Hung Yee-shun v. Director of Lands

Crown Lands Resumption Reference No. 19 of 1995

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HEADNOTE

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Property law - Crown Lands Resumption - Carpenter Workshop -Business Losses - Valuation of Goodwill - Interest rate - Crown Lands Resumption Ordinance, Cap. 124, s. 10(2)(d) - Compensation at $4.68 million.

Ground floor premises used as carpenter workshop for many years when notice of resumption served. The premises were registered in the name of the wife of the applicant proprietor. The applicant proprietor claims loss of goodwill. The reported taxable profits of the business were very low and the applicant relies on bank statements to show better financial position of the business. The respondent contends that the workshop could have relocated and disputes the calculation of goodwill for lack of reliable profits record.

Held: (1) In accordance with s. 10(2)(d) of the Crown Lands Resumption Ordinance, the applicant is entitled to compensation that would restore them to the business position where it would be had there been no resumption. (2) Accepting the Applicant's evidence that he is old and could not find alternative accommodation for his business, compensation should be determined on total extinguishment basis. (3) Relying on calculation based on data extracted from bank statements, goodwill valued at $4.68 million. (4) The discount rate for capitalized profits should be the same as that for deferred reversionary interest which should be determined by considering the rate of return for business or property investment, not the rate of interest for personal injury compensation.

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 19 of 1995

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JUDGMENT

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The Applicant is the sole proprietor of a workshop known as Tung Hing Decoration Company ("the business") at premises situated at the Ground Floor of No. 2 Sui Lun Street, Ma Tau Kok ("the subject premises"). The subject premises were resumed pursuant to section 3 of the Crown Lands Resumption Ordinance, Cap. 124 ("the Ordinance") under a Notice of Resumption dated 26th June 1992, published in Volume CXXXIV Hong Kong Government Gazette on 3rd July 1992 as G.N. No. 2264 of 1992 and reverted to the Crown on 3rd October, 1992. Nonetheless, the Applicant was allowed to carry on the business at the subject premises until April 1994 when the Applicant was evicted.

2. Despite advice given by several members of the Tribunal at various stages, the Applicant decided not to engage legal representatives or valuers of any speciality to help him to prepare his case. The Tribunal has also repeatedly emphasized in open court that the burden was on the Applicant to prove each and every element of his claim. During the trial, the Applicant was given ample opportunities to enumerate all his losses, to adduce more evidence, if any, and to canvass more effectively for his claim.

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

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

In practical terms, the Applicant is entitled to reimbursement that would restore him to the business position where it would be had there been no resumption. In this regard, the Applicant has abandoned all but a claim for loss of goodwill on total extinguishment basis.

4. 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 Sui Lun Street, the Scheme site extended to Pak Tai Street, Wang Cheung Street, Ma Tau Kok Road, San Shan Road and Pau Chung Street in Ma Tau Kok. The present case is one of nearly thirty applications by property owners and business operators affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement. The claim for the value of the resumed subject premises registered as owned by the Applicant's wife has been dealt with in a separate case.

5. We now consider the Applicant's specific claim for loss of goodwill.

Total Extinguishment

6. Mr. Tam for the Respondent contends that the Applicant should have re-located thereby avoiding total extinguishment. In answer, the Applicant says that he commenced business on his own account at the subject premises in Sui Lun Street in 1988. Prior to that, he had been working at the same premises for his craft master. It took him some years to put the business firmly on its feet. He says he is over sixty. His hair is all white. He no longer has the physical and mental strength to search for new premises, to organize the removal of materials and machinery, to notify all his customers, and to struggle again with an effectively new business facing higher rent. In any event, he did try to look for alternative accommodation in vain. That is why he could not re-locate. We consider it a truism in life that the operator of a profitable business is most unlikely to fold his business before giving careful consideration to and making serious efforts for relocation so as to preserve the pride embodied in the business establishment and continue to reap the profits of an established undertaking. Having observed the Applicant and considered his evidence, and taking into account all factors and circumstances, we accept that the Applicant had to cease business as a result of the resumption. In the premises, the Applicant's claim for total loss of goodwill is justified.

Goodwill

7. The method we adopt to determine goodwill is the one we have applied in other cases arising from the Scheme. First, we establish the normal profit trends of the business before resumption. Conceivably, the reported profits of the business, the rental value of the premises at which the business is conducted or the wages and salary costs of the business may be used as basis for this purpose because each of them may somewhat relate to the profitability of the business. Once the annual profit trend of the business has been arrived at, it must be related by multiplication to the anticipated future life of the business, had the business premises not been resumed. Then, if appropriate, the product is discounted to take into account the fact that the business operator will have a sum representing capitalized future profits.

8. The business had been operating at the subject premises since 1988. It was essentially a carpenter's workshop, hired a number of craftsmen on casual basis, and specialized in producing made to order high value furnishings. We know the taxable profits of the business were for the year 1990-91 at $1,508 and for 1993-94 at $219,832. Therefore, Mr. Tam for the Respondent in final submission suggests that, assuming compensation is payable, the loss of goodwill should be $221,340 on total extinguishment basis or $156,500 on relocation basis. The Applicant in evidence says that tax returns are not reliable measures of the profitability of his business because they were prepared with the view to minimize tax liability as much as possible. Instead the Applicant produces a bundle of accounts and bank statements in Exhibit A2 to show the true financial position of the business for the years 1992-93 and 1993-94. Due to some calculation errors in Exhibit A2, the Applicant in place thereof used Exhibit A3 to prove that he made profits of $829,609 for 1992-93 and $2,204,066.30 for 1993-94. He says that these figures should be used by the Tribunal for determining the goodwill of the business. Having studied the Applicant's calculations in Exhibits A2 and A3 very carefully, we have no doubt he made a number of fundamental accounting and arithmetical errors which render his calculated profits inaccurate.

9. Mrs. Chan Ho Yuk-kuen, accountancy expert for the Respondent, has re-worked the profits of the business with her professional skills by relying on the bank statements provided by the Applicant. Making the most favourable assumptions for the Applicant, Mrs. Chan arrived at $515,164.40 as profits for 1992-93 and $1,993,343.66 for 1993-94. See Appendix IA of Exhibit R4. We accept that the results may not be entirely satisfactory because a few bank statements are missing. Mr. Tam for the Respondent would like to have the missing statements so that Mrs. Chan can have all relevant data. The Applicant, on the other hand, does not want any delay and objects to another adjournment for the purpose of obtaining copies of the relevant bank statements. We note that the missing bank statements relate to different bank accounts and random months. Having studied Appendices Ia and Ib of Exhibit R4, we do not think exceptional large deposits or withdrawal would have shown on the missing bank statements. If the missing bank statements are available, some minor adjustments may have to be made to the figures calculated by Mrs. Chan but such minor adjustments should be insignificant after further necessary accounting treatment. We, therefore, decided that the missing bank statements can be ignored.

10. Both the Applicant's own calculations and that of Mrs. Chan show huge increase in profit level from 1992-93 to 1993-94. The Applicant's own figures indicate a well over 100% jump. Mrs. Chan's figures suggests that the profits for 1993-94 is nearly 4 times that of 1992-93. Such large increase in the last year of trading may be due to genuine prosperity or other unknown reasons. We do not think it is safe to take the final one year high as evidence of a trend. Taking Mrs. Chan's figures as more reliable, the appropriate average would be around $1,250,000. We note that the Applicant estimates his wages outgoings at about $100,000 per month for the casual craftsmen he employed. By way of cross-check with the salary and wages cost approach, we factor in a 20% profit margin for the employer as in other related cases, the annual figure would be $100,000 x 1.2 x 12 = $1,440,000 which is reasonably close to $1,250,000. Considering that the wages outgoings is only a rough estimate by the Applicant, we think the figure of $1,250,000 is more reliable. Our rough estimate is that the profit rent should be approximately $50,000 per year. After deducting $50,000 profit rent, we obtain $1,200,000 as the base figure for calculating goodwill.

11. Since the subject premises were owned by the Applicant's spouse, we would adopt a multiplier of 5 as in similar cases. The product should then be discounted for interest on advance cash payment. We have in related cases applied an interest rate of 9% per annum but some of the applicants now question why we do not apply a 4% or 5% interest rate as in personal injury cases. We did not think the interest rate for personal injury cases should be adopted because victims in personal injury cases are rarely businessmen capable of investing for higher return. The applicants we deal with in these cases are all business operators or investors in property. A higher interest rate should be applied. Our experience is that conservative investment in property would yield about 6% per annum return; higher in the case of investing in a business undertaking. For the period in question, expert valuers in related cases have generally recommended an interest rate of 9% per annum to calculate deferred reversionary interest in real property. We have used that rate for a number of cases and none of the property owners have raised any objection or called any expert evidence to canvass for another rate. Deferred reversionary interest is the converse of capitalized future profits. If we use one rate for deferred reversionary interest and another for capitalized future profits, we would be applying double standards. For consistency and in line with professional valuation, we think the same rate should apply. The capitalization discount factor for 5 years at 9% is 3.8897, say 3.9. Accordingly, we determine the goodwill of the business at $1.2 million x 3.9 = $4,680,000.

The Order

12. Accordingly, we determine compensation for the Applicant at $4,680,000. Leave is reserved to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Ordinance. There is an order nisi that the Respondent shall pay the Applicant's expenses incurred in prosecuting his claim which we assess at $15,000 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.

13. 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 23rd December 1996