McDonald's RESTAURANTS (HONG KONG) LTD v. DIRECTOR OF LANDS

LDMT 2 OF 2004

 IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MTR Ordinance Application No. 2 of 2004

_______________

_______________

 

________________

J U D G M E N T

_________________

Background

1.   The Applicant is the tenant occupier of a shop in Connaught Road Central operating a fast-food restaurant of a household name there.  Certain road works were undertaken by the MTR lasting from August 1995 to August 1998.  The Applicant alleged that the road works caused a drop in the business turn over resulting in loss of profits during the relevant period.  For this loss the Applicant has brought the present proceedings to recover compensation under the Mass Transit Railway (Land Resumption and Related provisions) Ordinance (“the MTR Ordinance”).   The Government disputes both liability and quantum.

Liability

2.  The Applicant based its right to compensation on sections 17 and 18, and the First Schedule of the MTR Ordinance. More specifically, the Applicant alleges that the loss it has suffered falls under item 4 of the First Schedule of the ordinance. 

3.  To qualify for compensation under item 4, the alleged loss must meet four criteria, set out respectively under each of the columns of the schedule. The first column set out the cause for the loss. For the item 4, it has to be a loss caused by closure or substantial alteration of a street.  It is common ground that there has been closure or substantial alteration of the street during road works. The third column specifies the person who is eligible for the compensation, namely, owner or occupier of the property. Again there is no dispute in this respect.  The fourth column provides for time for serving the claim on the Government.  Equally it has no bearing in the instant case.  The present dispute relates to the criteria set out in the second column of the schedule.

4.  The second column of the First schedule provides for the basis of assessment. For item 4, it provides:

“The amount of any pecuniary loss or damage to any property held under a Government lease: Provided that, in the case of a temporary closure or temporary substantial alteration, that closure or alteration continues for a period exceeding 6 months.”

5.    Loss of profits is no doubt a kind of pecuniary loss.  However, Mr. Houghton, counsel for the Government, argues that on the true construction of the provisions under the second column, the loss must not only be pecuniary loss but of a relating to property held under a Government lease.  

6.  The Applicant does not hold any property under a Government lease. The alleged loss of business turnover or profits does not relate to any property. Mr. Houghton therefore submits that the Applicant is not entitled to be compensated for such loss.  o  

7.  Mr. Houghton points out that the MTR Ordinance adopts similar terms of the Street Ordinance which it has replaced. Under the Street Ordinance, only the leaseholders would be entitled to compensation. Mr. Lui, counsel for the Applicant, has no quarrel with this.  

8.  Mr. Houghton’s contention is that in construing the provisions in question, the effect of the Street Ordinance should be taken into account. He does not elaborate on the reasons for doing so, perhaps he is thinking of the legislative intent of the MTR Ordinance.

9.  Mr. Lui does not dispute that if these proceedings were to be brought under the repealed Street Ordinance, the Applicant would have no right to compensation. However he invited us to look at the whole of the MTR Ordinance in interpreting the true meaning of pecuniary loss.

10.    We do not think it necessary to look beyond the provisions. The plain meaning of its wording is clear and it does not require the pecuniary loss to be related to property. Mr. Houghton in effect, though not in so many words, submits that the provisions should be interpreted as if the word “relating” is inserted immediately after the word “damage”. There is no reason to interpret the clearly and unambiguously worded provisions by reference to a repealed Ordinance. There is no justification to look at the Street Ordinance in order to give a constrained meaning of the provisions, not even in context of legislative intent. Even if we should look at the Street Ordinance, there is nothing there or elsewhere to suggest that the MTR Ordinance is intended to keep the same scope of compensation as the Street Ordinance. 

11.  We are of view that the Government is liable to compensate the Applicant for the alleged loss.

Quantum

12.  The Applicant alleges that the road works has caused a reduction of  net profits totalling some 12 millions over a period of a little bit more than 3 years. Mr. Houghton submits it is an exaggerated claim.  He suggests that, if we stand back from the details and look at the photographs depicting the road works, we can easily understand his point.  Be that as it may, impression formed from the depiction of photographs can be misleading.  The scientific methods of assessment are more reliable. In any event one cannot simply brush aside results of methods by impressions formed after seeing photographs.  Both parties have argued their cases on analysis of figures. Whose analysis is more reliable cannot and should not be decided by the impression of photographs. We do not think that the photographs in the present case can be used to discredit the analysis of the Applicant’s experts.

13.  The Applicant engaged experts to work out the reduction in net profits during the period of road works.  The loss of profits is simply the difference between projected profits and actual profits. The Applicant’s case is that this loss is solely caused by the road works. A reduction in profits generally or in a particular outlet of the Applicant could have been caused by many other factors. That must be so in view of the nature and scale of business, and the nature of the products. Competition within the same location of the subject shop and competition with others providing similar services or products generally in the whole of Hong Kong are conspicuous examples of these other factors.  Some one high up in the hierarchy of the Applicant must have personal knowledge of these factors. Yet none of these personnel has been called to give evidence. Nor has the Applicant disclosed what information in this regard has been provided to the experts for their consideration.  The experts implicitly assumed that the loss was solely caused by the road works.  Mr. Houghton has rightly pointed out that the government expert correctly qualifies his own assessment as the maximum loss. For the same reason the Applicant’s own assessment can only be the maximum, as there might have been other factors affecting profits or sales which the experts have not been able to take into account.

14.  The Applicant’s experts work out the loss relying on certain comparable shops all operated by the Applicant.  One of these is in Pacific Place. They have chosen this comparable because of the results of a correlation analysis using financial data supplied by the Applicant. This shop scored the second highest among a number of short-list comparables.

15.   The person who originally conducted the analysis has not been called to give evidence. The expert called in his place has experience in using this analysis as his tool in analysing financial data. This is about all of his expertise.  He does not know well, if at all, the limitations or rationale of this analysis. What he could confidently tell us is that he is using a famous formula.  Definitely he is in no position to say why the correlation analysis should be employed to identify the comparables.

16.  In fact it is not clear at all as to which of the experts suggested or decided to use this method or to include the Pacific Place shop in the short list of comparables. The Pacific Shop is in a different location and set up.  Of the two experts who gave evidence for the Applicant, Mr. So, was probably the one who made up the short list of comparables, as he is the valuation surveyor. It is clear that the short list has been made on the sole basis of proximity to the subject shop. The surveyor has the requisite expertise in selecting comparables by reference to location and street characteristics.  Without the help of the correlation analysis, we do not think the surveyor expert can justify to have it short-listed or to prefer it to other comparables he has rejected. Because of the unsatisfactory state of evidence relating to the employment of correlation analysis, we do not accept the interpretation of the analysis as given by the experts. The high correlation coefficient might have been easily accounted for by other factors. The limitations of this analysis must be present and which are not put forward for consideration, let alone explaining them in court.  Without the results of the correlation exercise, we do not believe the surveyor would have chosen it as comparable or have it included in the short list in first place. We do not think Pacific Place shop is a suitable comparable at all. Mr. Houghton has enumerated the different features of the subject shop and the Pacific shop. His observation coincides with our knowledge and experience of the two location.  We do not think the Pacific Place shop can be used a comparable.  

17.   Mr. Houghton has made other criticisms on the experts of the Applicant. We agree with him. If one looks at the expert reports and the evidence of the experts engaged by the Applicant, it is difficult not to do so.  Mr. Houghton has gone so far as to dismiss the Applicant’s claim simply because of the unsatisfactory state of evidence of the experts. Fortunately for the Applicant, its able counsel, Mr. Lui, has come to its rescue salvaging something of value from the wreckage of the Applicant’s case.  It is the Central shop.

18.  As we have found in the particular circumstances of this case, the likelihood of factors other than road works affecting sales or profits cannot be ruled out. The Applicant advocates using the method of comparing like with like.  It is important that such comparables be found and credible analysis be done. It is a misconception by many claimants that they can put in an exaggerated claim and let the Tribunal trim it down. In reality we cannot and should not work out on our own the compensation for the claimant. We have to act on evidence. Mr. Houghton’s submission is correct. If the case is founded on poor comparables and discredited analysis, the claimant should get nothing.

19.  The availability of suitable comparable is vital in this case. Mr. Lui has urged upon us to use the Central shop comparable. We find that this is an exceptionally good comparable. Other factors which might affect this shop would in all probabilities affect in the same way as the subject shop and likely to the same extent. Using this comparable would eliminate or reduce to an insignificant extent the effects of other factors affecting our assessment.  Under these circumstances we can work out the compensation using the available evidence. Incidentally as we have a good comparable we do not need to use other comparables used by the government.

20.  The Applicant’s experts argue for a pick-up period of three months.  In this respect we prefer the assessment of the government expert. There should not be any allowance for pick-up period after completion of road works. Likewise we prefer the government assessment of various expenses.

21.  To sum up, we found the expert evidence of the Applicant’s experts has been discredited. We prefer the assessment by the government expert save that we would only use the Central shop as comparable.  The compensation we work out and round down is 6.9 million. We award this sum together usual interest and costs.  The actual working out of the compensation is put in Appendix for convenience.

Appendix

TABLE 1 ^(e)

Notes:

(a) Actual product sales are based on the unaudited monthly profit and loss accounts of the Subject Premises.

(b) Growth % is based on the product sales growth rate of “Yu To Sang” shop.

(c) Projected product sales

25/08/1995	-	31/08/1995		$2,571,562	x	7/31	=	$580,675
09/1995							=	$2,512,340
10/1995							=	$2,667,855
11/1995							=	$2,498,060
12/1995							=	$2,740,830
Projected product sales (25/08/1995 – 31/12/1995)							:	$10,999,761

(d) Projected product sales

01/1998								$2,039,671
02/1998								$1,878,153
03/1998								$2,042,779
04/1998								$2,125,959
05/1998								$1,887,706
06/1998								$1,851,738
07/1998								$2,064,423
01/08/1998	-	27/08/1998		$2,231,314	x	27/31	=	$1,943,403
Projected product sales (01/01/1998 – 27/08/1998)							:	$15,833,832

(e) This TABLE 1 follows the format of the hearing document bundle C-44.

TABLE 2 ^(a)

Notes:

(a) This TABLE 2 follows the format of the hearing document Bundle C-40.

(b) The adopted percentage of variable expenses to turnover is a simple average of percentages calculated for years from 1995 to 1998.