PERRINE CHAMONIX LTD v. STAR LEAGUE LTD AND ANOTHER

HCA 1139/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1139 OF 2017

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DECISION ON COSTS

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1.  The hearing of an interlocutory injunction in the present case was scheduled to take place on 16 August 2017 before this court.  But on the joint application of the parties, by way of a consent summons filed on 4 August 2017, the hearing was vacated with costs to be determined by this court on paper. Parties have since filed their respective written submissions.

2.  The material terms of the consent order dated 4 August 2017 (“the Consent Order”) are as follows:

“ AND UPON the 1^st Defendant’s undertaking not to:-

(a) Permit the property situated at the 2^nd Floor, No.3 Burd Street, Hong Kong in Section B of the Remaining Portion of Marine Lot No.16B (the ‘Property’), to be used, as an establishment for engagement of sexual activities for reward and/or brothel and/or similar establishment;

(b) Permit the Property to be used, for any noisesome, obnoxious, immoral and/or illegal purpose; and

(c) Permit the continuation of, the nuisance or annoyance to the Plaintiff or the other occupiers of the building or adjourning premises.

BY CONSENT, IT IS ORDER THAT:-

(1) The Plaintiff do have leave to discontinue this action (‘the Action’) as against the 1^st Defendant and to withdraw the Summons taken out on 16 May 2017 (‘the Summons’);

(2) The Action be discontinued and the Summons be withdrawn;

(3) The hearing of the Summons scheduled to take place on 16 August 2017 be vacated.”

Background

3.  The 1^st Defendant is the registered owner of the Property. The Plaintiff is the registered owner of the property above the Property, ie, the 3^rd Floor of No 2 Burd Street as well as the rooftop (“the Plaintiff’s Property”).

4.  Clauses 10(c) and 11 of the relevant Deed of Mutual Covenants (“the DMC”) provide:

“ 10 (c) Not to use or permit or suffer to be used its self-contained portion for any noisesome, obnoxious, immoral or illegal purpose and not to do, or permit to be done or suffer in the said self-contained portion or in the said building anything which may be or become a nuisance or annoyance to the other party or the other occupiers of the said building or adjoining premises.”

“ 11. Each party hereto shall have the fullest right and liberty without reference to the other party or parties and without the necessity of making the other party or parties a party thereto to sell, mortgage or otherwise dispose of its share and interest of and in the said premises together with the benefit of and subject to these presents and to let or demise any self-contained portion to which such party is entitled hereunder to any tenant or lessee provided that such party shall be responsible to the other party or parties for the due performance and observance on the part of such tenant or assignee of the covenants, terms and conditions hereof.” (Emphasis added.)

5.  In breach of Clause 10(c) of the DMC, the Property had been used as a vice establishment to provide sexual services (“the Brothel”).  Three former police officers filed affirmations to confirm that a number of females worked as prostitutes in the Property, causing nuisance and annoyance.  It also appeared that customers of sexual services would trespass onto the rooftop which is the Plaintiff’s Property.

6.  It is quite clear to this court that the 1^st Defendant, by reason of Clause 11 of the DMC, is responsible for the conduct of its tenant.

7.  On 4 May 2017, the Plaintiff issued a letter to the 1^st Defendant drawing to the attention of its sole shareholder and director, Miss Wong Yuen Laam Jacqueline that the Property had been used as a vice establishment.  Miss Wong’s evidence was that the letter only came to her hands on 9 May 2017.

8.  Mr Ng, for the Plaintiff, pointed out to this court that according to the Electronic Extract of Information of the Business Register, the date of commencement of the Brothel is stated to be 5 May 2017, immediately after the issuance of the Plaintiff’s letter dated 4 May 2017, though it is fair to say that according to the three former police officers’ investigations, the brothel business must have been commenced prior to 5 May 2017.

9.  As the Plaintiff had received no response from the 1^st Defendant, the Plaintiff commenced the present action on 16 May 2017 and took out a summons for interlocutory injunction against the 1^st Defendant (“the Summons”).  I agree with Mr Ng that the key purpose of the present action and the Summons is to stop the operation of the Brothel, primarily by evicting the 1^st Defendant’s tenant who was operating the Property as a brothel in breach of the DMC.

10.  The Summons is supported by the affirmations of three former police officers who inspected the Brothel and confirmed that sexual services were offered by prostitutes for reward on multiple occasions.  Mr Yu, for the 1^st Defendant, whilst submitted that the content of the three affirmations are substantially identical in many aspects, could not really dispute that the Property had been used as a brothel in breach of the DMC.  I do not consider that the challenges to the format and content of the three affirmations by Mr Yu are relevant for the purpose of determining the issue of costs.

11.  On 19 May 2017, the 1^st Defendant undertook to the court not to (a) permit the Property to be used as an establishment for the engagement of sexual activities for reward and/or brothel; (b) permit the Property to be used for any noisesome, obnoxious, immoral and/or illegal purposes; and (c) permit the continuation of the nuisance or annoyance to the Plaintiff or the other occupiers of the building or adjoining premises (“Interim Undertaking”).  The Interim Undertaking is in terms similar to that of the Writ of Summons and the Summons which was adjourned for argument.

12.  Mr Ng, for the Plaintiff, informed this court that Deputy High Court Judge To indicated during the hearing on 19 May 2017 that the 1^st Defendant does not appear to have any valid defence to the Plaintiff’s claim.  This court agrees with Deputy High Court Judge To’s view.

13.  Subsequently, the 1^st Defendant disclosed its tenancy agreement with a Mr Zhang and the Plaintiff repeatedly urged the 1^st Defendant to terminate the same so as to close down the Brothel.

14.  The 1^st Defendant, however, refused to do so, despite (a) the Interim Undertaking, (b) incontrovertible evidence of the operation of the Brothel at the Property, and (c) the 1^st Defendant’s power to terminate the lease, expressly recognized by the 1^st Defendant in its letter to Zhang dated 17 May 2017.

15.  On 31 May 2017, the 1^st Defendant issued a notice under section 58 of the Conveyancing and Property Ordinance, Cap 219 to the tenant, alleging various breaches of the tenancy agreement.

16.  It is also the 1^st Defendant’s case that between 17 May 2017 and 9 June 2017, it instructed its then solicitors to write and remind its tenant not to use the Property for any noisesome, obnoxious, immoral and/or illegal purposes.

17.  The 1^st Defendant asserted that Zhang telephoned the 1^st Defendant’s solicitors, denying the operation of the Brothel.  The 1^st Defendant accordingly asserted that it was unable to terminate the lease.  It also appears that the 1^st Defendant had never inspected or visited the Property after the commencement of the present action, despite the fact that it was at liberty to do so and it should have done so.  It is surprising that in view of the Interim Undertaking, the 1^st Defendant should simply accept Zhang’s bare denial without carrying out at least an independent verification.

18.  Eventually, the police conducted an operation on 13 or 14 June 2017, arresting four females for operating an unlicensed massage parlour.  The 1^st Defendant was aware of the police’s operation and arrest, but only terminated the lease on 26 June 2017. The 1^st Defendant later confirmed that Zhang surrendered the lease and re-delivered possession of the Property on 10 July 2017.

19.  Having achieved the purpose of the present action and the Summons because of the 1^st Defendant’s termination of the lease, by the Consent Order, this court granted leave to the Plaintiff to discontinue and withdraw this action and its Summons vis-à-vis the 1^st Defendant.  The Consent Order was made upon the 1^st Defendant’s undertakings which basically continued the Interim Undertaking (“the Final Undertaking”).

20.  Understandably, the Plaintiff claims for the costs of the present action and the Summons.  Mr Ng, for the Plaintiff, submitted that while the general rule is that a party withdrawing a claim should pay for the costs of the opposite party, the court has complete discretion in dealing with the issue of costs and to do justice between the parties.  The court may order costs against the defendant on an application for discontinuance by the plaintiff if it considers it just to do so in the light of the defendant’s conduct. (See Hong Kong Civil Procedure 2017Vol 1, at §21/5/12)

21.  Mr Ng, for the Plaintiff, submitted that the 1^st Defendant should bear the Plaintiff’s costs for two reasons:

(1)   The Plaintiff is the effective winner and is in any event bound to win;

(2)   The Plaintiff took out the present action and the Summons reasonably, and withdrew simply because of the 1^st Defendant’s belated termination of the lease, something which the 1^st Defendant could and should have done much earlier.

22.  Mr Yu, for the 1^st Defendant, submitted that the Plaintiff, having withdrawn its action and the Summons against the 1^st Defendant, should pay the costs of the action and the Summons because “the Plaintiff could not show it would succeed in a postulated trial on a proper factual basis.”  Alternatively, the 1^st Defendant seeks no order as to costs.

Legal principles

23.  First, the starting point is that the party seeking to withdraw its action should pay the costs of the other party.  (Trend Publishing (HK) Limited v Vivien Chan & Co[1996] 2 HKLR 227, 229J–230D per Keith J (as he then was).)  The burden of persuading the court to depart from the general rule rests on the party who seeks to withdraw.

24.  Secondly, however, when a party has achieved substantially what he or she sought in the action or application, costs should be awarded to him or her.  It is an application of the principle that normally costs should follow the event.  Harris J in Re Lucky Ford Industrial Ltd[2013] 3 HKLRD 550 at §§14 – 15 said:

“ 14. In my view having regard to O.1A r.1 the correct approach to determining costs in cases which do not involve the court granting substantive relief is for the court first to consider the terms of settlement and assess whether the petitioner has obtained substantially what he sought in his petition. If he did it will not be necessary or appropriate for the court to consider evidence and arguments directed to the merits of the case and whether or not the petitioner would have been successful if the petition had gone to trial. The petitioner will be treated as having been successful and entitled to his costs.

15. There may be cases in which it is not clear from the terms of settlement whether it can fairly be said that the petitioner has been substantially successful.  In such cases the court will have to determine whether it is probable that the petitioner would have been substantially successful. This may require a consideration of the merits of the case, but this process should be as economical as is consistent with the court’s duty to decide the issue fairly.”

25.  The court does not adopt a mechanical approach.  The court looks into the substance and the merits of an application.  If, but for a plaintiff’s or an applicant’s application, he or she would not have obtained the relief he or she seeks in a writ of summons or a summons, then he or she is in effect the substantive winner of the case.  The fact that a defendant consents to the claims by a plaintiff or an applicant which renders it unnecessary for the plaintiff or the applicant to continue the action or summons should not be a reason for denying the plaintiff or the applicant his or her costs.  This approach was also adopted by the Court of Appeal in Re Chinese United Establishment Ltdunreported, CACV 214/1995, 24 April 1996 at §§13 and 15:

“ The way that the judge approached the problem was to consider what had been achieved by the petitioners. It had been as a consequence of the filing of the petition that the respondents had made the offer they had. It could be said that the action taken by the petitioners had achieved this.

…

Mr Tang submitted that there had been no determination of the issues between the parties.  This is not really germane to the present case.  The fact of the matter here is that the petitioner did substantially obtain the relief sought.”

26.  This principle has also been applied in the non-company context, such as in Pang Chun Kwong v Pang Hang Lauunreported, HCMP 2352/2012, 13 December 2013, an administration of estate case, where the court ordered costs in favour of the withdrawing plaintiff when he “has obtained substantially what he sought.” (at §§23 and 24)

27.  In Re Fook Lam Moon Restaurant Limitedunreported, HCMP 438/2010, 8 December 2015, To J at §§37 – 40 said:

“ 37. If a plaintiff wishes to avoid the consequence of having to pay costs for the withdrawal, he may seek the court’s leave to discontinue under Order 21 rule 3(1). Under this rule, the court has complete discretion to grant leave to discontinue on such terms as to costs as it thinks fit. The guiding principle is fairness and justice in the circumstances: Covell Matthews & Partners v French Wools Ltd. Invariably the court takes into account two legal principles when deciding on the terms as to costs. First, Order 62 rule 10(1) provides a convenient starting point. Second, the principle that costs follow event usually applies.

38. A plaintiff applying under this rule has to show he has a good reason to discontinue the action. What is a good reason depends on the circumstances of the case. Examples of good reasons include: that the dispute has become academic; that a crucial witness has died or has otherwise become unavailable; that the subject matter of the litigation has ceased to exist; or that the defendant has no means to satisfy any judgment which may be awarded against him.A good reason does not necessarily entitle a plaintiff to unconditional leave to discontinue. It is only the threshold which he must overcome before the court would even consider whether to grant leave to discontinue on terms without costs. Absence of good reason must necessarily mean the starting point applies.

39. If a good reason is shown, the second principle comes into play. Because of the starting point and the general rule that costs follow event, plaintiffs are frequently given leave to discontinue or withdraw only on terms of their paying the defendants’ costs, unless the court is satisfied that it has a proper basis for making a different order: Lloyds Bank Ltd v National Westminster Bank Ltd. This principle was confirmed by the English Court of Appeal in that same case. Hence, it was described as the ‘general rule’ by Keith J (as he then was) in Trend Publishing (HK) Ltd v Vivien Chan & Co (a firm) and by Chadwick LJ in BCT Software Solutions Ltd v C Brewers & Sons Ltd.

40. To persuade the court to depart from the general rule, the minimum a plaintiff has to do is to show that the discontinuance is for reasons other than an acknowledgment of defeat or likely defeat.  The most direct way of proof is to show that he will succeed in a postulated trial.  The burden of proof is on the plaintiff and the standard of proof is the usual civil standard.  Proof of a prima facie case is not enough.  The court has to be satisfied on proper factual basis, whether based on agreed fact or determined fact, that the plaintiff will succeed.  Discontinuance under such circumstances is consistent with the underlying objective of Order 1A.  It is also beneficial to the defendant in that further costs to be incurred by him leading to nowhere but his eventual defeat are saved.  The defendant can have no complaint that he was made to incur costs in an action which he is bound to lose but which the plaintiff chooses not to proceed.  If the plaintiff is able to discharge this burden of proof, fairness and justice must require that he be permitted to discontinue his action without costs consequence.”

See also §§41 – 52, per To J.

28.  Thirdly, if a plaintiff or an applicant withdraws an action or a summon because the defendant had done something, after the issuance of writ of summons or summons, which renders it unnecessary or academic for the plaintiff or the applicant to proceed with the action or application, the court has a full discretion to award costs to the plaintiff or applicant after taking all the circumstances of the case into consideration. In Re Peaktop Technologies (USA) Hong Kong Ltd[2007] 4 HKLRD 207, Barma J (as he then was) at §8 said:

“ Further, it seems to me that where an applicant’s application is doomed to failure by reason not of anything which he has done or not done, but because of an act of the respondent which is within its control and out of the hands of the applicant and is, further, a step which could have been taken either prior to the application being made or at an earlier stage in the application so as either to obviate the possibility of the application being made, or to minimise the costs associated with it, it may well be appropriate to recognise this by an appropriate costs order.”

The Plaintiff is the effective winner

29.  In the present case, I am of the view that there is no doubt that the Plaintiff is the effective winner.  It has achieved all that it wanted to achieve in both the action and the Summons.

   (1)   Faced with the Summons, the 1^st Defendant offered the Interim Undertaking to the court on 19 May 2017.  The 1^st Defendant then took steps, albeit, in my view, inadequate ones, to comply with the Interim Undertaking.

   (2)   Eventually, the lease to Zhang was terminated by the 1^st Defendant and hence the cessation of the operation of the Brothel which is the primary objective of the present action and the Summons.

   (3)   I agree that the eventual termination of the lease by the 1^st Defendant was a direct result of the present action and the Interim Undertaking.

   (4)   The Plaintiff also secured the Final Undertaking which is in terms similar to the injunction sought in the Writ of Summons.

30.  As the Plaintiff has achieved what it sought to achieve by the present action and the Summons and the 1^st Defendant has not advanced any credible defence, this court is of the view that the Plaintiff should be entitled to the costs of the action and the Summons.

31.  Even if this court were to assess the merits of the Plaintiff’s claims and the Summons, this court would have no hesitation to come to the conclusion that the Plaintiff would succeed in a postulated trial but only with more costs to be paid by the 1^st Defendant.  I am of the view that the Plaintiff’s case is so strong that it is bound to win had it gone on to a trial and therefore it is justified in commencing the action in the first place.  (Sawlani v Sawlaniunreported, HCA 2231/2011, 9 May 2013, at §§10 – 15, per Recorder Shieh SC.)

32.  As far as the merits of the present action are concerned, it cannot be sensibly disputed that the Property has been used for an immoral and/or illegal purpose in breach of Clause 10(c) of the DMC and pursuant to Clause 11 of the DMC, and that the 1^st Defendant should be responsible for the conduct of its tenant.  The DMC is enforceable against the 1^st Defendant pursuant to section 41(3) and section 41(9) of the Conveyancing and Property Ordinance, Cap 219. 

33.  Mr Yu submitted that the 1^st Defendant’s responsibilities under Clause 11 of the DMC should not include an obligation at all costs to take an action to prevent breaches of the DMC by its tenant.  The duty is not an absolute one and must be subject to a test of reasonableness.  It was submitted that the 1^st Defendant had taken all possible reasonable steps to prevent the breach of the DMC by its tenant.  I disagree.  First, the obligation of the 1^st Defendant is clearly set out in Clause 11 of the DMC, it is responsible for “the due performance and observance on the part of, such tenant or assignee of the covenants, terms and conditions hereof.” Secondly, even if the 1^st Defendant’s obligation is subject to a test of reasonableness, the absence of any inspection of the Property on the part of the 1^st Defendant and the want of any active steps taken by the 1^st Defendant to stop the operation of the Brothel in the Property until the said operation ceased after the police’s arrest on 13 or 14 June 2017 can hardly be said to be reasonable.  

34.  In the circumstances, I am of the view that there is simply no credible defence on the part of the 1^st Defendant.  If this action were to proceed to trial, I am very certain that the 1^st Defendant would lose with a much more significant costs consequence.  That should really be the end of the matter. 

35.  Mr Yu, for the 1^st Defendant, submitted that the word “permit” in Clause 10(c) of the DMC means either to give leave for an act which without leave could not be legally done, or to abstain from taking reasonable steps to prevent the act where it was within a man’s power to prevent it.  The words “permit” and “suffer” were treated as having the same meaning.  (Realty Harvest Ltd v Gold Margin Development Ltd[2001] 1 HKC 234, 239A–F, per Leong CJHC, citing Berton v Alliance Economic Investment Company Limited[1922] 1 KB 742 at 759)

36.  The 1^st Defendant also denied that it used, permitted and/or suffered the Property to be used as a brothel or has knowledge of the alleged Brothel operating in the Property.  I am of the view that none of these of defences is credible and can stand up to scrutiny.  It is clear to this court that at least from 9 May 2017 onwards, the 1^st Defendant had knowledge that the Property was being used as a vice establishment.  It was up to the 1^st Defendant upon receiving the Plaintiff’s letter dated 4 May 2017 to investigate the matter and to take proper actions to remedy the breach of the DMC by its tenant. 

37.  What strikes this court is the 1^st Defendant’s conduct in, on the one hand, giving the Interim Undertaking to the court and on the other hand, never taking any steps to inspect the Property which in effect allowed the Property to be used as a brothel until the police operation and arrest on 13 or 14 June 2017. Such conduct cannot be said to be reasonable.

38.  Mr Yu also submitted that “without sufficient information provided by the Plaintiff in its letter dated 4 May 2017, the 1^st Defendant was handicapped in taking enforcement action against the tenant or the occupier or user of the Property.”  I have no hesitation in dismissing such submission. Under the DMC, the 1^st Defendant has a positive obligation to make sure that the Property is not used for purposes in breach of Clause 10(c).  Upon receiving the Plaintiff’s letter dated 4 May 2017, the 1^st Defendant should take proper actions on its own volition to inspect the Property, to find out what happened and to take remedial actions forthwith.  The 1^st Defendant did not take any of these reasonable steps.  It is rather irresponsible now to suggest that the Plaintiff’s letter dated 4 May 2017 lacked sufficient particulars and therefore the 1^st Defendant was handicapped from taking enforcement action against its tenant.  I am of the view that the 1^st Defendant was not handicapped at all if it chose to take reasonable steps to remedy the obvious breaches of the DMC.

39.  Mr Yu further submitted that the 1^st Defendant had promptly instructed its then solicitors to issue reminders between 17 May and 9 June 2017 to the tenant not to use the Property for any noisesome, obnoxious, immoral and/or illegal purposes.  The 1^st Defendant’s solicitors received a phone call from the tenant on 5 June 2017 informing that they did not do anything in contravention of the law or commit any illegal activities in the Property.  Hence, it was submitted that “there was no further evidence indicating the Property continued to be used as a vice establishment after 12 May 2017.  The alleged Brothel (which is denied) may have ceased to operate after the 1^st Defendant’s solicitors issued the repeated warning letters.”  Again, I have no hesitation to reject such submission.  The police operation and arrest on 13 or 14 June 2017 proves beyond doubt that it was not adequate to just issue warning letters.  It was irresponsible for the 1^st Defendant to simply accept its tenant’s assertion without any independent investigation by the 1^st Defendant itself and there is simply no evidential foundation for the 1^st Defendant to assume that the Brothel might have ceased operation after the 1^st Defendant’s warning letters.

40.  Mr Yu also submitted that even if there was a brothel operating in the Property, it is mandatory for the 1^st Defendant to issue a notice under section 58 of the Conveyancing and Property Ordinance, Cap 219 and the tenancy could not be terminated immediately.  That section also stipulates that a reasonable time had to be given to the tenant to remedy the breach.

41.  Be that as it may, I am of the view that the 1^st Defendant could and should have inspected the Property and issued the section 58 notice much earlier than 30 May 2017.  Indeed, a responsible course of conduct entails an immediate inspection of the Property after receiving the Plaintiff’s letter dated 4 May 2017 and a forthwith issuance of a section 58 notice if its tenant had not remedied its breaches within a short period.  The 1^st Defendant chose not to take any of these reasonable steps. 

42.  Mr Ng also submitted that at common law, operating a brothel can amount to an actionable nuisance.  (See Clerk & Lindsell on Torts 21^st Ed, at §20-09 and Hunter v Canary Wharf Ltd[1997] AC 655 at 685H – 686A, citing Thompson-Schwab v Costaki[1956] 1 WLR 335) Mr Yu argued otherwise.  There is no need for this court, for the purpose of costs, to determine this issue.

43.  There was a clear breach of the DMC and the police operation and arrest on 13 or 14 June 2017 proves such breach beyond doubt.  It was definitely within the 1^st Defendant’s power to terminate the lease, in view of the terms of the lease.  Indeed, the 1^st Defendant reached the same conclusion in its letter to its tenant dated 17 May 2017.

44.  Separately and in any event, the police operation and arrest suggests that Zhang did not obtain a Massage Establishment Licence pursuant to the Massage Establishments Ordinance, Cap 266, such that the business carried out in the Property was illegal, irrespective whether sexualservices were offered.  This also amounts to another breach of the DMC.  I am of the view that there is no credible defence to the Plaintiff’s claims in the present action.

45.  As for the Summons, Mr Ng is right that in an interlocutory application to restrain breaches of express negative covenants, the balance of convenience test does not apply, as the defendant’s promise is strictly enforced irrespective of the balance of convenience.  Once a serious issue to be tried is established, the court will usually grant an injunction unless the defendant can show special circumstances of such a nature that the hardship caused to the defendant would far outweigh the inconvenience to the plaintiff.  (See Hong Kong Civil Procedure 2017Vol 1 at §29/1/38; Jack Gordon Leslie Smith v Tam Wing Wahunreported, HCA 2638/2004, 13 June 2007 at §32 per Deputy High Court Judge Gill)

46.  In the circumstances, I am of the view that but for the Final Undertaking, this court would have no hesitation to grant an order in terms of the Final Undertaking.

The Plaintiff’s reasonableness in commencing the action and taking out the Summons

47.  I am of the view that the present action and the Summons were sensibly withdrawn so as to save judicial resources because of the belated termination of the lease by the 1^st Defendant on 26 June 2017.  This is, in Mr Justice Barma’s words, “an act of the respondent which is within its control and out of the hands of the applicant and is, further, a step which could have been taken either prior to the application being made or at an earlier stage in the application.”

48.  Further, I am also of the view that the 1^st Defendant should be responsible for the Plaintiff’s costs in view of its unreasonable conduct. The reasonableness of the parties’ conduct is relevant, particularly when the application to be withdrawn was taken out reasonably and was necessitated or prolonged by the respondent’s unreasonable conduct.  In Huie Lai Shan Koko v Yang Fu Yen[2015] 3 HKLRD 621, where an application for security for costs taken out reasonably was withdrawn after the respondent belatedly disclosed her assets in Hong Kong, thewithdrawing applicant was awarded costs.

49.  I am of the view that the Plaintiff has always been acting reasonably, and ought not to be prejudiced by the 1^st Defendant’s unreasonable resistance and belated termination of the lease, which unnecessarily prolonged the proceedings and escalated costs.

(1)   Adequate pre-action notice had been given to the 1^st Defendant.  The pre-action letter was sent to the 1^st Defendant more than 10 days before the commencement of the action.  On the 1^st Defendant’s case, it had actual knowledge of the letter on 9 May 2017, prior to the commencement of the action.

(2)   It also lies ill in the 1^st Defendant’s mouth to assert that the pre-action notice was inadequate and hence the 1^st Defendant continued to allow the operation of the Brothel in the Propertyinstead of terminating the lease even after the commencement of the action and even after it had knowledge of the incontrovertible evidence of the operation of the Brothel such as the affirmations from the three former police officers.  Indeed, the 1st Defendant only belatedly terminated the lease on 26 June 2017, more than 10 days after the police’s operation and arrest, despite the 1^st Defendant’s knowledge thereof.

(3)   I accept that the Plaintiff has tried to resolve the present dispute amicably and to save costs.  For example, by a letter dated 19 May 2017, the Plaintiff suggested that the present action be discontinued if the 1^st Defendant was willing to provide an undertaking and to pay costs.  The Plaintiff made further settlement proposals by letters dated 30 June 2017 and 25 July 2017.

(4)   It was also the Plaintiff who proactively offered the discontinuation and withdrawal of the action and the Summons with costs to be dealt with on paper, in order to save costs.

(5)   I am of the view that the discontinuation and withdrawal applications were sensibly made in view of the 1^st Defendant’s belated termination of the lease.  Such a change of circumstances is not within the Plaintiff’s control, but within the control of the 1^st Defendant, who should have terminated the lease much earlier.

50.  I am of the view that in this case, the Plaintiff has all along acted reasonably and would have won this case.  In the circumstances, justice demands that the Plaintiff should not be prejudiced and should be awarded with costs.

51.  On the other hand, I do not think that the 1^st Defendant had acted reasonably.  In particular, the proceedings was necessitated and prolonged by the 1^st Defendant’s, perhaps, rather unrealistic and unjustified reluctance to terminate the lease:

(1)   I agree that the 1^st Defendant should have terminated the lease much earlier.  The 1^st Defendant had in effect allowed the prolonged operation of the Brothel instead of terminating the lease despite (a) the pre-action letter; (b) the commencement of the action; (c) the Interim Undertaking; and (d) its knowledge of the incontrovertible evidence of the operation of the Brothel as set out in the three affirmations from the three former police officers.

(2)   Also, the 1^st Defendant only belatedly terminated the lease on 26 June 2017, more than 10 days after the police’s operation and arrest, despite its knowledge of the operation of the Brothel in the Property.

52.  I agree with Mr Ng that the steps taken out by the 1^st Defendant are clearly inadequate and thereby unnecessarily prolonged the proceedings:

(1)   The 1^st Defendant relied on a telephone conversation between its then solicitors and its tenant, Zhang.  Zhang offered the bare assertion that he was not operating a brothel.  Surprisingly, the 1^st Defendant was content with such bare denial without conducting any independent investigations to verify the same.

(2)   There is no dispute that the 1^st Defendant could have simply inspected the Property to find out whether there was a brothel in the Property.  For inexplicable reasons, there is no evidence of such inspection.

(3)   What the 1^st Defendant should have done was to inspect the Property forthwith and then forthwith terminate the lease unless the tenant immediately ceased the operation of the Brothel.  I agree that its failure to do so in a timely manner might amount to a breach of the Interim Undertaking to the court and a possible violation of section 143 of the Crimes Ordinance, Cap 200.

Disposition

53.  For the reasons stated above, I make an order that the Plaintiff is entitled to the costs of and occasioned by the action and the Summons against the 1^st Defendant.  Such costs is summarily assessed at HK$280,000.

54.  Finally, it remains for me to thank Mr Ng for the Plaintiff and Mr Yu for the 1^st Defendant for their helpful written submissions which rendered assistance to this court.