CAMSILK CO LTD v. HIGH FASHION CORNER LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF MESNE PROFITS

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1. This assessment is pursuant to a Judgment entered by consent on 9th December, 1989, in favour of the Plaintiff for possession of the suit premises and mesne profits in respect of the premises for one month, being the month of September, 1989.

2. The suit premises are Unit A, on the Ground Floor of the Winner Building, 40 Man Yue Street, Hunghom, Kowloon.

3. Both parties had obtained valuation reports and each called the expert who prepared the report to give evidence.

4. At the end of the assessment hearing, there were several areas of dispute about the appropriate sum of mesne profits for me to resolve. The first of these is as to whether mesne profits should be assessed on the basis of "industrial" or "commercial" use of the suit premises.

"Industrial" or "Commercial" Use

5. Both experts based their valuation on a hypothetical 2 year lease. The Plaintiff's expert had produced his report on an exclusively "commercial" use basis, whereas the Defendant's expert had prepared separate valuations for "commercial" and "industrial" use.

6. The reason for the dispute about the appropriate use is that the ground floor units of the Winner Building are certified by the Government as being for "industrial" use, but in fact they are being used for such "commercial" uses as fashion and boutigue shops, the "commercial" use being of a higher value. It was common ground that, in this situation, the Government could charge a premium upon those premises being used for the higher value "commercial" purposes, and that where any premises are being used for "commercial" purposes without Government approval the owners run the risk of such a premium being imposed or of the ultimate sanction of Government re-possessing the premises. It was submitted on behalf of the Defendant that I must assess mesne profits on the basis of the legal "industrial" use, whereas the Plaintiff's position was that I should recognise the realities of the situation and assess on the basis of "commercial" use. The suit premises were also subject to a condition of the lease that they be used for "industrial" purposes only. Despite the Government restriction and that condition of the lease, the fact is that the Defendant had been using the premises for 5 years as a fashion showroom, i.e. a "commercial" use.

7. I am satisfied that the proper basis of assessment of mesne profits is to arrive at the "ordinary letting value" of the premises: Swordheath Properties v. Tabet [1979] 1 W.L.R., at p.288. Clearly, despite the Government restriction, there are tenants willing to bay a higher rent than would normally be obtained for purely "industrial" use, and either pay the premium or risk its being imposed, and even risk the, as it seems to me on the evidence, unlikely imposition of the ultimate penalty of repossession. I shall base my assessment on "commercial" use, in recognition of the reality of the situation, without in any way condoning the violation of the Government restriction.

The Opposing Valuations

8. The Plaintiff's expert's valuation report gave a market rental value for the suit premises of $187,000 per month exclusive of rates and fees. The Defendant's expert's valuation report gave a rental of $143,000 per month.

9. In cross-examination, the Plaintiff's expert described how he had reached his figure of $187,000 by using the rents of comparable premises. Since preparing that report, the witness had had access to the report of the Defendant's expert, and his final valuation in Court was based upon one of the comparables in that report, and was in the sum of $188,000. The same comparable had been used by the Defendant's expert in reaching his valuation.

10. As the assessment hearing developed, both sides concentrated upon that particular comparable as being the most appropriate of those available, and I shall use it as the basis of my assessment.

11. The comparable premises is in the same block as the suit premises and also on the ground floor. As it happens, the comparable premises is the one to which the Defendant moved after leaving the suit premises. Each expert has taken the rent being paid for the comparable premises and then adjusted it upwards or downwards in respect of what they consider to be the advantages or disadvantages of the 2 premises when compared one with the other. Their respective calculations can be tabulated as follows:

12. The agreed size of the suit premises is 512.34 sq.m. Hence, the Plaintiff's expert's calculation produces a rent of $187,875, which he rounds to $188,000. The Defendant's expert's calculation produces a rent of $143,455, which he rounds to $143,000.

13. Both experts agreed a 5% reduction because the comparable has a better location nearer to a main pedestrian route. Both agreed a reduction because of the smaller size of the comparable, there being a 1% difference between the reductions.

14. I will accept the views of the experts that both these factors do necessitate a reduction in the rent of the suit premises, but I consider the proper reduction to be 5% in each case, since I was not satisfied that there was any reason why the Plaintiff's expert's percentage as to size should be different from the Defendant's expert.

15. So far as frontage is concerned, the Plaintiff's expert considered the suit premises' greater frontage to Man Yue Street was the determining factor in favour of the suit premises, whereas the Defendant's expert considered the frontage of the comparable to be better as it fronts both onto Man Yue Street and to a side scavenging lane. As to layout, the Defendant's expert considered that the comparable's regular diagonal layout gave it the advantage, when considered against other factors, over the uneven layout of the suit premises. The Plaintiff's expert, on the other hand, considered the uneven layout of the suit premises to be the better since more of the floor area was near the frontage of the premises.

16. As to both layout and frontage, I am not persuaded that either premises has the advantage over the other. It seems to me that the important factor common to both premises is their location in a particular business area of Hung Hom. I shall make no adjustment to the rent for either of these factors.

Tenant Inertia

17. It was agreed by the Plaintiff's expert that there is a possible factor of "tenant inertia", i.e. that once a business is located in a particular area, there is a reluctance to move out of that area, and therefore a tenant, the Defendant in this case, would pay more than another potential tenant because of his wish to remain in the same area. DW1, the Defendant's shop manageress, confirmed that her company did wish to remain in the same area, firstly because their customers knew their address, but more importantly because they may have lost staff resident in the area if they had moved out. However, she was not involved in the negotiations for the comparable premises. The Plaintiff's expert said the normal adjustment to be made for tenant inertia is 5%. He maintained, however, that no such adjustment need be made in the present case for 2 reasons: firstly, that proper negotiation technique, not mentioning the tenant's inertia, would overcome this factor, and secondly, that there are many tenants in the area wanting to expand business, so that there were many "special bidders" in the market. If tenant's inertia really had been a factor in the rent agreed for the comparable, the Defendant could have called evidence to that effect. In the absence of such direct evidence on this issue, I shall accept the view of the Plaintiff's expert and make no adjustment for "tenant inertia".

Conclusion

18. I shall adopt the unit rent of the comparable premises as my starting point and reduce it by 10% for the location and size factors agreed as relevant by both experts, and make no further adjustments. My calculation of the appropriate rental figure is, therefore, $345.9 per square metre, less 10% = $311.31 per sq.m. x 512.34 = $159,496, say $159,500, and I assess mesne profits in that sum.

19. I will hear the parties on the question of costs.