NG YUEN KANG t/a WING LEE METAL CO v. SECRETARY FOR TRANSPORT

CACV 4095/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 4095 OF 2001

(ON APPEAL FROM LDMR NO. 27 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This is an appeal from the order of the Lands Tribunal (Deputy District Judge Wong, Presiding Officer and Mr W K Lo, Member) dated 4 December 2001 that the sum of $32,466 be paid by the respondent to the applicant as compensation for disturbance.

Background

3. The applicant has been operating a scrap metal business on a site comprising five lots of land leased to him by five different owners under separate leases. He acquired the business of collecting and trading in scrap metal as well as used electrical appliances in 1995 from his predecessor who had been conducting that business on the site since 1987. On 16 January 1999, part of the site representing just over 20% of the total area was resumed by Government as part of the West Rail (Phase I) Scheme. The land resumed formed part of Lot 766RP which was let to the applicant under a two-year tenancy expiring 31 July 1999.

4. On 16 September 1999, the applicant submitted a claim to the respondent under section 34 of the Railway Ordinance ("the Ordinance") for compensation for loss caused by the resumption. The claim was amended on 9 October 1999 and, so far as is relevant to this appeal, included the following items:

Disturbance
Profit rent	$37,400
Loss of goodwill	$602,000
Reinstatement costs	$114,018
	________
Total	$753,418

The claim for disturbance was rounded up to $754,000. Whilst the respondent acknowledged that some compensation was payable, the applicant's claims were considered excessive. The respondent's calculations as to the compensation due was as follows:

Loss of profit rent	$5,000
Loss of goodwill on partial extinguishments	$0
Reinstatement costs	$17,800
	_______
Total	$22,800

The Tribunal's award

5. The Tribunal's award of $32,466 was made up as follows:

Profit rent	$10,166
Partial loss of goodwill1	$0
Reinstatement cost	$22,300

At the hearing, the applicant sought to add one more item to its claim, namely, post-resumption loss of profit. The Tribunal rejected the claim for want of jurisdiction. Because this item did not feature in the applicant's claim or amended claim, the Tribunal considered that it was not a claim that had been submitted to the respondent pursuant to section 34(1) of the Ordinance with the result that it was not a claim that had been referred to the Tribunal under section 34(7) of the Ordinance. The Tribunal also expressed the view that even if it did have jurisdiction, the applicant had not adduced sufficient evidence to prove that the post-resumption drop in profit had been caused by the resumption.

This appeal

6. The applicant challenged the Tribunal's findings on each of the components of its award as well as its rejection of the applicant's claim for post-resumption loss.

Loss of profit rent

7. 'Profit rent' is explained in these terms in Cruden's Land Compensation and Valuation Law in Hong Kong, 2nd Edn. p. 136:

"... If the actual rent being paid is less than the market rent, then the owner is enjoying a non-market rent. The difference between the market rent and the lower actual rent represents the profit rent. ..."

8. In assessing the loss of profit rent, the Tribunal had first to assess the unit market rent for the land resumed. At the appeal hearing, the applicant no longer sought to challenge the Tribunal's assessment of $15.82 as the appropriate unit market rental rate for Lot 766RP. The applicant also accepted the Tribunal's determination of a capitalisation rate of 15%. The issue between the parties was limited to the appropriate multiplier for profit rent. At the date of resumption, the unexpired residue of the term was 6.5 months under the lease for Lot 766 RP. However, the resumed land was not cleared until 16 June 1999 and the applicant had apparently remained in occupation until that date. In the court below the respondent contended that the profit rent should only be assessed for the period from the date of clearance to the expiration of the lease, a period of 1.5 months and this submission found favour with the Tribunal.

9. Paragraph 1 of Part II of the Schedule to the Ordinance provides that compensation may be claimed for the resumption of land under the Ordinance and the basis upon which such compensation is to be assessed is as if the claim were made under the Lands Resumption Ordinance, Cap. 124 ("the LRO"). Section 10 of the LRO provides as follows:

" (1) The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it ... on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim.

(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 at the date of resumption;

(b) the value of any easement or other right in the land resumed, owned, held or enjoyed by a claimant at the date of resumption;

...

(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;

..."

The Tribunal considered that the issue it had to resolve was whether the loss of profit rent should fall within paragraph (a) or (d) of section 10(2) of the LRO, the only difference being that for paragraph (a), the relevant date of assessment would be the date of resumption so that what has to be taken into account is the 6.5 months left of the tenancy whereas, under paragraph (d), the relevant date of assessment would be the date of removal of the business so that what has to be taken into account is the remaining 1.5 months of the tenancy.

10. So far as the case law is concerned, it has been held that a leasehold interest is an interest in land falling within paragraph (a): see Director of Public Works v Leung Sze [1997] HKLTR 158, Cheung Tai Hee and Others v Director of Lands [1983-85] CPR 497. In Director of Public Works v Dr R Ching and Dr M Feng [1978] HKLTLR 320, the Tribunal accepted the applicant's concession that the claimants were entitled to claim for the value of their land under paragraph (b) of section 10(2) and the award was made on that basis although the Tribunal pointed out (at p. 333) that it might be argued that the claim for the profit rent fell under paragraph (a) rather than (b) of section 10(2). More recently, in Hon Mei Hing trading as Wing Tat Iron and Steel Engineering v the Secretary for Transport, 30 November 2001, unreported, LDMR 19/2000 being a decision on review of the Tribunal, the Tribunal expressed the view that profit rent did not come within the meaning of "land" under section 2 of the LRO and that a leasehold interest did not come within either paragraph (a) or (b) of section 10(2) of the LRO. Rather, it concluded that section 10(2)(d) applied to profit rent.

11. The Tribunal agreed with the decision in Wing Tat and held that section 10(2)(d) was applicable to profit rent. Counsel for the respondent did not seek to uphold the Tribunal's decision on this point. Mr Mak submitted that profit rent fell within section 10(2)(a) of the LRO. That appears to be the correct analysis since a leasehold interest is an interest in land and profit rent (if any) would be the value of that land (in which his leasehold interest subsisted) to the applicant. In my judgment, the Tribunal erred inasmuch as it held that profit rent fell within section 10(2)(d) with the consequence that the balance of the lease to be taken into account was limited to 1.5 months.

12. However, Mr Mak submitted that in assessing the loss or damage suffered by the applicant for which he is to be compensated under section 10(1) of the LRO, that assessment has to be made, as it were, with the benefit of hindsight such that on the facts of this case, it would be on the basis of the value of the land at the date of resumption but with a deferred date of possession to coincide with the actual clearing of the resumed land. Mr Mak argued that it would be unfair to the respondent if it had to pay compensation on the basis of vacant possession as at the date of resumption because that did not in fact happen and that the applicant would otherwise be receiving double compensation inasmuch as he had continued to occupy the land until the date of clearance.

13. As a matter of construction of section 10 of the LRO, there is nothing in the wording (express or implied) that would support such an approach. Possession is nowhere mentioned. Indeed, at the date of resumption, the applicant had no right to remain on the land. It may be that the respondent has some separate claim against the applicant, for example, for damages or mesne profits, but its entitlement has to be established and that would depend on the facts were such a claim to be advanced. That is something separate and independent of the determination the Tribunal has to carry out under the Ordinance by reference to section 10 of the LRO.

14. In my judgment, the valuation under section 10(2)(a) must be made as at the date of resumption. At that date, the lease had another 6.5 months to run. The parties are agreed that if the period to be taken into account at 6.5 months, the appropriate multiplier is 0.4861 which would result in a loss of profit rent of $42,783.

Post-resumption loss of profit

15. On the question of jurisdiction, Mr Mak accepted that the Tribunal did have a jurisdiction to entertain the claim. Once a claim to compensation has been lodged within the time prescribed under the Ordinance, it is capable of being corrected or expanded by amendment. The Tribunal plainly erred in holding that it did not have jurisdiction to entertain the additional item claimed.

16. The applicant's claim was premised on the fall in the assessable profits of the business by comparing the assessable profit figure as shown in the accounts for the year ended 31 March 1999 and 31 March 2000, i.e. a difference of $280,609. Mr Lee who appeared for the plaintiff claimed that that loss was attributable to the resumption. It was not Mr Lee's case but it emerged in the course of the hearing that the computation of assessable profits in the accounts for the years 1998/99 and 1999/00 was an exercise undertaken purely for tax purposes. Assessable profits were computed by adjusting the net profit shown in the accounts to allow for depreciation on a 'pool system' basis. But in arriving at the net profit as shown in the 1998/99 and 1999/00 accounts, depreciation had already been charged: the depreciation figure was $200,639 for each of those years which suggests that it had been made on a straight-line basis. In my view, the relevant figure is, in fact, the difference in the net profit figures for 1998/99 and 1999/00: resumption occurred in January 1999 and the trading year immediately following was 1999/00 i.e. 1 April 1999 to 31 March 2000. The drop in net profit for that period is accordingly $324,408 and not, as was Mr. Lee's case, $280,609.

17. At the hearing before the Tribunal, the applicant gave evidence to the effect that the loss of the resumed area which had been used for storage did affect his business inasmuch as storage space was reduced by more than 20%, storage which had been systematic in the past was no longer possible with items being put "on top of others" or "on the ground like rubbish". The reduction in size also meant that trucks were unable to come in and only one vehicle at any one time could access the site. Despite the increase in turnover after the resumption, profitability in fact decreased. The applicant explained that it was due to a number of factors: there was no facility to sort the goods and to display them, there was difficulty in loading and unloading and the lack of storage space meant that he had to sell goods even when the market price was not right because he did not have the capacity to hold on to the goods and wait for the market to rise before disposing of them as had been his previous practice.

18. In rejecting the applicant's claim on the basis that the burden of proof had not been discharged, the Tribunal was of the view that the expansion of the scale of business after resumption and the doubling of stock value contradicted the applicant's contention that his business had been adversely affected by the resumption. But turnover/stock value on the one hand and profitability on the other are distinct matters. A rise in one does not necessarily mean a rise in the other. I therefore agree with counsel for the applicant that the Tribunal had misdirected itself by equating stock value with profitability.

19. Mr Lee submitted that the applicant had discharged the evidential burden that resumption was the legal and factual cause of the loss in profits and that the loss and damage suffered was of the type of damage reasonably foreseeable as a consequence of the resumption. Mr Mak submitted that the applicant had not done enough in that his evidence could not be translated into the loss sustained. He criticised the applicant's evidence, in particular, as to the absence of evidence to explain an apparent increase in expenditure which had the effect of driving down profits and the impact of the Asian economic downturn in 1997 on the business. Mr Mak argued that the burden was on the applicant to show that the drop in profits was not attributable to these other factors or causes. But it would appear that none of these matters had been put to the applicant in cross-examination. In my view, it was incumbent on the respondent, if it had wanted to challenge the applicant's case that the drop in profits was attributable to the resumption, to put these other matters to the applicant in cross-examination. Having failed to do so, the respondent cannot now criticise the applicant for not dealing with matters said to be possible causes for the drop in profits.

20. In my judgment, the applicant had discharged the evidential burden that there was a drop in profits in the year following the resumption and that such loss was the natural and reasonable consequence of the resumption. Accordingly, the applicant is entitled to post-resumption loss of profit in the sum of $324,408.

Partial extinguishment of goodwill

21. Each of the parties had filed its own expert's reports relating to the heads of claim comprised in the overall claim for compensation made by the applicant. For reasons not readily apparent, despite the differences in approach on many of the issues, the written reports were submitted as evidence but the experts themselves were not required to attend for cross-examination. This is made the more incomprehensible given that the trial lasted no less than eight days.

22. Be that as it may, the valuation of goodwill normally involves a three-stage process:

"Stage 1.	The ascertainment of a figure of historic profit, which is customarily (but not necessarily) taken as the average of the three previous years' trading.
Stage 2.	The adjustment of this historic profit by making certain deductions ...
Stage 3.	The capitalisation of the adjusted annual profit by applying a multiplier in terms of years' purchase. This multiplier is intended to be such as will produce an end-figure representing, as fairly as may be, the value to the claimant of the loss of his ability to derive a future profit out of the premises from which he had been dispossessed."

See Reynolds v Manchester City Council [1981] 257 EG 939 at 941. In the present case, resumption occurred less than four years after the applicant took over the business. The historic profit figure being the average of the three previous years' trading prior to resumption was, in fact, a negative figure. The applicant's accountant therefore discarded that method of ascertaining the annual profit and suggested a "wages and salary costs" approach based on 50% as the rate of return as the measure of potential profitability.

23. The Tribunal rejected this approach and preferred the method suggested by the respondent's expert ("Mr To") for calculating the annual profit:

"Annual Profits Calculation
			From
			22.3.1995 to
Accounting period/year	31.3.1998	31.3.1997	31.3.1996
Year of Profits Tax Assessment	(1997/98)	(1996/97)	(1995/96)
	HK$	HK$	HK$
Accounting profits/(losses) as per unaudited accounts	609,722	(201,733)	(448,039)
Less : Depreciation expense	(200,639)	(141,314)	(68,700)
Adjusted profits/(losses)	409,083	(343,047)	(516,739)
	======	=======	=======
Assigned weight	2	1	N/A

Annual profits are calculated as follows:-

HK$(409,083 x 2 - 343,047 x 1) ÷ (2+1)

= HK$158,373"

===========

Mr To's calculation was done by first discarding the profits/losses for the year 1995/96 on the basis that it represented the initial set-up phase of the applicant's business and was not an appropriate measure of the applicant's business profitability. Because the most recent year is a better indicator for future performance, a weighted average method was adopted, placing more weight on the accounts for the year 1997/98 which was the last full year of assessment prior to the resumption.

24. At the appeal hearing, Mr Lee insisted that it was not the applicant's case that profitability be ascertained through the 'salary and wages' approach. Mr Lee's submissions were confused and confusing. It is no more than common sense that an applicant who seeks to challenge the Tribunal's award of compensation for land resumption can assist the court by making available a short written summary of the amount claimed under each head, showing the appropriate calculations which would reveal the methodology adopted in arriving at the calculation. Had such an exercise been undertaken before the appeal hearing, it would have made the applicant's claim more readily comprehensible. It was only at the court's request that such a written summary was eventually prepared and made available. Mr Lee's approach was to arrive at the historic profit figure by averaging out the assessable profits for 1997/98 and 1998/99.

25. At the hearing below, the accounts for the year ended 31 March 1999 were available. Resumption did not occur until 10 months into that year of accounts. In the circumstances, the accounts for 1998/99 ought to have been taken into account together with those of the two years preceding, i.e. 1997/98 and 1996/97 in arriving at the historic profit figure. Whilst a weighting approach might be appropriate in some circumstances, there would appear to be little justification for adopting that approach when accounts for a third trading year were available and resumption did not occur until well into that third year.

26. The net profit figure shown in the accounts for 1998/1999 was arrived at after charging depreciation but the net profit figures shown in the accounts for 1996/97 and 1997/98 were before depreciation. For this reason, I have used the adjusted profit/loss figure shown in Mr To's calculation for those two years and the net profit figure shown in the accounts for 1998/1999 in calculating the annual profit as follows:

	1996/97	1997/98	1998/99
Net profit/loss	(343,047)	409,083	432,129
Total:	(343,047) + 409,083 + 432,129 = 498,165
Annual profit	498,165 ÷ 3 = 166,055

The annual profit is thus $166,055 rather than the Tribunal's figure of $158,373.

27. So far as Stage 2 deductions are concerned, the Tribunal concluded that it was not necessary to make any deduction from the annual profit for interest on capital or for owners' remuneration but that profit rent should be deducted from the annual profit. It was also the Tribunal's view that the appropriate multiplier (for Stage 3) in terms of the years' purchase should be four and that the proportion of the area of the resumed land be pro-rated to the site to reflect the appropriate percentage of partial loss of goodwill. The calculation is as follows:

Annual profit of the whole site :				166,055
	Less profit rent of the whole site :
		Open market rent
		(2,380m2 x $15.82/m2 x 12 months)	451,819
		actual rent ($17,531 x 12 months)	210,372	241,447
				(75,392	)

Given the negative annual profit figure i.e. a loss, compensation for partial extinguishment of goodwill does not arise.

Re-fencing costs

28. The Tribunal awarded the applicant $17,800 for re-fencing costs. It would appear that the Tribunal adopted the figure put forward by the respondent's expert, Chesterton Petty. The old fence along the resumed area was said to be about 72m long while the new fence was about 54m long. It would appear from page 8 of the "Rule 20 document" dated 9 July 2001 prepared by Chesterton Petty that the figure of $17,800 was the cost of relocating the old fence to the new boundary. In other words, it was made on the assumption that the old fencing would be re-used.

29. At the hearing below, there was clear evidence that the old fencing had been dismantled and removed by West Rail without the knowledge or consent of the applicant. On no footing, therefore, could the old fencing have been reused. In fact, the fencing at the new boundary line was new fencing. Chesterton Petty's estimate was simply irrelevant. It would follow that the Tribunal's award under this head is not sustainable.

30. The applicant relied on an invoice dated 5 August 1999 from Shing Fai Engineering Company for "labour and material" for rebuilding the perimeter fencing. The applicant had given evidence to the effect that that sum of $96,400 had been paid to Shing Fai. The respondent submitted that reliance should not be placed on the applicant's evidence because no documentary evidence such as a bank statement had been adduced to substantiate payment.

31. As I see it, the material question is not whether the sum of $96,400 had been paid to Shing Fai but whether that amount reflected the actual cost for the new fencing. This is because the applicant had himself adduced an appraisal report dated 17 May 1999 from Great East Asia Surveyors and Consultants Co. Ltd which opined that the cost of dismantling and rebuilding the new fencing wall of 54m in length would be $54,000. This appraisal report was obtained some two and a half months prior to the invoice from Shing Fai. There was no evidence to suggest that the appraisal report which, after all, was from the applicant's own expert, was unreliable or wrong. That being so, why would the applicant have commissioned new fencing at what would appear to be an exorbitant price? As no plausible explanation has been proffered for the significant difference in price, in the circumstances, the best that can be done is to award compensation for re-fencing at $54,000, there being no suggestion that the appraisal report was inaccurate in any respect.

Conclusion

32. In summary, the amount of compensation that should have been awarded to the applicant is as follows:

Profit rent	$42,783
Post-resumption loss of profit	$324,408
Partial extinguishment of goodwill	$0
Re-fencing costs	$54,000
	________
Total:	$421,191

I would allow the appeal. The Tribunal's award must be set aside and an award of compensation in the sum of $421,191 be substituted. I would also make an order nisi for costs both here and below in favour of the applicant.

Hon Sakhrani J:

33. I agree.

Hon Rogers VP:

34. There will therefore be an order as set out in paragraph 32.