SO KEE TRANSPORTATION CO LTD v. THE SECRETARY FOR THE ENVIRONMENT, TRANSPORT AND WORKS

LDRW 36/2003

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

RAILWAYS ORDINANCE APPLICATION No. 36 of 2003

______________________

______________________

______________________

JUDGMENT

______________________

Background

1. This is the Applicant’s application for compensation to be determined pursuant to section 34(7) of the Railways Ordinance, Cap 519.  When the case first came up for trial in 2005, the parties agreed that we should decide the Applicant’s entitlement to claim as a preliminary issue.  We gave our decision on the preliminary issue on 17 October 2005 and found that the Applicant was not entitled to make any claim under the Railways Ordinance.

2. The Applicant was dissatisfied with our decision and brought the matter to the Court of Appeal.  The Court of Appeal in CACV 363/2005 set aside our decision and remitted the matter to us for retrial.

3. The present hearing is for the retrial of the matter.  However, the Respondent no longer wishes to challenge the Applicant’s right to claim compensation.  Thus, we only need to determine the amount of compensation payable to the Applicant at the retrial.

4. There are various issues raised by the Respondent, and we shall deal with them below.

Periodic or fixed term tenancy

5. The first issue raised by the Respondent is whether compensation must be assessed on the basis that the Head Lease would have come to an end by 31 December 2003.

6. The Respondent’s case is that the Applicant’s interest in the land would have come to an end by 31 December 2003, that being the date when the Head Lease would have come to an end by effluxion of time, and the compensation should be assessed on that basis.

7. The Respondent relies on Lord Millet NPJ’s observation in Director of Lands v. Yin Shuen Enterprises Ltd & Anothor [2003] 2 HKLRD 399, and submits that a sitting tenant is entitled to compensation for his lease, but not to the chance of obtaining its renewal, that being the true ratio of Lynch v. The Corporation of the City of Glasgow (1904) 5 F 1174.

8. The Respondent also submits that section 12(c) of the Lands Resumption Ordinance, Cap.124, went much further than the principle laid down in Lynch’scase.  Section 12(c) reads as follows:-

“	no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:
	Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed;”

9. In this regard, the Respondent relies on the case of Director of Public Works v. Leung Sze [1977] HKLTLR 158, where President Power (as he then was) held that the Lands Tribunal was “by virtue of s.12(c), prevented from taking into account any probability that the existing lease might have been renewed.”

10. The parties have no dispute that section 12 (c) is applicable where the lease in question is a fixed term tenancy, but it does not apply to a periodic tenancy.  A periodic tenancy, in terms of its original grant, continues for an indefinite period until terminated by notice (see Weco Textiles Manufactures Ltd v. Secretary for transport [1991] HKDCLR 77 and Dr. Lui Tat Hung v. The Director of Lands, LDLR 1/1998).

11. The Applicant, however, submits that the Head Lease is void at law as it was not made by deed.  It was saved by equity and a tenancy at will arose.  When rent was paid and accepted, the tenancy at will was automatically converted into a yearly or other periodic tenancy (see The Law of Real Property, Megarry and Wade, para. 14-039).  Thus, the Applicant argues that section 12(c) is not applicable when the Head Lease is void and a periodic tenancy is created.

12. Nevertheless, we agree with the Respondent that the Applicant’s submission in this regard is not a correct summary of the law as set out in Megarry and Wade. Paragraph 14-039 in fact reads as follows:-

“	A lease which did not satisfy the above requirements was void at law and passed no legal estate.  But a tenancy might arise independently of the lease.  If a tenant took possession with the landlord’s consent, a tenancy at will arose.  As the law formerly stood, as soon as rent was paid and accepted, the tenancy at will was automatically converted into a yearly or other periodic tenancy, depending on the way in which the rent was paid.  Such a yearly tenancy was a legal estate, for the law implied an oral grant from one acceptance of rent by the landlord.  Furthermore, it was held subject to any terms which the parties had agreed upon, so far as they were consistent with a yearly tenancy.
	An informal lease which was “void at law” under the Real Property Act 1845 was thus not entirely ineffective if a yearly tenancy later arose.  If, for example, the tenant had covenanted to do repairs, this became one of the terms of the yearly tenancy.  Other examples of such terms which are transferable to a yearly tenancy are given later.  Before 1875, therefore, the position in a common law court of a tenant who had entered and paid rent under a void lease was generally that of a yearly tenant subject to certain of the terms of the lease. The landlord was in a corresponding position.”
	(underlines added)

13. What the Applicant submits is just the common law position before the passing of the Judicature Act 1873-1875.  The Position after 1875 is different.  As explained by Jessel M.R. in Walsh v. Lonsdale (1882) 21 Ch.D. 9 at pp. 14-15:-

“

There is an agreement for a lease under which possession has been given.  Now since the Judicature Act the possession is held under the agreement.  There are not two estates as there were formerly, one estate at common law by reason of the payment of the rent from year to year, and an estate in equity under the agreement.  There is only one Court, and the equity rules prevail in it.  The tenant holds under an agreement for a lease. He holds, therefore, under the same terms in equity as if a lease had been granted, it being a case in which both parties admit that relief is capable of being given by specific performance.  That being so, he cannot complain of the exercise by the landlord of the same rights as the landlord would have had if a lease had been granted.  On the other hand, he is protected in the same way as if a lease had been granted; he cannot be turned out by six months’ notice as a tenant from year to year.”

(underlines added)

14. Thus, the tenants of the Head Lease must be treated as holding under the terms of the Head Lease and not under a yearly tenancy.  The tenancy expires when the term of the Head Lease comes to an end.

15. We also agree with the Respondent that a tenancy at will would not assist the Applicant in the circumstances of the present case, as such a tenancy would be implicitly determined when the lessor does acts inconsistent with its continuance, as for instance, if he alienates the reversion from the land (see Cheshire & Burn’s Modern Law of Real Property, at p. 509).  The lessor of the Head Lease, i.e. the Tong, did sell the land to the buyer, Mass Ocean, in 1999, and hence the tenancy at will was implicitly determined.

16. We are therefore of the view that there is no periodic tenancy as suggested by the Applicant.

Inextricably tied to the land

17. The Applicant also relies on the case of Director of Public Works v. Dr. Renald Ching & Dr. Marie Fung [1978] HKLTLR 320 to argue that section 12(c) is not applicable when the Applicant’s business is not inextricably tied to the land.  The Applicant contends that its business is relocatable in the Lok Ma Chau area and will not cease even if the Applicant has to leave the site in December 2003.

18. In Dr. Ching’s case, President Power adopted a different approach from Leung Sze’s case and gave the following judgment:-

“

Be that as it may, what we must now ask is whether in Hong Kong the specific words of     section 12(c) are such that the section operates so as to limit the amount of compensation that can be granted in this regard to the term of the tenancy.  The question we must ask is whether the partners when seeking an award under section 10(2)(d) are asking for compensation in respect of the probability of the continuance of their tenancy.  We are quite satisfied that they are not.  What they are asking under that section is compensation for the loss and damage to their practice.  The continued operation of the partnership practice was not dependent upon the continuance of any tenancy as its operation was not tied to the premises in which it is situated at the time of reversion.  The situation is quite different from that in Director of Public Works v Leung Sze, (1977) HKLTLR 158.  In that claim the Tribunal was satisfied that the small family grocery business was inextricably tied to its leased premises, and that a refusal to renew the lease would, inevitably, have brought the business to an end.  In such circumstances the Tribunal considered that section 12(c) must be applied so as to limit the amount of compensation that could be awarded.  In the present claim we are satisfied that section 12(c) has no application to the claim under section 10(2)(d) as the existence of the partnership practice was not dependent upon its occupation of the rented premises.”

19. The Respondent submits that President Power in Dr. Ching’s case reached the right decision but for the wrong reasons.  What distinguished Dr. Ching’s case from Leung Sze’s case was the nature of the tenancy.  In Dr Ching’s case, the tenancy was a monthly tenancy, whereas the tenancy is Leung Sze’s case was a fixed term one.  The Respondent contends that President Power should have ruled that section 12(c) was not applicable to the periodic tenancy in Dr Ching’s case.

20. It seems to us, however, that President Power did deliberately remove the operation of section 12(c) from cases where the business was not tied to the rented premises.  We do not think that it was wrong to do so.  When the business is not tied to the rented premises, it just means that the goodwill of the business is personal instead of locational.  For business with personal goodwill, it does not matter whether the lease would be renewed or not.  It is clearly right that section 12(c) is not applicable in such cases.

21. Thus, we do need to consider the formulation of President Power in Dr. Ching’s case and see whether the Applicant’s business was inextricably tied to the leased premises. 

22. We accept the Respondent’s submission that “inextricably tied to the leased premises” must mean that the nature of the business is highly localized.  Even for a “corner shop”, goodwill will not be lost if it moves to new premises right next door, or even a few shops down the same street.  Goodwill remains transportable within a certain “locality” which varies in size depending on the nature of the business. We may have extended the meaning of “inextricably tied to the leased premises” to “inextricably tied to the locality”, but this must be the logical interpretation of President Power’s formulation.  Location goodwill should not just be confined to a particular shop, but a locality.

23. The Applicant’s evidence is that it would suffer no loss in goodwill if it could relocate to another suitable site in Lok Ma Chau, but if it had to move to another area such as Lau Fau Shan, it would not have any business.  That was why it had to close down the business when no suitable site in Lok Ma Chau was found.  So for the Applicant, the “locality” is Lok Ma Chau and its business is tied to that area.  Clearly, the Applicant did not have personal goodwill such as those of the two doctors in Dr. Ching’s case.  The doctors could move to anywhere and the patients would still follow them.  The Applicant’s customers, on the other hand, would not follow the Applicant to anywhere outside Lok Ma Chau.  Although there was evidence from the Applicant that about 10% of the old customers went to the new container site in Lau Fau Shan, that business was set up by another company.  It clearly cannot be considered as the personal goodwill of the Applicant.

24. Thus, we are of the view that the Applicant’s case is totally different from Dr. Ching’s case and section 12(c) is still applicable to the Applicant’s case.  In other words, we have to assess the compensation on the basis that the Head Lease would have come to an end by 31 December 2003.

The basis of compensation

25. Under the Railways Ordinance (Cap. 519), the basis on which compensation to the Applicant for the resumption and rights of temporary occupation of the subject Site is to be assessed “as if the claim were made under Lands Resumption Ordinance”.

26. Under the Lands Resumption Ordinance (“the Ordinance”), it was provided in section 10 (2)(d) that,

“	10.	(2)	The Tribunal shall determine the amount of compensation (if any) on the basis of-
				….
			(d)	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 the resumption.”

27. Furthermore, the compensation to be assessed under section 10(2)(d) is subject to the additional rule in section 12(c) of the Ordinance.

Summary of the valuation of Applicant and the Respondent

28. We set out below a summary of the claims for various items of compensation submitted by the Applicant and the respective valuation figures submitted by the Respondent in respect of these claims:

Table 1- Summary of various items of claims and valuation

The Applicant’s case

29. Mr. So Chuen Yan, a director of the Applicant gave evidence regarding the background and the reasons for the Applicant’s claimed total extinguishment of the Container Yard business.  He produced a Witness Statement and a Supplementary Statement regarding what the Applicant tried to do before the resumption.  It is clear from the evidence that he, being a seasoned operator in the business, was the one director who controlled the Applicant and made the decisions.  After knowing about the proposed project affecting the Site, he instructed his solicitor in March 2002 to put forward a proposal to the Highways Department to see if the project could be revised to avoid affecting the Applicant’s operation.  However, he was advised that the project plan could not be changed so that after the resumption, there would not be sufficient space for the Applicant to continue both the Container Yard business and the Transportation business.  In the middle to end of 2002, he started a search for a suitable site that he could relocate the Container Yard business.  A few sites were identified but he eventually found that they were not suitable for the said business.  Having no alternative, the Applicant decided in February 2003 to cease its Container Yard business but retain its Transportation business in the remaining site.  The Applicant also decided that in order to mitigate the loss, the Applicant gave instruction to a plant & machinery auctioneer to sell all the relevant assets of the Container Yard business by way of auction, and to agree with the employees who were made redundant by the cessation of the said business to postpone paying their severance payments.

30. The Applicant called for the expert evidence of Mr. Alain Lau, a Chartered Estate Surveyor who was appointed to replace Ms. Ellen Lo (“Ms. Lo”), the expert surveyor who was initially instructed to file Rule 20 valuation report and supplementary reports since September 2004.  Basically, Mr. Lau adopted the valuation of Ms. Lo in its totality.  And Ms. Lo’s assessment of the goodwill of the Container Yard business on total extinguishment basis was a straight forward valuation, involving multiplying (i) the estimated yearly profit of the said business (at $2,570,504, as shown in the report prepared by Mr. Leung Lok Ming, an accountant expert called to give evidence by the Applicant by (ii) an estimated multiplier of YP (Years Purchase) 5, arriving at the figure of $12,850,000 (Exh. AR-2/p.173).

31. Ms. Lo also show in her report dated 20 September 2004 (Exh. AR-2/p.175) that the loss incurred under the heading of “loss on forced sale of vehicles, containers, plant & machinery, fixtures & fittings, reinstatement costs, etc.” was computed as follows: -

	Total Appraised Value	$8,754,360
Less-	Forced Sale Receipt	$3,682,500
		$5,071,860
Add-	Auction Expenses	$190,305
	Total Loss	$5,262,165

32. Although the Applicant had earlier indicated that they would seek additional compensation for (i) the loss on partial extinguishment of goodwill of the Applicant’s Transportation business (which remained in the remaining site after the resumption) and (ii) the loss of profits of the Applicant’s Transportation business due to resumption and temporary occupation by the Respondent, the Applicant confirmed at the beginning of the hearing that these 2 items of claims were both abandoned.

33. The Applicant also called for the evidence of Mr. Leung Lok Ming (“Mr. Leung”) as an accountant expert.  Mr. Leung produced in his expert report dated 20 September 2004 an extract of the summary of the management accounts of the Applicant for the years 1999 to 2002 showing the breakdowns for the Container Yard business and the Transportation business of the Applicant.  The audited accounts of the Applicant did not differentiate the revenues and expenditures of these 2 business divisions.  These management accounts were prepared by a Ms. Koo Nga Ping, the account supervisor of the Applicant.  The income and the expenditure of the Applicant were divided into 2 different divisions: the Container Yard business and the Transportation business.  Apparently, these management accounts were prepared for the purpose of this Application.  Ms. Koo however did not give evidence in the hearing.  Based on these management accounts, Mr. Leung calculated that the average profit of the Container Yard business of the Applicant for the 4 years from 1999 to 2002, was $2,570,504 (see Exh. AR-2/p.140).  As noted above, Ms. Ellen Lo actually relied on this average profit figure in estimating the loss of goodwill of the Container Yard business of the Applicant on the basis of total extinguishment.

34. Mr. Leung in giving oral evidence agreed to abandon his reference to the Price Earning ratios of 2 listed companies as a guide to the Price Earning ratio of the Applicant’s Container Yard business, for the purpose of finding the appropriate multiplier figure that should be applied to the yearly profit of the Container Yard business in estimating the loss of goodwill.

35. During the hearing, Mr. So Chuen Yan confirmed and clarified the amounts of remuneration that various directors of the Applicant had taken during the years 1999 to 2002.  This amounted to $3,785,352.  After deducting this sum from the total profit of the Applicant’s Container Yard business for these 4 years, the profit would be reduced substantially from $10,282,014 to $6,496,662.  In response to the Respondent’s queries on the issues of whether the directors’ remuneration and the Bad Debts (that surfaced in the accounts of 2003 when the Applicant ceased its Container Yard business) as shown in the management accounts of the Applicant should be deducted from the profits of the Container Yard business for the respective years, Mr. Leung prepared 2 computation sheets showing these adjustments.  The Respondent did not dispute the arithmetic accuracies of these computations.  The parties actually agreed that these computation sheets be produced as Exhibit AR-13 that consisted of 2 pages, with page 1 showing the analysis of directors’ remuneration for the years 1999 to 2002 and page 2 showing the said actual adjustments of directors’ remuneration and the Bad Debts (averaging back to each of the years 1999 to 2002).

36. However, in the hearing, it was still the Applicant’s primary case that the figure as adopted by Mr. Leung should be accepted for the purpose of estimating the loss of goodwill of the Applicant’s Container Yard business on total extinguishment basis.  Only if the Tribunal were satisfied that the adjustments of the directors’ remuneration and the average of the Bad Debts would be warranted that the Applicant would agree that the yearly profit figure should be revised to that as shown in Exhibit AR-13.

37. The Applicant did not call for the evidence of its plant & machinery expert, Mr. Simon T. K. Sham (“Mr. Sham”), a director of China Hongkong Auctioneeers Valuers Limited because the Respondent said she had agreed with the Applicant that the Respondent had no objection that the expert be not called.  Mr. Sham earlier filed his Rule 20 Report dated 20 September 2004 giving his opinion on the fair market valuation of various items of (1) plant & machinery, (2) stock, (3) motor vehicle/trailer, (4) container, (5) office furniture & equipment and (6) fixtures & fittings, in the total sum of $8,754,360 (Exh. AR-2/p.246).  Mr. Sham also produced a report of the auction sale held on 29 January 2003, which show that the total net receipt and the total expenses of the auction were in the sums of $3,682,500 and $190,305 respectively.  As noted above, Ms. Ellen Lo had used these figures in computing that the total loss incurred by the Applicant due to forced sale of vehicles, containers, plant and machinery, stock, fixtures and fittings, reinstatement costs, etc.” was in the sum of $5,262,165.

38. In support of the claim that the reduced site after resumption was insufficiently large enough for continuing the Container Yard business, the Applicant called for the evidence of Mr. Chin Kim Meng (“Mr. Chin”) of CKM Asia Ltd., Traffic & Transport Planning Consultant whose report was produced in Exh. AR-3/p. 836 to 875.  Mr. Chin demonstrated that after allowing for sufficient room for the operation of container cranes and the passage of vehicles, the remaining site could only optimally support the storage of 275 TEU containers.  The Applicant submitted that based on this finding, it is reasonable for the Applicant to decide to have a total extinguishment of the Container Yard business instead of continuing the said business in the reduced site.

39. Finally, the Applicant submitted that as a result of the closure of the Container Yard business, a number of employees were made redundant.  The Applicant therefore claimed for the loss due to the payment of severance payments to these employees.  The Applicant produced documents in support of this claim, which was set out in Exh. AR-2/p.316, in the total sum of $2,313,071.36.   The Applicant also produced another computation sheet in Exh. AR-4/p.1029 that gave a total severance payment figure of $2,258,883.54.

The Respondent’s case

40. In the Notice of Opposition filed on 4 September 2003, the Respondent denied that the Applicant had, in principle, any right to claim compensation and alternatively, the Respondent denied that the claimed amount was properly assessed and the said claim was considered to be excessive.

41. The Respondent called for the evidence of Mr. Lee Chi Ping (“Mr. Lee”), a surveyor expert who had replaced Mr. Robert Pendleton, the former surveyor for the Respondent who filed a Rule 20 report and a supplementary Rule 20 report valuation reports that were all produced as exhibits in this hearing.  Mr. Lee also produced his own report dated 25 May 2007 and a supplementary report dated 11 July 2007 (Exh. AR-7).  In the earlier report, Mr. Lee set down the details of a few sites that the Lands Department had notified the Applicant in 2002 that they might be suitable for relocation.  These include sites in Ngau Tam Mei, Mai Po Lung Tsuen, Kwai Tsing Container Port Road and West Kowloon Reclamation.  Mr. Lee concluded that there should be no difficulty of finding a relocation site by the Applicant if the Applicant had started a search for a suitable site earlier when the Applicant had known of the impending resumption and had not waited until the last few months before the resumption.

42. Mr. Lee said that Mr. So Chuen Yan of the Applicant as a seasoned operator of Container Yard business had a lot of experience in finding sites and relocation in the past.  According to the information shown in the audited accounts as well as the management accounts, it was apparent that the Applicant had no financial difficulty of carrying out a re-location.  Therefore, Mr. Lee shared the view of his predecessor Mr. Pendleton that as alternative sites were available and that Mr. So had both the financial ability to effect a relocation and that he was not near retirement age, the Applicant should have no difficulty of relocating its Container Yard business.  As such, the proper assessment for compensation for the loss of goodwill of the Applicant, if any, should only be on relocation basis.  He further opined that “if the Applicant had acted unreasonably in extinguishing the profitable business or change in business mode or the extinguishment was not the direct and natural consequence of the resumption”, the Applicant should not be compensated under the total extinguishment basis, following the Land’s Tribunal decision in Yip Kui trading as Tai Wo Trading Company v The Secretary for Transport (unreported, LDMR 52/2000) which was up-held by the Court of Appeal in CACV 379/2002 (unreported).

43. Mr. Lee also gave comments to the report of Mr. Chin, the traffic expert called by the Applicant.  Mr. Lee shared the view of Mr. Pendleton that “the maximum capacity of the remaining yard seems to have been understated by Mr. Chin.”  Mr. Lee summed up in page 10 of his report the following differences in the estimation of the storage capacity of the site after the resumption:

Table 2 - Estimates of the storage capacity (in TEU) in the Before & After situation

44. With regard to the Applicant’s claim for loss on forced sale of vehicles, containers, etc., Mr. Lee also agreed with Mr. Pendleton that the Applicant was acting unreasonably in effecting the forced sale of these items.  Mr. Lee alleged that as the Applicant was able to retain a significant portion of the original site after the resumption for the temporary storage of the vehicles, the containers, etc., there would be no need to sell all these items in a rush in one go by the auction.  Mr. Lee also criticized that the auction had been carried out very hastily, with the time difference between the earliest advertisement notice in the newspaper and the date of auction to be only 6 days.  So, if the weekend and the Sunday were discounted as most offices closed during either one of both of these 2 days, the potential bidders would only have 4 day to consider before the auction date.  And this includes the day for arranging inspection and actually carrying out inspection of the items for sale by auction.  Therefore, the Applicant submitted that the entire process of auction of these items were conducted not in accordance with the normal commercial sense and the usual practice with a view of getting the highest value for the auctioned items.  Further, should the Applicant retained these items and sold them by private treaty in the orderly manner or even by auction giving more reasonable time to potential bidders, the sale prices fetched would have been much closer to the Market Values of these items as shown in the valuation report prepared by Mr. Sham, the Applicant’s expert.  Mr. Lee also questioned that some motor vehicles that were reported to have been sold at auction actually related to the Transportation business instead of the Container Yard business and that some containers that were reported to have been sold were later found in the site.

45. Lastly, Mr. Lee opined that since the Applicant had acted unreasonably in extinguishing the Container Yard business, the Applicant should not be compensated for the severance payments of its employees.

46. The Respondent also called for the evidence of Mr. Norman Tsoi (“Mr. Tsoi”) who produced a report dated 16 July 2007 (Exh. AR-15) during the hearing.  Mr. Tsoi, replacing Mr. John Chiu as the Respondent’s accountant expert, estimated in his report the adjusted annual profit of the Container Yard business using both the 4-year weighted average approach as well as the 3-year weighted average approach.  Mr. Tsoi used weighed factors of 1, 2, 3 and 4 for the adjusted profit/(loss) for the years 1999, 2000, 2001 and 2002 respectively in arriving at the weighted average adjusted profit of $688,826.  After deducting the average of the Bad Debts in 2003 in the amount of $222,818, the adjusted yearly profit arrived at using a 4-year weighted average method was $466,008.  Similarly, using the weighed factors of 1, 2 and 3 for the latest 3 years of 2000, 2001 and 2002 respectively and after deducting the average Bad Debts of $222,818, the adjusted yearly loss was estimated to be $157,551.

47. Summing up all the evidence adduced by the witnesses of the Respondent, we find that the Respondent raised the main issue that the Applicant had not taken reasonable steps to mitigate the loss.  These include: (i) the Applicant could continue its Container Yard business in the reduced site after the resumption albeit in a smaller scale yet the Applicant chose to close down its Container Yard business entirely but only retain the Transportation business in the reduced site prior to the reversion date in March 2003; (ii) the Applicant did not start to look for suitable sites for relocation of the Container Yard business earlier, as soon as it understood from Government sometime in 2002 that the resumption and the temporary occupation were inevitable; (iii) the Applicant failed to consider moving the Container Yard business to any of the suitable sites that were available to the Respondent and made known to the Applicant by the Respondent at the time shortly before the resumption; (iv) the Applicant also failed to consider moving the Container Yard business to Lau Fau Shan area yet it re-started its Container Yard business over a leased site in Lau Fau Shan area some months later, in 2004.

48. The Respondent also submitted that the Applicant had decided to close down its Container Yard business simply because the Applicant found that the business was doing badly and making losses in 2001 and 2002, the last 2 full years prior to the resumption with no hope of a revival.

49. For the above reasons, the Respondent submitted that as the total closing down of the Container Yard business was unreasonable, the Applicant should not be compensated for the claim for the total extinguishment of the Applicant’s goodwill of the Container Yard business on the Site as well as other claims incidental to total extinguishment of business.  The Respondent said that for a claim under the total extinguishment to be appropriate, the Tribunal must satisfy that firstly, the cessation of the said business is caused by the resumption, and secondly, the Applicant as the claimant has taken reasonable steps to mitigate its loss.

50. As to “the loss on forced sale of vehicles, containers, plant & machinery, fixtures & fittings, reinstatement costs, etc.,” the Respondent did not oppose to the valuation of various items by Mr. Sham, the Applicant’s plant & machinery expert but submitted that the auction was hastily held; otherwise, the auction price received would be much higher.  In addition, the Respondent suggested that as there was sufficient space for the temporary storage of these items in the reduced site, there was no need for the Applicant to have sold these items by auction so that the eventual sale prices of these items would be much closer to the estimated market values had the Applicant chose the other option of disposal.

51. Also, the Respondent opposed that there should be any compensation for the office structures on the Site as the construction of these structures obviously contravened the terms of the Government Lease under which the land was held by the head lessee. 

52. Finally, on the issue of severance payment, the Respondent said in the final submission that the Respondent would agree with the Applicant’s computation of severance payments, subject to checking on arithmetic accuracy.  However, in the supplementary written submission filed on 31 July 2005, the Respondent stated that, “upon checking, it is discovered that the list on AR2/316 contained a number of inexplicable discrepancies, when compared to the computation shown on AR4/1029” and that, “R’s expert had attempted to seek clarification from A’s expert but had not received any concrete explanation to date.”

Summary of the adjusted profit figures of the Container Yard business of the Applicant for the years 1999 to 2002

53. Although the directors’ remuneration were not deducted in the Applicant’s original estimate of the yearly profit of the Container Yard business, there was no dispute from the Applicant that the said remuneration should indeed be deducted in arriving at the adjusted yearly profit for the estimation of the loss of goodwill.

54. However, the Applicant submitted that the Bad Debts as shown in the accounts for the year 2003, which business period was less than 2 months, should not be related back to the profits for the previous 4 years even though they were incurred in respect of sales of those years.  Firstly, it was submitted that in accounting practice, as confirmed by the Respondent’s accounting expert Mr. Tsoi, “one would not post it back to the year in which the sale took place”, rather “it should be written off as a debit expense when the trade receivable becomes unrecoverable”.  Secondly, the Respondent submitted that even Mr. Tsoi said that, “one would rarely make prior year adjustment unless it was extremely material”.  Thirdly, the Respondent argued that the unexpected bankruptcy of a customer long after the date of transaction should not affect the profitability of the Transportation business of the Applicant even though it may affect its actual profit.

55. We do not agree with the logics of the Applicant.  The objective of the exercise is to estimate the profitability of the business for the purpose of estimating of its goodwill.  We do not understand why it was not necessary to relate back the Bad Debts to the respective years after these were known.  More particularly, we note in re-examination that Mr. Tsoi in fact answered that in a year when the bad debt amount was about the same magnitude as the profit (such as year 2002 for the Container Yard business of the Applicant), it would be extremely material and that prior year adjustments should be made even for auditor’s accounts purpose.

56. There was also a dispute between the parties as to whether a simple average method or a weighted average method should be adopted for assessing the profitability of the Container Yard business.  Mr. Leung for the Applicant opined that a simple average method should be adopted for the profits for the 4 complete years (1999 to 2002) where the accounts of the business were available.  Using the simple average method and allowing for the adjustments of the directors’ remuneration and the averaging the Bad Debts incurred in 2003, the yearly profit was estimated to be $1,401,348. 

57. In support of the use of the simple average method, which will reduce the need to adopt an arbitrary weighed factor for each year, the Applicant produced Exh. AR-16, being the business receipts indices for service industries and service domains as a surrogate for the business performance of Container Yard business.  Under the Storage sector of the Service Industries of these business receipts indices, it shows that for the years 1999 to 2006, the respective indices are 116.3, 118.6, 100.9, 81.1, 77.4, 90.6, 100.0 and 110.2.  Based on these indices, the Applicant submitted that this show that the business was very much cyclical in nature.  As a result, it will not be correct for the Tribunal to use the most recent 2 or 3 years of the accounts of the Container Yard business of the Applicant to arrive at the average profitability of the business.  Similarly, it will also not be correct to give a heavier weighting to the accounts of the more recent years. 

58. On the other hand, Mr. Tsoi for the Respondent suggested that a weighted average approach giving greater emphasis to profit and loss account performance in more recent years should be adopted, following the approach as adopted by the Lands Tribunal in the case of Chan Kwok Lam v Director of Buildings and Lands [1986-88] CPR 447.  Therefore, the Respondent’s primary case is that it is appropriate to adopt the last two years’ figures only.  Also, the Respondent submitted that the use of simple arithmetic average over a span of 3 or 4 years was only appropriate “in the case of a normal profit trends where a business starts with a loss-making situation in start-up, and progressively makes higher profits.

59. Further, the parties submitted that they had agreed that the interest on capital, based on the value of the plant & machinery, etc. used in the business, had been agreed at the figure of $175,087, which should be deducted from the adjusted yearly profit determined by the Tribunal.

60. As noted above, Mr. Tsoi calculated in his report at Exh. AR-15 the adjusted annual profit of the Container Yard business, on a 4-year weighted average approach and a 3-year weighted average approach, in the sums of $466,008 and -$157,551 (i.e. a loss) respectively.  However, even Mr. Tsoi agreed, in re-examination, that the last 2 years’ figures of 2001 and 2002, in the absence of further evidence, was not normal because they had a sudden drop in profit.

61. In summary, we agree with the Respondent that both the directors’ remuneration and the bad debt amounts should be adjusted to arrive at the profitability figure for the purpose of estimating the goodwill of the Container Yard business of the Applicant.  However, we do not agree that either a 4-year weighted average or a 3-year weighted average, as shown in the Further Supplementary Report of Mr. Tsoi, the accountant expert of the Respondent (Exh. AR-15) should be adopted.  Instead, we prefer the use of the simple average method as adopted by Mr. Leung, the Applicant’s accountant expert.  Using all the yearly accounts that are available are, in our view, fair to both parties.  Besides, the use of the simple average method reduces the arbitrariness of the choice of the weighed factors and also takes into account that the performance of Container Yard business of the Applicant may be cyclical in nature, akin to the cycle of the storage sector of the service economy that we have observed from the published indices.  In this manner, the yearly profit is estimated to be $1,401,348 (as shown in Table 2 above).

62. Therefore, assuming that the directors’ remuneration were adjusted and that the total sum of bad debts in 2003 were adjusted back on an average basis to the 4 previous years of 1999 to 2002, the adjusted profitability was estimated to be $1,401,348.  The calculations are summarized below:

Table 3 - Analysis of the profitability of the Container Yard business of the Applicant

Loss on total extinguishment of goodwill of the Container Yard business

63. The next question is, after arriving at the estimated yearly profit of the Container Yard business of the Applicant, how would we estimate the loss of goodwill of the said business?

64. We have determined above that based on the existing tenancy of the Applicant, the background of tenancies pertaining to the Site and the interpretation of the Section 12(c) of the Ordinance, we only accept that the tenancy of the Applicant for the Site had an unexpired term up to 31 December 2003 (i.e. less than 10 months from the date of resumption in March 2003 and the date of cessation of Container Yard business as evidenced by Mr. So).  For the same reason, we have also determined above that the Applicant should not be compensated for the loss on total extinguishment of goodwill of the Container Yard business as if the Applicant’s tenancy was a periodic tenancy on the Site or there should be no discount on the goodwill so assessed as if the Applicant were the owner of the Site or held a long lease of the Site.  Instead, the goodwill of the Container Yard business of the Applicant, even if we accept that that could be assessed on the total extinguishment basis, should be restricted by the fact that the Applicant would only have, at most, a remaining tenure of 10 months when she could continue the business on the Site if there were no resumption.

65. Therefore, on the above basis and adopting the adjusted yearly profit of the Container Yard business of $1,401,348 as assessed above, we proceed to assess the loss on total extinguishment of goodwill of the Container Yard business of the Applicant below: 

	Estimated yearly adjusted profit of the Container
	Yard business of the Applicant	$1,401,348
Less	Interest on the Applicant’s capital (agreed)	$175,087
	Estimated yearly profit	$1,226,261
	Estimated Goodwill ($1,226,261 x10 /12)	$1,021,884

66. We have deducted from the estimated yearly profit of the Container Yard business the interest on the Applicant’s capital that was agreed by the parties to be $175,087.  We have therefore arrived at a figure of $1,021,884 as to be the estimated loss of goodwill of the Container Yard business of the Applicant.

The optimum capacity of the Site after the resumption

67. After having considered the evidence adduced by the parties, we are of the opinion that the evidence of Mr. Chin is preferred to that of Mr. Lee.  Mr. Chin is a recognized traffic and transportation expert.  He attempted to consider the After situation of the Site after taking into account the Guideline for the Design of the Container Yards as published by the trade body in the Container Yards business.  There is nothing wrong with that.  He was also criticized for being too conservative.  We do not agree that an expert is “conservative” simply because he has taken account of the guidelines of the professional and the trade bodies.

68. On the other hand, we are astonished at the amateur manner that Mr. Lee attempted to present the design layout of the Site in the “after” situation.  That he did not properly draw his suggested layout on an accurately scaled drawing is something that an expert should not do in a case such as this which involves tens of millions of dollars of claims, days of Court’s hearing time and substantial legal costs.  We do not wish to put all the blame on Mr. Lee who was, we note, an experienced and qualified valuation surveyor but with no particular expertise in transport planning and traffic management.  We do not understand why those instructing Mr. Lee did not see necessary to appoint another properly qualified professional to take up the particular aspect of expert evidence that was handled by Mr. Lee.

69. The Respondent submitted that according to Mr. Chin’s estimate, the percentage reduction in capacity was far greater than the percentage reduction in size of the Site when comparing the ground before and after the resumption.  We are not surprised because from what we have seen from the pictures, we find that the containers’ vehicles as well as the trailers, the cranes etc. require a very large space for manoeuvring so that there is a minimum size of the site under which it is difficult to operate a profitable container yard business. 

70. All in all, we agree to adopt the proposed layout of Mr. Chin as to represent the optimum layout of the Site after the resumption.  We further accept the evidence of the Applicant’s witnesses that because of the resumption, there was insufficient space left in the remaining site for the continuation of both the Transport business and the Container Yard business.  Therefore, we also find that failing the availability of a suitable relocation site, the Applicant was right to seek a cessation of the Container Yard business leaving the continuation of the Transport business in the remaining site.  This was the best alternative available to the Applicant at the date of resumption, the relevant date for consideration of the compensation payable under the Ordinance.

Whether the Applicant had failed to take reasonable steps to mitigate the loss by not relocating to another site

71. We have heard evidence from the witnesses that certain sites that were or might be suitable for relocation of the Container Yard business by the Applicant were made known to the Applicant in 2002.  We have however also heard evidence from Mr. So Chuen Yan of the Applicant that he had considered some of these sites but found them all to be not suitable for one reason or another.  A lot of time was also spent in the examination in chiefs, cross-examinations and re-examinations of witnesses regarding the alternative sites that were or might be suitable for relocation.

72. In particular, Mr. So told us that some of the sites were too big involving too much capital investment while in 2002 and early 2003, he also did not consider Lau Fau Shan to be a viable location as it was too far away from his established terrain in Lok Ma Chau.

73. We agree with Mr. So that of the sites cited by the Applicants, they were either in the various stages of seeking planning approvals or were not permitted for the use as a Container Yard. 

74. We also agree with him that Lau Fau Shan, being a considerable distance away from Lok Ma Chau, is quite a different area in terms of both the clientele as well as the source and destination of the containers as far as the Container Yard business is concerned.  Therefore, we accept Mr. So’s evidence that in 2002 and early 2003, he did not think that the sites in Lau Fau Shan were suitable for relocation of his business.  Although Mr. So eventually set up another business in Lau Fau Shau in 2004, it cannot be inferred that the deliberate decision of Mr. So to have not considered relocating to Lau Fau Shan before the resumption in March 2003 was necessarily a wrong or unreasonable decision leading to the Respondent’s conclusion that the Applicant had failed to take reasonable steps to mitigate the loss.  We find that this conclusion cannot be right.

Whether the Applicant had failed to take reasonable steps to mitigate the loss by agreeing to an auction sale that was hastily done

75. We find that although the Respondent submitted that the auction sale had been hastily done as a result of which the Respondent alleged that the Applicant had failed to take reasonable steps to mitigate the loss.  However, we are surprised that the Respondent saw fit to agree with the Applicant that the Respondent did not have to call for the evidence of Mr. Sham, the plant & machinery expert of the Respondent and the auctioneer.  The Applicant has also not adduced any expert evidence in support of their claim.

76. Therefore, although we also find it quite odd that the Applicant had saw fit to limit the time for “advertising” the auction sale, we had no evidence as to the general practice in the field in Hong Kong.  Mr. So explained that it was necessary to complete the auction sale within a short time; otherwise, it would be even more difficult to find prospective bidders during and after the Chinese New Year season in 2003.  Mr. So also said that the arrangements were made by the auctioneer who after all has been practicing in Hong Kong for some years with HKSAR Government as one of his clients.  Hence, we find that we could not infer from this oddity that the Applicant had failed to take reasonable steps to mitigate the loss.

77. Also, we note that the Respondent did not dispute the valuation of the market values of various items of vehicles, etc. by Mr. Sham, the Respondent’s expert.  As to the Respondent’s objection that the office structures should not be compensatable as they were erected contrary to the term of the lease under which the land was held, we find on balance that there was insufficient evidence to prove that they were structures as submitted by the Respondent.  Therefore, we would not exclude this itme in the computation.  Summing up, we accept the Applicant’s estimate of loss on forced sale of vehicles, etc. in the sum of $5,262,165. 

Recoverability of the loss of severance payments if s. 12(c) held to apply to the Head Lease

78. The Respondent disputed that 7 drivers were not part of the Container Yard operation and therefore their severance payments should not be compensatable in any event.  We have heard explanation from Mr. So that in the operation of the Container yard business, they need the service of drivers bringing the clients’ containers to and fro the piers or other locations.  We accept this explanation of Mr. So and find that the severance payments to the drivers are also compensatable.

79. In the Respondent’s “Supplemental Submission on Section 12 (c) and Lynch v Glasgow” filed on 31 July 2007, counsel for the Respodnet Mr. Miu made very detailed analysis and submission on the issue of “recoverability of severance payment etc. if s.12 (c) held to apply to Head Lease”. 

80. The Respondent submitted that upon closer scrutiny of the two cases referred to in page 145 of HH Judge Cruden’s book, i.e. Scaiffee Ltd. v. Chow Hei Chun [1983] HKDCLR 11 and Cheung Tai Hee v Director of Lands [1983-1985] CPR 497, they did not support the Applicant’s contention that the claimed items such as severance payment remained recoverable from the Respondent even if this Tribunal finds that section 12(c) of the Ordinance applies and that the Tribunal must not assume that the Head Lease would not be renewed beyond 31 December 2003.

81. We would like to quote from para. 30 of Mr. Miu’s written Supplemental Submission the following:

“	… We submit that the Tribunal should approach the issue of compensation in the following manner, step-by-step:-
	(1)	S.12(c) provides that the Tribunal must not take into account any expectation that the Head Lease will be renewed;
	(2)	Therefore, A must the subject premises by 31 December 2003;
	(3)	Resumption had brought forward that date by 10 months;
	(4)	What additional disturbance or loss has this acceleration caused?”

82. However, we do not agree with the Respondent that simply because the Applicant’s tenancy had only less than one year’s unexpired tenure, the Applicant’s cessation of the Container Yard business was not caused by the resumption but that the resumption only brought forward the cessation by 10 months.  On the contrary, we find that we should consider the situation faced by the Applicant as at the date of resumption as laid down by the Ordinance and the Gazette Notices governing this resumption, but not, as submitted by the Respondent, seek to compare her position at the date of resumption and the hypothetical situation 10 months later if there were no resumption.  We should ask ourselves, was the Respondent required by law to give up possession of the Site before the reversion date set down in the Gazette Notices, which were in turn governed by the wordings of the Ordinance authorizing this resumption?  If yes, should the Respondent try its best at the time, prior to the resumption, to mitigate the loss by trying to find an alternative accommodation for relocating?  Should the Respondent, failing relocating to another site that was suitable for its business activities, again prior to the resumption date, try to lay off her surplus employees and pay the severance payments to these employees in order to mitigate further loss?  We answer both questions in the affirmative, notwithstanding that without the resumption the Applicant may face the same problems 10 months down the road, before 31 December 2003.

83. We do not agree with the submission of the Respondent that this item of loss is not compensatable because the resumption has only accelerated the date of payment since the Respondent would have to bear these payments if the Respondent were allowed to stay in the Site until the expiry of the remaining lease term of the existing tenancy.  We could immediately think of a situation when, for example, if some of these employees left the Applicant for other employment voluntarily in the next 10 months, the Applicant may not have to bear the severance payments for these employees.  Also, if the Respondent could find a suitable site for relocation in the next 10 months such that all the employees could be relocated to the new site, then there would be no need for incurring the severance payments.

84. We therefore decide to award the compensation for these claimed items.  Although the Respondent indicated in the hearing that they agreed to the Applicant’s computation of severance payments, subject to checking on arithmetical accuracy, the Respondent said in the Supplemental Submission filed on 31 July 2007 that the Respondent could not accept the computation attached to the Applicant’s Closing Submission. 

85. In the circumstances, since the Applicant has filed 2 separate items of claims in Exh. AR4/p.1029 and Exh. AR-2/p.316, we decide to award the lesser of the two figures, i.e. $2,258,883 (i.e. the figure shown in Exh. AR-4/p.1029).

Orders

86. Accordingly, we order that the Respondent do pay the Applicant compensation for the resumed Lot in the sum of $8,542,932 the breakdown of which is as follows:

(1)	for loss on total extinguishment of goodwill of the Container Yard business in the sum of $1,021,884;
(2)	for loss on forced sale of vehicles, containers, plant and machinery, stock, fixtures and fittings, reinstatement costs, etc. in the sum of $5,262,165; and
(3)	for severance payments for the employees of the Applicant in the sum of $2,258,883.

87. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Listing Officer, with liberty to apply for any other ancillary and consequential matters.