SILVERCORD LTD v. OFF THE WALL LTD

DCCJ4367/2016

[2018] HKDC 471

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.4367 OF 2016

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ASSESSMENT OF DAMAGES

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1.  This is an assessment of damages arising from the breach of a tenancy agreement. By a written tenancy agreement dated 25 Aug 2015 (the agreement), the plaintiff landlord let to the defendant tenant Shop No.220 on 2/F of Silvercord (the premises) at 30 Canton Road for 2 years from 17 Aug 2015 to 16 Aug 2017.

2.  On 1 Sept 2016, the plaintiff commenced these proceedings against the defendant for breach of the agreement.

3.  No notice of intention to defend having been filed, final and interlocutory judgment was entered on 17 Nov 2016 (the judgment) against the defendant for (1) the sum of $368,606.92; and (2) interest on the sum of $362,426.12 at 3% p.a. above HSBC prime rate from 27 Feb 2016 to the date of the judgment and thereafter at judgment rate until payment.

4.  By para (3) and (4) of the judgment, damages for breach of the agreement and damages representing costs on indemnity basis remain to be assessed.

5.  By order of Registrar Ho dated 24 Aug 2017, discovery by way of list of document and service of witness statement as to quantum was ordered.

6.  On 7 Sept 2017, the plaintiff filed and served its list of documents.

7.  On 30 Nov 2017, the plaintiff filed and served the witness statement of Chin Ho Wing (Chin).

8.  By another order of Registrar Ho dated 14 Dec 2017 (the Order), this matter was set down for assessment on 24 Apr 2018. When this matter came before me on 24 Apr 2018, the plaintiff was represented by counsel Ms Miranda Li (Ms Li) while none turned up on behalf of the defendant.

9.  However, I am satisfied on the affirmation of Li Kai Chi filed on 17 Apr 2018 that the plaintiff had successfully served the Order and the assessment bundle at the current registered office of the defendant and on the strength of an undertaking given by plaintiff’s solicitors to file an additional affirmation to prove service of Ms Li’s written opening and list of authorities at defendant’s registered office address, I decided to proceed with the assessment in the absence of the defendant as requested by Ms Li.

10.  Ms Li had helpfully prepared a written opening dated 18 Apr 2018 which set out the plaintiff’s 5 heads of claims and the amounts sought thereof. She adopted it before me and drew my attention to relevant clauses of the agreement and also pertinent documents in the assessment bundle relied by plaintiff.

11.  Chin, plaintiff’s leasing officer, was the only witness called by the plaintiff at this assessment. He gave evidence in punti and adopted his witness statement as his evidence-in-chief as allowed by me. He answered a few questions from this court and Ms Li did not see the need to re-examine.

12.  After closing plaintiff’s case, Ms Li proceed to make short and succinct oral closing submissions on behalf of the plaintiff.

Analysis

13.  I have carefully and fully considered all evidence, submissions and authorities drawn to my attention at this assessment of damages.

Documentary evidence

14.  Having carefully considered their contents, I give full weight to all documents adduced before me by way of documentary evidence. They are inherently plausible and consistent with one another.

Credibility of Chin

15.  For Chin, most of his evidence is, I note, supported by the documentary evidence I accept above. His evidence is, I find, also inherently plausible. Having observed him giving evidence in the box, I find him an honest and reliable witness, and I accept his evidence set out below.

Findings of facts

16.  Based on my assessment of the evidence above, the facts I find are as follows.

17.  By the agreement in para 1 above, the plaintiff let the premises to the defendants for 2 fixed years from 17 Aug 2015 to 16 Aug 2017 (both days inclusive).

18.  The agreement provides for the defendant paying to the plaintiff: -

(1)  Minimum monthly rent of $90,000 per calendar month payable in advance on 1^st day of each calendar month[1];

(2)  Percentage rent at such amount calculated as 12% of defendant’s gross monthly revenue minus the minimum monthly rent, if there is excess at any calendar month[2];

(3)  Service charges at $6,854.40 per calendar month[3]; and

(4)  Rates charged on the premises as assessed by the government quarterly in advance and due on 1^st day of Jan, Apr, July & Oct each year[4].

19.  Under the agreement, the tenant shall take up the premises on a “bare shell” basis[5].

20.  The agreement requires the defendant to yield up the premises in bare-shell condition at its sooner determination and to remove at its expenses all fixtures and additions to it and to make good any damage so caused. In the event of the defendant failing to do so, it shall on demand forthwith pay to the plaintiff all costs and expenses of such reinstatement or making good[6].

21.  The agreement has the usual re-entry clause in the event of failure to pay rent and for other breaches[7]. It further provides that all costs and expenses including legal costs (on a full indemnity basis) incurred by plaintiff in demanding rent and other charges payable and in exercising its remedies or in any actions or distraint for their recovery shall be paid by the defendant and shall be recoverable from it as a debt or deductible from any deposit held by the plaintiff.

22.  The agreement also requires the defendant to pay to the plaintiff upon its execution deposit totaling $611,726.40 (the deposit), which will be repayable without interest on its sooner determination if there are no breaches of its provision. In the event of any money due to the plaintiff, the plaintiff may apply the deposit towards payment of such sums without prejudice of its other rights under the agreement[8].

23.  For the full and exact wordings of the aforesaid provisions, the agreement should be referred to.

24.  On the execution of the agreement, the defendant did pay the deposit in full to the plaintiff, as evidenced by a statement of account before me[9].

25.  Save for some elementary landlord’s structures, fixtures and fitting itemized in a Handover Form dated 17 Aug 2015[10], the premises were handed over to the defendant on the said date in “bare shell” conditions, as evidenced by photos before me[11]. By a remark in the form, the defendant is reminded to reinstate the premises to its bare shell condition on its sooner determination.

26.  In breach of the agreement, the defendant defaulted in payment of rent and service charges since 1 Nov 2015 and rates since 1 Jan 2016.

27.  In an attempt to recover its rent due under the agreement, the plaintiff took out distraint action DCDT No.3302/2015. Goods itemized in an inventory list[12] worth $1,000 odd were seized from the premises by bailiff on 27 Jan 2016 (and photos of the premises were taken on that day before me[13]).

28.  Auction of seized goods took place on 3 Feb 2016 but, I accept from Chin, none of them was sold and no proceeds of sale was realized. The entire expenses of this abortive exercise, I find, comes up to $11,967.30. It is supported by a fax letter from District Court Registry to the plaintiff dated 16 May 2016 in which a figure of $11,717.30 is found. I further accept from Chin that a fixed stamp duty in sum of $250 was payable, and has been paid by the plaintiff, in this distraint action.

29.  In further breach of the agreement, the defendant deserted or abandoned the premises without plaintiff’s consent in or about Jan 2016. The plaintiff eventually re-entered the premises on 19 Feb 2016 and recovered its possession.

30.  Upon repossession, the premises was found in breach of the agreement not in its original bare shell conditions. Hence, the plaintiff had by its agent invited tender to carry out reinstatement works to it. Out of 10 contractors invited, 4 replied by the deadline of tendering on 3 Feb 2016 and the price quoted ranged from $85,200 to $266,000[14]. The lowest tender submitted by one Hugh Profit Construction Engineering Ltd. (the contractor)[15] was selected.

31.  The contractor carried out the reinstatement works from 26 Feb 2016 to 10 Mar 2016 and, after completion, the premises was restored to its original bare shell condition as evidenced by photos before me[16] and the contractor was paid $85,200 by the plaintiff[17].

32.  As evidenced by a lease kit of the premises[18] before me, the plaintiff offered to lease out the premises for 2 years at minimum monthly rent of $90,000, percentage rent at 15% of gross monthly revenue and 1-month rent-free period after recovering its possession. These were, I accept from Chin, asking prices and negotiable, and in line with the overall portfolio of the shopping mall in question and existing rent of similar properties therein.

33.  Despite no document was produced before me, I believe from Chin that such offer above was also publicized through real estate agents, promotional flyers distributed by fax and email, and cold calls by his colleagues under his direction and supervision.

34.  Approach was, I accept from Chin, made by 2 or more potential tenants but none was interested to inspect the premises. One Satami International Ltd (Satami), who was previously interested to take up a lease at the shopping mall in question but failed, was contacted again and quickly showed interest in the premises.

35.  I accept from Chin that Satami, while accepting other asking terms of the plaintiff, including 15% percentage rent, counter-offered at a minimum monthly rent at $70,000 level. After further negotiation between the plaintiff and Satami during a 2-week period, a minimum monthly rent of $81,000 was finally agreed upon by the two and the plaintiff entered into a tenancy agreement dated 24 Mar 2016 (the replacement agreement) to let the premises to Satami for 2 years from 14 Mar 2016 to 13 Mar 2018.

36.  During these 2 weeks of negotiation between the plaintiff and Satami, while the premises was still being offered for lease, no other potential tenant came forward to express interest.

37.  As such, the premises was only left vacant after plaintiff’s repossession of it on 19 Feb 2016 until it was let out again to Satami on 14 Mar 2016.

38.  In terms of monetary provisions, the provisions of the agreement and that of the replacement agreement are almost the same. The only material difference between the two is $8,000 difference in monthly minimum rent and a higher percentage rent of 15% of gross monthly revenue for the latter as opposed to 12% for the former. Due to one-month rent-free period in the latter, rent began to be payable by Satami as from 14 Apr 2016, but rates and service charges remained payable during the rent-free period.

39.  For such term of the replacement agreement up to 16 Aug 2017, the original date of expiry of the 2-year term under the agreement, I accept from Chin and plaintiff’s turnover report of the premises[19] that Satami had only paid minimum monthly rent of $81,000 to the plaintiff and no percentage rent at all (as 15% of Satami’s monthly gross revenue never exceeded $81,000).

40.  Hence, allowing for such rent the plaintiff had received from Satami under the replacement agreement, it was out of pocket in terms of rent of the premises in the total sum of $304,779.64 for the period from 20 Feb 2016 to 16 Aug 2017 due to defendant’s breaches of the agreement. The detailed calculations can be found at para.37(1) of the witness statement of Chin.

41.  Allowing for such service charges the plaintiff had received from Satami under the replacement agreement, for defendant’s breaches of the agreement, the plaintiff had been out of pocket in terms of service charges payable under the agreement in the total sum of 5,238.02 for the period from 20 Feb 2016 to 13 Mar 2016. One can find the detailed calculations at para.37(2) of Chin’s witness statement.

42.  For the same period from 20 Feb 2016 and 13 Mar 2016, the plaintiff had to pay out from its own pocket rates in the sum of $3,867.03 due to defendant’s breaches of the agreement. The quarterly payable amount of the premises as per notice from the Rating & Valuation Department dated 14 Mar 2016[20] was $15,300 and the detailed calculations are at para.37(3) of Chin’s witness statement.

43.  Finally, after the judgment was obtained on 17 Nov 2016, the plaintiff had applied $389,599.91 out of the deposit towards satisfaction of paragraph (1) and (2) of the judgment with interest calculated up to 17 Nov 2016 and it now holds a balance of $222,126.49 of the deposit (detailed calculations are found at para.27 - 31 of the witness statement of Chin).

Applicable principles of law

44.  I have had regard to judgment of Master de Souza in Wing Siu Co. Ltd. v Goldquest International Ltd., unreported, HCA 3183 & 4145/2001, 18 Aug 2006, where the law was succinctly summarized at para.7 – 8 thereof as follows:

“An aggrieved landlord’s entitlement to damages for wrongful repudiation of a tenancy agreement following general contractual principles is well established …. He can legitimately anticipate in the measure of damages to be awarded, such damages as reflecting the rental, service charges, rates and reinstatement cost stipulated in the tenancy and therefore payable were the agreement to be permitted to run its full course, subject always to a duty to minimize his loss…. He is, accordingly, expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at a market rent… However, it falls upon the errant party to establish that mitigation has not taken place….

The duty to mitigate is not onerous as the landlord is not required to do anything other than in the ordinary course of business:…”

Plaintiff’s heads of claims

1) costs of distraint action

45.  I accept the submission of Ms Li that all the costs and expenses of the distraint action is recoverable from the defendant by way of a debt under provision of the agreement at para.21 above.

46.  In any event, this is a reasonable step to mitigate plaintiff’s loss for defendant’s breach of the agreement and the fact that it turned out to be a failure at the auction does not prevent plaintiff’s recovery of such costs and expenses from defendant. Considering the costs of the auction itself being close to $3,000 and the seized goods worth only $1,000 odd, I do not find it reasonable for the plaintiff to spend further money on a second auction to try its luck.

47.  I award the sum of $11,967.30in full to the plaintiff for this head of claim.

2) loss of rent

48.  I also accept Ms Li’s submission that the plaintiff had acted reasonably in re-letting the premises to Satami in all the circumstances of this case.

49.  I first find that the plaintiff had carried out reasonable steps to promote and market the premises for re-letting on the facts as I find above.

50.  Though the replacement agreement was, I do note, at a lower monthly minimum rent of $81,000, such offer of immediate occupancy came soon after the premises became vacant and there was no other interested party making offer at around the same time of plaintiff’s negotiation with Satami. It was thus uncertain if and when another offer would be forthcoming, not to mention the plaintiff was to incur further marketing and promotional costs as Chin said.

51.  Bearing in mind the asking rental etc. of the premises in the lease kit of the plaintiff were almost identical to those of the agreement[21], they were, I accept from Chin, reasonable starting points for negotiation having regard to existing rentals of other units in the same shopping mall  and its overall portfolio, and the plaintiff was, I think, doing no more than in the ordinary course of business in accepting a reduced monthly minimum rent[22] in order to avoid having vacant unit in a shopping mall it owned and managed.

52.  Hence, I award the sum of $304,779.64 in full to the plaintiff for this head of claim.

3) loss of service charges

53.  For the same reasons at para.48 – 51 above, I also award the sum of 5,238.02 for this head of plaintiff’s claim.

4) loss of rates

54.  For the same reasons at para.48 – 51 above, I further award the sum of $3,867.03 for this head of plaintiff’s claim.

5) costs of reinstatement

55.  For this last head of plaintiff’s claim, I agree with Ms Li that the same is recoverable from the defendant under such provision of the agreement at para.20 above.

56.  In view of the facts that tendering was adopted to select contractor and that the lowest tender was chosen, I do not think any issue can be taken as to the sum of $85,200 incurred by the plaintiff and I award this sum in full to the plaintiff.

6) credit for balance of the deposit

57.  Chin and Ms Li both accept that the plaintiff should give credit in this assessment for the balance of deposit in sum of $222,126.49 kept by it and I agree.

Summary

58.  According, the net total amount due from the defendant to the plaintiff on my assessment is $188,925.5, calculated as $11,967.30 + $304,779.64 + 5,238.02 + $3,867.03 + $85,200- $222,126.49.

Disposition

59.  I therefore enter final judgment in plaintiff’s favour against the defendant in the sum of $188,925.5.

Interest

60.  Instead of seeking pre-assessment interest at judgment rate as Chin sought in his witness statement, Ms Li was contented to seek pre-assessment interest at commercial rate (which she suggested to be 1% above prevailing HSBC prime rate). I agree with her.

61.  I therefore further award interest at the judgment sum of $188,925.5 at 6% p.a. from 1 Sept 2016 to the date of this assessment and thereafter at judgment rate until payment.

Costs

62.  Costs usually follow the event. In any event, as reminded by Ms Li, the agreement obliges the defendant to pay plaintiff’s legal costs on a full indemnity basis at para.21 above and I see no reason not to hold defendant to what it had agreed and what para (4) of the judgment at para.4 above had provided.

63.  Considering that the amount of the judgment sum on my assessment exceeds $150,000 and the valuable assistance provided by Ms Li, I also certify the attendance of counsel at this assessment hearing.

64.  I therefore order the defendant to pay the plaintiff forthwith on an indemnity basis the costs of this action inclusive of all reserved costs and the costs of this assessment hearing before me together with certificate of counsel.

65.  Having carefully considered the statement of costs prepared by plaintiff’s solicitors for summary assessment, I find this case suitable for summary assessment in all its circumstances and I summarily assess the amount of costs payable by the defendant to the plaintiff under my costs order in para.64 above at $45,000.

66.  Finally, I thank Ms Li for her assistance.