ROCO INVESTMENT LTD AND ANOTHER v. GUSCHLBAUER (HONG KONG) LTD

HCA 1467/2017

[2019] HKCFI 2272

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1467 OF 2017

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JUDGMENT

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A. INTRODUCTION

1.  This is an assessment of damages in an action for vacant possession, arrears of rent and damages arising from a Tenancy Agreement dated 20 September 2016 entered into between the Plaintiffs as landlord and the Defendant as tenant (the “Tenancy Agreement”). The subject property is Shop No.1 on Ground Floor of Two Chinachem Exchange Square, No. 338 King’s Road, Hong Kong (the “Premises”).

2.  The Defendant failed to give notice of intention to defend, and a Final and Interlocutory Judgment was entered against the Defendant on 10 August 2017 (the “10.8.2017 Judgment”). By the 10.8.2017 Judgment, the Defendant was adjudged to give the Plaintiffs vacant possession of the Premises and was ordered to pay the Plaintiffs:

2.1     the sum of HK$251,141.02 (paragraph 2(a) of the 10.8.2017 Judgment);

2.2     further interest on the sum of HK$193,994.83 at the rate of 3.5% per month from 16^th June 2017 to 10^th August 2017 and thereafter at the judgment rate until payment (paragraph 2(b) of the 10.8.2017 Judgment);

2.3     arrears of rent/mesne profits at the rate of HK$90,000.00 per month from 1^st July 2017 to the date when vacant possession of the Premises is delivered up by the Defendant to the Plaintiffs (paragraph 2(c) of the 10.8.2017 Judgment);

2.4     management fees and air-conditioning charges at the rate of HK$6,097.50 per month from 1^st July 2017 to the date when vacant possession of the Premises is delivered by the Defendant to the Plaintiffs (paragraph 2(d) of the 10.8.2017 Judgment);

2.5     rates at the rate of HK$16,350.00 per quarter or at such other rates as may be assessed by the relevant authority from 1^st July 2017 to the date when vacant possession of the Premises is delivered by the Defendant to the Plaintiffs (paragraph 2(e) of the 10.8.2017 Judgment);

2.6     damages for the Defendant’s breach of the Tenancy Agreement to be assessed (paragraph 2(f) of the 10.8.2017 Judgment); and

2.7     costs of this action to be taxed (paragraph 2(g) of the 10.8.2017 Judgment).

3.  Thus, this hearing is held pursuant to paragraph 2(f) of the 10.8.2017 Judgment.

4.  The Defendant did not attend the hearing.

B.      BACKGROUND

5.  The Tenancy Agreement between the Plaintiffs and the Defendant was for a term of three years from 1^st August 2016 to 31^st July 2019 (both days inclusive) at the rent of HK$90,000.00 per month, exclusive of management fees, air-conditioning charges, rates and all other outgoings which are payable in advance on the 1^st day of each calendar month without any deduction.

6.  The Tenancy Agreement provides for two rent-free periods: (1) 1^st August 2016 to 31^st August 2016; and (2) 17^th July 2019 to 31^st July 2019, during which the Defendant was nonetheless obliged to pay for the management fees, air-conditioning charges and all other outgoings.

7.  The Defendant failed to pay rent, management fees and air-conditioning charges from 1^st February 2017, and failed to pay rates from 1 April 2017.

8.  The Plaintiffs issued the Defendant with a pre-action letter dated 2^nd June 2017, but the Defendant continued to fail to pay up.

9.  The Plaintiffs commenced this action by issuing a Writ on 21^st June 2017.

10.  The Plaintiffs’ case is that the Defendant’s failure to pay the aforementioned sums amounted to repudiation of the Tenancy Agreement, which repudiation was accepted by the Plaintiffs by the service of the Writ dated 21^st June 2017.  In the premises, by the service of the Writ dated 21^st June 2017, the Plaintiffs forfeited and terminated the tenancy under the Tenancy Agreement.

11.  By the Order of Master Lai dated 25^th October 2017, the Plaintiffs were granted leave to issue a Writ of Possession and Fieri Facias Combined against the Defendant for the recovery of possession of the Premises.

12.  The Plaintiffs issued a Writ of Possession and Fieri Facias Combined dated 8^th December 2017 against the Defendant.

13.  As a result of the Writ of Possession which the Plaintiffs issued, the Plaintiffs recovered possession of the Premises through the court bailiff on 23^rd January 2018.  The Plaintiffs’ case is that the Premises was not in “bare shell” condition when the Plaintiffs regained possession of the Premises.

14.  The Plaintiffs did not proceed with the Writ of Fieri Facias as the goods and chattels left by the Defendant at the Premises as per the inventory list prepared by the bailiff are of nominal value, and sale of the same would be insufficient to cover the bailiff expenses in the execution of the Writ of Possession, not to mention the costs in the execution of the Writ of Fieri Facias.

15.  Shortly after regaining possession of the Property, on or about 30^th January 2018, the Plaintiffs engaged various estate agents, for example Midland Realty and Centaline Property, to try to re-let the Premises.  The Plaintiffs set the asking rent at HK$90,000.00, being the same rental as that under the Tenancy Agreement.

16.  The Plaintiffs also obtained a quotation from Tai Ming Engineering Co (“Tai Ming”) dated 5^th February 2018 to carry out demolition and maintenance works to reinstate the Premises to a good, clean and tenantable “bare shell” condition.  The quoted contract price for such works was HK$34,800.00.

17.  Accordingly, the Plaintiffs engaged Tai Ming to carry out the reinstatement works at the Premises.  Tai Ming issued a completion notice dated 5^th March 2018 certifying the completion of such works on 3^rd March 2018, enclosing a photograph of the Premises taken on 3^rd March 2018 which showed the condition of the Premises after completion of the works.

18.  Not long afterwards, the Plaintiffs received an offer letter dated 10^th April 2018 from Ms Elsie Chan, an Account Manager of Midland Realty, saying that a potential tenant was interested in renting the Premises at a monthly rent of HK$85,000.00, exclusive of Government rent, rates and management fees.  This was the first offer received by the Plaintiffs after recovery of possession of the Premises.

19.  The evidence of Mr Yung Shing Cheung (“Mr Yung”), a Leasing Officer of the Chinachem Group (with the Plaintiffs being part of the Chinachem Group), is that the Plaintiffs, as the whole-building landlords, did not wish to set a lower asking rent with a view to finding a substitute tenant for the Premises because such step would have an adverse impact on the rent reviews, renewals and new lettings of other units in the same building.

20.  Thus, the Plaintiffs maintained that the rental of the Premises should be set at HK$90,000.00 per month. Having said that, the Plaintiffs was prepared to accede to the request of the potential tenant to grant it a rent-free period of 45 days, bearing in mind that the Plaintiffs had also granted a rent-free period of 45 days to the Defendant.

21.  After several rounds of negotiation, the substitute tenant, later known to be Gokyo (North Point) Limited (“Gokyo”) agreed to rent the Premises at a monthly rental of HK$90,000.00 for a term of two years from 7^th May 2018 to 6^th May 2020 (both days inclusive), with rent-free periods from 7^th May 2018 to 6^th June 2018 and from 22^nd April 2020 to 6^th May 2020.  A formal tenancy agreement dated 14^th May 2018 with respect to the Premises was entered into between the Plaintiffs and Gokyo.  During the rent-free periods, Gokyo was still obliged to pay for management fees, air-conditioning charges, and rates.

C.      LEGAL PRINCIPLES

22.  Where a landlord accepts a tenant’s repudiation, the landlord is entitled to recover damages reflecting the rent of the unexpired portion of the tenancy agreement, service charges, rates and reinstatement costs.  See Chan Annie v Lau Wai Kwong and Others [1984] HKC 231, 235G-H; Wing Siu Co Ltd v Goldquest International Ltd, HCA 4145, 18 August 2006, paragraph 7.

23.  This is subject to a duty on the landlord to mitigate, and the landlord is expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at market rent.  The duty to mitigate is not onerous, and the landlord is not required to do anything other than in the ordinary course of business. The burden rests on the tenant to show that damage has not been mitigated.  See Wing Siu Co Ltd v Goldquest International Ltd, supra, paragraphs 7 and 8.

D.      DISCUSSION

24.  The damages claimed by the Plaintiffs, and which I need to determine, are as follows:

	Nature	Period	Amount (HK$)
(a)	Reinstatement costs		34,800.00
(b)	Loss of rent	From 24/01/2018 to 06/06/2018 (ie HK$90,000.00 per month x (8/31 + 4 + 6/30) months)	401,225.81
(c)	Loss of management fees and air-conditioning charges	From 24/01/2018 to 06/05/2018 (ie HK$6,097.50 per month x (8/31 + 3 + 6/31) months)	21,046.21
(d)	Rates	From 24/01/2018 to 06/05/2018 (ie (HK$16,350.00 per quarter – HK$1,000.00) (rates concession) x 67/90 quarter + (HK$15,600.00 per quarter – HK$2,500.00) (rates concession) x 36/91 quarter)	16,609.64
		Total:	473,681.66
			=========

25.  The Plaintiffs claim interest on the sum of HK$473,681.66 at the rate of 1% per annum above the HSBC prime rate from the date of the Writ, ie from 21^st June 2017, to the date of judgment, and thereafter at judgment rate until payment in full.

D1.     Reinstatement costs

26.  The Plaintiffs claim for reinstatement costs in the sum of HK$34,800.00.

27.  I accept the evidence of Mr Yung that when the Premises was rented out to the Defendant, he was informed by the management company for the Plaintiffs and that the Premises was in a “bare shell” condition.  Having considered the photographs included in the Take-over note dated 29^th January 2018, I agree with the Plaintiffs that the Premises was not in “bare shell” condition when the Plaintiffs regained possession of the Premises.

28.  Pursuant to Clause 3.44 of the Tenancy Agreement, the Defendant was under a duty to reinstate the Premises before yielding up the Premises to the Plaintiffs.  I also note the paragraph marked “Others” in the Hand-over note dated 3^rd August 2016, which was signed by the Defendant and Together Management Company Ltd, the management company acting for the Plaintiffs, which states that:

“The Tenant … agreed upon earlier determination or expiration of the Tenancy, upon the request of the Landlord, the Tenant shall remove [sic] reinstate to a ‘bare shell’ condition before delivering up vacant possession of the premises to the Landlord.”

29.  In my view, the Plaintiffs acted reasonably in engaging Tai Ming to carry out reinstatement works at the Premises for the price of HK$34,800.00 in order for the Premises to be returned to “bare shell” condition.  Although a quotation was obtained from only one company, I accept Mr Yung’s evidence that: (1) the Plaintiffs wished to re-let the Premises quickly; (2) the Plaintiffs have used Tai Ming’s services for over seven years, and have a longstanding working relationship with Tai Ming; and (3) the quantum involved in the present case was not high. Under the circumstances, I consider it reasonable for the Plaintiffs to have proceeded as they did.

30.  I find that the Plaintiffs are entitled to reinstatement costs in the sum of HK$34,800.00.

D2.     Loss of rent

31.  The Plaintiffs claim loss of rent from 24^th January 2018 to 6^th June 2018 in the total sum of HK$401,225.81.  The date of 24^th January 2018 is the first day after the Plaintiffs regained possession of the Premises, and 6^th June 2018 is the end of the first rent-free period enjoyed by Gokyo under the tenancy agreement between the Plaintiffs and Gokyo.

32.  I agree that the Plaintiffs should be entitled to claim for the loss of rent during the period that it was seeking to re-let the Premises, but had not yet succeeded in doing so.

33.  I also agree that the Plaintiffs should be able to claim for the loss of rent during the first rent-free period enjoyed by Gokyo.  First, I consider it reasonable for the Plaintiffs to have granted the two rent-free periods as requested by Gokyo given that the Plaintiffs had also granted rent-free periods to the Defendant amounting to the same length.  Secondly, as Gokyo had initially asked for a lower rental than that under the Tenancy Agreement, I consider it reasonable for the Plaintiffs to agree to the rent-free periods requested by Gokyo in order to procure the re-letting of the Premises at the same rental as under the Tenancy Agreement.  Thirdly, under the Tenancy Agreement, the Plaintiffs had already allowed the Defendant to enjoy the first one-month rent-free period before the Defendant had defaulted in paying rent, and I see no reason why the Plaintiffs should have to bear a duplicate first one-month rent-free period with respect to the re-letting of the Premises to Gokyo.  See also Chinese Estates (Harcourt House) Ltd v Surex Consultants Ltd and Another, DCCJ 3378/2003, 20 July 2005, paragraph 30.

34.  Thus, I award HK$401,225.81 to the Plaintiffs for loss of rent for the period from 24^th January 2018 to 6^th June 2018.

D3.     Loss of management fees and air-conditioning charges

35.  The Plaintiffs claim for loss of management fees and air-conditioning charges from 24^th January 2018 to 6^th May 2018 in the total sum of HK$21,046.21.  The date of 24^th January 2018 is the first day after the Plaintiffs regained possession of the Premises, and 6^th May 2018 is the last day before Gokyo’s tenancy of the Premises began.  Although Gokyo’s tenancy began on 7^th May 2018 with a one-month rent-free period until 6^th June 2018, as explained above, Gokyo was still obliged to pay for management fees, air-conditioning charges, and rates during the rent-free periods, and the Plaintiffs rightly claim against the Defendant for management fees and air-conditioning charges up till and including 6^th May 2018, but not beyond.

36.  I award the Plaintiffs management fees and air-conditioning charges from 24^th January 2018 to 6^th May 2018 in the sum of HK$21,046.21.

D4.     Rates

37.  The Plaintiffs claim HK$16,609.64 for rates paid from 24^th January 2018 to 6^th May 2018.  I have already given my observations on these dates at paragraph 35 above.  I award HK$16,609.64 to the Plaintiffs under this head of damages.

D5.     Interest

38.  The Plaintiffs claim interest on the sum of HK$473,681.66 (being the total of the heads of damages discussed in Sections D1 to D4 above) at the rate of 1% per annum above the HSBC prime rate from the date of the Writ, ie from 21^st June 2017, to the date of judgment, and thereafter at judgment rate until payment in full.

39.  I agree with the Plaintiffs that 1% over the prime rate is the appropriate pre-judgment interest rate.  1% over the prime rate is the usual rate for awards of interest in Hong Kong, and in the present case, there is no evidence to suggest that any other rate would be appropriate.  See Waddington Limited v Chan Chun Hoo Thomas and Others, CACV 10/2014, 20 May 2016, paragraphs 172 to 186; Tadjudin Sunny v Bank of America, National Association, CACV 12/2015, 20 May 2016, paragraphs 179 to 184.

E.      CONCLUSION

40.  In conclusion, I order that the Defendant do pay the Plaintiffs damages in the sum of HK$473,681.66, together with interest on such sum at 1% over the prime rate of HSBC to the date of this judgment, and thereafter at judgment rate until payment in full.

41.  I also make a costs order nisi that the Defendant do pay the costs of this action to the Plaintiffs, summarily assessed in the sum of HK$150,000.00.  Unless any party applies to vary the same by Summons, the costs order nisi shall be made absolute 14 days from today.