JAMES S. LEE & CO (KOWLOON) LTD v. KAPOK GRAMENTS LTD

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JUDGMENT

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1. The plaintiff is the owner of the ground and mezzanine floors and flats 1 to 5 on the first floor of Haiphong Mansion in Nathan Road. It may be that the plaintiff owns other parts of that building also but I am only concerned with the parts which I have mentioned. By separate agreements, each of 11th May 1981 postdating the agreements to which they relate, the plaintiff let to the defendant, the ground and mezzanine floors for a term of two years commencing on 16th July 1980 in the one case, five flats on the first floor in the other for two years commencing on 1st October 1980. In most essentials, in fact for the purposes of this action in all essentials, the two agreements are in the same terms. The first was due to expire on 15th July 1982 and the second on 30th September 1982.

2. It was not the intention of the plaintiff to allow the tenancies to continue on their original terms and so in each case, six months before the expiry through its agent, a managing company called Modern Aspac Development Company Limited, the plaintiff issued notice of the termination of the agreements. As is not unusual the plaintiff followed up notice of termination by offering fresh terms upon which the tenancies might be renewed. Those terms were not acceptable to the defendant and there then followed some correspondence, the understanding and construction of which is crucial to the decision in this case. After the letter offering fresh terms dated 17th May 1982, the defendant wrote back to the plaintiff's agent as follows:

"    We refer to the tenancy agreement in respect of the above premises which will expire on 15th July 1982 and 30th September 1982 respectively and we regret to advise you that we decide to terminate the above two tenancy agreements by the end of 15th July 1982."

of course, on 15th July 1982, the second of those agreements still had something of the order of ten weeks to run. The reply came from Modern Aspac on 27th May. The relevant parts are these:

"    We have to advise you that our principal is prepared to early terminate your tenancy on the 1st floor which does not expire until September 30, 1982 provided a prospective tenant is found before then, otherwise, you will be held responsible to pay the rent, rates and management fees for that floor up to and including September 30, 1982."

and

"     We must stress that in accordance with the terms of the agreement you are to make good to any damages and reinstate the premises to its original."

And the last paragraph of the letter goes on to make reference to arrears of rent, rates and management fees which are not in dispute in this action. That letter was not responded to, I think, straightaway but on 12th June, the defendant wrote back referring to the letter of 17th May stating:

"   We regret to advise you that we decide to terminate the above two tenancy agreements and will deliver vacant possession of the said premises to you on or before 15th July 1982."

The next letter from Modern Aspac to the defendant is dated 23rd June and acknowledges the fact that vacant possession will be delivered up on or before 15th July. It continues:

"   Please let us know the exact date and time you will be handing over the premises, so that we can arrange for our representative to be present to take over the keys of the premises from you. You are held responsible to return the premises in good clean tenantable state and to make good to any damages and reinstate the premises to its original.

     We must stress that you will be held responsible to pay the rent, rates, management and other utility charges including and up to the expiration date of the tenancy agreements, July 15, 1982 and September 30, 1982 respectively."

A response came on 7th July. It confirmed that vacant possession would be delivered up on 15th July. The second paragraph of that letter makes it plain that should any representative of the plaintiff fail to be there, then they, the defendant, will assume that it in accepted that the premises were delivered up in good condition. Then, on 10th July, still before the date on which it had been agreed, at any rate tentatively, that possession of the premises would be delivered up, Modern Aspac Development wrote again confirming the arrangement for handing over possession and continuing:

"    We also refer to our letter June 23, 1982, you are held responsible to return the premises in good clean tenantable state and to make good to any damages and reinstate the premises to its original. As you are aware, our representatives, Mr.Wong and Mr. Hui have already showed and advised you how you are to reinstate the premises.

   We must stress that we are prepared to take over the first floor premises on July 15, 1982, on the understanding as stated in our registered letter dated May 27, 1982, that you are held responsible to pay the rent, rates and management fee up to and including September 30, 1982."

3. On 15th July, Mr. Wong and Mr. Hui went to the premises. When they arrived, the work of removing certain fixtures and additions which have been put there by the defendant was still going on and it was not until very late in the evening that the defendant was in a position to hand over the keys. Because of the lateness of the hour, an inspection was not made by Mr. Hui and Mr. Wong at that time but on the next day, 16th July, they returned and inspected the premises. They noted that in the course of removing certain of the defendant's fixtures, damage had been done to the original fixtures and fittings in the premises and also some damages connected with the removal of fixtures. They took a number of photographs, which have been produced in evidence, and Mr. Wong together with Mr. Hui prepared a schedule of defects which is part of the Agreed Bundle.

4. Now, the claim in this action is, in the first place, for arrears of rent, rates and management fees up to 15th July 1982, which have been admitted to be due and owing on the pleadings and I need not concern myself further about them except to take them into account in the judgment which follows. Secondly, there is a claim in relation to the first floor, flats 1 - 5 for rent, rates and management fees from 15th July up to 30th September, which I shall call, the unexpired portion of the tenancy agreement. Thirdly, there is a claim for damages arising out of an alleged failure to yield up the premises in accordance with the terms of the tenants covenants in Tenancy Agreement and in particular, in accordance with Clauses 2(f) and 2(w) of the first agreement and Clauses 2(f) and 2(x) of the second agreement. Clause 2(w) of the first agreement and Clause 2(x) of the second agreement are in identical terms, the difference in lettering simply resulting, I imagine, from the presence of an additional sub-clause in the second agreement. The relevant parts of Clause 2(f) in both agreements reads as follows:

"To keep all the interior of the premises including the flooring and interior plaster or other finishing material or rendering to walls floors and ceilings and the Landlord's fixtures therein including all doors windows electrical installations and wiring and fire fighting apparatus in a good clean tenantable substantial and proper repair and condition and as may be appropriate from time to time painted and decorated and so to maintain the same at the expense of the Tenant and to pay or reimburse to the Landlord the cost of replacing all broken and damaged windows whether the same be broken or damaged by the negligence of the Tenant or owing to circumstances beyond the control of the Tenant. ....."

By Clause 2(w) and Clause 2(x) respectively, the defendant covenanted:-

"To yield up the premises with the fixtures and additions thereto at the expiration or sooner determination of this Agreement in good clean and tenantable repair and condition in accordance with the terms thereof."

Clause 4(k) is relied upon in each case and is a covenant on the tenants' part that they shall on the expiration or sooner determination of this Agreement deliver up vacant possession of the premises in good repair in accordance with the provisions to include "any authorised additions thereto or structures thereon without any claim for compensation." Although the evidence before me has been from Mr. Wong that the various alterations and additions which he saw at the premises had been carried out without any written consent from the landlord.  There is no claim arising out of any alleged breach under Clause 2(m) of the agreements by which, in effect, the tenant covenants not to make any alterations or additions to the premises without having first obtained the landlord's consent in writing.

5. As originally pleaded that is at the start of the hearing, the plaintiff's case in relation to the unexpired portion of the lease was that there has been a wrongful repudiation of second agreement which the plaintiff had conditionally accepted through its agent. The conditions upon which the repudiation was accepted were said to be that there was to be a reinstatement of the premises to their original condition and there would be payment of any shortfall to the plaintiff arising from the premature termination of the agreement if it was the case that a new tenant could not be found after every reasonable attempt had been made to do so. The pleading went on to allege that the conditions not having been complied with in that the defendant had not made good the premises to their original state and no substitute tenant having been found, and having not paid rent, rates and management fees for the unexpired portion of the lease, the acceptance did not stand and the plaintiff was therefore entitled to sue for rent, rates and management fees for the unexpired portion. In other words, and in all the circumstances, the plaintiff had not accepted the repudiation.

6. When this case was first called on for hearing, I indicated to Mr. Wong who appears for the plaintiff that he might like to consider the effect on his case of a decision given by me very recently in the case of Annie Chan v. Lau Wai Kwong & Others ⁽¹⁾ in which, fellowing a decision of the Supreme Court of Canada, Highway Properties Limited v. Kelly, Douglas & Co. Ltd. ⁽²⁾ and also an earlier decision in Hong Kong of Mr. Justice Barnes,⁽³⁾ I held that notwithstanding a wrongful repudiation related to a lease if accepted by the landlord without prejudice to any claim for damages which might arise out of the non-reccvery of rent, rates and maintenance charges for the unexpired term a claim for damages would nonetheless arise inappropriate circumstances. I did not need to remind Mr. Lee of that decision because he appeared for the successful plaintiff. Mr. Wong took time to consider his position and in due course, made application to further amend his Statement of Claim to plead that there had been a repudiation and acceptance which, nonetheless, reserved to the plaintiff the right to seek to recover any damage which might flow from that repudiation and thus, it was said that on an alternative basis, this case fell within the decision in Annie Chan v. Lau Wai Kwong.⁽¹⁾ I gave leave to further amend relatively late in the day. I think I am right in saying that the application was not intimated until after the close of the plaintiff's case. By that time, Mr. Lee had taken the decision on behalf of the defendant not to call any evidence. I said that I would give Mr. Wong an overnight to consider the position and to submit the draft of his proposed amendment and that I would hear Mr. Lee on the application to amend this morning. I also indicated to Mr. Lee that in the circumstances I would entertain an application by him to reopen his case should I allow the amendment. This morning, Mr. Wong submitted his further amended Statement of Claim. The effect of it as I find is that he has now confined himself to alleging that there was a wrongful repudiation of the second Tenancy Agreement which repudiation was accepted without prejudice to the right to sue for damages arising out of the breach. He appears to have abandoned the original basis of claim. He did have further thoughts about his pleading, and I mention it so that it will appear on the record, that he wished to further amend or enlarge the scope of his claim by relying upon an agreement which, he said, might be constructed out of the correspondence which was to the effect that the plaintiff would accept back vacant possession of the first floor premises provided that the defendant would make good the premises to their original condition and indemnify the plaintiff for any loss arising out of the failure of the defendant to pay rent, rates and management fees for the unexpired portion of the lease. If I had given leave for that last mentioned amendment, the question might have arises as to whether or not the new proposed pleading sufficiently set up such an agreement but it does not, in fact, arise because although Mr. Lee did not oppose the amendment that was presented at the very start of today's hearing, he did oppose the application to add the additional basis of claim which he says, Mr. Wong was only prompted to make as a result of hearing exchanges between Mr.Lee and the court and that he, Mr.Lee, might be prejudiced if that further amendment were to be allowed. In the circumstances, I have confined Mr. Wong to the amendment which Mr. Lee does not oppose and which was intimated yesterday. I have not given leave for any further amendment then need for which may have occurred to Mr. Wong subsequently as a result of what has transpired in the course of argument.

7. As it seems to me on the correspondence which I have reviewed, the facts of this case give rise to no fewer than four possible interpretations. The first is that as originally pleaded there was a conditional acceptance of a wrongful repudiation. Secondly, that by virtue of the passing of correspondence and the fact that the keys were handed over on 15th July, there was an agreement struck between the plaintiff and the defendant that the plaintiff would accept back possession of the first floor premises and endeavour to find a new tenant for those premises for the unexpired portion in condierstion for which, the defendant would undertake to reinstate the premises to their original condition and to make good any shortfall of rent etc. for the unexpired term. Thirdly, as is now pleaded that there was a wrongful repudiation on the part of the defendant in indicating by its letters that it no longer intended to be bound by the agreement beyond 15th July which repudiation on a true construction was accepted by the plaintiff without prejudice to any right to claim damages with regard to the unexpired portion of the lease. Fourthly, and this the construction which would have been contended for mainly by the defendant, I believe, had the Statement of Claim set forth the other three alternative bases of claim, that on a true reading of the correspondence, there was nothing more or less than a surrender of the suit premises. In this last eventuality, the plaintiff would have no claim in relation to the unexpired portion but, of course, would not be debarred from claiming in respect of any antecedent breach of covenat.

8. So to succeed, as I find, on the present state of the pleadings with regard to the first contested part of its claim, the plaintiff must establish that there was a repudiation of the tenancy agreement which was accepted without prejudice to any claim for damages. I indicated, during the course of argument that that was the view which I had formed tentatively of the effect of these letters. Since then, Mr. Lee very rightly invited my attention to the letter of 10th July which he says, should lead me to a different conclusion if I read it correctly. I remind myself of the terms of that letter and in particular the third paragraph where Mr. Bonar, the General Manager of Modern Aspac writes that the plaintiff is prepared to take over the first floor premises on the understanding as stated in the letter of 27th May 1982 that the defendant is to be held responsible for the rent, rates and management fees up to and including 30th September 1982. That, says Mr. Lee in a powerful submission, is consistent with there having been some kind of compromise agreement effected between the plaintiff and the defendant and not with there having been a wrongful repudiation accepted by the plaintiff. So, says Mr. Lee, on the pleadings as they stand the main plank of defence is no longer the assertion that there has been a surrender of the premises but that there was an agreement between the parties which, if pleaded, would have entitled the plaintiff to recover, but since it has not been, the plaintiff must fail.

9. I must not allow the feeling that the plaintiff must have succeeded had the Statement of Claim contained all alternatives to affect my mind. That was a matter which I was entitled to and did take into account at the time when the application was being made to further amend the Statement of Claim, though it is doubtful as to whether or not the proposed amendment to the Statement of Claim would have covered all the possible bases of claim.

10. I find on the evidence that there was no surrender of the lease, and it has never been seriously contended that there was. The question for me in the first place is: was there a wrongful repudiation of the agreement by the defendant? If so, was the repudiation accepted without prejudice to a claim for damages?

11. After some hesitation, I conclude that the tenative view which I indicated I had formed yesterday is the view which I ought finally to endorse. I consider that it is possible to place an alternative construction on the correspondence, and I am mindful of the very forceful submissions which Mr. Lee has made to me about it, but I think that the defendant having intimated an intention not to he bound after 15th July, what the plaintiff through Mr. Bonar was intending to say and did, in the result in fact say, is this: "you have no right to terminate the agreement on 15th July. The agreement goes on to 30th September. We do not accept your right to bring it to an end but if you insist, we shall accept your breach but will hold you responsible for any loss which may occur to us through our being unable to relet these premises for the unexpired portion of the term or any part of it." That seems to me to be indistinguishable in all respects from the position which arose in the case of Annie Chan v. Lau Wai Kwong and others.⁽¹⁾ So I find that there was here a wrongful repudiation which was accepted without prejudice to a claim for damages. Mr. Lee has not attempted to persuade me that Chan's case was wrongly decided and I feel bound to apply the law as I there found it to be. It will follow that the plaintiff succeeds for the amount of the rent, rates and management fees attributable to the unexpired portion of the lease.

12. The other part of the claim in dispute relates to the damage said to have been done to these premises by the putting in or taking out of tenant's fixtures and fittings and the failure to maintain the premises in their original condition. It was pleaded at one time that the cost of reinstating the premises would have been some $91,000. I think it must be the case that Mr. Wong was embarrassed in not having evidence available to prove the figures because, in the end, what the plaintiff sought to recover was the rent for one month which the new tenant had been allowed by reason of the condition of the premises.

13. What would have been recoverable if there had been a breach the tenant's covenants? No more, I find, than the cost of putting the premises back into the condition which they were in at the date of the letting. That must be the high water mark of the claim. There has been no evidence before me as to the cost of reinstating these premises. So assuming that there had been a breach of covenant which is adequately pleaded in the Statement of Claim, I am bound to say that I have the greatest difficulty in assessing damages. They are all quantifiable items and if they are to be recovered ought to have been pleaded. The dilapidations fall into distinct categories, damage caused by removing fixtures and fittings and that caused through lack of repair. As to the first it is not alleged that there has been any breach of Clause 2(m) of the agreement or that there was some separate agreement that the defendant would restore the premises to their condition at the date of letting. Irrespective of the difficulty in assessing the cost of reinstatement, I hold that such cost cannot be recovered. As to the second, though I am satisfied that there have been minor breaches, I am quite unable in the absence of evidence to quantify any resulting loss. In the circumstances, I shall award nominal damages of $100.

14. I think it follows, therefore, that there will be judgment for the plaintiff in the sum of $123,544.28 after taking into account the $104,013.30 paid into court in respect of which, an order for payment out was made on 3rd May 1983.

Judgment interpreted for further argument on interest and costs

                Mr. Wong claims interest both on the amount which was paid into court and on the balance of the claim for which he succeeded in obtaining judgment. I do not think it would be right to make any award for interest with regard to the sum paid into court having seen the terms of the notice making the payment in and the notice taking it out. It seems to me that the sum was paid in and taken out in full satisfaction of that part of the claim. With regard to the sum of $123,444.28 being the balance of the judgment less the nominal damages, I think it is right that there should be an award for interest running from the 1st October 1982 until today's date. It is said that the date of the breach was 15th July 1982 but the sum recovered would not have become payable until some time later later and although it is somewhat arbitrary, I have taken 1st October as appropriate being the first day after the expiry of the term. As to the rate of interest, I propose subject to argument to say that it should run at 12 ½ % which again is a somewhat arbitrary figure but the best calculation I can make of the average commercial rate of interest over the relevant period. That will be up to the date of judgment. Hereafter interest will run at the current court rate until the date of payment. There will be no interest on the nominal damages of $100. Not surprisingly, perhaps, there have now been submissions made on both sides with regard to the correct orders which ought to be made on costs. Mr. Lee, who was first to his feet, says that the defendant should have the costs of this action after the date of payment in because the plaintiff has only succeeded by reason of a substantial amendment. He rightly makes the point that the revised pleading on which the plaintiff has succeeded is really a contradiction of the way in which the case was originally put. Well, I do not think that can be contested but I think that in considering how my discretion ought to be exercised, I have to consider the averments of fact as they appear in the original pleadings apart from the conclusions of law which the court has been invited to draw from those averments of fact. Here, the plaintiff's case has always been the same on the facts; indeed, the relevant allegations are all derived from the documents in the case which, in the event, were agreed between the parties. I think that represents a very considerable difference from the circumstances which Mr. Justice Devlin, as he then was, had to consider in the Anglo-Cyprian Trade Agencies Ltd. v. Pathos Wine Industries Ltd. ⁽⁴⁾ where fresh allegations of fact, as it appears from the headnote, emerged for the first time during the hearing, and I think that it would not be right in the exercise of my discretion to deprive this plaintiff of its costs altogether. I think that the plainiff should have costs with the following reservations. This case was originally listed before my brother Mr. Justice Macdougall on 19th December 1983 when, yet again, it was held that the plaintiff's pleadings were not in order. The amendment which resulted on that occasion led to the hearing being adjourned and costs were reserved. I think it is right that the defendant should have the costs thrown away as a result of that adjournment and I so order. The other portion of the costs to which I think the plaintiff is not entitled are the costs thrown away by reason of the amendment upon which it eventually succeeded. I find that difficult to assess but doing the best I can, I hold that the costs of today would not have been incurred had the pleadings been in order at the start of the hearing yesterday and, therefore, I propose to order that the costs thrown away which include the costs of the amendment itself and the costs of the hearing today should be borne by the plaintiff.

(1)    unreported H.C.A. No. 5062 of 1982 11th May 1984

(2)    17 D.L.R. (ed) 710

(3)    unreported H.C.A. No. 4760 of 1981

(4)    [1951] 2 A.E.R. 873