HUA CHIAO COMMERCIAL BANK LTD. v. EMPIRE ONE TRADING LTD. AND OTHERS

CACV 109/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 109 OF 2000

(ON APPEAL FROM HCA NO. 15441 OF 1998)

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J U D G M E N T

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Keith JA (giving the first judgment at the invitation of Godfrey V-P):

Introduction

1. Last November, Master Lok ordered the 7th and 8th Defendants to make interim payments to the Plaintiff for their use and occupation of premises in Kwai Chung. They appealed against that order, but their appeal was dismissed by Mr Recorder Kotewall SC. They now further appeal to the Court of Appeal. They do not dispute their liability to make interim payments. They contend that the interim payments which they have been ordered to make are too large.

The parties' respective cases

2. For the purpose of disposing of this appeal, little needs to be said about the litigation. The 7th and 8th Defendants admit that they are occupying the premises and using them as a nursing home. The 8th Defendant is the proprietor of the nursing home, and the 7th Defendant is its corporate arm. The Plaintiff has already obtained an order for possession of the premises against the 2nd Defendant which had charged the premises to the Plaintiff in October 1997, and the Plaintiff alleges that the use and occupation of the premises by the 7th and 8th Defendants constitute trespass. Accordingly, it claims an order for possession of the premises against the 7th and 8th Defendants and damages for trespass. The measure of such damages is the market rental value of the premises for the period of the wrongful occupation and user.

3. The 7th and 8th Defendants deny trespass. Their case is that the 8th Defendant is the tenant of the premises pursuant to a tenancy agreement with Eagle Fair Development Ltd. ("Eagle Fair"), and that that tenancy agreement is valid and binding on the Plaintiff. They accept that the 8th Defendant continues to be liable for the rent due under that tenancy agreement. The tenancy agreement was for a term of six years from 1 January 1996. The rent for the first four years was to be $115,000.00 a month, and $143,750.00 a month for the last two years ("the original rent"). The 7th and 8th Defendants' case is that, because of problems with the lifts, Eagle Fair agreed in or about March 1997 to reduce the rent. From 1 April 1997 to 31 January 2000, the rent would be $80,000.00 a month, and it would be increased to $100,000.00 a month thereafter ("the reduced rent").

The application for interim payments

4. The order for interim payments was made under Ord. 29 r. 12(b) of the Rules of the High Court. That requires the court to be satisfied of the following matters before a defendant may be ordered to make an interim payment:

"... the plaintiff's action includes a claim for possession of land and, if the action proceeded to trial, the defendant would be held liable to pay to the plaintiff a sum of money in respect of the defendant's use and occupation of the land during the pendency of the action, even if a final judgment or order were given or made in favour of the defendant ...."

It is common ground that these conditions have been met. After all, the 7th and 8th Defendants accept that if the 8th Defendant remains the tenant of the premises under its tenancy agreement with Eagle Fair, it is obliged to pay the Plaintiff, which now stands in the shoes of Eagle Fair, the rent due under the tenancy agreement.

5. Once the Court is satisfied that the conditions set out in Ord. 29 r. 12(b) have been met, Ord. 29 r. 12 invests the court with a wide discretion in the following terms:

"... the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely."

Ord. 29 r. 12(b) is identical to its equivalent in England (prior to the new Civil Procedure Rules), and the thinking behind the rule is explained in the Supreme Court Practice 1999, Vol. 1 at p. 559 as follows:

"The underlying principle is that, during the pendency of the action, the plaintiff should not be deprived of money which he would be entitled to recover from the defendant in any event, and that conversely the defendant should not be enabled to retain money which he would be bound to pay the plaintiff in any event."

6. But what if there is, as in the present case, a dispute as to what the plaintiff would be entitled to recover from the defendant in any event? In my view, the words "even if a final judgment or order were given or made in favour of the defendant" show that the interim payment should be calculated on the basis of what the defendant contends the plaintiff is entitled to recover. Mr C. Y. Li for the Plaintiff does not contend otherwise.

7. The evidence before the master was that the market rental value of the premises was $120,000.00 a month. That evidence came from valuers engaged by the Plaintiff. However, the master ordered the 7th and 8th Defendants to make interim payments of $115,000.00 a month, increasing to $143,750.00 a month from 1 January 2000. Accordingly, he was accepting that the interim payments should be based on sums which reflected the rent payable under the 8th Defendant's tenancy agreement with Eagle Fair rather than on the market rental value of the premises. The judge agreed. He said:

"Although I was not impressed with the defence, seeing that it was not exactly detailed or particularised, especially as to the allegation of fraud, I had to proceed on the assumption that the evidence and pleaded defence constituted the basis on which this appeal ought to be decided."

I agree as well. The rent payable under the 8th Defendant's tenancy agreement with Eagle Fair was what the 7th and 8th Defendants accept the Plaintiff is entitled to recover.

8. Thus, the only issue which the judge then had to decide (and indeed the only issue which the appeal raises) is whether the interim payments should have been based on the rent to which the 7th and 8th Defendants claim it was reduced with effect from 1 April 1997. They contend that the interim payments which they should have been ordered to make were payments of $80,000.00 a month up to the 31 January 2000 and $100,000.00 a month thereafter. In my view, if the 7th and 8th Defendants have an arguable case for contending that the rent was indeed reduced to those sums and that the reduction in rent was binding on the Plaintiff, the interim payments should have been based on that reduced rent.

The judge's reasoning

9. The judge referred to six points in his judgment which might have justified the master's order, but he rested his conclusion on two of them. The first related to the master's decision to take the monthly rent as the basis rather than the market rental value of the premises. That does not help on why he preferred to take the original rent rather than the reduced rent. Only the second point on which the judge rested his conclusion related to that issue, and what the judge said was:

".... there is no evidence to suggest that the plaintiff knew about the alleged rental reduction. I am unable to see how the plaintiff can be said to have had constructive notice of any reduction."

I am unable to go along with the judge's reasoning. Whether the Plaintiff knew of the reduced rent is immaterial. If the interim payments should have been based on the rent payable by the 8th Defendant under its tenancy agreement with Eagle Fair (as both the master and the judge found they should have been), the Plaintiff's lack of knowledge of what the rent had been reduced to was irrelevant since the reduced rent had been agreed before the charge had been executed in favour of the Plaintiff. If the Plaintiff is bound by the terms of the 8th Defendant's tenancy agreement with Eagle Fair, it does not matter if the Plaintiff was ignorant of some of those terms. Since, therefore, the judge's process of reasoning on the critical issue which he had to decide was flawed, we should now consider the matter afresh and exercise our own discretion on the issue.

The exercise of the court's discretion

10. Three points are taken by Mr Li. They were all referred to by the judge in his judgment even though he did not rest his conclusion on them. First, Mr Li contends that there was no evidence before the judge to support the assertion pleaded in para. 4 of the Defence that the rent had been reduced to $80,000.00 a month with effect from 1 April 1997 and to $100,000.00 a month with effect from 1 February 2000. I disagree. On 4 March 1997, the 7th and 8th Defendants' solicitors wrote to Eagle Fair's solicitors recording an agreement which had allegedly been reached between the parties as to the reduction in rent. It is true that the letter was marked "subject to contract", but it is nevertheless arguable that that would not have the effect of denying to the previous agreement between the parties contractual force if that was what the parties had intended.

11. Secondly, Mr Li contends that the variation of the 8th Defendant's tenancy agreement with Eagle Fair to provide for the reduced rent was not reduced into writing, and it was therefore rendered unenforceable by section 3(1) of the Conveyancing and Property Ordinance (Cap. 219), which restricts the circumstances in which an action can be brought on any contract for "the sale or other disposition of land". The judge was rightly sceptical of that argument. It is at the very least arguable that an agreement to reduce rent does not amount to "the sale or other disposition of land".

12. Thirdly, Mr Li contends that as the agreement for the reduction in rent was never registered, it was, by virtue of section 3(2) of the Land Registration Ordinance (Cap. 128), not binding on any subsequent bona fide mortgagee such as the Plaintiff. However, section 3(2) only applies to instruments in writing, and it is at the very least arguable that there was nothing therefore for the 7th and 8th Defendants' solicitors to register since the solicitors' letter of 4 March 1997 merely recorded the terms of what the parties had previously agreed orally.

13. For these reasons, I have concluded that it is arguable that the rent payable under the 8th Defendant's tenancy agreement with Eagle Fair had been reduced and that that reduction in rent is binding on the Plaintiff. In those circumstances, there is, in my opinion, no justification for not basing the interim payments on the reduced rent rather than the original rent.

Conclusion

14. I would therefore allow the appeal, I would set aside the order of the master, and I would substitute for that order an order which has the practical effect of requiring the 7th and 8th Defendants to make interim payments from 29 January 1999 (which was the day after the Plaintiff obtained its order for possession of the premises against the 2nd Defendant) at the rate of $80,000.00 a month up to 31 January 2000 and $100,000.00 a month from 1 February 2000. That order will have to give credit for any interim payments already made, whether pursuant to the master's original order or pursuant to the conditions attached to any order staying the execution of the master's original order, and I should like to hear the parties on the precise terms of the order which we should make.

15. There are two further matters I want to mention. First, I have already referred to the Plaintiff's valuers' valuation of the market rental value of the premises at $120,000.00 a month. For their part, the 7th and 8th Defendants wanted to file evidence on the appeal to the effect that valuers engaged by them have assessed the market rental value of the premises at $80,000.00 a month. For my part, I was not prepared to permit the 7th and 8th Defendants to rely on that evidence, since it was common ground that the interim payments should not be based on the market rental value of the premises but on the actual rent payable under the 8th Defendant's tenancy agreement with Eagle Fair. Secondly, on 27 March, Master Ho gave the Plaintiff liberty to enter judgment against the 7th and 8th Defendants if the 7th and 8th Defendants failed to pay the sum of $100,000.00 to the Plaintiff every month from 1 May 2000. That sum was not paid on 1 May, though a cheque for that sum was delivered to the Plaintiff's solicitors today. The 7th and 8th Defendants now apply for an extension of time to comply with that order, and for my part I would extend their time for doing so until next Monday to enable the cheque which has been delivered to be cleared.

Godfrey VP:

16. For the reasons given by Keith JA, and although we are differing from the Recorder, to whose careful judgment I would pay tribute, I agree that this appeal must be allowed and that we should make the orders which Keith JA has proposed.