Chiu Chi Wo and Others t/a Hang Hing v. Director of Lands

Crown Lands Resumption Reference No. 3 of 1995

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HEADNOTE

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Property law - Crown Lands Resumption - Electroplating Workshop - Business Losses - Valuation of Machinery and Equipment - Valuation of Goodwill - Valuation of Fixtures and Fittings - Crown Lands Resumption Ordinance, Cap. 124, s. 10(2)(d) - Compensation at $3,850,000.

Ground floor premises rented for electroplating workshop resumed by and reverted to the Crown on 3rd October 1992. The workshop was allowed to operate until April 1994 when, upon eviction from the premises, the machinery and equipment and chemical stock of the business were auctioned off for $40,000. The partners of the workshop claim, inter alia, loss of goodwill at over $4.54 million, loss on forced sale of machinery and equipment valued at $0.88 million, loss of fixtures and fittings costing $1.18 million. The respondent's experts valued all items at less than as claimed. The respondent also contends that one major item of the fixtures and fittings claimed, i.e. tanks and associated facilities which the partners say were for waste water disposal, were non-existent.

Held: (1) In accordance with s. 10(2)(d) of the Crown Lands Resumption Ordinance, the applicants are entitled to compensation that would restore them to the business position where it would be had there been no resumption, i.e. an amount of compensation so as to restore the applicants to the position where it was at the time of resumption. (2) By reference to assessed taxable profits, loss of goodwill valued at $3,000,000. (3) Accepting the purchase cost as supported by documentary evidence and allowing for depreciation, machinery and equipment valued at $645,600. (4) On the evidence, tanks and associated facilities for effluent discharge found to be non-existent. Even if these did exist, they were unjustified and not compensatable. (5) After adding other items allowed, total compensation determined at $3.85 million.

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 3 of 1995

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JUDGMENT

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The Applicants are the partners of a workshop known as Hang Hing ("the business") at rented premises known as No. 9, Ground Floor, Sui Lun Street, Ma Tau Kok ("the subject premises"). The business was mainly concerned with the electroplating of jewelry items. 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. Nonetheless, the Applicants were allowed to carry on the business at the subject premises rent free until April 1994 when the Applicants were evicted. 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 do not engage legal representatives or valuers of any speciality to help them to prepare their case. Instead, they authorize Mr. CHIU Chi-wo, one of the partners, to act as their representative. The Tribunal has also repeatedly emphasized in open court that the burden is on the Applicants to prove each and every element of their claim. During the trial, Mr. CHIU 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. CHIU on behalf of the Applicants alleged the following business losses:-

4. As apparent from final submission, the Respondent contends that the compensation due to the Applicants should be as follows:-

5. Before we proceed further, we should mention that the subject premises were part of a major resumption of more than one hundred properties for the Hong Kong Housing Society's Urban Improvement Scheme ("the Scheme"). In addition to Sui Lun Street, the Scheme site extended to Wang Cheung Street, Ma Tau Kok Road, Pak Tai Street, San Shan Road and Pau Chung Street in Ma Tau Kok. The present case is one of nearly thirty applications by property owners and business operators affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement.

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

Goodwill

7. 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 business premises not been resumed. Then, where appropriate, the product is discounted to take into account the fact that the business operator will receive by way of compensation an immediate sum representing capitalized profits.

8. The business in this case did not trade on goods or materials. According to Mr. CHIU who gave evidence for the Applicants, the business depended on work orders for electroplating jewelry items like necklaces and rings. Mr. CHIU produced the revised Notices of Assessment for Profits Tax for the years 1992-93 and 1993-94 respectively (last two pages of Exhibit A2). The Notices show reported profits of $1,166,965 and $1,513,658 for the years 1992-93 and 1993-94 respectively. We understand that the profits of the business were originally assessed by the Inland Revenue Department at $1,686,965 and $1,913,658 for the years 1992-93 and 1993-94 respectively. (See Exhibits A3a and A3b). We have no reason to doubt these figures. Mr. Sham, expert valuer for the Respondent, suggests in p. 12 of Exhibit R4 that valuation for goodwill be based on $1,340,311.50 being the average of the taxable profits for 1992-93 and 1993-94. From this, interest on capital calculated at $31,620 and profit rent at $31,560 are deducted. Then, using a multiplier of 1.5, he obtains the figure of $1,710,000 as the value of goodwill.

9. We do appreciate that the profits of a business may fluctuate from year to year and hence there may be justification for averaging the profits over a number of years. On the other hand, the notice of resumption and impending eviction probably had an adverse effect on the business. Since there is no such thing as an accurate measurement for goodwill, having taken all factors and circumstances into consideration, we decide to rely on the reported profits for 1993-94 even though we may err on the generous side. For reasons we have explained in previous related cases, we do not think it is appropriate to make a deduction for interest on capital. We did in previous related cases make a deduction for profit rent. However, in view of the relatively small amount of profit rent involved in this case, we think it would be fair to simply take the round figure of $1.5 million as the base figure.

10. Conventional wisdom had it that the multiplier, i.e. number of years as the projected span of profits, for even the most generous cases rarely exceeds five. In Hong Kong where business tenancies are not protected and under section 12(c) of the Ordinance no account is to be taken of probability or expectancy for renewal in assessing goodwill, a multiplier equal to the number of years remaining to run on the current tenancy is adequate. Where the current tenancy runs from month to month or has only a very short residuary term, a multiplier of at least two has been applied in many U.K. and Hong Kong cases of similar nature. In the present case, since the tenancy for the business had less than two years to run, we apply the usual multiplier of 2.

11. Accordingly, we determine the goodwill of the business at $1.5 million x 2 = $3 million.

Profit Rent

12. Before the profit rent can be calculated, the full market rent of the subject premises has to be ascertained. Mr. Sham for the Respondent suggests a unit rate of $250 per square metre. See p. 11 of his expert report Exhibit R4. We have in a previous related case for the Ground Floor, No. 6 Sui Lun Street applied the rate of $280 per square metre. We see no reason to depart from that.

13. In the premises, we determine the profit rent at $75,000 calculated as follows:-

Machinery and equipment

14. The business had two electroplating lines and miscellaneous machinery, equipment and tools. In September, 1993, officers of the Lands Department made an inventory record of the machinery, equipment, tools and chemical materials held by the business at that time. There are altogether 27 items of machinery and equipment and 21 items of chemical materials in all; see the faired list in Exhibits R1 and R2. The inventory is not disputed by the parties. All these together fetched a total of $40,000 at an auction in April 1994. The Applicants claim for losses suffered as a result of the forced sale of the machinery, equipment, tools and chemical materials. Since the machinery, equipment, tools and chemical materials were disposed of in April 1994, the Applicants are entitled to compensation being the value to them at the time of sale less the auction proceeds they have received. In our view, the value to the Applicants in April 1994 is the price paid by the Applicants at various times previously to obtain the machinery, equipment, tools and chemical materials less depreciation for wear and tear. Alternatively, the value should be the cost to obtain from the open market the same quantity and quality the Applicants had in April 1994. In either case, it is the replacement value.

15. Mr. Shadbolt of Chesterton Petty for the Respondent assessed the value of the machinery, equipment, tools and chemical materials at $406,400. See Exhibit R1 as amended by Exhibit R2. In essence, Mr. Shadbolt's valuation is based on quotations obtained from suppliers in the market. The Applicants, on the other hand valued the machinery, equipment and tools at purchase cost at $880,000. We have no difficulty in rejecting the Applicants' valuation for it does not take into account depreciation. In the absence of evidence to the contrary, we have no reason to doubt the purchase cost of the machinery, equipment and tools of the business as supported by invoices or receipts in Exhibit A2.

16. We think the fairer approach is to adopt the useful life span estimate, the end of life residuary value and apply the standard depreciation factor of 0.74 as used by Mr. Shadbolt to the purchase cost of the machinery, equipment and tools of the business. By this approach, we obtain a total value of $651,200. As for the chemical materials, the valuation by Mr. Shadbolt at $34,400 is acceptable.

17. In the premises, we place the value of the machinery, equipment, tools and chemical materials of the business at $(651,200 + 34,400) = $685,600 and determine compensation for loss due to forced sale of the same at $(685,600 - 40,000) = $645,600.

Fixtures and Fittings

18. The Applicants claim compensation for $1,180,000 being the cost of the fixtures and fittings in the subject premises. These fixtures and fittings are detailed in an invoice at p. 5-1 of Exhibit A2. The bulk of the expenditure on this item appears to relate to the construction in or about the beginning of 1992 of underground treatment tanks for chemical waste produced by the business. Mr. CHIU says that these are to meet the requirements of the environmental protection. However, Mr. Chow, an officer from the Environmental Protection Department, told us that according to the records of his department, no chemical waste treatment facilities were observed when his colleagues inspected the subject premises in 1993. See Exhibit R9. Indeed, a form completed by a partner of the business in 1993 does not even state that the business had at the subject premises chemical waste treatment facilities. See Part C in Exhibit R8. Mr. Chow further informed us that a separate licence by his department would be required for approved chemical waste treatment facilities but there is no record of such licence for chemical waste treatment facilities at the subject premises. Mr. CHIU in his final submission tries to make a distinction between chemical waste and waste water. He says that the construction was for disposal of waste water, hence the consideration of chemical waste treatment is irrelevant.

19. We do not accept the self-serving distinction drawn by Mr. CHIU. Mr. CHIU says that the construction work was done for environmental protection. But the Environmental Protection Department was not interested in harmless waste water. We do not see the justification for huge expense on facilities for harmless waste water. In any event, the question remains whether the alleged construction work did take place. We would have thought that the costly underground work, irrespective of purpose, required a permit from the Building Department. But there is no evidence in this regard. In view of all the circumstances, we are not satisfied on the balance of probabilities that the Applicants had treatment tanks constructed as invoiced. Even if there was such construction work, we do not think it is justified. Since the biggest item in the invoice at p. 5-1 of Exhibit A2 is unbelievable and unjustified, we also reject the remaining smaller items as suspect and unacceptable.

20. In the premises, we dismiss the claim for this item entirely.

Miscellaneous Items

21. The Applicants further claim transportation fees for auction at $72,000, auction exhibition ground and security charges at $28,000 and auctioneers' charges at $13,224.80. The claims for transportation, auction exhibition ground and security charges are not supported by receipts. The claim for auctioneers' charges is supported by receipts as shown in Exhibit A2. The Respondent does not accept the amounts claimed for transportation fees. Mr. Sham in his report at p. 10 of Exhibit R4 puts the cost of removal and transportation at $50,000. Taking into account the bulk and nature of the machinery and equipment to be dismantled and moved, we have no reason to doubt the claim for $72,000 for transportation charges. We gather from evidence in related cases that the auction exhibition ground and security charges at $28,000 are in fact an apportionment of a much larger amount which all the business operators affected by the Scheme and had to auction their goods had to share. We have no reason to doubt this and would allow the amount as claimed. We also accept the auctioneers' charges at $13,224.80.

22. The Applicants' claim of $150,000 as expenses for looking for premises with a view to relocating the business is neither supported by documents nor otherwise sufficiently justified. It must be dismissed.

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

The Order

24. Accordingly, we determine compensation for the Applicants at $3,850,000. 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 $12,000 to be made absolute unless application is made, within 21 days from the date of handing down of this judgment, to the contrary. Liberty to apply is also reserved for ancillary and consequential matters.