Hon Mei Hing trading as Wing Tat Iron And Steel Engineering v. The Secretary For Transport

LDMR 19 OF 2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 19 of 2000

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DECISIONS ON REVIEWS

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1. After the Tribunal had delivered its judgment of this case on 24th July 2001, both the Applicant and the Respondent applied to review that judgment.

2. The Applicant's application was made on the following grounds: -

"(1) that the Applicant's interest in the open area of 371.5 sq. m. was only a licence instead of exclusive occupation:

(a) The Applicant has discharged the evidential burden as to the existence of a lease of the whole area and there was no or no sufficient evidence from the Respondent to rebut the presumption of the lease for the whole site.

(b) The Applicant's permitting Luen Cheong Company to pass through the open area did not affect its rights to exclusive possession.

(c) There was ample evidence of an intention from the landlord to grant of a lease to the Applicant which was distinguishable from the case Lucky Shoe Repairing & Key Duplication Centre v Best Sharp Development Ltd. [1988] HDC 286.

(2) That there was a distinction between rent payable under a lease and rental payable under a licence.

(a) There was no evidence that such disparity existed.

(3) That the compensation awarded to the Applicant was apportioned.

(a) Weight should be given to the decision of Chan Kwok Lam v Directors of Buildings and Lands.

(4) That no compensation was payable for contravention of block government lease

(a) Weight should be given to the decision of Melhado and Winfat.

(b) due regard to section 5(1) of the Schedule of the Railways Ordinance.

(5) That no compensation for loss of stock.

(a) The parties have agreed on the value of the stock.

(b) Possession is not only prima facie evidence of ownership but is also evidence of the highest title to the property in question."

3. Applicant's ground of review - on exclusive possession

The main issue is whether the open area of 371.5 sq. m. is the subject-matter of a tenancy between the Applicant and her landlord. The Tribunal's decision is that it was only a licensed area, and not a leased area.

3.1 Mr. Lee, Counsel for the Applicant, submitted that the Tribunal failed to consider all the facts and circumstances which militate the grant of a lease. One of such facts is that the Applicant exercised the right of a landowner, in fencing off the site and in excluding others. But this is not true. Under cross-examination she was asked why she did not construct some fence to enclose her own area. Her answer was "how to enclose because the space outside the house is accessible by people." The evidence adduced reveals that to the north of the open space there is Lot No. 199 on which there are some houses. The Applicant agreed that there was no iron fence along the northern boundary of the open space so that people could just walk to the open space. This is consistent with the sketch plans shown on page 19 and page 230 of the Agreed Bundle (Exhibit No. 1), which show that there is no fence constructed along the northern boundary of the open space. The Applicant also agreed that the people of Luen Cheong Company could walk through the open space.

3.2 The intention of the parties is also relevant in considering whether the open space is a leased area. The tenancy agreement (page 91 of Agreed Bundle) only referred to the leasing of the half-house. When asked by the Respondent's Counsel why she did not make sure that the open space was also covered by the tenancy agreement, her answer was that she had not known about the land resumption then, and had she known about the land resumption she would have stated it clearly. If the parties had intended that the tenancy agreement also covered the open space, it should have been stated there. It would not have been difficult for a few more Chinese characters to be added to the tenancy agreement so that the open space adjacent to the half-house was included in the written tenancy agreement as well.

3.3 That being the situation, the Tribunal could not have erred to find that the open space was not the subject matter of a tenancy.

4. Applicant's ground of review - on calculation of loss of profit rent

In ascertaining the value of the leased area and the attached licensed area, the Tribunal said that: -

“We have got no evidence regarding the possible ratio of the value of the leased area (i.e. the half house in the Site) and the value of the attached licensed area (i.e. the remaining Private Lot and the Government Land). However, we are of the view that the unit value of the leased area should be at least twice the unit value of the licensed area. On this basis, in the absence of better evidence, we attempted to break down the rental and the license value of the existing tenancy and license into two portions: a portion attributable to the leased area and a portion attributable to the licensed area ................"

4.1 Mr. Lee submitted that the Tribunal was wrong to differentiate the rental payable under a lease and the rental payable under a license as there was no evidence that such a disparity exist. But the Tribunal is of the view that there must have been such a disparity. The leased area was a half-house whereas the open space was a mere open space, without any cover erected on it. The landlord must have spent money either in putting up or acquiring the structures. On the other hand, the structures kept away rain, wind and sunlight, thereby providing a better working environment and a good storing place for properties against rain. They also provided security to the properties kept inside the structures against theft. Due to these reasons, it would be very natural and reasonable for a landlord to demand more money (in terms of rent) from the tenant than the licence fee, for the same unit area. The Tribunal is unable to say how much more money would be demanded. In the absence of evidence, the Tribunal holds the view that it would not be unreasonable to say that the unit value of the leased area should be at least twice the unit value of the licensed area.

4.2 For reasons set out in our original judgment, we repeat our estimate of the market rent and licence fee for the whole Site, as follows: -

(a)	Leased area (half-house) 96.5 sq. m. @ $20 per sq.m.	=	$1,930
(a)	Licensed area of the remaining private lot
	371.5 sq. m. @ $10 per sq.m.	=	$3,715
(b)	Licence area of the Government land
	Total area 128.5 sq. m. @ $10 per sq.m.	=	$1,285
	Estimated monthly market rent and licence fee of the Site	=	$6,930

4.3 Based on the Court of Appeal decision in Wong Hoi Nung, the loss of profit rent and licence fee to the Applicant should be calculated on the basis of the total occupational area of the Applicant. Hence, the loss of profit rent and licence fee is calculated as follows: -

	Estimated market rent and licence fee for the Site
	(including Government land)	$6,930 p.m.
Less	Rent reserved under the existing tenancy for the Site (including Government land)	$2,880 p.m.
Monthly profit rent and licence fee		$4,050 p.m.
	X	12
		-----------
Annual profit rent and licence fee		$48,600
Years' purchase for 7 years @ 13%		4.4226
Estimated loss of profit rent and licence fee		$214,938

5. Applicant's ground of review - on apportionment

The Tribunal follows the Court of Appeal decision in Wong Hoi Nung formerly trading as Bailey Trading Company v The Secretary For Transport (CACV 521/2001) ("Wong Hoi Nung"), which is binding on the Tribunal. At page 10 of that judgment, the Court of Appeal said: -

"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 land specified in the notice ...... 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."

Based on this decision, the Tribunal will set aside all the compensations made on apportionment basis, and award full compensations instead.

6. Applicant's ground of review - on loss of construction and site improvement work

Mr. Lee submitted that in failing to take enforcement action, the Government tolerated and acquiesced the existence of the structures, as such structures were openly used over a long period of time. Alternatively the Government by its conduct impliedly waived its right to enforce the Government lease provisions which prohibited the erection of structures by accepting annual rates and taxes from the Applicant throughout its occupation of the site. The Tribunal took the view of the fact that the structures in question had been in use openly for a long time does not necessarily give rise to an inference that the Government had knowledge of such a fact. There is no evidence adduced by the Applicant to show that the Government had such knowledge at the material time, and therefore the issue of acquiescence or waiver of the Applicant's conduct in erecting the structures does not arise.

6.1 Mr. Lee further submitted that the Tribunal erred in failing to follow the decision in Melhado v A. G. and Winfat and in holding that such work was in contravention of the Block Government Lease. The Court of Appeal in Wong Hoi Nung fully considered this issue. The Tribunal's decision in this respect is in line with that decision; therefore the Tribunal's decision cannot be faulted.

6.2 Mr. Lee opined that the Tribunal erred in failing to give due regard to paragraph 5 of the Schedule to the Railways Ordinance which reads as follows: -

"Compensation may be reduced so far as may be just and equitable for any building or part of a building which has been constructed or modified, or on which building works have been carried out, that is a contravention of the Buildings Ordinance (Cap. 123) or a contravention of a Government lease or other instrument under which land built upon is held."

The Tribunal cannot see how this paragraph can be of any assistance to the Applicant.

7. Applicant's ground of review - Loss of stock

The Applicant submitted that " the Tribunal erred in failing to award compensation for the loss of stock as based on the amount as agreed by the parties at $163,280 and based on a joint stock taking exercise. The Tribunal failed to distinguish the legal requirement of establishing ownership and the administrative requirement of proof of ownership."

7.1 In our original judgment, we have already set out the grounds of adopting different stock value figures by both parties. Whilst the Respondent agreed with the Applicant the value of stock at the stock taking exercise, the Respondent did not agreed on the actual quantity of stock. We accept that the Respondent has the right to question the Applicant on the proof of ownership of the stock. We further accept the Respondent's submission that the stock taking exercise was unreliable for the reasons as stated in paragraph 19 of the Tribunal's original judgment. In the absence of any satisfactory proof produced by the Applicant, we decide that the stock figure of $35,220, based on the Applicant's accounts as at 31.3.1999 was an appropriate figure to be used.

8. The Respondent's review application - on the calculation of loss of profit rent

Mr. Lam, Counsel for the Respondent, submitted that 'the Tribunal erred in treating the Applicant's claim for loss of profit rent as part of her claim for loss or damage to her business, under section 10(2)(d) of the Lands Resumption Ordinance Cap. 124 ("the Ordinance"). Loss of profit rent ought instead be the value of Applicant's leasehold interest in the land resumed, compensatable under section 10(2)(a) of the Ordinance.' Secondly, the Respondent submitted that "the Tribunal erred in holding that section 12(d) of the Ordinance had no application in the assessment of profit rent. Section 12(d) ought instead to have formed the basis of assessment of loss of profit rent, viz. loss of profit rent ought to have been assessed on the basis of the amount which the Applicant's leasehold interest in the land resumed might be expected to realize if sold by a willing seller in the open market."

8.1 "Profit rent" is the profit enjoyed by a tenant because the monthly rental paid by him is below that of the market rent. This is the difference between the market rental and the rental actually paid by him. For instance, if the rental paid by him before the resumption of the land was $2,000 per month, whereas the market rent was $2,500, then he obtained a "profit rent" of "$500" ($2,500 - $2,000) per month. Based on this analysis, it is immediately apparent that section 10(2)(a) is not applicable to the realm of "profit rent". Section 10(2)(a) reads: -

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

(a) the value of the land resumed and any buildings erected thereon the date of resumption".

8.2 The issue is: what is meant by "the value of the land resumed". "Land" is defined under section 2 of the Ordinance to mean: -

"Government land of whatever description (whether held under Government lease or other title recognized by the Government), or any part or section thereof, in Hong Kong and the New Territories, and includes buildings erected thereon".

According to section 12(d) of the Ordinance, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.

8.3 Mr. Lam quoted the case of Lee Chun v Director of Lands [1983-85] CPR 426, to support his submission that profit rent is compensatable under section 10(2)(a) of the Ordinance, i.e. it is the value of the Applicant's leasehold interest on the land resumed at the date of resumption. The relevant part of the judgment in Lee Chun dealing with the Applicant's "leasehold interest" can be found on page 437 to page 440 of that judgment. For the present purpose, the Tribunal reproduces the extracts of that part of the judgment as follows: -

'...... The applicant is also entitled to compensation for the effect the resumption has on his interest in the land upon which he has been carrying on his business as a fish pond farmer. We will consider his present claim under these heads: -

(1) The value of the applicant's leasehold interest extinguished by the resumption.

(2) The loss of capital investment.

(3) The loss due to disturbance.

Dealing first with the resumption of the appellant's leasehold interest the measure of the value of that interest, in accordance with s. 12(d) of the Ordinance, is the amount which that interest: "...... if sold in the open market might be expected to realise"

............................................

These adjustments reduce the operating expenses to $1,033 per dau chung or a total of about $32,130 p.a. This sum has to be apportioned for the resumed land comprising 4,040 sq m as follows:

$32,130 x 4,040/21,100 equals $6,150

The annual expenses for the resumed land are therefore $6,150. The net annual income produced by the resumed land is $39,600 made up as follows:

Annual net revenue	45,750
Less annual operating expenses	6,150
Annual net income	39,600

Rounding up the sum of $39,600 to $40,000, we find that the value of the applicant's leasehold interest in the resumed land is the price attributable to a net income of $40,000 p.a. which it could reasonably be expected to continue for the unexpired residue of the leasehold interests from the date of resumption.'

(Emphasis added)

8.4 The Tribunal in Lee Chun simply applied section 12(d) of the Ordinance without explaining why. It was not dealing with the value of the leasehold interest per se under section 12(d). It was in fact dealing with "the value of the business" on the applicant's leasehold interest. If it was merely to ascertain the value of the leasehold interest, it should not have resorted to ascertaining the net income of the fist pond business. This case is not the authority for applying section 10(2)(a) in the realm of "profit rent".

8.5 Under the terms of a tenancy/lease, both the landlord and the tenant have their respective rights and obligations. One of the obligations of the tenant is to pay to his landlord the monthly rentals. The obligation to pay the monthly rental stems from the tenancy/lease, but it is not the tenancy/lease itself. The profit rent he enjoys by paying a rental lower than the market rental is not the tenancy/lease itself. Therefore "profit rent" does not come within the meaning of "land" under section 2 of the Ordinance.

8.6 There may be various interests or rights enjoyed by various people at the date of resumption, and a tenancy/a leasehold interest is one of them. Such interests or rights only attach to the land, but they are not the land itself. Thus under section 10(2)(a) of the Ordinance, the Legislature legislated for compensation payable for "the value of the land" resumed whereas under section 10(2)(b) it legislated for compensation payable for "the value of any easement or other right" in the land resumed. Sections 6 and 8 refer to "estate or interest in the land". This shows that "land" and "estate or interest in the land" are two different things. In the present case, the Applicant only had a leasehold interest in the land. Therefore sections 10(2)(a) and 12(d) do not apply.

8.7 If section 12(d) is applicable, and the leasehold interest is sold in the open market, a sum representing the open market value will be obtained. But how could that figure reflect the fact that the tenant was enjoying a cheaper rent? Section 12(d) simply does not deal with this situation.

8.8 On the other hand section 10(2)(d) applies to this situation. The Applicant acquired the tenancy for the purpose of running the iron and steel business. It is an integral part of the business because without the tenancy the business simply cannot survive. On the reverse, if there had not been such business, the tenancy would not have been created.

8.9 The profit of the business is what will be left behind after deducting the total income from the total expenditure. No doubt the monthly rental forms part of the total expenditure. This is reflected in the Applicant's tax returns to the Inland Revenue Department for the year 1996/1997, 1997/1998, 1998/1999 where the business expenses include the rentals of the shop and the rental deposit (pages 35, 39, 45 of the Agreed Bundle).

8.10 In conclusion, we hold that section 10(2)(d) and not section 12(d) applies to the realm of profit rent, and therefore the Tribunal's judgment in this respect should not be disturbed.

8.11 Mr. Lam submitted that it would not be right to treat the "rent" of $2,880 paid by the Applicant as covering also the government land G1 and G2. It must be against public policy to "recognize" the purported grant of a licence over government land. However, in view of the decision of Wong Hoi Nung, a case involving compensation to a business covering private and government land, this argument simply cannot stand. On the cross appeal on the issue of profit rent, the Court of Appeal had this to say:-

"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.

............................................

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."

8.12 In the present case the Applicant had no knowledge at any material time that parts of the licensed area, namely G1 and G2, were government land. Therefore the Tribunal was entitled to find that the licence fee was for the whole of the area (which included the government land G1 and G2) licensed to him by her landlord.

8.13 Mr. Lam also submitted that "in any event, the adoption of a multiplier of 7 years (before discount) was too high in the circumstances of the case." because for a periodic tenancy, the adoption of a term of years of 7 is unprecedented.

8.14 We decide that the period for the capitalization of profit rent and licence fee obviously depend on the likelihood of duration of the business on the premises, in the absence of the resumption. We have in our judgment determined this to be 7 years. This issue will be covered in paragraph 10 of this review judgment below.

8.15 As set out in paragraph 4.3, the estimated loss of profit rent and licence fee is revised to be $214,938.

9. Respondent's review application - on loss of goodwill

Regarding our judgment on the loss of goodwill, Mr. Lam submitted that "the Tribunal's adoption of a multiplier of 7 years (before capitalization) was too high and of a discount rate of 20% was too low in view of all the circumstances of the cases particularly matters mentioned in paragraphs 15.7 and 15.8 of the Judgment."

9.1 In Callwin International Electric Co. Ltd. & Anor v. Director of Engineering Development [1984] HKC 556, the Tribunal stated that: -

"There are several methods of valuing goodwill and each has its advantages and disadvantages. Some methods are more appropriate for certain cases than others. The selection of a particular method will often depend on the factual situation. At times it may be helpful to use more than one method so that each may be a check on the goodwill figure arrived at by the other. This is a complex area of valuation."

9.2 The Tribunal also observed in the same page of the judgment of Callwin that: -

"Any assessment of goodwill includes an element of arbitrariness for it involves projections into the future often on the basis of minimal information of even existing factors. The employment of scientific methods should tend to improve the soundness of the ultimate assessment. However, in most cases it will merely narrow the range within which a realistic assessment may be made. In making a final assessment within that range experience and at times even intuition will be of importance."

9.3 In the present case, it has been accepted by both parties that the method of assessing the goodwill of the Applicant's business affected by the resumption is to multiply the agreed annual profit of the business by an appropriate years' purchase. The Applicant's expert suggested a multiplier of 11.11 arrived at by applying a discount rate of 9% in perpetuity. On the other hand, the Respondent's expert adopted a multiplier of 2, based on the years' purchase for 5 years at a capitalization rate of 43%, or 1.94. In our judgment given on 24th July, 2001, we decided that the capitalization period should be 7 years whilst for the discount rate, in the absence of better evidence, a rate of 20% be adopted. The Respondent in the review application submitted that the capitalization rate of 20% is too low for reason set out below: -

"(a) Capitalisation rate is determined by adding a discount rate (assigned on the basis of the perceived risk of the business) to a risk free rate. Shun Fung Ironworks Ltd. v. Director of Buildings and Lands [1995] 2 HKLR 311, 387 and Chum Hon Chi v. Director of Lands [1997] 3 HKC 421

(b) In the present case, the discount rate ought to be in the region of at least 26 to 30%

Shun Fung (supra. 388)

(c) If a risk free rate of, say 6% is added, the capitalization rate ought to be at least 32%."

9.4 The principles to be applied in arriving at a discount rate in the assessment of goodwill are to be found in the Privy Council's decision in Shun Fung. It was held (at 132B-E) that: -

" [t]he present value of a stream of profits expected over a period of years depends essentially on three factors: the amount of the profits, the dates when they are expected to materialize, and the discount rate applied. There was no issue before the Board on the first two of these items. ... The dispute concerned the third item: the discount rate.

In this calculation the discount rate, or capitalization rate, comprises the rate at which an amount of money payable at a future date should be reduced to arrive at its present value. Its present value is the price a person would pay now for the right or prospect of receiving the amount of money in question at the future date. Three ingredients can be identified in the discount rate. One is the rate of return the potential purchaser would expect on his money, assuming that the payment to him at the future date is free of risk. A second ingredient is the allowance the potential purchaser would make because of the likely impact of inflation. He is buying today, in today's currency, the right to be paid at a future date an amount of money which, when paid, will be paid in tomorrow's depreciated currency. The third ingredient is the risk factor. The greater the risk that the purchaser may not receive in due course the future payments he is buying, the higher the rate of return he will require. It is around this third factor that the dispute before the Board centred."

(Emphasis added)

9.5 In Shun Fung, the parties agreed on the formula for converting the nominal rate of return to a real rate based on an agreed inflation rate. The Claimant used a real discount rate of 12-13% when calculating the value of future profits on an extinguishments basis whilst the Government on the other hand adopted a real discount rate of 28%. The Tribunal in its judgment dated 29 June 1992 fixed the real discount rate at 25%. There was nothing before the Judicial Committee to cause it to disturb the Tribunal's conclusions on this issue of discount rate.

9.6 Despite the principles set out by Shun Fung, the problem of assessment of goodwill for compensation cases in Hong Kong such as the present case has remained more or less unchanged because the difficulties of finding the appropriate discount rate (especially the third component, the so-called risk factor) persists.

9.7 In the review application, Mr. Lam for the Respondent submitted that the rate to discount the risk factor ought to be "in the region of at least 26 to 30%". This was based on the Schilt's categorization of risk premium table adduced in the Land Tribunal's hearing of Shun Fung. It was Mr. Lam's submission that in the present case, the business should fall within Category 5 of Schilt's table where the risk premium was stated as 26-30%. Therefore, after adding an estimated risk free rate of 6% to this suggested risk premium range, the minimum capitalization rate for the loss of profit for the Applicant should at least be 32%.

9.8 However, we have much reservations on the above computation suggested by the Respondent. First, we note that even when the Lands Tribunal in finding that the Schilt's table to be helpful in the determination of the appropriate capitalization rate for Shun Fung regarded the method as a somewhat crude method. Also, we understood from the Lands Tribunal judgment of Shun Fung that the hearing of that case in the Tribunal spanned between 1988 to 1992. Whilst we do not know the date of publication of the Schilt's table adduced by the expert in Shun Fung, we believe that it was most probably published not earlier than the mid 1980's and the business data that it was based was in the early 1980's, at the earliest. Of course, the business that the table attempted to categorize are based on locations very different from those in Hong Kong. Also, the categorization of business may not be applicable to Hong Kong situation as well. Under the circumstances, whilst we also agree that in the absence of any evidence, the Schilt's table may provide a guide but we do not think that it would be right for the Respondent in the present case to ask the Tribunal to follow strictly the categorization of the business and the corresponding risk premium rate as shown in the table extracted in the Land's Tribunal's judgement of Shun Fung.

9.9 Furthermore, even based on the Schilt's table as referred to by the Respondent, we do not agree with the Respondent that the Applicant's business be considered as Category 5. We rather consider that Category 4, being for "small businesses that depend upon the special skill of one or two people" is a more appropriate category for the Applicant's business. This category suggests a risk premium rate of 21-25%

9.10 The parties, in advancing their cases have cited the Y.P. adopted by the Courts over the years. They are summed up below: -

(1) Shun Fung - 25% as detailed above;

(2) Chum Hon Chi v. Director of Lands [1997] 3 HKC 421 in which the Court of Appeal decides that: -

"In my judgment, the Tribunal's methodology can plainly be faulted in that it failed to apply the Shun Fung principles in determining the discount rate. However, it does not necessarily follow that the appeal must be allowed. The burden is on the Appellant to show that a 9% discount rate was plainly wrong."

As regards the estimation of the real return (i.e. after allowing for inflation) and the discount rate, the Court further said: -

"But as appears from the judgment of Litton V-P in Chan Pui Ki v. Leung On [1966] 2 HKLR 416 D-F, upon the evidence before the court in that case, the average return from a lump sum invested in the average pension fund covered by the surveys conducted by Wyatt Co (HK) Ltd. of retirement fund portfolios from 1983 to 1984 was 15.9%. Inflation between 1982 and 1994 as measured by the consumer price index averaged 8/1% per annum. Thus the "real" return for the period 1982-1994 was 7.8%.... In my judgment, 7.8% represents a realistic and statistically supported return and for that reason is to be preferred to "assumed" real returns of 4% to 5%......It is clear from Shun Fung that to arrive at the discount rate, the real return has to be adjusted to take into account the risk factor. As noted above, in Shun Fung itself, the debate concerning the real discount rate ranged from 12% to 28% based on an agreed historic average inflation rate of 7.1%. The risk factor thus fell within the range of say 5% to 21%."

(3) Chan Kwok Lam v. Director of Buldings and Lands [1986-88] CPR 447 in which the Lands Tribunal decided to adopt a YP of 2 based on a yield or capitalization rate of 33 1/3 after taking into account the somewhat erratic nature of the business. Otherwise, the Tribunal opined that a lower rate of 20% advocated by the Applicant's expert might be appropriate: -

"Whilst it might be shown that YP's adopted by the courts have varied little over the years it would be wrong to rely too heavily in previous cases. Those cases have been decided on their own merits and the circumstances prevailing at the time they were decided. As well as the different general interest rate levels, which may again may or may not influence the expected yield, the type and nature of the compare businesses may well be totally different. All of these features, unfortunately, to some extent, are relevant to the authorities cited by Mr. Pang. Having said that, his allowance of 20% may have been appropriate had this single proprietor business been producing a steady income."

9.11 In the present case, we find that insufficient evidence pertinent to the three ingredients that make up the capitalization rate has been adduced to assist the Tribunal in the finding of an appropriate discount or capitalization rate to be used for the valuation of the loss of profit. However, we are aware that the inflation rate in January 1999, the date of reversion of the Applicant's premises, should be much lower than that in the 1980's.

9.12 Therefore, having regard to the rates adopted in Shun Fung and Chan Kwok Lam, the judgment of Chum Hon-Chi and in the absence of more and better evidence, we decide to maintain our original decision of using a capitalization rate of 20%, even it may be slightly to the benefit of the Applicant.

10. Respondent's review application - discounting period in the valuation of loss of profit (goodwill)

The Respondent submitted that the adoption by the Tribunal of a term of years 7 for loss of goodwill was too high.

10.1 We have set out in our original judgment the reasons for adopting 7 years in our valuation. We have reviewed those reasons and the justification put forward by the Respondent for the shorter 5 years period.

10.2 We find that there is no evidence before us that either the Applicant's husband and the Applicant herself were in bad health. Having regard to the dependence of the Applicant on her husband in the running of the business, the steady though modest profitability of the business, the average life expectancies of men and women in Hong Kong, and the fact that the Applicant's husband has been working in this type of 'blue collar' work for a long period of time, we still consider it reasonable to adopt a period of 7 years in the valuation of the goodwill for the business.

10.3 The Applicant and the Applicant's husband were 58 and 64 respectively in 2001. So, at the year of resumption (1999), they were about 56 and 62 respectively. Therefore, it is our view that without the resumption, it is most probable that they will continue the periodic tenancies and the running of the business on the premises for about 7 years, by which time they will be about 63 and 69 respectively. They would most likely cease business by that time, mainly because the husband will be nearing 70. Besides, it is our view that working further appears to be very demanding, especially for the Applicant's husband.

10.4 All in all, we stick to our original decision that it would be reasonable in the circumstances to adopt a 7-years period in the valuation of goodwill on the basis of total extinguishment of the business.

10.5 Therefore, after revising the assessed profit rent and licence fee, the loss of goodwill is re-assessed as follows: -

Agreed annual profit of the business		$236,814
Less
Profit rent and licence fee (see para. 4.3)	$48,600
Interest on capital ($30,000 as Shown in the accounts @ 5.82%)	$1,746	$50,346
Adjusted annual profit		$186,468
Years Purchase 7 years at 20%	x	3.6046
Loss of goodwill		$672,143

11. Summary of compensation payable to the Applicant upon review

Following the Court of Appeal decision in Wong Hoi Nang, the following compensation amounts are therefore payable to the Applicant: -

(a)	Profit rent and licence fees	$214,938
(b)	Goodwill	$672,143
(c)	Loss of construction/site improvement work	Nil
(d)	Loss of forced sale of plant and machinery,and furniture and fixtures	$127,746
(e)	Loss on forced sale of stock	$35,220
		$1,050,047
	rounded to	$1,050,000

12. Order

1. The total compensation paid by the Respondent to the Applicant in the sum of $846,000 be varied to $1,050,000;

2. The issue relating to costs of this review be reserved for argument on a date to be fixed by the parties.