SOUTHLAND CO LTD v. JOYCE HERO INVESTMENT LTD

HCA2120/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2120 OF 2004

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J U D G M E N T

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1.  In this action, the plaintiff is the landlord and the defendant, the tenant of premises in the Kwun Tong Theatre Building Block A, No.9 Tung Ming Street and Nos.51-59 Hang On Street, Kowloon.  The master on 21 March 2005 on an Order 14 Summons granted an order for possession subject to relief against forfeiture upon payment within 10 days of $2,087,370.20 and the summary taxation of costs of $80,000 under Order 62, rule 9 of the Rules of the High Court.  The sum was not paid and the defendant appealed on 4 April 2005. 

2. There is also an application before me to join as proposed third party sub-tenant Dragon Network Development Limited (“Dragon Network”) but I will deal first with the appeal against the master’s order. 

3. The defendant put forward four grounds of appeal.  Now it has to be remembered, of course, that these proceedings are in fact a rehearing of the original summons so to an extent I do not need to go into the grounds of appeal and say specifically whether or not the master has made the correct decision.  However, I will paraphrase those grounds here.

4. The first ground is that the master was wrong in law in his evaluation of the evidence when he stated that the defendant had failed to show a triable issue and further that the evidence filed by the defendant was not credible.  The second ground is that the learned master was wrong in law and/or erred in law in that he wrongly applied the legal principles in relation to Order 14 applications.  The third ground is that the master was wrong in law that he failed or omitted to consider properly or at all various issues on matters raised by the defendant which were substantial questions of fact, in particular the question of the sub-tenancy.  The fourth ground was that the master was wrong in law in that he misdirected himself with regard to the fact that there was no written tenancy agreement at all.  On that the defendant’s evidence raised the question of the application of section 3(1) of the Conveyancing and Property Ordinance, Cap.219 (“the Ordinance”). 

5. I want to deal first with the question of section 3 of the Ordinance.  But before I do that it is necessary to look at the evidence and the documents in this case.

6. There seems to be no dispute between the evidence of the plaintiff which comes from a Mr Tan Chun Gam and that of the defendant which comes from a Mr Lai Kwok On that the defendant took over the premises from the previous tenant called Morigood Development Limited (“Morigood”).  The defendant said there was a surrender agreement, the plaintiff said there was not, but it does not matter.  The point is that in effect the defendant took over the tenancy and according to the plaintiff there was an oral promise that the defendant would continue to pay a monthly rent of $180,000 exclusive of rates and the same thereon contained in the tenancy agreement with Morigood should apply to the defendant.  The plaintiff’s witness said that he accepted that.  The defendant’s witness then said that because of the SARS epidemic, there was an agreement to allow the defendant to have a rent-free period of one year in 2004 subject to payment of certain percentages of gross income of the business.  Mr Lai said that he agreed with Mr Tan at the end of December 2003 the terms of this agreement for the percentages of gross income which I need not set out here.  It is also said that the agreement included the fact that the defendant had a joint venture with the sub-tenant, and that an accountant’s report had to be produced by the defendant to the plaintiff to show the percentage that had to be paid to the plaintiff by way of rent under this agreement.  It also said that it was the responsibility of the sub-tenant to pay rates and electricity charges.

7. Now, in fact what appears to have happened is that the defendant paid $180,000 on five occasions on or after 1 July 2003 and then it did not pay anything at all after that.  The plaintiff started to complain about the non-payment of rent in correspondence which began in about January 2004 and although it is said that there was an agreement for a reduction of rent to a percentage of gross income after that, there is no suggestion in any kind of correspondence emanating from the defendant in answer to the demands, albeit sporadic demands, for rents made throughout 2004 that such an agreement applied. 

8. A further point that I think has to be noted because we have touched on this in argument, is that for the purposes of the application for joinder there is an affirmation by a director of the applicant Dragon Network, which said in effect that it had been in occupation of the premises since 1 July 2003, and that it entered into a sub-tenancy and co-operation agreement with the defendant on 2 May 2003.  Now this agreement provides for exactly the same rent between the tenant and the sub-tenant on the basis of a percentage of the monthly gross income of the sub-tenant.  But the same time, it appears that the sub-tenant paid seven monthly payments of $180,000 between 27 October 2003 and 24 June 2004.  Of course this is said to be a temporary monthly share of profit.  It is notable that what we have not seen in either application is any real indication of what the income was although there is some sort of a balance sheet of Dragon Network up to 30 June 2004.  There is certainly nothing of that sort passing between the defendant and the plaintiff.

9. Now it appears from correspondence which is produced by the plaintiff’s witness in answer to the first affirmation from the defendant that on 27 October 2003 the defendant wrote to the plaintiff effectively asking for a reduction of rent to $120,000.  There was nothing at that stage in that letter about any kind of payment according to a percentage of gross receipts — that does not seem to have come into existence, if it came into existence at all, until January 2004.  The answer from the plaintiff was a refusal but it appears from this correspondence that the term of the rental agreement between the parties was to continue until 27 December 2006, that is for a period of more than three years.  It also appears that the defendant put forward a tenancy agreement signed by itself for a rent of $180,000 for the period from 1 July 2003 to 27 December 2006 with the rates to be paid by the tenant.  According to the plaintiff, the plaintiff did not sign this proposed agreement because it did not agree to the renewal of the tenancy agreement after the expiration of the term.

10. Now it will be seen that these documents raised the question of the length of the term of the lease and that term, it appears from the documentation, was for more than three years.  Section 3(1) of the Ordinance provides that :

“Subject to section 6(2), no action shall be brought upon any contract for the sale or other disposition of land unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged or by some other person lawfully authorized by him for that purpose.”

There is, however, an exception to this to be found at section 4(d) which provides that a lease for a term not exceeding three years which may be made other than in writing.  

11. This would appear as the basis of the fourth ground of the appeal which really started out as a proposition that there was a triable issue as to whether the term the lease was more or less than three years.  But the fact is that there has been part performance, both by the tenant taking possession and paying $180,000 per month rent for the premises, and there is also, in my view, a note or memorandum in writing which evidences the fact of the lease.  Now it is said this is not binding because it is not agreed particularly with regard to the extension of the lease.  But the fact is that it is evidence of the lease and it certainly appears to be evidence of a rent of $180,000 a month, and it appears to be evidence of the term of the lease.  So I do not think that there is any issue to be tried on section 3 precisely because even if there is a term of more than three years, it does not mean that the plaintiff has no right of action on this lease.

12. I return to the main point of this summons which is whether the defendant has been able to put forward sufficient of a defence to enable it to obtain leave to defend.  I do not think it is necessary to go through the principles of Order 14 here.  The defendant has to produce some kind of triable issue which has to have some foundation, and the authority for that is the Bank of India v. Murjani [1990] 1 HKLR 586.  Following on Murjani there were various other cases and Godfrey JA (as he then was) encapsulated the question of credibility of the issue raised by the defendant in the case ofNg Shou Chun v. Hung Chun Sang [1994] 1 HKC155, as whether the defence put forward is believable, not whether the defence is to be believed.

13. In Man Earn Ltd v. Wing Ting Fong [1996] 1 HKC 225, Godfrey JA also famously reminded us of the dictum in Codd v. Delap (1905) 92 LJ 510 where it was said that Order 14 should not be applied unless the defendant’s defence was “frivolous and practically moonshine”.  He took those words from the earlier case.  Really what has to be considered here — what the master had to consider and what I have to consider is whether the defendant’s defence is frivolous and practically moonshine.  I have already adverted to the evidence herein.  There is nothing, as I have indicated, to negate the fact of a tenancy with a monthly rent of $180,000.  Really, the only question remaining thereafter is whether there was a further agreement to vary that tenancy for the period of 2004 so as to reduce the rent to some kind of figure which was based on the gross receipts of the defendant.  I have pointed to the fact no reliance was placed on such agreement when the plaintiff started looking for its money.  I have also pointed to the fact that there has simply been no payment in terms of this alleged agreement nor any production of any evidence of the gross income from which the percentage should have been taken.  I have also adverted to the fact of the evidence in support of the other application which appears to indicate that throughout the period or certainly within period for which this amended agreement is contended, the sub-tenant was paying $180,000 to the defendant and although the defendant would appear to have pocketed that money, the plaintiff has not seen a penny of it.

14. In my view, this allegation of an amended agreement is moonshine.  It is incredible.  I should perhaps, also in this connection, refer to the dictum of Bokhary JA (as he then was) In re Safe Rich Industries Ltd [1994] HKLR 83 where he said :

“The test at the summary stage is whether the defendant’s assertions are believable.  But it must be recognized — because failure to recognise it would create a debt-dodgers’ charter — that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.”

15. Now in my view, when we look at this assertion of an amended or varied agreement against the background of the documents, it quite clearly is unbelievable.  I would add that it therefore appears that the defendant’s case is showing the unmistakable glimmer of moonshine as referred to in Codd v. Delap.

16. I might also add in addition to the fact that the defendant has not paid a button to the plaintiff since some time in 2003, the fact that the plaintiff was not paid anything in accordance with the order of Master de Souza dated 1 February 2005 for rates and electricity charges in the total sum of $507,675.20. 

17. I am not satisfied therefore that the defendant has been able to put forward a credible defence.  I consider that Order 14 is appropriate here.  I consider that the master was right to give the judgment that he did.  Accordingly, the defendant’s appeal will be dismissed and there will be judgment for the plaintiff in terms of the master’s original order.

18. The costs order made by the master will be confirmed and in addition the plaintiff will have the costs of this appeal, which are estimated at $45,000.  This figure is not disputed by the defendant.  The application for joinder of the sub-tenant will naturally fall away, that is agreed by the parties.  It will therefore be dismissed and the costs that I have ordered will include the costs of that application.