied upon by Mr. Shadbolt, we obtain the value of the machines as $845,000 x 0.74 = $625,300.

17. In the premises, we determine compensation to the Applicants for this item at $625,300.

Fixtures and Fittings

18. The Applicants limit their claim for compensation for loss of fixtures and fittings to those at the subject premises at $1,300,000. In support, the Applicants produce a quotation and receipts, Exhibits A2b and A2f, showing work done at No. 21, Ground Floor, San Shan Road in late 1991 and payments therefor in early 1992. The quoted cost is in fact $1,384,000.

19. The Respondent's experts, on the other hand, put the value of the fixtures and fittings at the subject premises at $621,030.77. See Exhibit R5 and the evidence of Mr. Shadbolt. However, as admitted by Mr. Shadbolt, the expert valuation was done without the precise specifications of some of the fixtures and fittings nor the benefit of actual site inspection. Such valuation, we surmise, can only be an educated guess at best, a shot in the dark at worst. Although we find that work quotation tends to be on the high side, the Applicants' claim is on the face of it well supported by documentary proof. In any event, we think we should give the Applicants the benefit of the doubt. Accordingly, we accept the quoted cost of $1,384,000 on which we think 20% depreciation should apply due to extra wear and tear under the high temperature of a laundry environment. It follows that compensation for fixtures and fittings should be $1,107,200.

20. In summary, compensation for the following items is justified:-

The Order

21. Accordingly, we determine compensation for the Applicants at $2,750,000. 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 incurred in prosecuting their claim which we assess at $9,000 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.

22. 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