CHAN SING HOI ENTERPRISES LTD v. VYKON MEDIA TECHNOLOGY LTD AND OTHERS

CACV 324/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 324 OF 2007

(ON APPEAL FROM HCA NO. 1604 OF 2006)

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JUDGMENT

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Hon Tang VP:

1.  The plaintiff obtained summary judgment before Master Yu.  Deputy Judge Gill dismissed the defendant’s appeal.

2.  The facts relevant to this appeal have been clearly set out in the judgment of Deputy Judge Gill and can be briefly stated.

3.  By a tenancy agreement dated 6 September 2005, the plaintiff let to the 1^st defendant the front and rear portions on the 1^st floor of No. 74 Percival Street as well as the 1^st floor of No. 76 Percival Street, Causeway Bay at the monthly rental of $177,500.  The 2^nd and 3^rd defendants are the guarantors of the obligations of the 1^st defendant, and they have no separate defence.

4.  The rent was high because No. 74 Percival Street is:

“5.     … on the crossroads of Percival Street and Russell Street which at most hours day and night is crowded with pedestrians.  Those crossing the roads on the pedestrian crossing towards this particular corner could not avoid facing and observing advertising signboards attached to the façades of Chan Sing Hoi’s premises on both streets.”

5.  It appeared from the occupation permit issued on 24 January 1963 that the 1^st floors were for domestic use.  The tenancy agreement stated that the tenant agreed to use the premises for residential purposes only.  However in the Fourth Schedule to the tenancy agreement, there was a number of special conditions, which the learned judge summarised as follows:

“(2)   No warranty is given by the Landlord that the premises are fit for use for any purposes intended by the Tenant, which may not terminate the tenancy in the event that it may not be entitled to use them in an intended way;

…

(6)     the Landlord will permit the external façades to be used for the installation of signboards but without warranting the right to do so; the burden is on the Tenant to have ascertained such matters before committing to the tenancy;

(7)     the Tenant shall not install signboards without first obtaining all necessary approvals, in particular from the BA;

(8)     the installation and maintenance of the signboards shall be undertaken in accordance with all statutory requirements, and be fully insured;

(9)     the Tenant shall comply at its expense with any Government or Court ordered demolition;

(10)   the Tenant shall comply with all statutory requirements and without nuisance to neighbours and the general public;

…

(12)   the Tenant has the right to sub-lease the internal areas of the premises.  As the premises are residential, the sub-tenants must acknowledge that in any sub-tenancy, without warranty from either the Landlord or Tenant that they are fit for any other purpose.  If there be a Government order calling for cessation of any unauthorized use the sub-tenant shall be required to comply without compensation;

…

(15)   the Landlord shall ask for the removal of the encroaching Sunday sign, but gives no warranty as to when or whether it will be removed.”

6.  Apart from the tenancy agreement, the parties also entered into a Side Letter.  We are only concerned with clause 2 which reads:

“(2)    In case of any complaint of breach of the user restriction of the Premises and/or in the event that the Government or the Court shall at any time during the Term of Tenancy require or order the cessation of any unauthorized use of the Premises or any part(s) thereof, the Tenant shall use its best endeavours to rectify such breach and/or to comply with such requirement or order and the Landlord shall use its best endeavours to assist and co-operate with the Tenant to carry out such rectification and/or compliance.  If the relevant breach shall not be rectified and/or if the relevant requirement or order shall not be complied with before any deadline or within any period prescribed by the Government, the Court or any competent authority, either party shall then be entitled to terminate the Tenancy Agreement forthwith at any time thereafter by giving to the other party a written notice to such effect and in such event, neither party shall have any claim against the other for any loss, damages or compensation of whatsoever nature resulting from such termination but without prejudice to any claim by either party to the other for any antecedent breach of the terms and conditions of the Tenancy Agreement and Provided That upon such termination, the Tenant shall be responsible for reinstating the Premises in accordance with the provisions of the Tenancy Agreement and the deposit paid by the Tenant to the Landlord under the Tenancy Agreement shall be refunded to the Tenant in accordance with the said Tenancy Agreement.

   It is further agreed by the parties hereto that in case of conflict between the terms and conditions of the Tenancy Agreement and the terms and conditions herein contained, the terms and conditions herein contained shall prevail.”

7.  The learned judge went on to record:

“22.   A month after this documentation was completed the parties negotiated revised, enhanced terms, because it came to be agreed that for due consideration Vykon should take over Chan Sing Hoi’s rights under licences from Sunday and Smartone concerning mobile communication equipment installed on the premises.  So it was that the rent was increased to $198,000 per month and the deposit by $61,500.

23.    There was a further, final adjustment agreed in January 2006.  Vykon having carried out certain internal decorating to facilitate the prospective letting of the internal areas of the premises had nevertheless failed to interest anyone, including in the rear portion of 74 Percival Street, and it was agreed that this be returned to Chan Sing Hoi.  That resulted in a reduction in the rent from 15 February 2006 to $177,500 per month.”

8.  The 1^st defendant failed to pay rent for May and June 2006.  On 27 June, it purported to surrender the premises to the plaintiff.  The plaintiff regarded that as a wrongful repudiation of the Tenancy Agreement, accepted it as such, took possession and began the action.

9.  The defence relied on by the defendants could be seen from the Draft Amended Defence and Counterclaim, which was exhibited to the affirmation of the 3^rd defendant affirmed on 30 March 2007.  The learned judge has summarised it in para. 25 of judgment thus:

“(1)   It was in the contemplation of the parties that one of the purposes of the Tenancy Agreement was to enable signboards to be installed on the façades of the premises;

(2)     the façade of 76 Percival street was partially obstructed by the Sunday signboard;

(3)     Vykon was entitled to install its own signboards free from such obstruction;

(4)     the Sunday signboard remained undisturbed;

(5)     Vykon erected inter alia a signboard that by a half circle went around the outside of the Sunday signboard, but without seeking or obtaining approval of the BA to do so;

(6)     On 12 April the BA issued an order calling for its demolition;

(7)     Vykon called upon Chan Sing Hoi to comply with clause 2 of the Side Letter and use its best endeavours to rectify the breach by seeking the removal of the Sunday signboard;

(8)     By virtue of its refusal to do so, Vykon was entitled to terminate the Tenancy Agreement pursuant to clause 2 of the Side Letter, upon the ground that Vykon’s signboards as contemplated could not have complied with requirements as prescribed by the BA.”

10.  In addition, it appears that the 1^st defendant also relied on the fact that the 1^st defendant had renovated the internal area of the said premises into a commercial arcade comprising units of various size and advertised the units for letting but that no notice had been given to the building authority about the intended change of user of the said premises from residential to non-residential.  Mr Jason Wong for the defendants submitted that this was illegal.

11.  But Mr Wong was unable to point to any provision in the Buildings Ordinance, Cap. 123, which makes such conduct unlawful.  Section 25 is relevant and provides:

“25.   Change of use of buildings

(1)   One month's notice in the specified form shall be given to the Building Authority of any intended material change in the use of a building by the person intending to carry out or authorizing the carrying out of such change.

(2)   Where in the opinion of the Building Authority any building is not suitable by reason of its construction for its present or intended use, he may by order in writing served on the owner or occupier-

(a)    within 1 month of the receipt of a notice under subsection (1) prohibit such intended use; or

(b)    require the owner or occupier to discontinue such present use of the building within 1 month from the service of the order:

Provided that the Building Authority may permit by notice in writing such building works as he deems necessary for the purpose of rendering the building suitable for its present or intended use.

(3)   The use of a building shall be deemed to be materially changed-

(a)     where the carrying out of building works for the erection of a building intended for such use would have contravened the provisions of this Ordinance; or

(b)     where the Building Authority could have refused to give approval to plans of such building works under section 16(1)(g).”

12.  Under section 40(1B)(b), the failure without reasonable excuse to comply with an order served under section 25(2) is an offence but not failure to give notice under section 25(1).

13.  Mr Wong then submitted that the renovation works might have been illegal.  However, there is no evidence that any of the renovation work involved the structure of the building, and section 41(3) provides:

“(3)  Building works … not involving the structure of any building may be carried out in any building without application to or approval from the Building Authority”

14.  Insofar as the defendants relied on the intended change of use from domestic to commercial for the defence that the tenancy agreement was tainted with illegality that has not been made out, although that might explain why there was the Side Letter.

15.  I turn then to consider the plea of illegality based on the signboards.  As the learned judge said, the 1^st defendant’s primary business was to install and maintain outdoor advertising signs in Hong Kong.  Indeed, the 1^st defendant had, prior to the purchase by the plaintiff of the premises, obtained a license from the then owner to construct and maintain signboards on the façade of the 1^st floor of No. 76 Percival Street, so that when the premises was sold to the 1^st defendant in 2005, the sale was made subject to the license.

16.  This is what the learned judge said:

“13.   Vykon’s priority was to have the use of the façades of 74 and 76 Percival Street for its advertising signs.  But its directors were also attracted to the availability of the internal premises.  They proposed to convert these by internal partitioning into boutique shops or a mini-shopping mall and the like.  In turn Chan Sing Hoi’s directors were attracted to the prospect of having a single tenant occupy all the available rentable space both inside and outside.

14.    Two matters engaged the attention of the parties and their solicitors were instructed to deal with these in the documentation.

15.    The first was the encroachment onto the external façade of 76 Percival Street from above by the Sunday sign; the second was that the internal premises were authorized for residential and not commercial use.”

17.  The evidence relied on in relation to this part of illegality defence can be found in the 3^rd defendant’s aforesaid affirmation:

“14.   [The 3^rd defendant] expressed our concern to Mr Yuen during our meetings in August 2005.

(i)      I asked whether the Plaintiff could see to it that the Sunday Lightbox or at least the obstructing portion of it be removed.

(ii)     If it could not be removed, the 1^st Defendant would have no choice but to erect a signage that would project over and cover the lower part of the Sunday Lightbox so as to conceal it from sight.

(iii)     I told Mr Yuen that the installation of signage at the Façade would require the prior approval of the Building Authority.  I also told him that from my experience the Building Authority would reject outright any such application if the signage comprised the projected portion because:

(a)   The Sunday Lightbox would be regarded as an illegal structure by the Building Authority.

(b)   Under the prevailing policy of the Building Authority, if any existing illegal structure (in this case, the Sunday Lightbox) would be in any way obstructing the construction of a proposed new structure (in this case, the projected portion of the signage), the existing illegal structure must be removed prior to an application for the new proposed structure was submitted.

15.    Mr Yuen noted my concern:

(i)     He told me that the Plaintiff would endeavour to negotiate with the owner of the Sunday Lightbox for its removal.  However, there would be no guarantee to that.

(ii)     I then told Mr Yuen that in the event that the Sunday Lightbox was not removed, the 1^st Defendant would proceed to erect the advertising signage with the projected portion without seeking any approval from the Building Authority.”

18.  So far as the signboards is concerned, Mr Allen Lam, for the plaintiff, submitted, the fact that the possible installation of a signboard by the 1^st defendant was specifically dealt with in paras. 6 and 7 in the Fourth Schedule:

“6.   The Landlord is aware of the Tenant’s intended use of the external facades of the Front Portion of the 1st Floor of No.74 Percival Street and the 1st Floor of No.76 Percival Street (along Percival Street and Russell Street) for installation and construction of advertising signboards (‘the advertising signs’) and has no objection thereto Provided That no warranty whatsoever is or will be given by the Landlord that such installation and construction is permissible whether under any government legislation and/or the Deed of Mutual Covenant of the said Building or otherwise fit for such purposes, and in this respect, the Tenant shall be solely responsible for ascertaining these matters prior to the signing of this Agreement.

7.    No works for the erection/installation of the advertising signs shall be commenced unless and until the Tenant shall first have obtained all necessary approvals from all relevant government departments, in particular, the Buildings Department, to all intents and purposes that the erection/installation of the advertising signs shall be in full compliance with all government legislations, rules or regulations. The Tenant shall provide to the Landlord as soon as practicable copies of all relevant approvals for record purposes.”

19.  Indeed, before the tenancy agreement was signed, there were letters from the plaintiff’s solicitors Messrs T. S. Tong & Co., to the company responsible for the Sunday Light-box as follows:

         “We are instructed to inform you that our client will shortly carry out renovation works to its premises, including the modification of the external façade thereof by removing the existing windows and walls.

         However, it is noted that an advertising sign bearing the name ‘Sunday’ has been erected outside our client’s premises extending from the 1/F level up to the 3/F level with steel structures attached to our client’s premises. We understand that the said advertising sign was erected by you with the permission of your said landlord.”

20.  It appeared that by letter dated 27 September 2005, the 1^st defendant applied for approval in respect of certain new signboards to the Building Authority.  That letter was accompanied by a letter of consent, by the plaintiff also dated 27 September 2005, which stated that they had given consent to the 1^st defendant:

“… to erect the above new signages, which new signages are however also subject to your consent.”

21.  The Building Authority approval was given on 5 December 2005 and by fax of 7 December 2005, the 1^st defendant informed the plaintiff accordingly.  Mr Wong has explained that these signboards, however, only covered part of the signboard which was eventually erected by the 1^st defendant.

22.  Be that as it may, the question is whether on such evidence, the 1^st defendant has a good defence on the merits that the tenancy agreement was tainted by illegality.  In relation to that, Mr Wong submitted that the Tenancy Agreement was illegal as formed or that it was illegal as performed.  So far as the illegal formation of the agreement is concerned, it is said that the plaintiff had agreed to the 1^st defendant erecting a sign without the permission of the Building Authority.  But the defendants must condescend upon particulars.  Having regard to the vagueness of the evidence, I am of the view that the 1^st defendant has not raised an arguable case that the plaintiff had agreed that the 1^st defendant should build a signboard knowing that it would be illegal to do so.  In this context, I assume that the building of such a signboard without permission would be illegal under section 14 of the Buildings Ordinance.  It is unnecessary for me to go on to consider the effect of any such illegality because the factual foundation is not there.  It should not be assumed that such alleged illegality might defeat the plaintiff’s claim.

23.  As for the assertion that the contract was illegal as performed, the evidential basis for this assertion is to be found in para. 24 of the 3^rd defendant’s affirmation:

“20.   It had been within the contemplation of the Plaintiff and the 1^st Defendant that the requisite approval and consent for the Advertising Signboards would not have been forthcoming from the Building Authority by reason of their projected portion.

……

24.    There are now produced and shown to me marked ‘CWKW–7’ copies of the photographs taken of the various advertising signboards put up at the said Premises during the period from 20 December 2005 to 31 May 2006. The Plaintiff must have at various times seen those signboards. Yet, to date, it has raised no objection with the 1^st  Defendant about their installation.”

24.  From this, Mr Wong submitted that we could infer the plaintiff had condoned or acquiesced in the 1^st defendant’s breach of section 14.  Even assuming that condonation and acquiescence is sufficient for the plea of illegality, I do not believe that there is sufficient evidence of condonation or acquiescence.

25.  Mr Wong also submitted that under the Side Letter the 1^st defendant was entitled to terminate the tenancy because on 12 April 2006, the Buildings Authority required under section 24(1) of the Buildings Ordinance that the signboard be removed.

26.  I agree with the learned judge’s reading of the Side Letter.  As the learned judge explained:

“48.   By the ordinary meaning of the words it presupposes a scenario where the premises restricted to residential use are put to an unauthorized use, and there has been a complaint about that, or the BA or other Government Department having jurisdiction or a Court orders the cessation of that unauthorized use.”

27.  There was no complaint about the change of user from domestic to commercial.  Indeed, the premises have remained vacant throughout.  The fact that the 1^st defendant’s signboard was ordered to be removed was not an event covered by the Side Letter.

28.  For the above reasons, I dismiss the appeal with costs.

Hon Yuen JA:

29.  I agree.