WONG Sau Hing and Others (t/a Shing Kee Metal Dealer) v. Director of Lands

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 20 of 1994

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J U D G M E N T

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His Honour Judge Li:

The Applicants, a married couple together with their two sons, had been operating a scrap metal dealer's business known as Shing Kee Metal Dealer ("the business") at three premises situated at No. 1, Ground Floor, Sui Lun Street, No. 5, Ground Floor, Sui Lun Street and No. 97, Ground Floor, Pau Chung Street respectively ("the subject premises"). In 1992, No. 1, Ground Floor, Sui Lun Street and No. 5, Ground Floor, Sui Lun Street were premises rented by the Applicants at $4,400 per month and $4,600 per month respectively. The shop at No. 97, Ground Floor, Pau Chung Street was owner occupied for the business.

2. All the subject premises became parts 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 Sui Lun Street and Pau Chung Street, the Scheme site extended to Wang Cheung Street, Ma Tau Kok Road, Pak Tai Street and San Shan Road in Ma Tau Kok. In fact, earlier on 10th October, 1986, the Scheme site had been designated as a Comprehensive Redevelopment Area ("CRA") by gazetted amendments to the Draft Ma Tau Kok Outline Zoning Plan S/K10/1 under the Town Planning Ordinance, Cap. 131. The re-zoning had the effect of limiting owners of the properties within the CRA to re-develop their lots in accordance with the overall Scheme. All the affected properties, including 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. After publication of the resumption notice in the Gazette, the shop at No. 97, Ground Floor, Pau Chung Street was sold and rented back by the Applicants at a rent of $14,000 per month. All the subject premises then reverted to the Crown on 3rd October, 1992. Nonetheless, the Applicants were allowed to carry on the business at the subject premises rent free until April 1994 when the Applicants were evicted. The Respondent accepts that there was total extinguishment of the business as from April 1994.

3. It is common ground that the Applicants are entitled to compensation 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 they would be had there been no resumption. This means that, for example, where the Applicants had a thriving business with a quantity of trading stock which was totally extinguished by the resumption, the Respondent must pay an amount of compensation so as to enable the Applicants to acquire the same quantity and quality of trading stock together with the goodwill of an equivalent business.

4. At the beginning of the hearing, the Applicants asserted their claim for the following business losses:-

	HK$
Loss of goodwill	1,750,000.00
Loss of profit rent
(i) No. 97 Pau Cung Street )	to be assessed
(ii) No. 1 Sui Lun Street )
(iii) No. 5 Sui Lun Street	93,000.00
Loss on forced sale of stock	6,556,599.00
Loss on forced sale of machinery and equipment	136,162.00
Loss of fixtures	200,000.00
Transportation fees for auction	128,000.00
Exhibition ground and security charges	28,000.00
Auction expenses	173,424.80
	$9,065,185.80 =============

In their final submission, the Applicants increased their claim for value of stock to $15,000,000. After deducting the auction sale proceeds of $2,400,000 from this claimed value, the claim for loss on forced sale of stock becomes $12,600,000. Also the Applicants reduced their claim for loss on forced sale of machinery and equipment to $117,078 after reaching an agreement with the Respondent.

5. The Respondent's position took several turns during the course of these proceedings. Eventually, in final submission, the Respondent contends that the compensation due to the Applicants should be $587,475 made up as follows:-

	HK$
Loss of goodwill	224,000.00
Loss of profit rent	77,550.00
Loss on forced sale of stock, machinery equipment and	0.00
Loss of fixtures and fittings	63,100.00
Transportation Fees	49,400.00
Auction expenses	173,425.00
	$587,475.00 ===========

6. Before we proceed further, we should point out this is one of nearly thirty applications by business operators affected by the Scheme for compensation. It is also the first one tried by the Tribunal. Despite advice given by several members of the Tribunal at various stages, the Applicants have preferred not to engage legal representatives or valuers of any speciality to help them to prepare their case. The Tribunal has also repeatedly emphasized in open court that the burden was on the Applicants to prove each and every element of their claim. During the trial, the Applicants were given ample opportunities to adduce more evidence, if available, and to canvass more effectively for their case. As it turned out, Mr. Lee Sai Ho appeared for all the Applicants and produced, inter alia, an impressive bundle of exhibits. According to Mr. Lee, the business was managed by his father, he (the junior Mr. Lee) was not directly involved with the operations of the business and was at the subject premises only for brief periods during each week. Whilst more effective advocacy and expert assistance for the Applicants would be desirable, the Tribunal is satisfied that Mr. Lee has presented all the relevant facts and documentary materials in furtherance of the Applicants' case.

Trading Stock, machinery and equipment

7. The business had a huge trading stock of scrap metal, surplus building and decoration materials and used tools and machinery. The Applicants do not claim for trading loss, if any, suffered during the period from the commencement of the resumption process to April 1994 when the business ceased trading. Indeed the Applicants have not produced any accounting data to enable an assessment for trading losses to be made. Instead, the Applicants claim for losses suffered as a result of forced sale of the trading stock, machinery and equipment by auction in April 1994.

8. In September, 1993, officers of the Lands Department went to the subject premises and made a record of the stock, machinery and equipment held by the business at that time. There are altogether 176 items of them in all; see Appendix VI in Exhibit R3. Photographs have also been taken of samples of some items and some scattered lots of the stock; see Exhibits R14 and R16. The record in Appendix VI in Exhibit R3 is not disputed by the Applicants. In April 1994, when the Applicants were evicted from the subject premises, trading stock, machinery and equipment of the business were transported to a site in the New Territories where the whole lot was auctioned off for a gross sum of $2.4 million. Both the Applicants and the Respondent say they did not make an inventory of the trading stock, machinery and equipment auctioned off. We notice pages 4-1 to 4-8 of Exhibit A7 is a copy of the Particulars and Conditions of Sale published by the auctioneers which incorporates an inventory list based on Appendix VI in Exhibit R3.

9. It was only some time after the trial commenced that the Respondent made known its challenge to the record in terms of Appendix VI in Exhibit R3. It is said that, so far as trading stock is concerned, the record is unreliable in that although there were as many items of stock as recorded, there was no actual physical count of quantities for many items. Exhibit R14 is that part of the record relating to stock, 61 items in all. It is apparent from Exhibit R14 that this part of the record was prepared by an officer of Lands Department named K.Y. Chong and signed by Mr. Lee Sai Ho. Mr. Chong was called to give evidence. He stated that he did count some of the stock on display, e.g. those placed on the pavement. For some others, such as the plastic sheets which were stacked up, Mr. Chong did not count every piece, but made an estimate. For those items with quantity expressed in weight, Mr. Chong said he put down the value in kilogrammes as suggested by Mr. Lee Sai Ho.

10. The Respondent called two other witnesses. Mr. Chow Kam-hung from Hoi Kong Ironwares Godown Company Limited gave evidence on, inter alia, the space required to store certain types of scrap metal. Mr. Liu Chi-keung from the Lands Department gave evidence to show, by geometry, how certain items of stock listed in Exhibit R14 could be stored in the subject premises as illustrated graphically in Exhibit R9. The net effect of these evidence, if the witnesses are treated as reliable, is that the Applicants could not have that much stock as listed in Exhibit R14 for want of holding or storage space even allowing for considerable use of the pavement and driveway in Sui Lun Street.

11. Leaving aside the problem of quantity, there is also dispute over the value or basis of valuation of many items of the trading stock. For example, one party says that some items should be valued as scrap pure and simple whilst the other party contends that their value is higher because they can be sold as second hand materials. The case is further complicated by questions of whether the buying price or the selling price should be taken and the relevant date for the purpose of valuation. In addition, the Respondent alleges that the Applicants failed to mitigate their loss by selling off as much of the trading stock as possible before the auction in April 1994.

12. We are surprised that the stock checking by the Lands Department in September 1993 was not done as meticulously as it should be. Prima facie, there is force in Mr. Liu's presentation that the business might not be able to hold or store that much stock as listed in Exhibit R14 in September 1993. However, we note from some of the photographs in Exhibits R14 and R16 that some of the Applicants' trading stock were placed in one or two nearby empty sites. Clearly the Applicants had use of more storage space than just the subject premises and the pavement outside. Even if there are discrepancies between the actual and recorded quantities of trading stock held, there may be innocent explanations for them. We note that the business is an over-grown family business. It did not have a sound accounting and stock keeping system. It would appear that some of the trading stock were acquired not by piece rate but by measurement of weight, otherwise Mr. Lee Sai Ho would not have given Mr. Chong the quantity of some of the trading stock of the business in terms of kilogrammes instead of pieces. For those items measured and traded by weight, we suspect that the translation into number of pieces can only be a hazardous guess. It follows that calculations of the space occupied by the estimated number of pieces may not be a reliable test of the quantity of trading stock held by the Applicants. Moreover, stock of scrap materials in all shapes and sizes scattered about could have been depleted through retail sale, pilfering or shop-lifting without the Applicants knowing and noting in their books. Having heard all the evidence and considered all factors and circumstances, we do not think the Applicants deliberately over-stated their level of trading stock in September 1993.

13. The opportunity to verify quantities has now gone. There are insufficient materials by way of historical or accounting records for the Tribunal to determine with acceptable accuracy the real level of trading stock held by the business in September 1993. Even if how much or how many of each item of trading stock listed in Exhibit R14 were in existence in September 1993 can be ascertained, it is impractical to gauge the quality of controversial items by examination of the photographs taken of them for the purpose of determining which of them should attract scrap value or second hand value. In any event, the level and value of trading stock in September 1993 are irrelevant because the forced sale took place in April 1994.

14. As to the question of mitigation of loss, it is also a muddled affair. Ideally, in order to reduce losses caused by forced sale at depressed prices, the Applicants should try to sell as much as possible of their trading stock at higher prices during the period between commencement of the resumption process in July 1992 and cessation of trading in April 1994. However, according to the evidence of Mr. Lee Sai Ho, after the resumption notice was gazetted, the business began to suffer because customers turned elsewhere for long term trading relationship. But the Applicants have not quantified losses on this account. The Applicants further contend that even if they were able to sell at better than forced sale prices, they were prevented from doing so by the Respondent. In a letter dated 6th October, 1993 (L/M (1) to ACQ 1/KPS/91 at page 2-5 of Exhibit A7) addressed to the Applicants, the Director of Lands stated that unless the Applicants accepted the formal offer of compensation, -

"the following arrangements will apply. Operators may proceed to sell

- plant and machinery

- fixtures and fittings

- stock

by public auction held by established firms of auctioneers subject to ......"

Since the Applicants did not accept the formal offer of compensation, they felt obliged to sell their trading stock through public auction. They were under the impression that they could not sell through normal trading operations.

15. In addition, the Applicants called one Mr. Mok Wang Biu, another shop operator affected by the resumption scheme, to give evidence to the effect that the Director of Lands refused to support sale of Mr. Mok's trading stock by private treaty. The Applicants say that all shop operators including themselves were treated in same way by the Respondent. The Respondent, in an attempt to refute Mr. Mok, called one of its Estate Surveyors Mr. S.J. McMillan. According to Mr. McMillan, business operators affected by the Scheme were encouraged to sell their trading stock so as to minimize their losses. His Department refused to support the proposal by Mr. Mok to sell his stock because there was no evidence that the price proposed was reasonable. However, when the Tribunal asked Mr. McMillan what would be the position if the price were five or six times that negotiated by Mr. Mok, he said the answer from the Department would be the same. In the circumstances, we find that business operators like the Applicants were trapped by official prudence. As we now appreciate, it is not an easy task to ascertain what is reasonable price to sell the sort of trading stock the business operators had. Officials in the Lands Department for obvious reasons were not willing to commit themselves to endorsing a sale otherwise than by auction. If the Applicants sell their trading stock before auction, unless they limit their claim for compensation, they would run the risk of subsequent challenge by the Respondent that the price fetched was not the best that could be obtained. So there was all the more reason for the Applicants to follow the auction arrangement. And we are left with the problem of restoring the Applicants to the position in April 1994 when they had trading stock, machinery and equipment of a particular quantity and quality.

16. Since the trading stock, machinery and equipment have been sold by auction in April 1994, the Applicants are entitled to compensation being the value of the trading stock, machinery and equipment to them at the time of sale less the auction proceeds they have received. In our view, leaving aside the machinery and equipment for the moment, the value of the trading stock to the Applicants in April 1994 is the price paid by the Applicants at various times previously to obtain the trading stock plus the management costs involved in selecting the items acquired and holding them until April 1994. Alternatively, the value of the trading stock to the Applicants in April 1994 should be the cost to the Applicants to obtain from the open market the same quantity and quality of trading stock they had in April 1994. In either case, it is the replacement value.

17. An expert report (Exhibit R2) prepared for the Respondent by Henry Butcher, valuers for plant and machinery, put the market selling value of the applicant's trading stock, machinery and equipment at $4,570,790. The Applicants themselves put the market value of their machinery and equipment at $136,162 which figure is claimed as their actual loss for forced sale of machinery and equipment, and the value of their trading stock at $8,956,599 which after deducting $2.4 million from the auction sale of trading stock, machinery and equipment becomes the $6,556,599 originally claimed as compensation for loss due to forced sale of trading stock. We rejected the Henry Butcher figure because it is based on market selling prices which include an element of profit.

18. Since each side vehemently challenged the other's valuation, we asked the parties to jointly check prices. For this purpose, the Respondent instructed a firm of loss adjusters, Kingsley Sit and Associates. Mr. Lee Sai Ho went along with an expert from Kingsley Sit and Associates to various scrap and metal dealers to get quotation for 1994 prices. The results of the exercise are in Exhibits R12 and R13. It will be seen that the parties still cannot agree the price for some of the items owing to differences of opinion over whether the items should be treated as scrap or second hand materials. Taking the average unit prices for buying as scrap in April 1994, the total value of the trading stock comes to $7,361,510 (which sum may expand or contract if alternative average unit prices are used for some controversial items). Adding $117,078 as the value of the machinery and equipment of the business agreed by the parties to the $7,361,510 for trading stock gives $7,478,588.

19. In the absence of a reliable inventory of the trading stock, machinery and equipment, and bearing in mind the range of prices quoted by different dealers in the trade, we are not entirely sure if the value of the trading stock, machinery and equipment can be accurately determined item by item. A broad approach may be more appropriate. In any event, we find it necessary to try another approach for cross-check purpose. In Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984, the Tribunal, comprised of H.H. Judge Cruden and Mr. Phillips, held that auction price is an acceptable basis for determining loss for purposes akin to section 10(2)(d) of the Ordinance. Here we believe the price paid by the successful bidder in the auction in April 1994 reflects the variety and quantity of the trading stock, machinery and equipment on auction. However, a scrap dealer like the Applicants can hardly absorb in one lot such huge quantities for holding as trading stock. The successful bidder most probably bought the lot for its value for quick disposal, such as onward delivery to melting plant. To allow for profit for the bidder, the price paid at the auction must be even lower than the minimal scrap value offered by melting plants or their collecting agents. It follows that the auction price is only a fraction of the value of the trading stock, machinery and equipment to the Applicants in April 1994. In Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984, the trading stock of the applicant company was sold by auction in large lots to a single purchaser for the total of $1,410,000 which was only 27.4% of the agreed gross value of the entire stock. The Tribunal there found that that was a reasonable auction price. In the instant case, to arrive at the appropriate value to the Applicants by a broad approach, the auction price should be multiplied by a factor.

20. The 27.4% auction return rate in Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984 was deemed reasonable by experts in that case. That percentage is equivalent to a multiplying factor of about 3.6. In the present case, neither party has called expert evidence to suggest any appropriate acution return rate for the type of stock under consideration. We see no reason to abandon accepted wisdom. Taking a broad approach, we consider a multiplier of 3.5 giving a value at $8.4 million would be appropriate for the instant case.

21. In their final submissions, the Applicants claim the value of the stock at $15 million. This claim is based on the assumption that a large number of the items of the stock can be sold by numbers at second hand prices and a few items at market prices as if they were new. Considering the type of business of the instant case, a scrap metal dealer, it is far more likely that most of the items would be sold as scrap. In reality, the value of the stock would be about 50% to 60% of the $15 million claimed by the Applicants, reducing the value to $7.5 - $9.0 million. This is consistent with our earlier finding that applying a factor of 3.5 to the auction price of $2.4 million would be appropriate.

22. In the premises, we value the trading stock, machinery and equipment of the business at $8.4 million and determine compensation payable to the applicants for loss due to forced sale of the trading stock, machinery and equipment at $(8.4 - 2.4)million which equals $6.0 million; this includes the value of the machinery and equipment of the business at $117,078.

Goodwill

23. A classic definition of business goodwill can be found in the formidable work - Land Compensation and Valuation Law in Hong Kong by H.H. Judge 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 Shun Fung Ironworks Ltd v. Director of Buildings and Lands [1994] 1 HKC 35, part of the claim was for loss of future profits over the specific number of years to be taken for the appellant in that case to re-establish its production capacity after relocation to another site, the Court of Appeal, at pp. 86-87, quoted Wells. J. in Emerald Quarry Industries Pty Ltd v. Commissioner of Highways (1976) 18 SASR 438 as saying:-

"What the claimant has lost is, no doubt, an opportunity to make a profit but not the profit itself; the claimant is to be fairly compensated, not by paying it an amount equivalent to the estimated profits but rather ..... what the ordinary man would pay for the same opportunity. [Emphasis added.]"

The Court of Appeal made it more explicit later, at pp 87-88:-

"The Tribunal ought to have been aware from the quotation from Emerald Quarry itself (which they set out verbatim in their judgment) that Wells, J. was there contrasting the equivalent of the estimated profits with what the 'ordinary commercial man' would have paid for the opportunity to earn those profits. They are not the same things. If what the owner has lost is profits, he prima facie is entitled to receive by way of compensation what he has lost."

This is re-inforced by the Privy Council at page 15 of the Board's advice:-

"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."

24. Since there was total extinguishment of the business, we proceed on the basis that both location and personal goodwill have been destroyed and the Applicants are entitled to full compensation for loss of goodwill. 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.)

25. The Applicants claim loss of goodwill at $1.75 million. When Mr. Lee Sai Ho gave evidence, he explained that the $1.75 million is derived by making estimates or assumptions about the number of customers who would deal with the business each day. This is in a way a method of assessment based on business turnover. However, the estimates or assumptions made by the Applicants are plainly unjustified. We, therefore, reject the Applicants' own assessment.

26. Mr. James Ng, expert valuer for the Respondent, in his report Exhibit R3 puts forward two methods for assessing the goodwill of the business. We do not propose to set out the workings here, suffice to say that Mr. Ng has rejected one of the methods as being inapplicable to the particular circumstances of the business and he recommends assessment by reference to the value of the trading stock of the business. In Appendix IX of Exhibit R3, Mr. Ng assumed that (1) there would be turnover equivalent to twice the value of the trading stock and (2) there would be gross profit at 35% of the value of the turnover. We have no difficulty in rejecting Mr. Ng's assessment by reference to the value of the trading stock. According to particulars given in Exhibit A7, all items of trading stock accounted for in September 1993 had been acquired before mid 1991. We cannot see how it can be assumed that twice the quantity of these items would be sold within any particular year.

27. Unfortunately for the present case, the trading accounts of the business are not available. We, therefore, have to look for other measure. Conceivably, in appropriate cases 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 calculating goodwill because each of them may somewhat relate to either the profitability or turnover of the business. In his final submission, Mr. Lau, counsel for the Respondent, suggests using figures of the taxable profits of the business to determine goodwill. The taxable profits of the business for the years 1989/90 to 1993/94 inclusive were $414,109, $516,626, $393,085, $317,908 and $347,499 respectively. Mr. Lau takes the average as $397,845, then $286,063 is deducted therefrom for interest on capital (calculated as 8.5% interest on the value of the trading stock, machinery and equipment estimated by the Respondent at $1,669,285) and profit rent to give a yearly net profit figure of $111,782. The inherent risks with such approach, probably based on a misunderstanding of the meaning and effect of the decision in Director of Public Works v. Leung Sze [1977] HKLTLR 158, has been explained in Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984. In the latter case, the Tribunal stated:-

"The difficulty Director of Public Works v. Leung Sze creates is that the Lands Tribunal then went on to apply interest to 'tangible assets' and not to capital. The tangible assets were listed as stock, fittings and fixtures. The business was conducted on a small scale by a sole proprietor with rudimentary accounts. The report does not refer to any fixed liabilities. On the particular facts it may be that the items listed as tangible assets were considered to represent, in kind, the capital of the business. If that is so it is possible to reconcile the decision with established goodwill principles although the reference to tangible assets instead of capital is unfortunate.

"In a larger business where liabilities as well as assets exist, the sub-stitution of tangible assets for capital would not only be misleading but would result in the miscalculation of goodwill. Tangible assets may be contrasted with intangible assets. Tangible assets include cash, stock, fittings and furniture. Intangible assets include goodwill. However, neither species of asset is relevant to the deduction of interest for the purpose of assessing goodwill. In a goodwill calculation interest should only be calculated on capital."
(Page 18 of the judgment.)

This led to the conclusion, at page 19 of the judgment, that the proper approach was "to calculate interest on capital - in the wider sense - actually invested and not on tangible assets". Even with this clarification, we suspect the distinction between the cost of capital and the cost of assets will remain blurred in some cases.

28. The fallacy in the Respondent's case can best be illustrated by examples. Suppose there is a vacant site in a busy commercial district. Instead of developing the site, the owner uses the land as a ground level commercial carpark which brings in a regular monthly income after deducting operating costs. When the land is resumed, the owner obviously is entitled to compensation for the value of his land. He must also be compensated for the loss of the opportunity to earn the regular monthly income. It would be plainly wrong to reduce the value of the opportunity by deducting from the regular monthly income an amount of notional monthly interest on the estimated market price of the land as interest on capital employed. Take for another instance a shop which consistently has a turnover of $1 million with 5 types of goods each year for the last five years. The fact that the shop has a stagnant stock of another type of goods acquired three years ago for $2 million does not detract from the fact the shop has potential turnover of $1 million with 5 types of goods each year. When the business of the shop is sold, the interest in the property where the shop is situated, the goodwill of the business and the stock of goods can be sold separately. The value of the goodwill of the business should not be reduced by subtracting from the profits potential an amount of interest calculated on the $2 million spent on the stagnant goods.

29. In any event in this case, as we have pointed out, the value of the trading stock auctioned off in April 1994 bears no relationship to the turnover of the business because this bulk of trading stock had been idle for over a year before the resumption notice was gazetted and was still there in September 1993 when the Respondent's staff came to make record. In the particular circumstances of the business, we do not think the value of the trading stock under consideration should be used for assessing goodwill.

30. Using taxable profits per se as basis, we obtain a figure of either $400,000 or $445,000 as the multiplicand, depending on whether the average of the taxable profits of the business for five years or three year before April 1994 is taken. However, it is not uncommon for business operators to adjust their accounts so as to produce the lowest possible profits figure for legitimate tax avoidance. We, therefore, suspect that the true profitability of the business may be higher.

31. Assuming, for a business which trades on stock held on premises the space occupied by the business determines turnover, the rental outgoings of the business may be taken as an indirect measure of turnover. As a rule of thumb, businessmen expect to make an amount of net profits equivalent to at least 100% of the market rent for the business premises. In this connection, as will be seen, we estimate the market rent for the subject premises together comes to about $500,000 per annum. But this does not take into account use of open space, an unique situation in this case, outside the three shops. Hence we believe the market rent for the subject premises may be an undervalue of the actual turnover capacity.

32. We are told that the business used to hire 10 workers and one salaried staff at an annual salary and wages cost of $1.386 million. We have no reason to doubt that this was the genuine annual labour costs of the business. To this we should add an amount to represent salary for the partners who managed the business. Using a conservative estimate of $20,000 per month for salaries for managing or working partners, the total annual salary and wages cost of the business comes to $1.626 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 total annual market rents. We believe the business could well have masked up to $350,000 of its real annual profits for tax avoidance. To hide an even greater portion of its real profits would easily be a tax evasion exercise. We think the value of the total space used by the business may well be $800,000 although it never had to pay for use of open space outside the shops. We, therefore, take $800,000 per annum as the measure of the potential profitability of the business.

33. Conventional wisdom had it that the multiplier, i.e. number of years as the projected span of profits, for even the most generous cases rarely exceeds five. In Hong Kong where business tenancies are not protected and under section 10(2)(c) of the Ordinance no account is to be taken of probability or expectancy for renewal in assessing goodwill, a multiplier equal to the number of years remaining to run on the current tenancy is adequate. Where the current tenancy runs from month to month or has only a very short residuary term, a multiplier not exceeding two or three is unassailable.

34. A difficult problem arises in the case of a business conducted on owner occupied premises. In, again, Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984, the Tribunal has pointed out that the preferred approach is not to multiply by an arbitrary number of years but to select a multiplier on a personal injury basis which takes into account future business risks, any proven potential for increased profits as well as subject factors which in the experience of the assessor may be relevant. We do not take this to mean that where a business is operated from self owned premises the multiplier would be as large as the number of years remaining on the working life of the proprietor or perpetuity for a limited company. Many factors like the age of the building at which the business was based, the nature and organization of the business and property development trend in the neighbourhood may well have a limiting effect on the economic life of the business. For example, according to our knowledge, the area affected by the CRA is an old quartier due for renewal. Sporadic re-development had been going on for some time in the immediate vicinity. It was to be expected that very soon either the government would resume or private developers would assemble sites in the area for major re-construction. The very implementation of the Scheme so aptly named an urban improvement project confirms our belief. Moreover, most of the buildings affected by the Scheme were nearly 40 years old and could hardly be expected to stand wear and tear much longer. The block of buildings opposite 97 Pau Chung Street, known as 99-105 Pau Chung Street, was demolished in 1991 because 101 Pau Chung Street was declared a dangerous by the Building Authority. We would not give a business within the area affected by the Scheme more than 5 years before it is extinguished by natural causes.

35. In view of the fact that one of the three shops used by the business had been owner occupied for many years until shortly after publication of notice of resumption, we apply a multiplier of three, instead of two for businesses operated from wholly rented premises. Accordingly, we determine goodwill at $800,000 x 3 = $2,400,000. For the small multiplier used, we do not think it is necessary to make a discount for capitalization. The award is even higher than that claimed by the Applicants; nonetheless, we think it is the fair and appropriate amount.

Profit Rent

36. Before the profit rents can be calculated, the full market rents of the premises have to be ascertained. Both parties agree the full market rent of Ground Floor, No. 97 Pau Chung Street be at $350 per square metre. The Applicants allege that the full market rent for both Ground Floor at No. 1 and No. 5 Sui Lun Street, should be at a rate of $305 per square metre whilst the Respondent's expert estimates the rate at $210 per square metre which is based on rents from lettings of comparable premises in Sui Lun Street within the CRA in April to June 1992. It is believed that the uncertainty of the remaining tenure of premises within the CRA had an adverse effect on the rental level. If the affected rental level was about 3/4 of what it should be had the area not been zoned as CRA, the expert's figure then becomes $280 per square metre after removing the blight factor. This rate is more in line with the $350 per square metre for No. 97 Pau Chung Street.

37. In the premises, we determine the total value of the profits rents at $118,000 calculated as follows:-

Ground Floor, No. 97 Pau Chung Street
Fixed tenancy 28.8.1992 to 3.10. 1992

G/F	42.9 sq.m. @ $350	$15,015
Yard	15.8 sq.m. @ $350 x 1/8	$691
Cockloft	16.6 sq.m. @ $350 x 1/4	$1,453
		$17,159
Full Market Rent	Say	$17,500
Rent passing	$14,000
Less rates	$530
		$13,470
Profit rent		$4,030

Monthly in advance for 6 months @ 8% p.a.	5.9015
	$23,783

Value of Profit rent

say

24,000 =======

Ground Floor, No.1 Sui Lun Street
Fixed tenancy 1.5.1990 to 31.10. 1992

G/F	39.1 sq.m. @ $280	$10,948
Yard	16.0 sq.m. @ $280 x 1/8	$560
		$11,508
Full Market Rent	Say	$ 11,500
Rent passing	$4,400
Less rates	$ 240
		$4,160
Profit rent		$7,340

Monthly in advance for 6 months @ 8% p.a.	5.9015
	$43,317
Value of Profit rent say	44,000
	=======

Ground Floor, No.5 Sui Lun Street
Fixed tenancy 1.5.1992 to 30.4. 1993

G/F	39.1 sq.m. @ $280	$10,948
Yard	16.0 sq.m. @ $280 x 1/8	$560
		$11,508
Full Market Rent	Say	$11,500
Rent passing	$4,600
Less rates	$240
		$4,360

Profit rent	$7,140
Monthly in advance for 7 months @ 8% p.a.	6.8624
	$48,998

Value of Profit rent

say

50,000 ======

Total value of profit rents = $24,000 + $44,000 + $50,000 = $118,000.

Fixtures and Fittings

38. The Applicants itemize in detail at pages 7-1 to 7-3 of Exhibit A7 the costs of improvement work to the subject premises, alleging that they spent $64,000 in 1987 to improve Ground Floor, No. 1 Sui Lun Street, $138,000 to improve Ground Floor, No. 5 Sui Lun Street and $176,500 to improve Ground Floor, No. 97 Pau Chung Street in 1990. The total cost is thus $378,500 and after allowing for depreciation the Applicants claim compensation under this head at $200,000. The Respondent's surveyor, Mr. Ng, estimates the loss at $63,100. There is no clear indication as to how the expert arrived at his assessment which apparently relates to costs of materials only. We find the Applicants' figure more realistic and accordingly determine compensation under this head at $200,000.

Miscellaneous Items

39. The Applicants further claim transportation fees for auction at $128,000.00, auction exhibition ground and security charges at $28,000.00 and auctioneers' charges at $173,424.80. The claims for transportation fees and auctioneers' charges are supported by receipts issued by the auctioneers and the carrier as shown in Exhibit A7.

40. There cannot be any serious dispute over the auctioneers' charges. However, the Respondent does not accept the amounts claimed for transportation fees and auction exhibition ground and security charges. Mr. James Ng, valuer for the Respondent, in his report Exhibit R3 at page 11 worked out the costs for transportation at $36,400 and those for exhibition ground and security at $13,000. These workings are based on certain assumptions and glossed over figures which we find difficult to accept. For example, Mr. Ng assumed that an open storage area of 5,000 sq.ft. plus two security guards would require only $13,000. We do not have a breakdown for the rent or wages for one guard. For all we know, three guards might be needed to cover the ground round the clock. Mr. Ng also assumed that two 3.5 ton lorries and 8 coolies for seven days would be needed to move the entire trading stock, machinery and equipment of the business. We are not shown how these relate to the total weight or volume of the bulk to be moved. No provision is made for insurance to cover theft or damage during shipment.

41. We have no reason to think that the Applicants' claims for these items are inflated or otherwise unjustified. Accordingly, these items are allowed in full as claimed.

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

	HK$
Loss of goodwill	2,400,000.00
Loss of profit rent	118,000.00
Loss on forced sale of stock, machinery and equipment	6,000,000.00
Loss of fixtures and fittings	200,000.00
Transportation fees for auction	128,000.00
Exhibition ground and security charges	28,000.00
Auction expenses	173,424.80
	9,047,424.80
say	9,050,000.00 ============

The Order

43. Accordingly, we determine compensation for the Applicants at $9,050,000. 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 Applicants' costs on the High Court party and party scale to be taxed if not agreed; 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 this 23rd day of January, 1996.