CHAN Chi-sum and Others v. Director of Lands

Crown Lands Resumption Reference No. 6 of 1996

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HEADNOTE

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Property law - Crown Lands Resumption - Chinese Provision Shop selling Snakes and related By-Products - Business Losses - Valuation of Goodwill - Valuation of Stock - Valuation of Fixtures and Fittings - Crown Lands Resumption Ordinance, Cap. 124, s. 10(2)(d) - Compensation awarded at $1 million

Ground floor rented premises used as shop selling snakes and related by-products resumed by the Crown for urban redevelopment. The applicants also had a warehouse in Shenzhen used as a staging post. The applicants claim, inter alia, loss of goodwill, loss on forced sale of stock and loss of fixtures and fittings totalling at $1,945,400. The trading accounts of the business produced by the applicants show only negligible profits. The cockloft of the subject premises had been rented out. The respondent contends that the Shenzhen operation was suspect and illegal and hence losses in connection therewith should not be taken into account. Moreover, the decoration expenses relating to the sub-let cockloft should also be ignored. At most, the respondent would support total compensation at $524,344 only.

Held: (1) In accordance with s. 10(2)(d) of the Crown Lands Resumption Ordinance, the applicants are entitled to compensation that would restore them to the business position where it would be had there been no resumption, i.e. an amount of compensation so as to put the applicants in the position where it was at the time of resumption. (2) On the evidence, the Shenzhen operation deemed genuine and lawful. (3) On the evidence, the business was found to be unprofitable and the claim for goodwill dismissed. (4) Valuation by the applicants' expert of loss on forced sale of stock accepted. (5) Valuation by the applicants' expert of the cost of decoration, fixtures and fittings accepted. (6) Adding other items allowed, total compensation determined at $1 million.

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 6 of 1996

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JUDGMENT

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The Applicants are the partners of a Chinese provision shop known as Shea Wong Fung ("the business") at premises situated at Ground Floor, No. 42J, Pak Tai Street, Kowloon ("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.

2. 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 Improvement Scheme ("the Scheme"). In addition to Pak Tai Street, the Scheme covers Sui Lun Street, Wang Cheung Street, Ma Tau Kok Road, San Shan Road and Pau Chung Street in Ma Tau Kok. The present case is the latest of many applications by business operators and property owners affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement. It is not disputed that the Applicants are 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 Applicants are entitled to reimbursement that would restore them to the business position where it would be had there been no resumption.

3. Mr. Chan Chi-sum representing himself and the other two partners of the business has instructed Messrs. Lawson, Tam and Sung, a firm of chartered surveyors, to assist them with valuation. According to Mr. Tam of Messrs. Lawson, Tam and Sung, the Applicants are entitled to:-

4. Since Miss Fung, counsel for the Respondent, has not raised any issue on compensation on total extinguishment basis, we proceed on the same basis. But the quantum for major items claimed is in dispute. The Respondent also contends that no account should be taken of losses, if any, connected with the Shenzhen operation of the business. Miss Fung, based on the opinion of the Respondent's expert valuer, suggests that the compensation due to the Applicants should be as follows:-

5. We now consider each of the issues and items of claim under separate headings.

The Shenzhen Operation

6. According to Mr. Chan who gave evidence for the Applicants, the business had a warehouse in Shenzhen which was used as some kind of staging post. Because the subject premises could not hold too many snakes as stock, live snakes acquired from sources in Mainland China would be held in the Shenzhen warehouse and shipped to Hong Kong from time to time as required. The warehouse would also hold other miscellaneous items traded by the business. The Respondent questions why the claim for losses relating to the Shenzhen ware-house was raised at a very late stage. Counsel for the Respondent also casts doubts on the legality of the Shenzhen operation.

7. Having considered Mr. Chan's evidence, studied the photographs in p. 129 of Exhibit A3 and the items claimed for the Shenzhen warehouse, we are satisfied that the Shenzhen operation was a genuine part of the business.

8. As to the question of legality of the Shenzhen operation, we have mentioned in open court aspects of the business and its operations which probably require licences or permits. Miss Fung in her written final submission says that the Applicants had to obtain permit from the Commissioner of Customs and Excise under section 20 of the Dutiable Commodities Ordinance, Cap. 109 for bringing stock from the Shenzhen warehouse into Hong Kong, but the Applicants admitted that they had not obtained the necessary permit. After referring to the record of the trial, we are certain Mr. Chan on 30th July, 1996 testified under cross-examination by Miss Fung that the Applicants had completed customs procedure. In any event, the provision referred to by Miss Fung does not apply to snakes or most other products traded by the Applicants. Therefore, this submission by Miss Fung is unfounded. As to the other point by Miss Fung that the losses relating to the Shenzhen warehouse were not caused by the resumption but due to the Applicants' being unable to obtain import permission, based on the above observations, we cannot agree. Despite her cynicism towards the Shenzhen operation, counsel for the Respondent has not been able to produce a shred of evidence to show that the Shenzhen operation or any activity of the business was in breach of any law. In the premises, we cannot take the Respondent's challenge further than mere conjecture.

Goodwill

9. The method we would adopt to determine goodwill is the one explained in Land Compensation and Valuation Law in Hong Kong by H.H. Judge Cruden at pp. 80-81 and which we have applied in related cases. First, we establish the normal profit trends of the business before resumption. The reported taxable profit of the business is the preferred basis for this purpose unless it appears to be inherently unreliable. Once the annual profit trend of the business has been arrived at, it must be related by multiplication to the anticipated future life of the business, had the subject premises not been resumed. Then, where appropriate, the product is discounted for interest to take into account the fact that the business operator will have capitalized future profits immediately available for investment or other use.

10. Both parties in this case seek to rely on trading accounts produced by the Applicants except that there are two sets of these and each party prefers a different set. Based on a set furnished earlier by the Applicants to the Lands Department (Appendices 13 to 15 in Exhibit R2), the Respondent's expert find the business not profitable at all and recommends no compensation for loss of goodwill. The Applicant's expert uses another set of trading accounts which is in fact based on the one already referred to but adjusted by the expert to produce an annual profitability of $60,451. This is then multiplied by a factor of 3 to obtain the value of goodwill. Miss Fung for the Respondent says that the work of the Applicants' expert should be rejected because it is based on unreliable trading accounts.

11. We are sceptical about the accuracy of both sets of trading accounts which do not appear to have been prepared by professional accountants. Even if we rely on either one of them, after deducting depreciation to the tune of at least $80,000 per annum for decoration, fixtures and fittings as we have valued below, there is no profit left. Snakes and their by-products are not regular consummables; they are mostly seasonal favourites. We would not be surprised if the business did not do well. Indeed there is evidence suggesting that the Applicants were struggling. The Applicants had difficulties keeping up payments of rent for the Shenzhen warehouse; had the business been doing well before, we would have thought that the Applicants would have at least some savings to cover the relatively small amount of rent. Moreover, the Applicants sub-let part of the cockloft of the subject premises. We strongly suspect this was partly due to slack trading with less need for storage space and party due to the need to find extra revenue. In view of all the circumstances, we conclude that the business was not profitable.

12. Accordingly, we dismiss the claim for loss of goodwill.

Stock

13. Based on documents supplied by the Applicants, Mr. Tam calculates the purchase cost of the Applicants' stock in Hong Kong at $242,986 (p. 8 of Exhibit A3) and in Shenzhen at $131,777 (p.3 of Exhibit A4). There is also documentary evidence to show that the stock was sold by private treaty in Hong Kong and Shenzhen at $78,467 and $38,448 respectively. Mr. Ng, expert valuer for the Respondent, says the Applicants reported that the stock was sold by auction at $30,100; and no account is taken of stock in Shenzhen.

14. We think Mr. Ng was most probably mis-informed. Had there been an auction, the Applicants would not dare to produce documents indicating sale of remaining stock by private treaty. We see no reason to reject the modest claim for loss on forced sale of stock as valued by Mr. Tam.

15. Accordingly, we determine loss on forced sale of stock at $242,986 + $131,777 - $78,467 - $38,448 = $257,848.

Profit Rent

16. Although the Applicants' expert does not mention a claim for profit rent, the Respondent's expert arrives at a profit rent of $88,800. We have no reason to reject the opinion of the Respondent's expert.

17. Accordingly, we determine the Applicants' loss of profit rent at $88,800.

Decoration, Fixtures and Fittings

18. The business sold snakes and miscellaneous by-products. Therefore, at the subject premises and in the warehouse in Shenzhen, there were a large number of cages, refrigerators and other utensils. A record of fixed assets, fixtures and fittings found at the subject premises was made by officers of the Lands Department in September 1993. See pp. 31-40 in Exhibit R2. Mr. Tam, the Applicants' expert, has also produced documents to show the decoration, fixtures and fittings for the subject premises at Enclosures 12 and 14 of his report Exhibit A3 and those of the Shenzhen warehouse in Appendices 8 and 9 of his report Exhibit A4. The original cost of these, as calculated by Mr. Tam, can be summarized as:-

19. Miss Fung in her written final submission says that the decoration expenses claimed by the Applicants include expenditure on the cockloft. But the Applicants sublet the cockloft to others. Hence decoration expenses on the cockloft should not be included in the claim. We should point out that the subletting of the cockloft was a measure to bring in additional revenue for the Applicants and can be regarded as part of the business. Assuming no subletting, the Applicants could still decorate the cockloft as their own living or resting quarters, such expenses should still attract compensation.

20. We find the calculations reliable. Since the decoration was done and the fixtures and fittings were installed in 1989, we think an adjustment of at least 40% depreciation for four years should be made. In the premises, we determine the Applicants' loss of decoration, fixtures and fittings for both the subject premises and the warehouse in Shenzhen at $986,370.00 x 60% = $591,822.

Business Registration Fee

21. The Applicants' claim of $588 being the portion of the annual Business Registration fee paid but unused due to pre-mature closure of the business is also allowed.

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

The Order

23. Accordingly, we determine compensation for the Applicants at $1 million. 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 Applicants' expenses for prosecuting their claim which we assess at $3,000 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.

24. This judgment is delivered in both Chinese and English languages. Either language version may be used in aid of interpretation of the other. In the case of irreconcilable difference in meaning, that conveyed in the Chinese version shall prevail.

Dated 27th November 1996