BANK OF CHINA (HONG KONG) LTD. v. DANSON FAR EAST LTD.

HCA 1735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1735 OF 2002

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D E C I S I O N

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1. This is an appeal by the Defendant against the decision of Master S Kwang given on 19 January 2002 giving summary judgment in favour of the Plaintiff for possession of certain premises, arrears of rent and mesne profit and also the recovery of management fees and other utilities charges.

2. The premises in question was known as units 2.4 and 5 of the 12th floor, block C, Wah Tat Industrial Centre, No. 8 Wah Sing Street, Kwai Chung, New Territories, Hong Kong (herein after called the property). On 24 September 1999, the owner of the property, Crown Apex Development Ltd (hereinafter called the "mortgagor") mortgaged the property to the Kincheng Banking Corporation. By an undated tenancy agreement in Chinese, the mortgagor let the property to the Defendant for a period of 3 years from 1 October 1999 to 30 September 2002 at a monthly rent of $18,000 per month exclusive of management fees and other utilities charges. The property was let for industrial purposes. However there was no provision in the agreement to say for what kind of industrial purposes. The mortgagor went into default and as a result the Kincheng Banking Corporation entered into possession as mortgagee. The Defendant was duly notified of the mortgagee entering into possession by a letter dated 6 February 2001. Thereafter, it was not in dispute that the Defendant as tenant would have to pay rent to the Kincheng Banking Corporation and it was not disputed that effectively the Kincheng Banking Corporation became the landlord of the Defendant on the terms of the tenancy agreement.

3. The present Plaintiff acquired the rights and obligation of the Kincheng Banking Corporation by virtue of the Bank of China (Hong Kong) Limited (merger) Ordinance since 1 October 2001. For the purpose of this action, it is not necessary to draw any distinction between the Plaintiff and the Kincheng Banking Corporation. I shall therefore call them the Bank in the rest of this judgment.

4. Soon after the Bank went into possession or in fact even slightly before that, the Defendant went into default in the payment of rent. As a result on 26 March 2001, the Bank took out a warrant of distress on rent for the amount of $14,785.71 being the amount of unpaid rent for the month of February 2001. Apparently the distress did result in the payment of rent. However, the rents for the period of 1 March 2001 to 31 May 2001 were similarly not paid. As a result on 23 June 2001, the Bank commenced legal action (HCA 2867 of 2001) for the recovery of the sum of $54000 as rent in arrears and also for possession of the property. This action never went to trial because the Defendant had paid up the amount claimed and the action was discontinued on 8 May 2002.

5. The Defendant appeared to have paid the rent for the months of June, July and August 2001 at $18,000 per month. However from 1st September 2001, the Defendant went into default again. As a result the Plaintiff commenced this action on 8 May 2002 asking for possession, arrears of rent between 1 September 2001 to 31 May 2002 at the total sum of $162,000, and thereafter mesne profit at the rate of $18,000 per month until possession is delivered. In the prayer of the Statement of Claim, the Bank also claimed the "outstanding management fees (if any) as may be found due and payable by the relevant management office from 6 February 2001 to the date on which vacant possession of the property is delivered to the Plaintiff", and also "arrears of electricity, water, gas and other utility charges (if any) in respect of the property as may from time to time be assessed or revised by the relevant local authorities form 6 February 2001 to the date on which vacant possession of the property is delivered up to the Plaintiff". However there was nothing in the body of the Statement of Claim to show on what basis the outstanding management fees and the utilities charges were claimed.

6. Since the issuance of the writ in this action, the Defendant had paid the Plaintiff the further sum of $18,000 by a cheque dated 5 May 2002, which the Bank applied for the purpose of satisfying the arrears of rent for September 2001. Hence the amount of the rent outstanding up to the date of the writ was reduced to $144,000.

7. The Master gave the Plaintiff final and interlocutory judgment for (i) possession of the property, (ii) arrears of rent in the sum of $144,000, (iii) interest on the sum of $144,000 at 8.125% per annum from the date of the writ to 19 November 2002 (being the date of the judgment of the Master) and thereafter at judgment rate until full payment, (iii) mesne profit at the rate of $18,000 per month from 1 June 2002 till vacant possession is delivered, (iv) the sum of $38,650 being management fees in respect of the property up to May 2002, (v) arrears of electricity, water, gas and other utility charges in respect of the Property up to the date when vacant possession of the property is delivered up to the Plaintiff to be assessed, and (vi) cost of the action with certificate for counsel.

8. The Defendant in fact filed a Defence on 7 June 2002. By this, the Defendant merely asserted that by virtue of an agreement made with Mr Kent Liu of the Plaintiff, the Plaintiff was not entitled to the matters claimed. That prompted the Plaintiff to ask for further and better particulars of the agreement. In its answer of 17 July 2002, the Defendant alleged that there was an oral agreement whereby the Plaintiff had acknowledged that the rent was too high and that there would be a new rent to be agreed not later than April 2002. It was also alleged that 2 or 3 weeks before 17 July 2002, one Mr Lui of the Plaintiff had told the Defendant that the reassessed rent would be $13,000 per month. It was also alleged that at about the end of 1999 one Mr Lau of the mortgagor had agreed to lower down the rental to about $12,000 per month. The alleged agreement was denied by Mr Lui. According to Mr Lui there was a discussion in or about April 2002 between him and the Defendant whereby he told the Defendant that the Plaintiff would consider lowering the rent to $13,000 per month effective from April 2002 on condition that the Defendant should immediately pay up all the outstanding arrears up to 31 March 2002. Plainly the Defendant had failed to do so.

9. I am of the view that the Defendant's allegation on the new rental agreement was not credible at all. The Defendant's conduct since the alleged agreement was totally inconsistent with there being any binding agreement for the Plaintiff to accept rent at $13,000 per month since April 2002. At any rate, even if the Defendant could overcome the difficulty of the legal requirement that a binding agreement would have to be supported by consideration, the agreement as alleged by the Defendant would lack the necessary certainty of terms.

10. In the affirmations filed by the Defendants in opposition to the application for summary judgment, the Defendant also alleged that the Defendant had suffered from interference by the management company resulting in its daily operation being affected. It transpired that the management company had frequently raised objections to the Defendant's use of the common area of the building and had further alleged that the Defendant had caused nuisance to others. The management company attempted to get an interlocutory injunction against the Defendant but was not successful in doing so. However I fail to see how this interference from the management company, even assuming that it is an un-justifiable interference, could amount to any defence to the Plaintiff's case here.

11. It was also alleged that at the time when the Defendant took up the tenancy, there was already a chimney installed for the use of the Defendant. The Defendant was in the laundry business and it was essential that the Defendant should be able to put in a furnace and use a chimney. Through its solicitors the Incorporated Owners had sent a letter dated 30 May 2002 to the Bank pointing out to the Bank that the erection of the chimney would require the consent of the developer and that up to the date of the letter the Incorporated Owners had not received any notice that the Developer had given its consent to the erection of the chimney and requested the Bank that if the erection of the chimney was not with the consent or approval of the developer, the Bank should dismantle the same within 14 days. It would appear that the Bank had not taken any heed of such letter. On 25 June 2002, the solicitors for the Incorporated Owners wrote to the Defendant again informing the Defendant that it was only Yick Fung Holding Ltd that had the power to erect the chimney on the external wall of the building. The letter made the point that unless the Defendant had the consent of the developer to erect the chimney, the Defendant would not be entitled to erect the chimney. On 27 June 2002, the Defendant replied to this letter asking inter alia whether the solicitors had received any information that the developer had not given its consent. Thereafter the matter appeared to have been dropped, as there was no further development in this matter.

12. I am of the view that the chimney being an unauthorized structure against the Deed of Mutual Covenant could not give rise to any defence in this action. There was no promise on the part of the mortagor under the tenancy agreement that the chimney was part of the subject matter to be let nor was there any covenant that the mortgagor as landlord would warrant that the Property would be fit for the purpose of the operation of laundry business.

13. Before me the Defendant raised the further point that the Master had refused the Defendant leave to file an affirmation in one hearing and yet in a later hearing he allowed the Defendant to file the affirmation but later on held against the Defendant. I must say that I am unable to see how that could be a ground for me to reverse the Master's decision. At any rate, an appeal operated as a hearing de novo before me, and I have had the benefit of all the affirmations filed.

14. Having considered the material put before me and the submission of the Defendant's representatives, I am of the view that the Defendant has failed to show any triable issue on the Plaintiff's claim of possession, arrears of rent and mesne profit.

15. In relation to the award of interest at 8.125% in relation to the arrears of rent, I was told by the Plaintiff's counsel that the rate of 8.125% was not a contractual interest rate, but was a rate adopted by the Master in exercise of his discretion to award interest under the High Court Ordinance. This rate was in fact the Judgment rate. But for the fact that the hearing before me is by way of re-hearing de novo, I would not have been mind to over-rule the Master's exercise of his discretion. However hearing the matter afresh, I would consider that the award of interest at the court judgment rate is too high. I would substitute the commercial rate of 1% above the prime rate as the interest rate.

16. In relation to the judgment on the arrears of management fees and the order to pay the utility charges to be assessed, I am of the view that the Master is wrong to have given the Plaintiff judgment on those 2 items. It is trite law that for the purpose of an application for summary judgment, the statement of claim would have to be complete and regular on its face. There is no pleading in the statement of claim on any cause of action for the recovery of management fees or the utility charges.

17. Thus to conclude, I would allow the appeal but only to the extent that I will set aside the award on management fees and the utility charges in paragraph (2)(iv) & (v) of the first order of the Master and also in relation to paragraph (2)(ii), I would vary the rate of interest from 8.125% per annum to 1% above the prime rate for the corresponding period. Since the reason for the Plaintiff's failure to obtain judgment in relation to the management fees and utilities charges springs from its failure to properly plead its cause of action, I think the proper order I should make is that the application for relieves in the paragraph 1(b)(iv) and (v) of the Plaintiff's summons of 20 September 2002 is dismissed. Subject to the aforesaid variation and also the variation as to the order as to cost below, the appeal is dismissed.

18. As to the question as to cost, although I consider that the Master was wrong on certain parts of his order, I am of the view that the Plaintiff was substantially successful in its application for summary judgment. However as I am of the view that the Plaintiff had not been entirely successful in its summons of 20 September 2002, I do not think that the Plaintiff should be entitled to all the cost of the action and the application. I would thus vary the cost order to the Plaintiff was to obtain 80% of its cost of its application in the Court below with certificate for counsel. This action has not yet been completed; there is no question of the Plaintiff getting an order for the cost of the action. For the same reason I am of the view that the Defendant has substantially failed in its appeal. It is clear that the main target of the appeal is directed at the judgment for possession and arrears of rent and mesne profit at $18,000 per month. However having regard to the fact that the Defendant's appeal is still partially successful, I will make an order nisi that the Plaintiff is to get 80% of this appeal with certificate for counsel.