LIU CHIU t/a YEENA FASHION CENTRE v. DIRECTOR OF LANDS

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 13 of 1995

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JUDGMENT

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          The Applicant is the sole proprietor of a boutique known as Yeena Fashion Centre ("the business") at rented premises situated at No. 17, Ground Floor and Mezzanine Floor, Ma Tau Kok Road, Ma Tau Kok ("the subject premises"). The subject premises were resumed by the Crown pursuant to section 3 of the Crown Lands Resumption Ordinance, Cap. 124 ("the Ordinance") under a Notice of Resumption dated 26th June 1992, published in Volume CXXXIV Hong Kong Government Gazette on 3rd July 1992 as G.N. No. 2264 of 1992 and reverted to the Crown on 3rd October, 1992. Nonetheless, the Applicant was allowed to carry on the business at the subject premises rent free until April 1994 when the Applicant was evicted.

2. Despite advice given by several members of the Tribunal at various stages, the Applicant decided not to engage legal representatives or valuers of any speciality to help him to prepare his case. The Tribunal has also repeatedly emphasized in open court that the burden was on the Applicant to prove each and every element of his claim. During the trial, the Applicant was given ample opportunities to adduce more evidence, if any, and to canvass more effectively for his case. Whilst additional materials, more effective advocacy and expert assistance for the Applicant would be desirable, and the same can be said for all cases arising from the same resumption exercise that the Tribunal has beard so far, the Tribunal is satisfied that there are sufficient facts and materials for the Tribunal to determine the claim.

3. It is common ground that the Applicant is entitled to compensation for business loss calculated under section 10(2)(d) of the Ordinance as -

"the amount of loss or damage to a business conducted by a claimant at the date of resumption on the land resumed or in any building erected thereon, due to the removal of the business from that land or building as a result of resumption."

In practical terms, the Applicant is entitled to reimbursement that would restore him to the business position where it would be had there been no resumption. In this regard, he claims the following business losses:-

4. Miss Fung, counsel for the Respondent, contends that compensation should be assessed on the basis of re-location of the business. And, the quantum for each item claimed is disputed. The Respondent's assessment of the losses suffered by the Applicant, assuming compensation is payable, has been revised several times during the course of these proceedings. By way of final submission, counsel for the Respondent contends that the compensation due to the Applicant should be as follows:-

          (a) If on total extinguishment basis

          (b) If on relocation of business basis

5. Before we proceed further, we should point out that the subject premises were part of a major resumption of more than one hundred properties for the Hong Kong Housing Society's Urban Lmprovement Scheme ("the Scheme"). In addition to Ma Tau Kok Road, the Scheme site extended to Sui Lun Street, Wang Cheung Street, Pak Tai Street, San Shan Road and Pau Chung Street in Ma Tau Kok. The present case is one of nearly thirty applications by business operators affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement. Whilst each case must be decided on its own facts, an understanding of the background circumstances helps us to put this claim in the proper context and explain the differences between the parties on specific issues. Having considered and otherwise dealt with a number of these claims, examined photographs of the area in general and of the individual streets and heard quite a few estate surveyors and witnesses involved, we believe we now have a fairly good idea of the locality and the resumption process.

6. The area affected by the scheme was essentially an old residential area. Most buildings were constructed immediately after the Second World War. All the buildings we have had to consider were not higher than six storeys and did not have a lift. The upper floors were mainly tenement flats with perhaps the odd business or other trade. We have heard evidence that some of the buildings were issued with occupation permits for "domestic use" from the ground floor upwards. But nearly all ground floor units in the area were used as shops, restaurants or workshops. Many of these enterprises and over-grown small operations were run by families who, as can be expected, are poor managers; business takings went straight to meeting family, personal and trading expenses. Few, if any, had an accounting system; single entry records at best. And because it was a run down area, landlords and local residents were more tolerant of environmental, building and land use abuse. Most, if not all, ground floor units in the area had some sort of cockloft and an open yard which might be covered and protected from the elements by some overhead structure. Retail and food businesses in the area would hardly be able to find elsewhere with comparable cheap rent or purchase price and yet more storage or useful space. Moreover, the area was also partially industrial, with a significant number of factory buildings right outside the fringes of the plots affected by the Scheme. This means that the clientele for retailers and food businesses were not limited to local residents, but also workers who filled the streets in the area during lunch hour and for a period before and after work.

7. The Scheme was actually in the winds well before the resumption notices were issued in July 1992. Earlier, the Housing Society had begun to buy out some of the landlords and tenants in the area. After the resumption was gazetted in July 1992, the intention clearly was all the owners, occupiers and business operators would clear out in October 1992. Some did. Apparently, the land lords and tenants on the upper floors were dealt with first. The business operators on the ground level were given several extensions of time for moving out. Eviction was postponed first to the end of 1992, then to the beginning of 1993, then to September 1993 and eventually to April 1994. During all this time, the tenants were allowed to occupy and business operators permitted to trade (if there was still business) without having to pay rent. At first, claims for compensation were handled by the staff of the Housing Society which had a field office in situ. Later, processing of these claims was taken over by the Lands Department. It was in September 1993 that the Housing Society and the Lands Department sent staff to the ground floor businesses to take stock and inventory with the view to clearing them out then. Many of the claimants say that they handed over original documents and papers substantiating their claims to the Housing Society or the Lands Department during this period, hence they no longer have all the proof for their claims now. There is no doubt that a number of representatives of those affected by the Scheme had several meetings with officials of the Lands Department. They also sought help or mediation from local politicians and OMELCO. There were definitely letters passing between the parties, including offers of ex-gratia compensation. Some of the disputes were settled. Some claimants allege that they were given the impression that if they wanted to preserve their right to full compensation they had to cease trading, auction off their stock and not continue business in another locality. Others say that the ex-gratia payments they received on account from the Government were not enough to cover the costs of setting up elsewhere and the Government refused to lend them money, so that they were unable to re-locate. In any event, even if they could move to elsewhere, with higher rent, more restricted land use, different clientele and perhaps difficulties with labour supply, business would not be the same. But we hear from counsel for the Respondent that the Housing Society and the Lands Department had not advised the claimants to close their businesses altogether. We think there may be some misunderstanding there. In many cases, counsel for the Respondent says, the Housing Society and the Lands Department do not have the documents which the claimants allege they have handed over. We cannot determine who is right or wrong in fact in this respect; but. during the change over from a Housing Society operation to Lands Department processing, the possibility of some bureaucratic mix-up cannot be ruled out. In any event, it is pointless to argue and ponder over irretrievable papers now,

8. It was in April 1994 that the authorities managed to evict the remaining affected ones. There was a furore at the time, with angry words uttered, force displayed and the attention of the mass media attracted. The claims we have to deal with are mainly concerned with those who moved out in April 1994. Probably due to the confusion and urgency at the time to clear the remaining business operators, their stock and inventory were not checked again. Some operators were able to remove their stock as they planned, some were locked out first and then allowed to retrieve their possessions. Some claimants say that their business books and records were left and lost in the resumed premises as they left in a hurry or were forced out. Upon eviction, most of the business operators had their stock, plant and machinery transported to a place in the New Territories and auctioned off by one common auctioneer. It is now undisputed fact that there is no reliable inventory of the actual stock, plant and machinery sold by auction for each claimant. This is a problem we encounter in virtually every case before us.

9. We now turn to the issues in this particular case.

Total Extinguishment

10. Both counsel and expert for the Respondent say that the business could have easily relocated as long as suitable shop premises were found. Miss Fung also refers to the fact that the Applicant operated another shop in the same business name at Ground Floor, Cheung Ning Street between April 1990 and March 1992. The Applicant, on the other hand, alleges that the Lands Department had agreed he should close his business.

11. The question of relocation has in fact been discussed in earlier related cases. We thought we have explained our approach convincingly. However, since the same issue is raised again, in deference to counsel's submission we feel obliged to respond again with the required attention. In Director of Buildings and Lands v. Shun Fung Ironworks Ltd. [1995] 1 HKC 417, some guidance can be found in the Board's advice at p.428 as follows:-

"It all depends on how a reasonable businessman, using his own money, would behave in the circumstances. Such a case, however, the tribunal or court will need to scrutinize the relocation claim with care, to see whether a reasonable businessman with adequate funds of his own might incur the expenditure. This is particularly so when, as in the case of Shun Fung, compensation assessed on a relocation basis would greatly exceed the amount of compensation payable on an extinguishment basis. The greater the disparity, the more closely the claim should be examined, because the less likely would it be that a reasonable businessman would behave in this way. Compensation is not intended to provide a means whereby a dispossessed owner can finance a business venture which, were he using his own money, he would not countenance."

12. We have pointed out in other cases that goodwill is attributable to both personality and location. In some cases, the element of location may be far more important than personality. The most charming proprietor would not be able to generate sufficient profitable business at a location where there is no or lesser demand for the goods or services the business provides. Once it re-locates, a business is in another catchment area where even if the same kind of clientele is there the competition scenario may be quite different. Moreover, the initial costs of setting up elsewhere cannot be ignored. Resumption albeit for the public good is a tortious interference with the rights and interests of legitimate property owners and business operators. It is trite law that a tortfeaser is obliged to compensate even if the victim happens to have a thin skull. It would not be fair to expect every business to have standby financial resources for re-location at any time the authorities see fit to resume the site on which the business was operating. Nor can we assume that an operator may readily find a similar undertaking in another area to take over. It appears implicit in the Privy Council's advice that a businessman should not be expected to relocate if he does not have adequate funds of his own. We also consider it a truism in life that the operator of a profitable business is most unlikely to fold his business before giving careful consideration to and making serious efforts for relocation so as to preserve the pride embodied in the business establishment and to continue to reap the profits of an established undertaking.

13. We do not think relocation is as simple as merely finding alternative accommodation. The Applicant started another shop with the same business name and business registration at Ground Floor, Cheung Ning Street in April 1990 but had to close it in March 1992. We do not know exactly why he closed it. May be the landlord refused to renew the tenancy. May be the Applicant discovered that he was not making enough profits. In our view, the closure of the branch business tends to show that operating a fashion shop requires more than just shop space. Having considered all the evidence, and taking into account all factors and circumstances, we conclude that the Applicant cannot be reasonably expected to continue the business elsewhere. In the premises, we treat this case as one for total extinguishment.

Goodwill

14. A classic definition of business goodwill can be found in the formidable work - Land Compensation and Valuation Law in Hong Kong by H.H. J2udge Cruden at pp. 79-80 as follows:-

"Goodwill is the value of that element of profitability which arises from either one of two factors or a combination of both. Those factors are first, the specific business connections in respect of the resumed premises and secondly, those due to the personality of the owner. In some cases a resumption may only affect or extinguish the former species of goodwill. The personal goodwill of the owner may only be partially affected or not affected at all if the business can promptly be relocated to a new suitable site." (Page 16 of the judgment in Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984).

This definition must be properly understood. Whilst goodwill is often valued by reference to profits, it is profitability on account of shop location and personal connection that is the true measure of goodwill. In Director of Buildings and Lands v. Shun Fung Ironworks Ltd. [1995] 1 HKC 417, the Judicial Committee of the Privy Council at page 436 of the Board's advice further observed that:-

"However, this must not lead the tribunal into the error of equating the amount of a claimant's loss with the price he could obtain if he sought to sell the future profit stream to an outside commercial investor. Even on the willing seller basis, a prudent landowner running his own business might be prepared to pay more to keep his land and business and the expected profits than would an outside investor to acquire them. He might be prepared to accept a lower rate of return than an outsider who has no personal links in the business. In appropriate circumstances a tribunal may properly recognize this and make a modest allowance accordingly."

15. In Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984, at page 17, 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."

The Tribunal also observed 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." (Page 16 of the judgment and quoted in Land Compensation and Valuation Law in Hong Kong by H.H. Judge Cruden at page 81.)

16. The method we adopt is one that has been well established. First, we ascertain the normal profit trends of the business before resumption. Conceivably, the reported profits of the business, the rental value of the premises at which the business is conducted or the wages and salary costs of the business may be used as basis for this purpose because each of them may somewhat relate to the profitability of the business. Once the annual profit trends of the business has been arrived at, it is projected by multiplication to the anticipated future life of the business, had the business premises not been resumed. Then the product is discounted to take into account the fact that the business operator will have capitalized profits made immediately available for investment or other use.

17. The Applicant calculates his real annual profits on the basis of an estimated turnover at $3.6 million per annum. After deducting cost and expenses, he says he netted at least $600,000 each year. Using a multiplier of 3, he arrives at $1.8 million for loss of goodwill. There are no documents or accounts to support the Applicant's valuation. But we have the Notices of Assessment for Profits for the year 1989-90 which shows profits for that year as $115,198, $128,781 for the year 1990-91 and $138,872 for the year 1991-92. The Applicant also says that he had four salespersons working for him, each paid $7,000 to $9,000 per month with a 13th month year end bonus. A witness for the Respondent confirms that the Applicant did have salespersons. We also know that the rent for the subject premises immediately before resumption was $30,500 per month.

18. Mr. Clarke, expert for the Respondent, suggests at pp. 5-8 of his report Exhibit R1 that valuation be based on (1) the amount agreed as compensation for loss of goodwill for another business of the same type also affected by the Scheme or, (2) the average wage level of a salaried employee increased by 40% or, (3) an annual profit figure of $130,000. In all three cases, Mr. Clarke would use a multiplier of 3. We have no difficulty in rejecting the first method suggested by Mr. Clarke. There may be vast differences between businesses of the same type. For certain Mr. Clarke does not have information relating to the range and class of goods the "comparable" was selling. As to calculating goodwill by the average salary level of a statistical employee, we have repeated in earlier cases that this approach is not fair and appropriate where a business has several or more employees. We still hold this view. Since we have no reason to doubt that the Applicant had 4 salespersons, using the mean salary of $8,000 per month, our calculation by the wages and salary cost method would produce $8,000 x 4 x 13 x 1.2 = $499,200 per annum.

19. Alternatively, as done in earlier related cases, we cross check by reference to the rent payable for the subject premises. It is generally assumed that the profit of a normal, thriving business is at least equal to the rental value of the premises at which it is conducted. Here, there can be little doubt that the business had been making profits. According to our calculation, the full market rent for the subject premises should be $40,000. per month. Using this figure, annual profits should be $40,000 x 12 = $480,000. This very nearly matches the result obtained by wages and salary cost method. In the circumstances, we take the round figure of $500,000 as annual profit trends. Since the Applicant's tenancy had less than one year to run at the time of resumption with no option for renewal, we would adopt a multiplier of two.

20. Accordingly, we determine the goodwill of the business at $0.5 million x 2 = $1 million.

Profit Rent

21. Before the profit rent can be calculated, the full market rent of the subject premises has to be ascertained. The Applicant relies on the rent for Shop C on the Ground Floor of 54 Pak Tai Street and contends that the market rent for the subject premises should be at $114,000 per month. In WAN Yiu-ling and TSUI Tan-fai trading as Lucky Money v. Director of Lands, CLR No. 9 of 1995, we have found this comparable unacceptable because it is much smaller in size. Mr. Clarke for the Respondent supports a unit rate of $600 per square metre justified by reference to 4 comparables, i.e. the Ground Floor shops of Nos. 3,33 and 59 Ma Tau Kok Road and No 99 Pak Tai Street. See pp. 13-14 of Exhibit R1. After examining the rents of those shops in similar size range, i.e. Nos. 3 and 33 Ma Tau Kok Road, Ground Floor, we conclude that the ground floor unit rate of $600 per square metre suggested by Mr. Clarke is reasonable.

22. Accordingly, we determine profit rent at $57,000 calculated as follows:-

Trading Stock

23. The business had a huge stock of clothing items. In late September 1993, officers of the Lands Department went to the subject premises and made a record of the stock held by the business at that time. There are altogether 112 items of them in all, see the inventory list Exhibit A2. The parties do not dispute the number of items. They argue over the value of each item. The Applicant puts the market value of these at $1,552,219 as shown in Exhibit A3. The Applicant says, without support by any document or accounts, he obtained an estimated $200,000 from sale of the stock at the subject premises before eviction. The Respondent contends that there is insufficient proof of the value of the stock to the Applicant or of his loss on sale, hence no compensation should be paid in this regard.

24. We reject the valuation in Exhibit A3 because the Applicant uses retail sale prices for calculation. It cannot be seriously disputed that the Applicant did have as much stock as recorded by an officer of the Lands Department. The Applicant says that the officer verified with invoices and receipts the purchase price of most items of stock and recorded the information in the inventory record in Exhibit A2. The officer who made the record was called to give evidence. He denied he had any document for verification. We hesitate to attach any weight to the evidence of the officer because the overall impression we get from him is that he had no real recollection of the detailed events at the subject premises at the time of stock checking. By simple addition, we count 7,353 pieces of clothing among the stock the total purchase cost of which, according to the information in the inventory list, was about $910,000. The recorded information also shows that many items cost less than $100 a piece, mostly at the $50-$70 range. We reckon the Applicant had to sell at an average price of $27.2 per piece to get his estimated $200,000 from clearance sale. Although counsel for the Respondent regards the estimate of $200,000 unacceptably low, we should think it is very good return considering the original low cost and that the stock were all out of fashion items. By way of cross reference, it is common experience, supported by expert evidence in the cases we have heard, that goods on auction should fetch 20% to 80% of the ordinary market value. So $200,000 for original cost of $910,000 is also within that can be expected by auction sale. In the premises, we believe the Applicant is honest and accepts his estimated figure of $200,000. We also hold that he told the truth about verification of the purchase prices by the Lands Department officer and find that the stock cost $910,000 to him.

25. Since all the items were acquired in 1991 or early 1992, the stock were well out of fashion items by the time of the clearance sale. The Applicant himself admits as much. We think such old stock would have to be sold without a profit, margin even without the resumption. But the Applicant's shop was not really a high fashion centre. His customers must be in the low to middle income bracket who were not hot and up-to-date with fashion. We think he should still be able to sell the stock for much higher than $200,000 had he been allowed to continue to trade and sell in good time. Treating the clearance sale as the equivalent of an auction sale, we apply a factor of 3.5 to the $200,000 to obtain $700,000 as the market value of the Applicant's entire stock. Deducting the proceeds from the clearance sale, we determine compensation to the Applicant for loss due to forced sale of the stock at $(700,000 - 200,000) = $500,000.

Fixtures and Fittings

26. The Applicant claims compensation for $368,000 being the cost of the fixtures and fittings in the subject premises. Mr. Clarke, the Respondent's expert, accepts the amount spent as reasonable but adjusts it to $221,000 by a discount of 40% for depreciation for use over several years. We have no reason to reject the expert's opinion but would round it up to a final figure of $230,000. Accordingly, we determine compensation for fixtures and fittings at $230,000.

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

The Order

28. Accordingly, we determine compensation for the Applicant at $1,800,000. Leave is reserved to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Ordinance. There is an order nisi that the Respondent shall pay the Applicant's expenses incurred in prosecuting his claim which we assess at $6,000 to be made absolute unless application is made, within 21 days from the date of handing down of this judgment, to the contrary. Liberty to apply is also reserved for ancillary and consequential matters.

          Dated 26 JUN 1996