HO CHUCK RESTAURANT LTD v. HUNG HON MO AND ANOTHER

1990. No A1542

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF MESNE PROFITS

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1. On 3rd August 1990 the Plaintiff obtained final and interlocutory judgment under an amended Statement of Claim for the Defendant to deliver up vacant possession of shop premises No.38 on the ground floor of the Ho Chuck Centre, Kwai Chung in the New Territories. Under this judgment the Defendant was also ordered to pay arrears of rent at $11,700.00 per month and interest thereon at 1.5% per month from 1st February 1990 to the date of judgment and arrears of management fees at $2,062.10 per month and interest thereon at 1.5% per month over the same period. It was also ordered that mesne profits were to be assessed.

2. The assessment of mesne profits took place on 9th November 1990 at which the parties agreed that the period of the assessment was to be from 22nd February 1990 to the 30th September 1990 covering 7¼ months. It was also agreed that the management fees at the monthly rate of $2,749.50 were to be assessed over the same period and these were fixed at $19,933.88. The Plaintiff also undertook to give credit to the Defendant in the sum of $36,000.00 being the deposit paid by the Defendant in terms of the Tenancy Agreement between the parties.

3. At the assessment the Plaintiff called 2 witnesses. The first was Mr. Tam Hon Wing, the manager of the Plaintiff company, who gave evidence that Shop No.38 in the Ho Chuck Centre was re-let to Park N'Shop supermarket under an oral agreement some time between February and March 1990 for a term of 2 years running from early October 1990. This witness gave evidence that this lease included other premises approximately double the area of Shop No.38 with a total floor area of 1,000 to 2,000 sq.ft. When questioned about this Mr. Tam said that the area of Shop No.38 was about 600 sq.ft. and the area of the other premises included in the lease to Park N'Shop was about 1,000 sq.ft. This witness gave evidence that the oral lease to Park No'Shop was for a monthly rental of $50,000.00. Mr. Tam pointed out that Shop No.38 was adjacent to Park N'Shop and in a prime location in the shopping centre being close to the MTR entrance and the bus terminal. Mr. Tam contended that because Shop No.38 was in such a prime location the rental would be 20% to 30% higher than if it were located elsewhere in the shopping centre.

4. The second witness called by the Plaintiff was Mr. Tsui Yig Pui, a consultant surveyor with Raine, Horne & Lau, Francis Lau & Co. (Surveyors) Ltd. Mr. Tsui produced a written valuation report in which he concluded that the market rental value of Shop No.38 was in the range of $38,000.00 per month exclusive of rates and management fees for a term of 2 years commencing from 22nd February 1990. Considering that the previous rental of these shop premises was only $15,600.00 per month, it is not surprising that Mr. Tsui's valuation at $38,000.00 per month was subject to heavy criticism by the Defendant's solicitors. Mr. Tsui had set out a list of 5 comparables from within the same shopping centre on page 6 of his report and gave evidence that the best comparable was Shop No.58 being an adjacent shop of similar size but with an inferior location and layout. This shop No.58 was leased for 2 years in February 1990 for $31,000.00 per month. The area of Shop No.58 at 34.25 sq.m. is slightly larger than Shop No.38 at 33 sq.m. The unit rate ($1 sq.m.) arrived at for the lease of Shop No.58 in February 1990 was 905. At page 8 of his report Mr. Tsui had made upward adjustments from the unit rate of 905 used for Shop No.58 on the bases of 8% for better location and 20% for physical layout including wider frontages onto two arcade passages to arrive at his estimated unit rate for Shop No.38 of 1,158 ($1 sq.m.). When questioned about these adjustments in his report Mr. Tsui had to concede that to some extent at least these upward adjustments were arbitrary, although he claimed that in his experience as a surveyor the adjustments were reasonable in the circumstances and not excessive.

5. In cross-examination by the Defendant's solicitors Mr. Tsui admitted that he had never inspected the interior of the premises known as Shop No.38 before or since preparing his valuation report. He stated that he had only looked at the premises through the shop windows from the outside. Mr. Tsui also conceded that there were 4 empty shop premises in the Ho Chuck Centre of 52 shop units but including several businesses covering two or more shop units such as Park N'Shop supermarket. He denied that the restricted use of Shop No.38 as a "bakery only" in accordance with the terms of the tenancy for same would have adversely affected its market rental. Mr. Tsui persisted with his opinion despite the location of Shop No.38 next to a supermarket which also operated a bakery section on the basis that he considered a bakery to be profitable trade. Mr. Tsui admitted that Shop No.58 as his best comparable was also close to another MTR entrance and the bus terminus. He claimed that his market valuation of Shop No.38 at $38,000.00 was not wildly at variance with the existing lease of Shop No.38 to Park N'Shop for $50,000.00 where it made up only a third of the leased area on the basis that the total area of leased premises should not be directly apportioned to a percentage of the rental.

6. In re-examination Counsel for the Plaintiff tried to recover the situation by having Mr. Tsui contend that the user restriction of bakery only for Shop No.38 had not affected his valuation on the basis that a bakery was a normal trade like selling household appliances with normal profitability even though Shop No.38 did not have a monopoly on the bakery trade in the shopping centre.

7. In his submission Mr. K. Chik, Counsel for the Plaintiff, claimed that the user restriction for Shop No.38 in the previous tenancy between the parties should not affect the existing market valuation of the premises. Mr. Chik points out that Mr. Tsui in his report had not emphasised this restricted user aspect in reaching his valuation. Counsel maintained that the rental of the previous tenancy of these premises was irrelevant to the question of the existing valuation which is based on the open market value. Finally Mr. Chik submitted that trade competition is an irrelevant factor so that the user restriction on Shop No.38 should have little bearing on the market valuation of its existing rental.

8. Mr. S. Powner in his submission on behalf of the Defendant pointed out the considerable difference in rental from the previous tenancy at $15,600.00 per month to the figure claimed by the Plaintiff at $38,000.00 per month as the basis to assess mesne profits. He contended that the valuation report produced by Mr. Tsui failed to take account of the following factors:

1. That there were 4 empty shop units in the Ho Chuck Centre at the time.

2. The terms of reference for the valuation report include the user restriction to "bakery only" which has been ignored by the surveyor as a relevant negative factor considering the competition from an adjacent supermarket.

3. The best comparable Shop No.58 also had a prime location near another MTR entrance and the bus terminus.

4. The surveyor's 20% upward adjustment for the layout of Shop No.38 without making an internal inspection of the premises.

5. Mr. Tam's evidence that Shop No.38 and other premises twice the size of Shop No.38 relet to the adjacent supermarket for an inclusive rental of $50,000.00. It was submitted for the Defendant that the surveyor's market valuation of Shop No.38 at $38,000.00 was highly exaggerated and unreasonable.

9. After consideration of the evidence adduced at this assessment of mesne profits the Master is satisfied that there is some force and validity the in the objections raised by the Defendant to the surveyor's market valuation of the premises. In particular, the upward adjustments of 8% for better location and 20% for physical layout for Shop No.38 as compared to Shop No.58 are considered to be arbitrary and not warranted in the circumstances. Furthermore, the previous rental figure and the existing rental figure for Shop No.38 must be relevant in any assessment of its market rental. The comparable for Shop No.58 will be accepted as the basis for assessing the market rental valuation of Shop No.38 without any upward adjustment. That comparable concerns a lease taken up in February 1990 which is from the beginning of the assessment period and relates to shop premises of similar size, location and layout. The unit rate of 905 ($1 sq.m.) for the comparable will be applied to this monthly rental assessment of Shop No.38 as follows:

(Area) - 33 sq.m. x (Unit Rate) 905 = $29,865.00. This figure of $29,865.00 will be rounded off to $30,000.00. From this monthly figure the rent arrears at the rate of $11,700.00 per month for which judgment has been given to 3rd August 1990 will need to be deducted. $30,000.00 less $11,700.00 = $18,300.00 x 5 months 10 days to date of judgment = $97,600.00 plus period from 4.8.90 to 30.9.90 at $30,000.00 per month = $57,000.00 = total of $97,600.00 plus $57,000.00 = $154,600.00. Credit is also to be given to the Defendant for the rental deposit of $36,000.00 so that the outstanding balance of mesne profit is $154,600.00 less $36,000.00 = $118,600.00.

10. As no interest has been claimed for the mesne profits in the amended Statement of Claim there will be none awarded on the balance of mesne profits. Costs on this assessment to the Plaintiff, to be taxed if not agreed, with a Certificate for Counsel.