Dr. Lui Tat Hung v. The Director of Lands

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDLR No. 1 of 1998

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JUDGMENT

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1. This is an application pursuant to section 10(2)(d) of Lands Resumption Ordinance, Cap. 124 for compensation for the business loss or damage to the medical practice of the Applicant, Dr. Lui Tat Hung, due to the removal of the Applicant's practice to an alternative premises as a result of the implementation of the K-2 Scheme at Mongkok, Kowloon by the Land Development Corporation ("the LDC"). The Respondent is the Director of Lands. The Applicant is represented by Mr. Tommy Ho, counsel instructed by Messrs. C. W. Yung & Co. while the Respondent is represented by Mr. Nelson Miu, Government counsel for the Secretary for Justice.

Background

2. The LDC's K-2 Scheme comprises a rectangular shaped area bounded by Argyle Street, Portland Street, Shantung Street and Reclamation Street, and dissected by Shanghai Street in the Mongkok area of Kowloon.

3. In about 1985, the Applicant began to carry on his profession as a medical doctor in his clinic situated at the subject premises of ground floor, No. 551 Shanghai Street, Mongkok, Kowloon ("the Old Clinic") within the K-2 Scheme area.

4. In or about October 1993, the LDC began to implement its K-2 Scheme and resumed the properties within the K-2 area, before resorting to resumption by Government.

5. In August 1996, the Applicant opened a new clinic at ground floor, Shop 4, Ko's House, 577 Nathan Road, Kowloon ("the New Clinic"), which is outside the K2 area. He run the Old Clinic and the New Clinic simultaneously.

6. By Gazette Notification No. 60 dated 18th December 1996, notification was given by Government that following affixation of relevant notices to the said land and premises, the property would revert back to the Crown (as it then was) after a period of 3 months. Notice was served on all persons affected on 3rd January 1997, making 3rd April 1997 the relevant date for assessment of any claims for disturbance / business loss.

7. The Applicant closed his Old Clinic in December 1996 but the Old Clinic was not actually resumed until 3rd April 1997.

8. Being a person affected by the resumption of the K-2 area, the Applicant negotiated with Respondent on the amount of compensation payable by the Respondent to the Applicant. No agreement could be reached. On 3rd March 1998, the Applicant filed a Form 5 to formally notify the Respondent that the Applicant would apply to the Lands Tribunal for the determination of his compensation. The parties exchanged their Rule 20 documents following which the application was heard by this Tribunal.

9. The above background leading to the clinic are agreed by the parties, so is the Applicant's legal right to claim compensation for his loss in business profit due to the resumption. The dispute is on the quantum only.

Basis of compensation

10. The relevant legislation for the calculation of compensation for disturbance is section 10(2)(d) and 10(2)(e)(i) of the Lands Resumption Ordinance which states inter alia,

"The Tribunal shall determine the amount of compensation (if any) on the basis of:-

Section 10(2)(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.

Section 10(2)(e):-

In the case of land resumed under an order made under section 3 on or after the commencement of the Lands Resumption (Amendment) Ordinance 1984 (5 of 1984),

(i) 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, but excluding any amount to which paragraph (d) applies".

Further, the compensation to be paid under Section 10(2)(d) is subject to the rules in section 12(c). Section 12(c) provides that "no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence or continuance, by the Government or by any person, of any licence, permission, lease or permit, whatsoever: Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed."

Applicant's claim for compensation

11. The amount of the total claim for compensation for relocation of the Applicant's business to the New Clinic is:

12. In addition, the Applicant claimed that pursuant to section 10(2)(e), he should be entitled to the amount of any costs or remuneration mentioned in section 6(2A) and 8(4).

13. With regard to the interest on the compensation amount, the Applicant claimed that "authorities show that the interest rate should be the seven-day-call-rate plus 2% (Director of Building & Lands v. Shun Fung Ironwork Ltd. [1995] 1 HKC 417, at 442B)".

Respondent's estimate of the compensation payable to the Applicant

14. The Respondent did not raise any objection to the Applicant's claims for costs and interest on compensation amount nor did the respondent put forward any alternative interest rate to be applied in this case.

Issues before this Tribunal

15. The compensation payable to the Applicant in respect of Loss on Removal of Stock and Cost of Relocation to New Clinic had already been agreed by the parties at $87,500 and $645,185 respectively. The only compensation item in dispute before the Tribunal is the loss in business profits caused to the Applicant by the K-2 Scheme.

16. Mr. Tommy Ho, the counsel for the Applicant in his written opening summed up the issues of the Application as follows:

(1) Did the Applicant suffer any pre-resumption loss?

(2) If the Applicant had a pre-resumption loss, how should that loss be calculated?

(3) There is no dispute as to the existence of a post-resumption loss, the disputes are two: which years were appropriate for compensation and how to compute this loss?

(4) Did the Applicant suffer any permanent loss of profit?

(5) If there is permanent loss of profit, how should this permanent loss be calculated?

(6) Has the Applicant reasonably mitigated his loss?

They could really be reduced to two:

(1) The basis of analysing and projecting the business income and profit of the Applicant in order to estimate the business profit, in the "no-scheme" would, before and after the reversion date. This covers issues No. (1) to (5) raised by Mr. Ho.

(2) Whether the Applicant could claim losses beyond March 1999, and if yes, the basis of estimating such losses? This particularly covers Mr. Ho's issues No. (4) and (5).

17. Mr. Ho submitted as his fifth and last issue in dispute: whether the Applicant has reasonably mitigated his loss. Mr. Ho obviously submitted in the affirmative. Also, the Tribunal has not heard any submission from the Respondent that the Applicant had not acted reasonably in mitigating his loss. The Respondent has never suggested that because the Applicant had failed to act reasonably, the compensation should be reduced by a certain amount to reflect his inaction or wrongdoing. So, this is not really an issue in dispute.

18. Before attempting to go through these issues, the Tribunal will first summarise the evidence from the witnesses, including the source of the raw evidence, their analysis and interpretation, method of valuation by both parties, their assumptions and projections with emphasis on the differences between the parties and their rationale.

19. Evidence by Mr. Chan, Fu Wa Kenny, representative of the Applicant's accountant, Messrs. Leung, Wan & Co.

20. The first witness was Mr. Chan, Fu Wa Kenny, an auditor of the Applicant's accountant, Messrs. Leung, Wan & Co. (formerly Messrs. William Leung & Co.). He confirmed that all the unaudited accounts of the Applicant filed in this application were prepared by his company from the Applicant's records. He further confirmed that the gross income statements and patient number statements (Bundle page 227 - 234) were also prepared by his company. There were minor discrepancies between the income figures shown in these gross income statements but these discrepancies, ranged between 0.006% and 3.8%, were considered to be immaterial. Finally, Mr. Chan confirmed that his company had not performed any analysis on the Applicant's accounting records for the purpose of this Application.

21. As both the Applicant and the Respondent used the figures shown in the actual unaudited accounts in their valuation and in view of the minor discrepancies between the figures in the unaudited accounts and the gross income statements prepared by the Applicant's accountant, the Tribunal will adopt the figures shown in the actual unaudited accounts in this Judgment.

Evidence by Dr. Lui Tat Hung, the Applicant

22. The Applicant gave evidence himself. His witness statements, shown in pages 3 to 376 and pages 270 -272 of the Bundle of witness statements and Expert Reports (Bundle 1), were adopted as evidence in chief. He firstly gave detailed description of his qualification and past history of his medical practice in the subject premises, the Old Clinic. He graduated from the University of Hong Kong in 1994, had worked in various Government and public hospitals for about 10 years before he left in 1985 to set up his private proactive in the Old Clinic. This lasted until December 1996 when he closed the Old Clinic and continued his practice in the New Clinic after a few months of operating two clinics for a period from August 1996 to December 1996 in order to mitigate the loss due to the resumption. Dr. Lui was working as both a qualified General Practitioner as well as an Obstetrics and Gynaecology Specialist. He roughly estimated his average proportion of workload in his Old Clinic as 80% GP work and 20% O&G work.

23. Dr. Lui gave evidence that in or about October 1993, the LDC began to resume properties in K-2 Area and by about April 1994, the LDC had already resumed about 70% of the properties within the K-2 Area. Since the commencement of resumption by the LDC, there were "massive moving out of residents; continuous closing down of shops, food stalls and entertainment establishment; a severe deterioration of the environmental conditions; and a severe deterioration of the security conditions."

24. Dr. Lui attributed the following four factors as to be generally essential to a successful private medical practice: practice history, trust and confidence of patients, good location and specialist qualification.

25. Dr. Lui considered that his Old Clinic had a very strategic location in his catchment area, which roughly corresponds to the LDC's K-2 Scheme Area. Dr. Lui opined that as the Old Clinic was close to market place and various shops, housewives and their kids could consult him on their way to buy food and other household products. The Old Clinic was close to entertainment and vice establishments, close to restaurants including some popular ones, close to Grand Tower Hotel, to Mongkok MTR Stations and to dispensers and drug shops. Finally, the Old Clinic was situated in a district where there was no new doctor coming to practice as a General Practitioner since 1985 leaving him as the only GP with such seniority and qualifications.

26. Dr. Lui suggested that "86% of his patients was directly or indirectly connected with the K2 District." Similarly, he estimated that in terms of customer loyalty, the breakdowns of the combination of patients were as follow:-

"(1) 30% was returned and loyal patients for general advice and consultation.

(2) 15% was returned and loyal patients for specialist consultation and treatment.

(3) 55% was walk-in patients either within the catchment area and/or nearby regions or other parts of Hong Kong."

27. Based on the assessable profits filed by the Applicant to the Inland Revenue (Bundle 1, pages 24 - 25), Dr. Lui estimated that he had achieved an average annual growth of about 19.8% from the year 1988/89 to 1993/94.

28. However, the Tribunal noted that Dr. Lui had not taken into account the effect of compound interest in computing this average annual growth rate. Had this been taken into account, when an assessable profit of $395,903 in 1988/89 was compared to an assessable profit of $925,409 in 1993/94, they indicated an overall growth rate of +133.75% or an average annual growth rate of about +18.5%. We would however leave the question of why the Tribunal should, as suggested by the Applicant, choose these two years as the base years of comparison later.

29. Dr. Lui gave evidence that he had achieved an average annual growth of patients of about 9.2% from the year 1991/92 to 1993/4. His average growth rate of assessable profit was higher than his average growth rate of patients and Dr. Lui justified this on the operation of the following factors:

(1) the annual increase in consultation and other medical service charges;

(2) the special features of overheads for medical practice; and

(3) the "multiple income effect" of loyal patients- a loyal patient normally brings a profit 40% to 50% higher than a new patient.

30. Dr. Lui confirmed that by the time of 1994, he had already been practised in the Old Clinic for ten years and was "very much well established" in his catchment area. Also, he "had a very good relationship with the landlords of the subject premises, and was able to secure for an indefinite period only on the condition that there would be a periodical review of rent."

31. In projecting the growth for the years 1994/95 to 1996/97, Dr. Lui adopted his estimate of the percentage growth of his assessable profits from 1988/89 to 1993/94 (i.e. 19.8%) as the annual growth rate. He suggested that "given the tremendous economic growth during the years 1994/95 to 1996/97, it is reasonable to assume that my practice in the Old Clinic should have enjoyed even a higher growth rate than the average 19.8% in the previous 5 years'. He was aware that competition could have slowed down his growth rate. However, he found, from the yellow page telephone directory, that the number of doctors registered for the past years did not show any significant increase. Also, he calculated that even assuming the 19.8% annual growth, he would still be able to handle the increase in the number of patients.

32. On the basis of his projected net profit for the years 1994/95 to 1996/97, Dr. Lui estimated a total accumulated loss for these 3 years of $2,047,208. His detailed computation was shown in page 28 of Bundle 1. Dr. Lui also calculated that "the annual total number of patients actually acutely dropped by 26.28% in 1994/95, 49.31% in 1995/96 and 41.29% in 1996/97, as compared with the patient record of 1993/94."

33. We would comment on whether the patient numbers are good substitutes for estimates of profits later in this Judgment.

34. From August 1996 to December 1996 for a period of about four and a half month, Dr. Lui had been operating two clinics with "a view to achieving as far as practicable a smooth transition from the Old Clinic to the New Clinic".

35. Dr. Lui opined that although his New Clinic was only about 450 metres from the Old Clinic, the following factors have significantly and adversely affected his business:

(1) "Outside the K2 District, there are hundreds of doctors scattered over very major buildings and streets, most of them are already well established during the last 20 years or so in Mongkok."

(2) In the New Clinic, "it takes time for me to gain the trust and confidence of the new patients. As a result, I lost the 'long standing' and 'trust and confidence of patients' that I had gained in my Old Clinic."

(3) "The New Clinic is not located at the same or a similar strategic position as the Old Clinic. As such, I lost all the advantages of the "good location" of the Old Clinic.

(4) "The New Clinic suffers from a number of drawbacks as compared with the Old Clinic." Because of the smaller in area in the New Clinic, Dr. Lui could not set up an operation room for the purpose of performing minor operations.

36. A comparison of the Old and New Clinics is particularised in Annex 5 of Dr. Lui's Statement (Bundle 1, page 31 -32)

37. In calculating the post-resumption "Temporary Loss" of profit, Dr. Lui adopted a 19.8% growth rate for the year 1997/98, an 8% growth rate per year for the years 1998/99 and 1999/2000 after taking into account the actual economy of Hong Kong. He supported this by stating that he had managed a growth of 19.6% in terms of assessable profit for the year 1998/99 (when compared with 1997/98) because despite of the slump in the economy, he was able to increase his minimum medical charge by $10 per patient per visit and his minimum surgical fee by $200.

38. Dr. Lui further put forward the following factors in support of his view that "the general economic conditions could not have produced any significant adverse effect on my business had there been no resumption of the K-2 District":

(1) "The consumption on medical consultation is of high priority that can hardly be deferred or dispensed with."

(2) "A series of serious epidemic", "worsening air quality and numerous large scale incidents of food poisoning" had all helped to boost the growth of private clinical practice.

(3) "The increase of population" in Hong Kong

(4) "The poor quality of Government clinics for out-patient consultation"

(5) "Increase in insurance coverage and allowance for medical services by major medical insurance providers".

39. By adopting the same methods of computation of the Pre-resumption Loss of profit and adopting a growth rate of 19.8% for the year 1997/98 and 8% for the years 1998/99 and 1999/2000, Dr. Lui estimated the total accumulated loss of net profit after tax to be $3,761,340. The details were shown in Annex 6 of his Statement (Bundle 1, pages 31 - 33)

40. Dr. Lui gave evidence that "an immediate consequence of the resumption is that I have suffered a permanent loss of old patients". His record show that the percentage of new patients over all patients had risen from 27% in 1996/97 to 48% in 1997/98 and then to 58% in 1998/99. According to Dr. Lui, "the loss is not simply a matter of patient attendance but more importantly a loss of "the multiple income effect". Also, Dr. Lui gave an estimate that according to his own observation, he had lost altogether about two thirds of his old patients. He gave very detailed break-downs of his estimates.

41. Finally, for the purpose of determining the Post-resumption "Permanent Loss" of profit, Dr. Lui adopted "15% of the average net loss of net profit after tax from the year 1997/98 to 1999/2000 as multiplicand, and a multiplier of 4 in arriving at an estimate of the permanent loss of profit of $1,053,609.

42. During the hearing, Dr. Lui had explained on several occasions his so-called "the multiple income effect" of retaining existing clients. He admitted that the surge of actual net income and the large percentage increase in the actual net profit might be attributable to this factor. Many existing clients, before their relocation from the K-2 Area, visited him and during these consultations, they asked for detailed check-up for themselves and their families. Therefore, the actual net income and net profit increased by a large percentage when compared with pervious years.

43. Therefore, in summary, Dr. Lui had adopted the following figures and assumptions in computing his estimates of the loss of profit due to the resumption:

(1) 1993/94 should be adopted as the base year for projecting incomes for the future years. The year which ended March 1994 was still not much affected by the resumption even though the process of the resumption of K-2 Scheme had actually commenced in October 1993.

(2) Using a growth rate of 19.8% per annum for 1994/95 to 1997/98 and 8% per annual for 1998/1999 and 1999/2000, Dr. Lui projected the estimated total income for the years 1994/95 to 1999/2000. From these income estimates, he deducted drug & medicine expenses calculated at 12% of the total estimated income. This percentage was based on the ratio of actual drug & medicine expenses and actual total income for the year 1993/94, or 11.46%. He then deducted other expenses based on the actual expenses shown in his unaudited accounts for these years. As for the expenses for the year 1999/2000 the actual figure of which was not available, Dr. Lui estimated the expenses on the assumption that the percentage increase of expenses other than drug & medicine for the year follows the same percentage (4.52%) as that from 1997/98 to 1998/99

Thus, according to Dr. Lui, the actual net profit before tax, the estimated net profit before tax, the estimated loss of profit before tax and the estimated loss of profit after tax are summed up below:

(3) From the above table, the Expected Pre-Resumption Loss of Profit was the summation of the estimated loss of profit (after deducting tax at 15%) for the years 1994/95, 1995/96 and 1996/97, in the sums of $251,644, $482,103 and $1,313,461 respectively, resulting in a total loss of $2,047,208.

(4) The estimated loss of profit (after deducting tax at 15%) for the years 1997/98, 1998/99 and 1999/2000 were in the sums of $1,313,461, $1,278,034 and $1,278,565 respectively. The total of these losses, at a figure $3,761,340, was treated to be the Expected Temporary Loss.

(5) Using the average of the estimated loss of profit (after deducting tax at 15%) for the year 1997/98, 1998/99 and 1999/2000 and applying 15% to this average and a multiplier of 4, the Expected Permanent Loss was estimated to be $1,053,609.

(6) Dr. Lui claims Disturbance on Removal of Stock in the sum of $87,500.

(7) Finally, Dr. Lui claims Cost of Relocation to the New Clinic. These last two items had been agreed with the Respondent prior to the hearing.

Evidence by Mr. Tam, the expert surveyor called by the Applicant

44. Mr. F. C. Tam, Chartered Surveyor gave evidence on behalf of the Applicant. Mr. Tam was the consultant and agent for the Applicant. He had filed, on behalf of the Applicant, two Rule 20 Documents before the hearing. The valuation figures had since been superseded by the valuation shown in the Applicant's Statement (Bundle 1, page 3 - 36). Mr. Tam had endorsed Dr. Lui valuation, which was prepared based on the approaches shown in Mr. Tam's earlier Rule 20 Documents (all of which were filed in Bundle 1).

45. He gave an account of his negotiation with the Respondent and his consultant surveyor firm, Messrs. Sallmanns. The responsible surveyor from Sallmanns, Mr. David Pannach was another expert surveyor giving evidence in this hearing. Mr. Tam gave evidence that in negotiating with the Respondent and their consultant, he had attempted to agree, as far as possible, with the Respondent on both the methodology as well as the assumptions and the figures to be adopted in the valuation in order to simplify and streamline the settlement of the claim.

46. Mr. Tam did not agree with Mr. Pannach's new approach in the second valuation report filed for this hearing.

47. Mr. Tam did not understand why Mr. Pannach said he had incomplete information when preparing his first valuation report. Mr. Tam said that he had never received any notice from Mr. Pannach regarding the incomplete information.

48. Mr. Tam supported Dr. Lui's statement that Dr. Lui was the only doctor in the K-2 Area prior to resumption.

49. Mr. Tam commented that Mr. Pannach, in his first valuation report, also accepted a growth rate of 15% for total income for the years 1994/95 to 1996/97. However, in light of the "multiple income effect" demonstrated by Dr. Lui, it would be more appropriate to use the average growth rate of net profit for the years from 1988/89 to 1993/94 (i.e. 19.8%) as the basis of projecting the estimated total income for the years affected by the resumption, from 1994/5 and onwards. This, according to Mr. Tam, is more reliable.

50. Mr. Tam said that he could personally testified that the blighted or dilapidated situation of K-2 Area in general. For this reason, he confirmed that the figures for the years 1994/95, 1995/96 and 1996/97 should not be included in the so-called "No scheme" world in the analysis of the Applicant's accounts.

51. In summary, Mr. Tam opined that he disagreed that there was no "Pre-resumption Loss" for the Applicant. Secondly, although the Respondent acknowledged that there were losses of profit for three years' viz-1996/97, 1998/99 and 1999/2000, there were compensation for four years after the date of resumption for other precedent cases. Mr. Tam did not elaborate the cases concerned.

52. Mr. Tam also confirmed that in his opinion, the dividing line for the pre-resumption period and post-resumption period should be the end of 1994. He recalled attending a community meeting at that time during which the LDC representative advised the owners/residents in the K-2 Area that more compensation would be given out if the tenants moved earlier. At that time, the resumption and negotiation were already in a fairly advanced stage.

Evidence by Mr. David Pannach, the expert surveyor called by the Respondent

53. Mr. David Pannach, a Registered Professional Surveyor was called by the Respondent to give evidence. His firm was instructed by the Respondent to carry out valuation for the business loss due to the Applicant as a result of the resumption affecting the Old Clinic. Mr. Pannach has filed two Rule 20 documents, one dated 15th May 1998 and the second one dated 28th September 1999 (see Bundle 1, page 265-269). Mr. Pannach stated in his second report that the estimated compensation amount of $2,575,000 in his first report, was to be substituted by the estimate in the second report which show a total compensation amount of $2,732,000. In both reports, the estimated amounts on "Disturbance on Removal of Stock" and "Cost of Relocation to New Clinic", in the sums of $87,500 and $645,185 respectively, remained unchanged. The amounts of these items had been agreed with the Applicant.

54. Mr. Pannach said that after reviewing the more recently submitted, additional actual accounts for the years 1996/97, 1997/98 and 1998/99, he decided to file his second Supplemental Report.

55. We were advised by Mr. Pannach and the Respondent that they both had abandoned the approach used in Mr. Pannach's first Valuation Report. However, it appears to the Tribunal that it is still worthwhile to take a detailed look at how Mr. Pannach had carried out his valuation, before he received the of more up-to-date actual account figures.

56. In the first Valuation Report, Mr. Pannach followed the approach of Mr. Tam and accepted the year 1993/94 as the base year for projection for two main reasons: "First, the tax return figure ...shows an increase of a 56%, which I understand was a year of a major fee increase... Secondly, property acquisition by the Land Development Corporation in an active manner only really began in 1994. Therefore up to year end 1994, the population and trading activities along Shanghai Street had not been affected much from the implementation of the K2 Scheme. i.e. the residential population was still quite high. Thus, for these reasons, I am of the opinion that the 1994 profit figure is both a reasonable, and realistic business year to adopt as the base year for the Claimants business."

57. However, Mr. Pannach did not accept Mr. Tam's adopted annual growth percentage figure for the years from 1994 to 1997. Instead, he opined, after examining a number of economic indicators and their performance estimates, that "a generous growth figure of 15% to reflect the gross income increase from 1994 to 1997, if the K2 Scheme had not been implemented, is a very fair approach to take."

58. Mr. Pannach therefore projected the income and expenses of the Applicant's medical practice for the years ending March 1995 to March 1997 by assuming a growth rate on consultation and operation fee of 15% p.a. As for the expenses, he used all the actual expenses as shown in the unaudited accounts, with the exception that the costs of drug and medicine consumed, assessed at 12% of the total income was used instead of the actual figures. This approach is also similar to Mr. Tam.

59. Mr. Pannach compared the net profits so arrived with the actual net profits for these three years. He found that there was loss of profit for each of these years. He added all these losses, amounting $757,172 which he treated as the "Pre-resumption Loss".

60. As for the estimate of the "Permanent Loss", Mr. Pannach stated that "while the new premises is smaller than the old, I consider it reasonable to expect an established professional of the Claimant's age and experience (practising as a sole-practitioner) to be able to quickly build up the relocated practise". Although he submitted that "no authenticated statistical evidence to support the Applicant's net income since the resumption has been supplied", he has estimated that the Applicant would permanently lose 15% of his net income. Then, taking an average of his projected after-tax net income (i.e. in the "No Scheme world") over the three years from 1995 to 1997 gives a projected annual figure of $904,000. Mr. Pannach then stated that "A loss of 15% to this produces an annual projected figure of approximately $135,600. To fully compensate for this projected net profit loss, and based on previous Lands Tribunal decisions, I have adopted a multiplier of 4. This produces a lump sum figure of $542,400 which I consider a reasonable figure for the permanent loss of profits. This multiplier is the rate adopted in previous Lands Tribunal cases in which I consider to be similar cases." The cases referred to by Mr. Pannach were:

Callwin International Electric Co. Ltd. V. Director of Engineering Development (MTR 3 of 1984), Shun Fung Ironworks Ltd. V. Director of Buildings and Lands, Shing Kee Metal Dealer v. Director of Public Works, Dr. R. Ching and Dr. M. Feng ([1978], HKLTLR 320)

61. As to the "Temporary Loss" of profit, Mr. Pannach then agreed that "there will be a temporary loss for at least 2 years, and possibly 3 years - i.e. until March 2000." He added that "although the claimed amount is not supported by accounting evidence, I consider a reduction of 30% to be very reasonable compensation for any possible loss of profit for the first year with a declining percentage in subsequent years. Therefore, adopting a straight-line loss over 3 years and applying it to the prospective "No Scheme" net income as above ($904,000) this produces the following:

Temporary loss in Year 1 (1997/98)	30%	$271,200
Temporary loss in Year 2 (1998/99)	20%	$180,800
Temporary loss in Year 3 (1999/2000)	10%	$90,400
	Total	$542,400

Mr. Pannach had the following conclusion in his first valuation report:

(1)	Pre-resumption Loss	$757,000
(2)	Permanent Loss of Profits	$542,400
(3)	Temporary Loss of Profits	$542,400
(4)	Loss on Decoration & Equipment	Nil
(5)	Disturbance on Removal of Stock (agreed with Respondent)	$87,500
(6)	Cost of Relocation to New Clinic (agreed with Respondent)	$645,185

62. In summary, Mr. Pannach's approach in his first report was very similar to Mr. Tam's. In the second report filed to the Tribunal, Mr. Pannach admitted that his latest estimates of the compensation amount differed from his previous estimates as "the Applicant had submitted income receipts for 1997, 1998 and 1999 which reflected the actual situation for the additional period". On the basis of this additional information, Mr. Pannach had the following main findings and conclusion in his Supplemental Report dated 28th September 1999:

(1) The Applicant did not suffer any pre-resumption loss for the 1994/95 and 1995/96 years.

(2) The post-resumption loss was confined to the three years of 1996/97, 1997/98 and 1998/99. Later, in the Respondent's submission, these were more appropriately renamed as the pre-resumption loss for the year 1996/97 only and the post-resumption loss for the years 1997/98 and 1998/99.

(3) Based on the average actual annual growth of income (8.89%) for the years 1988/89 to 1995/96, Mr. Pannach applied the same growth rate to project the annual income for the three years from 1996/97 to 1998/99.

(4) The Applicant did not suffer any permanent loss of profit.

63. The compensation for Disturbance on Removal of Stock ($87,500) and Cost of relocation to the New Clinic ($645,185) remained unchanged and were the same as what were claimed by the Applicant.

Principles of compensation

64. Mr. Miu for the Respondent has rightly pointed out in his final submission that neither the Respondent, nor the Tribunal, should be bound by any methodology adopted or suggested in the past. The Tribunal should determine, as accurately as possible, using all the information that is presently available, the loss that the Applicant had sustained.

65. Mr. Ho has in his final submission drawn the Tribunal's attention to a few legal issues: the losses are recoverable under Lands Compensation Ordinance Cap. 124 and the compensation for disturbance is a subjective assessment. (Lee Chun v. Director of Lands [1983-85] CPR 426. These have not been disputed by the Respondent. This is therefore not an issue in this case.

66. Mr. Ho also submitted that "in respect of whether compensation is payable during the "shadow period", the law is now settled by the Privy Council in Shun Fung Ironworks Ltd. V. Director of Buildings and Lands [1995] 1 HKC 417.

67. In delivering the judgment, Lord Nicholls of Birkenhead rejected the contention that compensation is only payable to losses incurred after the date of resumption. To draw an artificial line before and after the date of resumption and deny compensation during the shadow period "would rightly bring the law into disrepute" (439A)

The Lordship has set out the following principles in Shun Fung case:

"To qualify for compensation, a loss suffered post-resumption must satisfy the three conditions of being casually 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 fall for lack of casual connection by reason only that the loss arose before resumption, provided it arose in anticipation of 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" (at 439I-440A-B)

"If the line is drawn in this way, the result is fair and sensible. Had there been no scheme, the losses in question would not have arisen. The result is coherent because it accords with the established Pointe Gourde principle. It also means that compensation is not dependent on whether the acquiring authority acts speedily or tardily in carrying through the process culminating in resumption. Losses arising after the inception of the scheme will attract compensation, however short or long the shadow period, provided they satisfy the criteria mentioned above." (at 440E-F)

68. The above principles have not been disputed by the Respondent. In this judgment, the Tribunal will follow these principles. However, in the eyes of the Tribunal, we find that the dispute in this case is very much in the interpretation of the facts, in particular the unaudited accounts of the Applicants for the years before and after the reversion. We will first start by looking into the unaudited accounts.

Observation from the analysis of the Applicant's actual accounts

69. We note that both parties have not carried out any detailed analysis of the Applicant's actual accounts (Bundle 1, pages 94 -121 and 203 -210). Instead, both parties accepted all the figures in the unaudited accounts and proceeded with their projection in their construction of hypothetical accounts assuming a no-scheme world.

70. The Applicant's unaudited account figures, all in dollars for the years 1994 to 1999 are outlined below:

	1994	1995	1996
Total income	1,976,200	2,018,870	2,186,780
Total expenses	1,109,325	1,317,957	1,437,334
Total expenses/Total income	56.1 %	65.3 %	65.7 %
Net profit	866,875	700,913	749,446
Net profit/Total income	43.9 %	34.7 %	34.3%

	1997	1998	1999
Total income	1,977,160	1,943,480	2,218,619
Total expenses	1,804,419	1,591,305	1,663,160
Total expenses/Total income	91.3 %	81.9 %	75.0 %
Net profit	172,741	352,175	555,459
Net profit/Total income	8.7 %	18.1 %	25 %

71. The actual total income figures for these 6 years are within a 12.2 % range (the highest being $2,218,619 for the year 1999 and the lowest being $1,976,200 for the year 1994). On the other hand, the actual net profit figures dropped from the highest of $866,875 in 1994 to the lowest of $172,741 in 1997. The profitability ratio (percentage of net profit to net income) similarly dropped from 43.9% in 1994 to 8.7% in 1997. The Tribunal, have great difficulties in understanding why, for example, in 1996/97 and 1997/98 when there was only a slight decrease in total annual income but very substantial decrease in the net profits.

72. We accept that different locations may have different cost components for a business. After removal to a new location, a business may have to incur additional overhead expenses, staff costs and so on. However, during the hearing, we have not heard any evidence from the Applicant regarding the additional costs of doing business in the New Clinic. On the other hand, the New Clinic, with a smaller area should presumably generate less overhead or other costs. Although there might be double overheads in terms of additional staffs and so on for running two clinics concurrently during a four and a half months period in 1996/97, these additional overheads should have been covered in the other item of claim (i.e. compensation for relocation to the New Clinic).

73. We come to a conclusion that we must study more carefully the items of expenses in the Applicant's unaudited accounts. We do not accept that because the Applicants suggested a certain figure as an item of expenditure in his unaudited accounts and the accounts have been accepted by the Commissioner of Inland Revenue for the purpose of assessing profit tax, the Tribunal must be bound to accept all these figures. In order to assess as accurately as possible the loss of profit to the Applicant's business due to the scheme, we have a duty to check how the profits were calculated for the years which were not affected by the scheme. This profit figure, we emphasis, shall form the basis of compensation to the Applicant. Similarly, we must also be concerned with how the profits were computed in the "no-scheme" world for the years when the business was affected by the scheme.

Adjustments of the Applicant's unaudited accounts

74. The Applicant gave evidence that he started private practice in about 1985. Only the unaudited accounts from 1988/89 were submitted. A summary of the accounts were shown in Mr. Pannach's Schedule 2 (Bundle 1, page 269). We have studied all theses unaudited accounts in the Bundle. We decide that essentially three items of expenses must be adjusted in order to arrive at a more reasonable set of net profit figures for the Applicant's business before and after the reversion date in April 1997.

75. The management fee item in the account increased from $120,000 for 1988/89 to $180,000 for each of the year 1995/6 to 1997/98 and then dropped to $150,000 in 1998/98. The Applicant, in answering to a query from Mr. Ho, explained that the management fee was paid to a company owned and controlled by members of his family. The fee was remuneration for services rendered in connection with the management and administration of his business, including such work as the printing of business letter paper, invoices, etc. After these management fee amounts are compared to the staff salaries, the other item of major expenses next to the rent & rates and drug & expenses, we conclude that the management fee item in each year's account is very much over-exaggerated and should be excluded.

76. The other item that has to be adjusted for some years is the allowance for depreciation. The depreciation amount for the years from 1988/89 ($14,477) to 1992/93 ($23,357) were quite consistent. They are all acceptable. From 1993/94, we noticed an unusual increase in the depreciation amount in the accounts, as follows:

1993/94	$59,501
1994/95	$154,500
1995/96	$157,140
1996/97	$58,375
1997/98	$62,375
1998/99	$92,320

77. The amounts for the last three years are based, presumably, on the historic cost of new furniture & fittings (of the New Clinic) and the motor car. We decide not to tamper with these figures.

78. However, for the year 1993/94 to 1995/96, we do not accept the depreciation allowance calculations as shown in the unaudited accounts. It is against basic accounting principle that the Applicant should choose to give a revised valuation to a capital value of $772,500 (in 1994/95 accounts) for the old furniture & fixtures in the Old Clinic. The Old Clinic has been used since 1985. Although there were some very minor additional investment in furniture & fixtures, we do not notice from the accounts that there was any major addition from 1988/89 to 1995/96. Moreover, since the Applicant began to know about the resumption in 1993/94, there would not be any ground for investing heavily in new furniture & fixtures from that year onwards. Otherwise, the Applicant has not acted reasonably to mitigate his loss. Finally, both parties accepted that they had before the hearing agreed on the compensation for Disturbance on Removal of Stock and Cost of Relocation to the New Clinic. From Mr. Pannach's first Valuation Report which covers these two items, we note that the Respondent had agreed to bear the cost of the new furniture in the New Clinic.

79. We therefore decide to disallow the Applicant's adopted depreciation allowance as shown in the unaudited accounts for the year 1993/94 to 1995/96. Without carrying out detailed depreciation allowance calculation, we use the following approximate depreciation allowance amounts instead, based on the depreciation allowance for the years preceding 1993/94:

1993/94	$20,000
1994/95	$15,000
1995/96	$10,000

80. Then, we note that the unaudited accounts for 1996/97 have obviously include the double rents and rates paid for the Old and New Clinic. Again, these items have already been agreed by the parties under the heading Double Overhead in the compensation of $645,185 for the Cost of Relocation to the New Clinic. We decide to add back the difference between the two figures of $822,012 and $450,412 respectively shown in Mr. Pannach's Schedule 1 & 2 (Bundle 1, pages 268 - 269) for the item Rent & rates for the year 1997. Thus, a sum of $371,600 must be rolled back to the actual net profit for the year 1996/97 to arrive at the adjusted net profit based on actual unaudited accounts.

Adjusted net profits for the Applicant's business

81. On the above basis, we calculated the adjusted net profit for the years 1988/89 to 1998/99 as follows:

82. We have highlighted the percentage change of the adjusted actual net profit for the years from 1993/94 onwards. We note that the net profit for these years do not change so dramatically as in the actual unaudited accounts for these years. For example, for the year 1996/97, we no longer have the situation where the actual net profit reported in the unaudited accounts was only $172,741 and the profitability ratio 8.7% when the actual total income was $1,977,160, which was actually roughly the same as the average of the previous three years, or even $960 more than the year 1993/94.

83. In the rest of this Judgment, we will refer to our adjusted net profits as to be the net profits of the subject business.

Determination of Loss of Profit by the Tribunal

84. In determining the loss of profit to the Applicant due to the resumption, several issues arose in both the assessments made by the Applicant and the Respondent's expert surveyor. They are as follows:

(1) The choice of the base year for projecting gross income or net profit

(2) The calculation of the historical annual growth rate of gross income or net profit and estimation of the annual growth rate from the base year

(3) The estimation of the projected annual net profits for the years following the base year

The choice of the base year for projecting gross income or net profit

85. There is consensus of opinion that the business suffered some pre-resumption loss in the year 1996/97. There is, however, a difference in opinion as to whether the pre-resumption loss should extend to the years 1994/95 and 1995/96.

86. The Applicant maintained that because K-2 Scheme had commenced in 1993 and he had suffered a reduction in net profit in 1994/95, he should use the previous year 1993/94 as the base year for the purpose of projecting his gross income or net profit assuming a no-scheme would situation.

87. During the hearing, the Applicant gave evidence that the environment, physical state and business potential of the K-2 Scheme Area has deteriorated seriously during the 31/2 years from 10/1993 to 4/1997. As a result of this, the Applicant submitted that compensation for pre-resumption loss should start from the year 1994/95 to 1996/97.

88. Also, the Applicant's witness, Mr. Tam, stated that it was common for claims of business loss to cover a provide of 3 or 4 years before and after the reversion date.

89. Initially, the Respondent's expert surveyor also accepted the Applicant's conclusion. However, with the availability of more recent yearly unaudited accounts from the Applicant, the surveyor had a new conclusion.

90. Following the projection of the Applicant's income and profit using 1995/96 as the base year, the Respondent concluded that there was pre-resumption loss only for the year 1996/97.

91. We decide that there is no hard and fast rule as to the number of years that a business may suffer loss of income due to a resumption exercise. That must be decided by the facts of each case.

92. In the present Application neither party has been able to produce any evidence of the effects of the resumption on other similar business in the K-2 Scheme Area. This is the only medical practice on street level in K-2 Area. No other comparison could be drawn.

93. The Tribunal consider it inappropriate to compare the income and net profit of the subject business at a certain year or years with the similar figures of other medical business in the rest of Hong Kong. Obviously, the location of the business and the performance of the practitioner could dictate the income and profitably level. Therefore, the reference to the average income/profit of any other medical doctor is of no relevance at all for this assessment.

94. If we concentrate on the three years 1993/94, 1994/95 and 1995/96, all prior to the year immediately before reversion, we note that their net income on a year to year basis in fact show a modest to reasonable increase: +2.2% in 1994/95 and then +8.3% in 1995/96. Using our adjusted actual net profits, the profitability ratios of these three years are respectively 53.2%, 49.2% and 49.2%. These ratios are very close and consistent to each other. Also, the adjusted actual net profit for these three years are very close too. The profit drops by 5.4% in 1994/95 and then goes up again by 8.4% in 1995/96.

95. The figures for the 5 years from 1988/89 to 1992/93 are very consistent, both in terms of the growth of the total income and the total profit, and the profitability ratio. The increase in total income and net profit from 1992/93 to 1993/94 is anything but extra-ordinary. As suggested by the Respondent, there is a high likelihood that the year may be an exceptionally good year.

96. The Scheme commenced at the end of 1993. However, even the Applicant admitted that the Scheme had little effect on the business in the year 1993/94. On the other hand, as acknowledged by the Applicant, some patients may pay more visits including paying comparatively expensive check-up calls prior to their relocation from the area. These visits could have started when the Scheme commenced. It could also affect the business in the other years prior to the resumption. As the incomes from these businesses were due to the Scheme, the profits from these incomes should have been deducted from the estimated compensation. However, without any information from the Applicant, it is virtually impossible to estimate the actual effects and the amounts involved. In any event, we are using net profit as the basis of calculating any business loss due to the scheme. Any possible income from the businesses due to the scheme will also increase the actual income and net profit figures, with the net effect of reducing the estimated loss or compensation payable to the Applicant.

97. If we compare the total income for the years 1994/95 and 1995/96 with the year 1992/93, we find that the overall increase from 1992/93 to 1994/95 was 23.5% and the overall increase from 1992/93 to 1995/96 was 33.8%. Similarly, the comparison of the figures between 1992/93 and 1994/95, and between 1992/93 and 1995/96 give a comparative figure of +41.0% and +52.8% respectively. These are very consistent with the figures in previous years. We could not but draw the same conclusion as the Respondent that 1993/94 could be just but a particularly good year. The annualized growth of income and net profit is very much distorted by the figures in 1993/94.

98. The Applicant's main argument was that his business had, by the year 1993/94, became so mature that the net income and profit was moving by a different path from previous years. Also, the net profit was increasing at a much faster rate due to the "multiple income effect". We know that the Applicant started his practice in 1985. We accept that it takes some years for a medical business to mature. However, why must it mature just in about 10 years' time? Is it possible that the medical practice has already reached its maturity in early 1990's? We have not been shown any evidence that the business curve of a private medical practice of a GP cum specialist doctor will suddenly have its income increased by about 21% and its net profit by about 50% in one year (for 1993/94), once the business has reached its mature stage.

99. To conclude, the Tribunal decide that with the exception of the year 1993/94 which was a particularly good year, there has been no appreciable variation in profits for the period before the year 1996/97. Therefore, the gross income or net profit figure for the year 1995/96 should be adopted as the base year, for the purpose of assessing the loss in profit (if any), for the subsequent years.

The estimation of the annual growth rate from the base year

100. The Applicant maintained that because he had sustained average annual growth rate of 19.8% for the years from 1988/89 to 1993/94, he was justified in using that figure to project his increase in total gross income (not profit-even Mr. Miu had mixed it up in his submission) for the subsequent years from 1994/95 to 1997/98. The Applicant explained that in a medical practice such as his, additional income would generate a much higher additional net profit. Therefore, he claimed that the gross income but not the profit should be projected. We cannot understand and agree with the logic of this argument.

101. Naturally, because of the variation of the growth rate of the profits over the years under study, different persons could have arrived at different growth rates using different period as a basis period. We have therefore to be very careful in the choice of a growth rate for projection. The adjusted net profits show an annualized growth rate of about 12% from 1988/89 to 1995/96. Alternatively, the figures show an annualized growth rate of about 9.5% from 1988/89 to 1992/93. The year 1992/93 is chosen so that the resulting annualized growth rate is not to be adversely affected by the performance of 1993/94, an exceptionally good year. Similarly, we find that the annualized growth rate from 1992/93 to 1995/96 is about 15%. This reinforces our conclusion, same as that drawn by the Respondent, that the two years preceding 1996/97, the last year before the reversion, are not affected by the resumption, so far as the adjusted actual net profits of the Applicant demonstrate. The adjusted net profits, as we explained earlier on, had in fact, better reflect the actual situation and had been adopted in these calculations.

102. This, incidentally, tie in with the Applicant's claim that his business was in a mature stage in mid 1990's. Also, this is consistent with the general economic climate of Hong Kong when we had the boom towards the 1997 hand-over.

103. For this reason, we decide to use the growth rate of 15% for projecting the net profit of the business from 1995/96 to 1996/97.

104. However, instead of using the same growth rate for the year from 1996/97 to 1997/98 and then from 1997/98 to 1998/99, we decide that we have to have regard to the actual economic performance for these years.

105. We do not accept the submission that the Applicant's business is to a large extent immune from the recession that was affecting Hong Kong to a degree that was unheard of for decades.

106. Using the Respondent's submitted Consumer Pro Index price figures (Bundle 1, page 269A), we decide that a lesser growth percentage of 10% and 5% for the two years following 1996/97 are adequate. These, we note, are almost twice the consumer price indices for the respective years.

What basis for comparison / projection - Accounts or Patient Numbers, Gross Income or Net Profits?

107. We heard evidence that the patient numbers dropped substantially in the years when the scheme's effects began to be felt. This is not supported by the figures in the unaudited accounts. If that is the case, why was the total income actually going upwards in 1994/95 and then in 1995/96? We conclude that the patients number figures given by the Applicant are not reliable.

108. As both parties used the actual accounts as the basis of estimating the loss in business profit, this basis will be adopted by the Tribunal. We decide not to use any other method based on the patient numbers or any quasi method employing a combination of the income and patient numbers. These are purely speculative estimates and are not supported at all by the evidence induced in this hearing.

109. Both parties projected the income following their chosen base year, using their estimated annual growth rate derived from the historical profit figures. Their differences are in the choice of the base year and the estimates of the growth rates. The Respondent submitted that the gross income should be used for projection. Net profit is considered to be not a reliable figure because many items in the expenses are found to be unrelated to the Applicant's business. However, both parties in assessing the profits for the years following the base year, still used the same actual expenses figures as shown in the unaudited accounts with the exception of the drug & medicine expenses (which were assessed at a fixed, 12% of the incomes). If what the Respondent said is correct, their method will give inaccurate projected figures too.

110. In the circumstance, we decide that as the average annual growth rate is derived from the profit figures, the growth rate should be applied to the net profit figures.

Estimation of the Loss of Profit due to the Scheme

111. Using the above parameters, the net project figures for the years 1995/96, 1996/97 and 1997/98 are projected and they are compared with the actual adjusted net profit figures to arrive at the net loss of profit, which shall be compensated by the Respondent. They are set out below:

Projection of new profit

Is the loss after 1998/99 compensatable?

112. The Respondent's submission is simple and convincing. Mr. Miu stated that "the claim for losses beyond March 1999 is precluded by s. 12(c) of the Land Compensation Ordinance, Cap. 124. Claimant's landlord only agreed to grant the Claimant another tenancy for 2 years from 1/4/1997. It is plain that he had no right to an automatic renewal." We agree with this conclusion.

Determination of the compensation amount

To conclude, we determine compensation in the sum of $2,800,000, the bread-down of which is as follows:

(1)	Pre-resumption Loss (from 4/1996 to 3/1997)	$513,572
(2)	Post-resumption Loss (from 4/1997 to 3/1999)	$1,553,859
(3)	Loss on Decoration & Equipment	Nil
(4)	Disturbance on Removal of Stock	$87,500
(5)	Cost of Relocation to New Clinic	$645,185
	(including double overheads)
	Total	$2,800,116
	Rounded to	$2,800,000

113. Leave is reserved to apply for the rate of interest, if not agreed, to be determined by the Tribunal under Section 17 (3A) of the Lands Resumption Ordinance. There will also be an order nisi that the Respondent pay the Applicant's costs on the High Court party to party scale, to be taxed if not agreed; to become absolute unless, within 14 days, application is made to the contrary. Liberty to apply is reserved for any other consequential matters.

Dated this 14th day of January 2000.