THE WORLD REALTY LTD v. ZEE STONE GALLERY LTD

DCCJ 3279/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3279 OF 2015

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JUDGMENT

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1.  This is the trial of a tenancy dispute.

2.  The plaintiff is represented by Miss Pang Mei Ngan of Messrs Ford, Kwan & Co at the trial. The defendant has not been legally represented in these proceedings.  It has been acting in person by its sole director, Mr Shaun Kelly.  The defendant is not present this morning. 

3.  Mr Kelly represented the defendant at the pre-trial review held on 23 February 2017.  Subsequently, the plaintiff’s solicitors have effected service of the trial bundles and opening submissions on the defendant. 

4.  I am satisfied that the defendant has notice of today’s trial.  The trial therefore has proceeded in its absence.

Factual background

5.  The property concerned is situated at Shop 5, Ground Floor, Chinachem Hollywood Centre, No 1-13 Hollywood Road, Hong Kong (“the Property”).  The plaintiff was the landlord and the defendant the tenant. 

6.  The Property was let by the plaintiff to the defendant under two consecutive tenancy agreements.  The first agreement was dated 2 August 2010, under which the Property was let for a term of about three years from 15 July 2010 to 14 July 2013.  The second agreement was dated 9 January 2014, under which the Property was let for another term of three years from 15 July 2013 to 14 July 2016.  These two tenancy agreements are referred to below as “the First Agreement” and “the Second Agreement” respectively and “the Agreements” collectively.

7.  Under the Agreements, the defendant agreed to pay:-

(a) rent;

(b) management fee, in each case on the first day of each calendar month; and

(c) rates on the first day of each quarter.

In the event of default in payment of any sum of money not received by the plaintiff within seven days from the due day, the defendant should pay to the plaintiff interest on the arrears at a monthly rate of 3.5%.  See clauses 2.01.03 and 7.02(a)(iv) in each of the Agreements.

8.  Further, under the Agreements, the plaintiff held security deposits of $262,245 and $314,694 respectively as security for the performance of the defendant’s obligations.  See clause 8.01 of each of the Agreements.

9.  The terms of the Agreements are not controversial.

10.  The defendant had been occupying the Property, running an art gallery there, until it moved out in April 2015.

The plaintiff’s case

11.  The plaintiff’s case is straightforward.  It is a company under the Chinachem Group, a well-known developer in Hong Kong.  It has called one witness, Mr Yung Shing Cheung.  Mr Yung works for the plaintiff and his title is Leasing Officer.  His duties include leasing of the plaintiff’s properties, including the Property, to tenants and attending to incidental matters to such leases.

12.  It is the plaintiff’s case that the defendant had started to make default on its payment obligations under the First Agreement.  It was late in paying rent, management fees and rates since as early as December 2011.  Since then, the defendant had been consistently late in its payment.  In the worst cases, it could be late by more than two months.  And the pattern of late payments continued when the parties were in negotiations for the renewal of the lease under the First Agreement in late 2013. 

13.  The plaintiff issued a number of demand letters, namely, on 26 September 2013, 17 October 2013 and 9 December 2013, chasing for settlement of late payments prior to the entering of a new tenancy agreement.  In these letters, the outstanding sums and interest accruing on them are tabulated in detail, with the actual calculations shown.

14.  In the end, the defendant managed to settle some of the outstanding sums in December 2013 and pay the security deposit in January 2014, as stipulated under the Second Agreement.  The parties proceeded to execute the Second Agreement. 

15.  Under the Second Agreement, however, the defendant continued to be late in paying rent and management fees. 

16.  In the course of 2014, the plaintiff took out distraint actions on two occasions in around August and November 2014, by reason of the defendant’s default in the payment of rent.  In both instances, the defendant in the end effected payment of the sums under the warrant of distress.  The plaintiff has disclosed the relevant correspondence from the bailiff’s office in this regard.

17.  Then, from January 2015 onwards, as shown in a chain of e-mail correspondence between January and March 2015, there was discussion going on between Mr Yung and Mr Kelly, in which Mr Kelly proposed that the defendant should give up possession of the Property and suggested that he would try to find a replacement tenant to take up the unexpired portion of the lease under the Second Agreement.

18.  In an e-mail dated 26 February 2015, Mr Yung wrote to Mr Kelly, stating that the plaintiff had received an offer in the Property and said:-

“Under the circumstances, we would like to know when can you surrender the said premises and settle all outstandings, if you cannot settle all outstandings upon signing contract, otherwise the Landlord will not consider your early termination your tenancy of the above premises.”

19.  Further e-mails were exchanged.  However, the defendant did not secure any replacement tenant for the Property.

20.  Given that the defendant’s default was continuing, the plaintiff commenced another distraint action.  An appointment was made with the bailiff to execute the warrant of distress on 10 April 2015.  In fact, by letter dated 25 March 2015, the plaintiff’s solicitors wrote to the defendant informing it of the appointment.

21.  What happened next is that on 2 April 2015, the defendant unilaterally vacated the Property, removed all the goods there to another unit in the same building, and returned the keys of the Property to the management office.  The plaintiff has disclosed an incident report dated the same date prepared by the management office in support of this.

22.  By letter dated 8 April 2015, the plaintiff’s solicitors wrote to the defendant stating that the defendant’s action on 2 April 2015 amounted to a wrongful repudiation of the Second Agreement and that the plaintiff accepted the repudiation.  Thus the Second Agreement was terminated.

23.  Then, shortly afterwards, on 22 April 2015, the plaintiff entered into an agreement with a new tenant to take up the Property.  The term was for three years commencing from 1 July 2015, at a monthly rent of $115,920, which is higher than the rent payable by the defendant under the Second Agreement (ie, $102,000).  Two months’ rent-free period was granted to the new tenant.

24.  Mr Yung explained that the new tenant was then an existing tenant of the plaintiff, occupying another unit in the same building.  He had a good record of punctual payments of rent for that unit.  The two months’ rent-free period and the commencement date were proposed by him and accepted by the plaintiff.

25.  At that time, the plaintiff had received no other offer.  Given the increased rent and the track record of the new tenant, the plaintiff granted the tenancy.

26.  The plaintiff contends that it was a reasonable step to take in the circumstances in order to mitigate the loss caused by the defendant’s breach.

27.  Accordingly, the plaintiff makes claims under the following heads:-

(a) rent, management fees and rates which have been outstanding and remained unpaid as of 2 April 2015. The total outstanding sum, after deduction of the security deposit, is $49,601.49;

(b) interest (at a monthly rate of 3.5%) which has accrued by reason of late payment of various sums under the Agreements;

(c) interest (at the same monthly rate) which has accrued by reason of the non-payment of various sums, in each case from the due date to 2 April 2015, ie, the date of breach. 

The total amount claimed under items (b) and (c) is $232,104.14;

(d) damages flowing from the wrongful repudiation of the Second Agreement, namely, the loss of rent, management fees and rates from 3 April 2015 onwards to 31 August 2015 (in the case of rent) and 30 June 2015 (in the case of management fees and rates). These amount to the sum of $525,686.51.

28.  The new tenant was indeed paying a higher rent than that payable by the defendant under the Second Agreement.  The additional rent received by the defendant as a result over the remainder of the defendant’s term was $145,486.45 (ie, $13,920 per month x 10 + 14/31 months).

29.  Miss Pang confirmed this morning that the plaintiff is prepared to give credit to this sum when assessing the loss suffered by the plaintiff.  Hence, the amount claimed under item (d) is $380,200.06.

30.  Items (a), (b) and (c) above represent outstanding sums that had become payable under the Agreements whereas item (d) represents the claim for general damages. The total amount of the claim comes to $661,905.69.

31.  Detailed calculations have been set out in the statement of claim.  I do not propose to reproduce them here.

32.  The plaintiff also claims interests on items (a) and (d).

The defendant’s case

33.  The defendant is not present at the trial today and therefore fails to give evidence in support of his case and tender himself for cross-examination.  The plaintiff’s factual case is therefore unchallenged.

Decision on liability

34.  The plaintiff’s case is straightforward and inherently plausible.  It is generally supported by contemporaneous documents.  The plaintiff is a commercial landlord.  Mr Yung works for the plaintiff.  There is really no basis on which to doubt Mr Yung’s truthfulness and credibility as a witness.

35.  I accept Mr Yung’s evidence in its entirety and hold that the plaintiff’s factual case is a truthful account of the events concerned.

36.  On the facts as found, the unilateral vacating of the Property, coupled with the return (or, more precisely, the abandonment) of the keys clearly amount to a wrongful repudiation of the Second Agreement.  I hold that the contract terminated when the plaintiff’s solicitors, acting on behalf of the plaintiff, accepted such repudiation by letter on 8 April 2015.

37.  The plaintiff is entitled to claim the outstanding sums as of the date of the repudiatory breach and also general damages flowing from the breach.

Decision on quantum

38.  Items (a), (b) and (c) claimed by the plaintiff as outstanding sums are in accordance with the terms of the Agreement. 

39.  As to damages, where a tenant defaults on payment and the tenancy is brought to an end by the landlord accepting the repudiatory breach, the latter’s entitlement to damages follows and is to be determined by general contractual principle.  Generally speaking, damages will include loss of rental, rates and fees stipulated in the tenancy agreement for the remainder of the term because, had there been no breach, the tenancy would have run its full term. 

40.  This is subject always to the landlord’s duty to mitigate his loss.  He is expected to act reasonably and take such steps as are necessary to re-let the vacant premises at market rent.  See, eg, Sano Screen Manufacturers Limited v J & R Bossini Trading Limited [2003] HKC 216; Wing Siu Company Limited v Goldquest International Limited, HCA 4145/2001, 18 August 2006 at paragraph 7; and Chan Annie v Lau Wai Kwong [1984] HKC 231 at 235G-H.

41.  I find the steps taken by the plaintiff, acting through Mr Yung, to be reasonable.  The new agreement was concluded very expeditiously on 22 April 2015, after the lapse of only two weeks from the date of termination.

42.  Mr Yung has offered a credible and satisfactory explanation as to how the commencement date and the rent-free period were agreed upon.  There is no room for complaint by the defendant.  It would have to compensate the plaintiff for the loss suffered by the plaintiff as claimed.

Order

43.  For the above reasons, I award to the plaintiff the sum of $661,905.69.

44.  The plaintiff is also entitled to:-

(1) interest on item (a) at the contractual rate of 3.5% per month from 3 April 2015 to today and thereafter at judgment rate until payment in full; and

(2) interest on item (d) at the rate of prime rate plus 1% from the date of writ to today and thereafter at judgment rate until payment in full.

45.  I also order that the plaintiff do have costs of the action, which is summarily assessed at $135,000.