Wong Hoi Nung v. The Secretary For Transport

LDMR 1/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Tribunal Application No. LDMR 1 of 2000

_______________

_____________

JUDGMENT

_____________

1. The Applicant formerly traded under the business name of Bailey Trading Company which dealt in the wholesale business of food stuff, farming medicine and feeds. On 16.1.1999 the land on which the Applicant carried on its business was resumed by the Government of the Hong Kong Special Administrative Region under the Railways Ordinance, pursuant to a resumption notice dated 15.10.1998. The parties agreed that at the time of resumption, the total area occupied by the Applicant for the operation of its business was 1375 sq. m. which comprised of :-

(i) an area of 497 sq.m. within Lot 1978 in D. D. 130, Tsing Chuen Wai, Tuen Mun, N. T. ("Lot 1978 (Portion)); and

(ii) an area 175 sq.m. within Lot 1980 RP.

(iii) an area of 703 sq.m. of Government land covered by Government Land Permit No. Y10165 which was cancelled by a notice of cancellation with effect from 1.1.1999.

2. The only issue in this application is the quantum of compensation payable to the Applicant by reason of the resumption. The summary of the Applicant's claims are as follows : -

(a) Loss of Profit Rent : $600,000.00

(b) Loss of Goodwill : $2,190,000.00

(c) Loss of Severance Payments

(d) Loss of Fixture & Fittings, Stocks, Chattels and Plant and Machinery $1,218,867.40

(e) Professional Fees : $155,776.60

3. Claim item (c) was settled between the parties and therefore this Tribunal is no longer required to deal with this item.

4. The parties agreed that the Applicant's claim for loss of disturbance should be assessed on a total extinguishment basis.

(a) Loss of Profit Rent

5. The parties agreed that the market rent of $7.50 per sq.m. should be adopted for the purpose of calculating the profit rent.

6. The issue between the parties is whether profit rent should be assessed and awarded in respect of the site area occupied by the Applicant, i.e. 1375 sq.m. or only in respect of 497 sq.m. within Lot 1978.

7. At the time of resumption, a monthly rent of $5,000 was paid by the Applicant to a Mr. Wong On, the representative of the owner of Lot 1978. This sum was paid pursuant to an agreement dated 3.2.1996 (Exhibit A3) signed between Wong On and Wong Yuen Tik, as the Applicant's representative. The contents of the agreement are as follows : -

黃王

“茲有藍地青山道青磚圍1978地段華蓬園
百利貿易公司租以近田則邊三間爛鐵
皮屋，因現已破爛，故委托百利貿易公司
黃遠迪先生重建，維修費用為港幣拾弍
萬元正(120,000.00)以百利貿易公司暫代支出
費用。如要收回此地方，要補回百利貿易公司
重建費用港幣拾弍萬元正(120,000.00)，如
不收回，便以每月伍千元正(5,000.00)的租金
永久租以百利貿易公司，租金包括三間鐵皮
屋、空地、六個石屋房、兩個石屋廳，以後不

黃 王

能再增加租金。特立此約為證。

此約一式兩份。

	一份為王安先生持有
	另一份為黃遠廸先生持有
	此約簽於一九九六年二月三日

	簽約人：	王安
		黃遠迪
	見證人：	張向珠 ”

(Underlines provided)

8. This agreement merely referred to Lot 1978 and no other lot number. It contained 4 corrections. Underneath the character "段", which is covered by correction fluid, is the character "道". Underneath the characters "屋、空地", which are covered by white correction fluid, are the characters "皮屋地". The characters "黃" and "王" written above the characters "地段" and beneath the characters "屋、空地" are apparently the respective initials of Wong Yuen Tik and "Wong On". They must have been put in these two places as marks of their approval of the corrections made in this agreement.

9. Regarding the description of the land in question, namely, lot "1978", the figure 7 is above the figures of "9" and "8". The ink with which the figure "7" was written is clearly deeper in colour than the ink with which the figures "198" were written. It is apparent that the figure "7" was inserted between the figures "9" and "8" after the figures "198" had been written. Apparently this figure "7" was inserted between the figures "9" and "8" after the parties had found out that the incorrect Lot number had been written, and they then rectified the mistake.

10. It is beyond doubt that the contents of this agreement were rectified by the parties concerned after mistakes had been discovered by them.

11. If at the time of the signing of the agreement Wong On had also represented the owners of Lot 1980 (RP) to rent out a portion of Lot No. 1980 (RP) to the Applicant, then it would have been careless in the first place for both parties not to have discovered that Lot No. 1980 (RP) had not been written down in the agreement. When "198" was amended to "1978", both parties were aware that the figure "7" had been omitted, and that it required correction. They were then directing their mind to the location of the land to be rented out to the Applicant. By that time they must have been aware that only 1 lot number, merely "Lot 1978", had been written in the agreement. If they had intended this agreement to cover Lot 1980 (RP) as well, no doubt they would have put down Lot 1980(R.P.) in the agreement as well.

12. In any event the Applicant only lodged its application in the Lands Tribunal in respect of Lot 1978 (Portion). Lot 1980 (RP) was not included in this application. On 03.01.2000 the Applicant instituted his application. On 10.03.2000 the application was amended for the first time. On 31.08.2000, the case was adjourned to 16.09.2000 for the Applicant to make a re-amendment to the application. But eventually he did not pursue the matter. Therefore, even if the application has a good claim for compensation in respect of Lot 1980 (RP), the Lands Tribunal has no power to award any compensation, by virtue of the absence of claim for compensation in respect of Lot 1980 (RP) in the application, as stipulated by Section 10 of the Lands Resumption Ordinance, which provides as follows: -

"10(1) The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) 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 sub-section (1) on the basis of :-

(a) ......

(b) ......

(c) ......

(d) the amount of loss or damages 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. "

13. Under section 10, the Lands Tribunal has power to determine the amount of compensation payable in respect of a claim submitted to it. In this case the claim submitted to the Lands Tribunal was in respect of Lot 1978 (Portion) only. Therefore no compensation can be payable in respect of Lot 1980 (RP).

14. It is not disputed that the market rent of $7.50 per sq. m. should be adopted in assessing the profit rent. The monthly unit rent of Lot 1978 (Portion) is $10.06 per sq. m. ($5,000 ( 497sq.m.) which is above the market rent. Therefore the Applicant is not entitled to any profit rent.

(b) Loss of Goodwill

15. The parties agree that:-

(1) Loss of goodwill ought to be assessed on a total extinguishments basis;

(2) The profit and loss figures for the Applicant's business as shown in the profit and loss accounts submitted to the Inland Revenue Department are :-

(i) Profit of $68,060 for 1995/1996;

(ii) Loss of $48,673 for 1996/1997;

(iii) Loss of $108,601 for 1997/1998.

(3) The profit for the year 1998/1999 in the sums of $31,150 ought to be disregarded.

(4) Loss of goodwill ought to be assessed by firstly ascertaining the profit trend of the business and then multiplying it by a certain number of year's purchase.

Profit trend

16. The Applicant's accountant (Mr. Chung Siu Wa) ignored the profit and losses figures of the Applicant's business as shown in item (b) above, and adopted the "wages and salary costs" approach to assess the loss of goodwill. In his report Mr. Chung stated :-

'(2) Wages and Salary Costs

"The Business" hired 7 staff in average during the years from 1996 to 1999 (as per Appendix 2) and wages cost amounted to $0.68 million.

a) 50% as the rate of return based on salary and wages cost.

In Li Sai Kuen and Lee Sai Ho trading as Shing Kee Metal Dealer v. Director of Lands (CLR 20 of 1994), half the annual salary and wages of a business was taken as the measure of the potential profitability of a business. By adopting such approach, the annual profit of the "business" will be $340,000.

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

The result obtained by the wages and salary cost method 2 a suggests "the business" would well have masked up to $370,000 of its real annual profits for tax avoidance. ................. Therefore the annual profit obtained by the method 2 a i.e. $340,000 per annual is taken as the measure of the potential profitability of "the business".'

17. Mr. Chung entirely disregarded the profit and loss accounts of the Applicant from 1994 to 1998 because the figures shown in these accounts were not genuine figures.

18. The material part of the judgement in Wong Sau Hing's case relating to the assessment of profitability, based on the "salary and wages cost" approach, can be found in para. 32 of that case :-

"We are told that the business used to hire 1 workers and one salaried staff at an arrival salary and wages cost of $1.386 million. ............. Obviously, every ounce of labour paid for by the business was expected to bring in profits. The question is what is the rate of return based on salary and wages cost. We find that half the annual salary and wages cost of the business is about $800,000 per annum, i.e. approximately $350,000 above annual taxable profits and $300,000 above annual market rents ........... We, therefore, take $800,000 per annum as the measure of the potential profitability of the business."

(Underlines provided)

19. In that case, the business of the Applicants ceased in April 1994, by virtue of resumption of their premises by the Respondent. The taxable profits of the business for the years 1989/90 to 1993/94 inclusive, as listed out in Para. 27 of the judgment, were $414,109, $516,626, $393,085, $317,908 and $347,499 respectively. In view of this fact, it would not be illogical for the Tribunal to have stated in its judgment,

"Obviously, every ounce of labour paid for by the business was expected to bring in profits."

20. The Tribunal did not expressly give any reason as to why it adopted the "salary and wages cost" approach to ascertain the potential profitability of the business. The approach adopted by that Tribunal must be confined to the facts of that case.

21. It must be borne in mind that whether a business makes a profit or not depends on a number of factors, such as the nature of the business, the economic climate, the quality of the management of the business, and the quality of the employees etc. If a business has poor management, the more manpower or labour it employs, the less profit it will obtain, or the bigger loss it will sustain. The profit of a business simply is not commensurate with the number of employees it employs.

22. In the present application, the Applicant's business was suffering a loss for the 2 years prior to its cessation of business. Therefore it is materially distinguishable from the facts in Wong Sau Hing's case in this aspect.

23. According to Mr. Chung, he was told by Mr. Wong Yuen Tik that the profit and loss accounts submitted by the Applicant to the Inland Revenue Department did not show the true profits made by the Applicant. However, when Mr. Wong Yuen Tik was giving evidence, he was not asked and he did not say anything to this effect. Thus it would simply be unsatisfactory to rely on what Mr. Chung was told by Mr. Wong Yuen Tik because that piece of evidence is hearsay evidence, which has never been tested. This Tribunal attaches little weight to that piece of evidence.

24. Mr. WONG Yuen Tik did say, when giving evidence, that he had not included in the profit and loss accounts some of the expenses made by him in connection with the trade conducted by him in South East Asia. If this is true, then it would only enlarge the losses suffered by the Applicant. This would not affect the loss trend of the Applicant.

25. The burden is on the Applicant to establish that the Applicant's accounts of profit and loss submitted to the Inland Revenue Department did not show the true profit made by the Applicant. He has failed to do so.

26. This Tribunal finds that the above-said accounts of profit and loss do reflect the state of profit and loss of the Applicant. Since the above-said accounts do not show a profit trend of the Applicant's business, no loss of goodwill is to be awarded to the Applicant.

(a) Furniture and fixtures

27. Furniture and fixtures formed part and partial of the Applicant's business. It is not disputed that the loss sustained by the Applicant due to the forced sale of furniture and fixtures is in the sum of $13,850. The Applicant argued that the Applicant should be awarded the total loss. He referred to the case of Chan Kwok Lam v Director of Buildings and Lands in which the Tribunal stated at P. 16 of the judgment :-

"The whole of the business has been affected by the resumption even though a portion of that business was carried on outside the resumed lot. The damage to the whole business follows directly from the resumption, and any business conducted outside the lot is still an inseparable part of that business. Any attempt at fragmentation must be unacceptable."

In that case the business carried on outside the resumed lot was operated on Government land. The Applicant was not entitled to do so, although the tenancy agreement with which he entered with the landlord for his business covered the Government land. However, he was awarded compensation for the part of his business operated on government land when he had no right to do so. Section 10(2) expressly provides that the Tribunal shall determine the compensation on the basis of the amount of loss or damage to a business conducted on the land resumed. The land resumed is the land specified in the claim. Therefore this Tribunal must strictly adhere to the provisions of section 10, and should not follow the decision of Chan Kwok Lam. In the present case, the land resumed is land on Lot 1978 (Portion). If the decision of Chan Kwok Lam is followed, and compensation is awarded for the entire business operated on the whole area of 1375 sq. m. it is tantamount to awarding compensation covering Lot 1980 RP and the government land in respect of which no claim has been made. This would contravene section 10(2).

28. The Tribunal in Chan Kwok Lam did not say that fragmentation was not possible. It merely said that it was unacceptable. Since the business has to be conducted on a piece of land. Therefore in the absence of a better method, it would not be unreasonable to adopt the ratio between the area of land in respect of which a claim has been made against the larger area of land used for the entire business , which also covers the area of land in respect of which no claim has been made, as the basis for the apportionment of compensation. For example, if the former area of land is 100 sq. m. and the latter area of land is 200 sq. m. then the compensation payable for the former should be 50% of the whole compensation. This is because by operating his business on the latter area, his original business is expanded by 100%, in so far as the area is concerned. Therefore assuming that when compensation is awarded for the entire business, the compensation payable in respect of the former area should be half of the compensation payable. Since the Applicant's business operated on an area of 1375 sq. m., and the business operated in Lot 1978 (Portion) covered an area of 497 sq.m., the amount of compensation payable under this head is $5,006 ($13,850 x 497/1375).

(b) Motor vehicles

29. Motor vehicles served the entire business which covered an area of 1375 sq. m. It is undisputed that the loss suffered by the applicant due to the forced sale of motor vehicles is in the sum of $9,300. Since part of the business was on Lot 1978 (Portion), the amount of compensation payable under this head is $3,361.50 ($9,300 X 497/1375).

(c) Construction and site improvement costs

30. The Respondent does not dispute the measurements, the description and the number of construction and site improvement items involved under this head of claim. The Tribunal decides that the Applicant is not entitled to compensation under this head for the reasons hereafter mentioned.

31. Section 12(b) of the Lands Resumption Ordinance provides that in the determination of the compensation to be paid under that Ordinance no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the government lease under which the land is held.

32. The Block government lease of Lot 1978 stipulates that : -

"......the Lesser or any other person or persons shall not, nor will, during the continuance of this demise, ...... convert any ground hereby expressed to be devised as agricultural a garden ground not use for building purposes other than for the proper occupation of the same ground as agricultural or garden ground without the previous, licence of His said Majesty, His Heirs, Successors or Assigns ......AND FURTHER that the lesser or any other person or persons shall not nor will at any time during the said term erect or construct any building or structure of any description on the said demised premises or any part thereof whether demised as agricultural on garden ground or otherwise without first having obtained the approval thereof of the surveyor to His said Majesty, His Heirs, Successors or Assigns ......"

(Underlines provided)

33. The covenant limits the use of the land by imposing a covenant against the construction of any building on the land without a licence. There is no evidence that any licence or approval had been obtained prior to the construction of the buildings and site improvements items or the site occupied by the Applicant. Therefore such construction is contrary to the Block government lease, and according to the S.12(b) of the Lands Resumption Ordinance no compensation is payable under this head.

34. The Tribunal also has to consider the ownership of the structures and improvements. The general rule is that anything fixed to the land becomes part of the land, unless the tenant is entitled to remove them at the determination of the tenancy by agreement or operation of law. According to the tenancy agreement (Exhibit A3), the renovation expenses of $120,000 were paid by the Applicant on behalf of the landlord for the time being, and when the landlord took the land back, namely, when the lease came to an end, the landlord had to repay this sum of $120,000 to the Applicant. Therefore the intention between the parties was abundantly clear that this sum of $120,000 was regarded as a loan to the landlord, which was used for the improvement of the land. Therefore the renovation/improvement made to the land by using this sum of $120,000 belonged to the landlord.

35. No evidence in respect of any agreement has been adduced in the trial to the effect that the Applicant is entitled to remove any chattel affixed by him to the land. The structures and improvements belonged to the landlord. Therefore the Applicant, being the tenant, is not entitled to any compensation in respect thereof.

(d) Loss on forced sale of stock

36. The parties did not have disputes over the description and quantity of stock involved. Also, the respondent did not dispute the purchase price of the stock (i.e. the price at which the Applicant acquired them), in the sum of $792,805.80.

37. In the Applicant's expert report on the subject, the current wholesale value of the stock involved was estimated at $998,197.40. From this was deducted the proceeds of two forced sales taking place on 6/1/99 and 2/3/99, in the respective sums of $172,300 and $75,000 totalling $247,300. The difference between the wholesale value of $998,197.40 and the actual sales proceeds of $247,300, in the amount of $750,897.40 was taken by the Applicant to be the loss on forced sale of stock. Mr. Chung Cham Man Anthony, the engineer who signed the appraisal report for stocks, etc. (Exh. A-4) did not give evidence. Instead, Mr. Billy Chiu, an assistant of Mr. Chung and one who was involved in the research, workings and estimation of values of stock gave evidence in the hearing.

38. Mr. Mella, the expert appraiser called by the Respondent estimated the loss on the forced sale of stock to be the difference between the purchase price of $792,806 and the forced sale value assessed at $317,122, (being 40% of the purchase price) which gave a figure of $475,684. The forced sale value estimate of $317,122 was used instead of the actual total sale proceeds of $247,300 reported by the Applicant because the Respondent determined the sale proceeds to be not reasonable. The Applicant, it was alleged, failed to show that reasonable steps had been taken by him to mitigate his loss. Notice of resumption was given in October 1998 and the Applicant ceased business about five months later, in March 1999. However, the Applicant had only tried to sell the stock through the introduction of friends. Neither was there any advertisement for sale nor any auctioneer approached for assistance in the disposal of the stock.

39. The Respondent submitted that before Mr. Chiu gave evidence, the Respondent was able to agree that the current wholesale value of the stock was $998,197.40. This was on the understanding that the Applicant, being a wholesaler, would have been able to sell the stock involved at that price had there been no resumption. However, the Respondent found that Mr. Chiu failed to explain the methodology and procedure of arriving at the current wholesale value of the stock in the report. At some stage, Mr. Chiu suggested that certain formula was used. Later, Mr. Chiu clarified that no formula was ever used and his colleagues had checked the price with two wholesalers and with stalls in the market place.

40. The Respondent further submitted that in any event, the precise definition of current wholesale value was immaterial as the Respondent decided that the purchase price (i.e. the acquisition price of the Applicant) of the stock should be used in the calculation of the loss on forced sale. On the other hand, the use of the current wholesale value (as the Respondent originally understood it to be) would include a profit element which should has already been compensated for in the assessment of goodwill, if any.

41. The Applicant submitted that stock should be valued at the current wholesale value, i.e., the value to the owner. Had it not been for this resumption, the Applicant could have sold his stocks at the current wholesale value as assessed by Mr. Chiu. Therefore, the Tribunal should adopt the assessed current wholesale value in assessing the loss on forced sale of the stock.

42. The Tribunal also finds the evidence given by Mr. Chiu to be not helpful. However, since the purchase price of the stock was agreed by the parties, the question before the Tribunal is whether the Applicant's estimated wholesale value is reasonable having regard to the agreed purchase price of the stock. The Tribunal finds that he difference between the agreed purchase price of $792,805.80 and the Applicant's estimated wholesale value of $998,197.40 is $205,391.60. The estimated wholesale value as a percentage of the purchase price is about 126%. Neither parties' experts had opined whether this percentage was fair in normal circumstances. However, in page 17 of the appraisal report prepared by Mr. Mella and produced as Exh. R-2, he estimated that in arriving at the forced sale value of stock as a percentage of the purchase price of the stock, a profit element of 23% was assumed, alongside with other factors. For the above reason, the Tribunal forms the opinion that as the profit elements assumed in the Applicant's estimate of the current wholesale value is about 26%, the Applicant's estimate of the wholesale value is not unreasonable and should be accepted in this valuation exercise.

43. Regarding the Respondent's submission that the current wholesale value (as originally understood by the Respondent) includes a profit element which has already been compensated for in the amount of goodwill, if any, the Tribunal disagrees. Firstly, no amount of goodwill was awarded in this application. Secondly, from what the Applicant has produced as to be his accounts, the Tribunal finds that there is no evidence that the Applicant has made any adjustment to his final year's accounts for the projection of virtual profits in respect of the existing stock held by the Applicant. So, there is no possibility that the profits elements of selling these stocks be double counted.

44. The Tribunal agrees with the Applicant that the estimated current wholesale value of $998,197.40 should be used because should there be no resumption, the Applicant would have been able to sell the stock at that value (i.e., the price to the Applicant's customers in the normal course of daily business).

45. Next, the Tribunal has to decide whether the actual sale proceeds of the stock was unreasonably low, having regard to the estimated forced sale value of the stock. Mr. Mella used two methods in arriving at two estimates of the forced sale value of the stock: $317,122 and $349,369. Perhaps knowing that his estimates were ball park figures, Mr. Mella in the final analysis used the forced sale value figure of $317,100 on the ground that "it is most favourable to the Applicant". On the other hand, the Respondent reported that the stocks was actually sold for a total sum of $247,300 by two lots to two different purchasers introduced by friends. This is about 78% of Mr. Mella's adopted estimate.

46. In addition, although the Applicant actually ceased business in March 1999, some five months after the date of notice of resumption, he was only formally given three months to quit. This is a short period for the business which had to organise all its affairs in connection with the total extinguishment of the business. It was not unreasonable for the Applicant to try, in the circumstances, to dispose of the remaining stocks to the customers through the introduction of friends. We were told the Applicant was in the wholesale business for some years. The Applicant should have known many business contacts in the trade. That could give sufficient exposure to the stock for sale for the purpose of ensuring that a fair forced sale price be fetched at the end. However, we were advised by the Applicant that he had difficulties to sell them to traders in the same industry because they were afraid that the stocks could be 'Shui For' (i.e. good not sourced from the legal distributors). That could well be the case.

47. All in all, the Tribunal considers that the claim that the Applicant has failed to take reasonable steps to mitigate his loss was not substantiated. In the final analysis particularly bearing in mind that the actual sales proceeds receipt was about 78% of Mr. Mella's estimated forced sale value and that an estimate of a precise forced sale value figure is difficult and cannot be very accurate, the Tribunal finds the actual sale proceed to be within a reasonable range of Mr. Mella's estimate and should be accepted.

48. The loss on forced sale of the stock owned by the Applicant's business equals to the difference between the Applicant's estimated wholesale value of $998,197.40 and the Applicant's actual sales proceeds of $247,300. This gives a figure of $750,897.40. Again, since only part of the business run by the Applicant was on Lot 1978, the amount of compensation payable under this head has to be proportionately adjusted, ($750,897.40 X 497/1375), or $271,415.

Summary of compensation payable to the Applicant

(a) Profit rent	Nil
(b) Loss of goodwill	Nil
(c) Severance payment (agreed by the parties)	--
(d) Loss on forced sale of furniture and fixtures	$5,006
(e) Loss on forced sale of motor vehicles	$3,361.50
(f) Construction and site improvement costs	Nil
(h) Loss on forced sale of stock	$271,415
Total compensation excluding severance payment	$279,782.50

Orders

Accordingly we order that the Respondent pay the Applicant compensation (excluding the severance payment which has been agreed by the parties) in the sum of $279,782.50.

The matter of professional fees, interest and costs be adjourned to a date to be fixed by the Deputy Registrar, after consultation with the Counsels' diaries.

Liberty to apply is reserved for any other consequential matters.

Dated this 10th November, 2000