POSTWELL LTD v. CHENG KAP SANG

HCA 2799/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2799 OF 1999

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ASSESSMENT OF DAMAGES

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1. This is a landlord and tenant dispute. The question before this Court is the amount of damages, if any, payable by the Defendant for his repudiation of the tenancy referred to below.

Background

2. The Plaintiff was at all material times the registered owner of the premises known as Shops Nos. 7A, 7B and 7C, Ground Floor, Federal Plaza, Federal Mansion, No. 471 Castle Peak Road, Kowloon, Hong Kong (hereinafter individually referred to as "Shop A", "Shop B" and "Shop C" and collectively referred to as the "Premises").

3. By a tenancy agreement in Chinese dated 7th April 1998 ("Tenancy Agreement") made between the Plaintiff as landlord and the Defendant as tenant, the Premises were leased to the Defendant for commercial purposes for a term of 3 years from 10th April 1998 to 9th April 2001. Under the Tenancy Agreement, the rent was fixed at HK$65,000 per month for the period from 10th April 1998 to 9th April 2000 and HK$75,000 per month for the period from 10th April 2000 to 9th April 2001. These rents, which were payable on the 10th of each calendar month, were exclusive of government rents, rates and management fees.

4. Since around January 1999, the Defendant failed to pay rent, management fee and rates. By a letter dated 10th February 1999, the Plaintiff treated the Defendant's default as a repudiation of the Tenancy Agreement. On 13th February 1999, the Plaintiff accepted the Defendant's repudiation of the Tenancy Agreement by commencing this Action.

5. As no Notice of Intention to Defend was filed, Final and Interlocutory Judgment was entered against the Defendant on 25th March 1999 ("Judgment"). Amongst others, the Defendant was ordered to deliver vacant possession of the Premises with damages for repudiation of the Tenancy Agreement to be assessed. After the Judgment was entered, the Plaintiff had taken various enforcement actions against the Defendant. The details of those enforcement actions are not relevant to the present assessment of damages. Suffice it to say that on 18th April 2000, the Defendant through his then solicitors Messrs. Ong & Chung delivered vacant possession of the Premises to the Plaintiff.

6. For the present purpose, the Plaintiff's claims comprised three heads and are summarised in paragraph 11 of the Plaintiff's Opening Submissions dated 15th August 2003. (See also the appendix to the Witness Statement of Tang Kin Kwok filed on 26th March 2003.) First, the Plaintiff claimed for the loss of rent at the rate of HK$75,000 per month for the period from 19th April 2000 to 9th April 2001 ("Unexpired Portion of the Tenancy Agreement") in the total sum of HK$876,774.19. Second, the Plaintiff claimed for the loss of management fees, rates and government rent for the Unexpired Portion of the Tenancy Agreement in the total sum of HK$92,230.80. Lastly, the Plaintiff claimed a sum of HK$26,000, being the sum said to have been incurred for reinstating the partition at the Premises. As regards the various sums payable by the Defendant in respect of the period before delivery of vacant possession, they have been dealt with in the Judgment and thus are not relevant for the present purpose.

Loss of Rent

7. As stated above, the Plaintiff treated the Defendant's failure to pay rent as a repudiation of the Tenancy Agreement and accepted the repudiation by the commencement of this Action in February 1999. On this basis, the Plaintiff claims damages equivalent to the rent payable by the Defendant for the Unexpired Portion of the Tenancy Agreement.

8. In law, I have no doubt that the Plaintiff is entitled to make this head of claim. Despite older cases to the contrary, it is now generally accepted that the contractual doctrine of repudiation also applies in the context of contractual leases. See: Silver Source Development Ltd. v Time Century Ltd. [1992] 1 HKC 366, per Deputy Judge A. Neoh Q.C. at pp. 377I-378C; Sichant Investments Ltd. v Wong Kam Kei, unrep., HCA No. 3430 of 1994 (Waung J.) (19/12/1995); Peter Luxton, "Termination of Leases: From Property to Contract?" contained as Chapter 7 in Birds, Bradgate & Villiers (ed.) Termination of Contracts (Wiley Chancery).

9. On the facts, the Plaintiff's case in this regard can be summarised as follows. Immediately after vacant possession of the Premises was delivered by the Defendant, the Plaintiff engaged a total of nine estate agents to lease the Premises. Initially, the asking rents for the Premises were in the total sum of HK$75,000 (i.e. HK$33,000 for Shop A, HK$22,000 for Shop B and HK$20,000 for Shop C). As there was no enquiry by June 2000, the Plaintiff reduced the asking rents to the total of HK$62,000 (i.e. HK$28,000 for Shop A, HK$18,000 for Shop B and HK$16,000 for Shop C). Despite this, there was still no interested tenant until March 2001 when the Plaintiff managed to license Shop A at a monthly licence fee of HK$17,000 pursuant to a Chinese Licence Agreement dated 20th March 2001 for a period of three months from 30th March to 29th June 2001. On this basis, the Plaintiff claimed against the Defendant damages equivalent to the monthly rent of HK$75,000 for the Unexpired Portion of the Tenancy Agreement less the sum of HK$5,483.87 (being the portion of the licence fee received by the Plaintiff from 30th March 2001 to the end of the term under the Tenancy Agreement on 9th April 2001).

10. In resisting the Plaintiff's claim, the Defendant contends that the Plaintiff has failed to mitigate its loss. Whilst the Plaintiff was in law obliged to mitigate its loss (see Silver Source Development Ltd. v Time Century Ltd. [1992] 1 HKC 366, per Deputy Judge A. Neoh Q.C. at p. 378G), it is questionable whether the Defendant can raise this issue at this hearing. By reason of Order 18, rule 12(1)(c), matters concerning mitigation have to be expressly pleaded. See: McGregor on Damages, 16th edn., para. 2048-2050; Bullen & Leake & Jacob's Precedents of Pleadings, 13th edn., p. 1117 and Kuan Heng Choi v Ma Pui Tung [2002] 1 HKC 111. In the present case, the Defendant has not raised the issue of mitigation in pleadings since no Defence has ever been filed. However, for the present purpose, it is not necessary to decide this point since the Defendant's contentions concerning mitigation are in any event unsustainable for the reasons given below.

11. On the question of mitigation, the Defendant has raised a number of contentions. Some of the Defendant's contentions involve disputes of facts and some do not. Having considered the evidence in the round and for the reasons stated below, I prefer the evidence adduced by the Plaintiff insofar as the parties' evidence conflicts with each other. On the whole, I find that the factual witness called by the Plaintiff, Mr. Tang Kin Kwok ("Mr. Tang"), is an honest and reliable witness.

12. First, on the basis that the Plaintiff has not produced any written evidence of engagement (such as engagement letter), the Defendant challenged whether the Plaintiff had engaged estate agents to market the Premises. Having heard the testimony of Mr. Tang and having considered the evidence in the round, I rejected the Defendant's submissions and accept the Plaintiff's case in this regard.

13. Mr. Tang's evidence, which I accept, in essence is to the effect that the Plaintiff was at all material times holding the Premises as a medium or long investment for the purpose of collecting rental income. Besides, the Premises were at the time mortgaged, together with another property, in favour of a bank and the Plaintiff had to make monthly mortgage repayment in the sum of around HK$200,000. That being the position, the Plaintiff certainly had every incentive to lease the Premises to another tenant as soon as it recovered vacant possession from the Defendant. Besides, there is no suggestion, let alone evidence, that the Plaintiff was deliberately withholding the Premises from the market so as to maximize its claim for damages against the Defendant. In any event, it is highly improbable that the Plaintiff would have chosen such a risky course since, given the history of this matter, there is no guarantee that the Defendant would be in a position to pay all the damages awarded in favour of the Plaintiff.

14. Second, the Defendant named three estate agencies in the vicinity of the Premises and queried why the Plaintiff did not engage any of them. Considering the way the cross-examination was conducted, the Defendant seemed to suggest that the closer the estate agency was to the Premises, the higher the chance it could introduce potential tenants. Hence, according to the Defendant, the Plaintiff should have engaged the three estate agencies named by him and its failure to do so was unreasonable.

15. Mr. Tang, during cross-examination, testified that he was not aware of two of the three estate agencies named by the Defendant. As to the third one, Mr. Tang said that it was a very small scale estate agency and that the Plaintiff preferred to engage bigger ones. I accept Mr. Tang's explanation and can understand why the Plaintiff preferred to engage substantial or well-known estate agencies. Looking at the nine estate agencies engaged by the Plaintiff (see paragraph 7 of the Witness Statement of Tang Kin Kwok filed on 26th March 2003), most, if not all, of them are substantial or popular names in the trade. In any event, apart from the bare assertion (if not speculation), there is no evidence that the three estate agencies named by the Defendant, if engaged, would be more effective or competent than those engaged by the Plaintiff. In the circumstances, this second contention by the Defendant is likewise without substance.

16. Third, the Defendant suggested that a number of his friends had made enquiries with him and that he had given the Plaintiff's telephone number to them. According to the Defendant, these friends had told him that: (1) they had contacted the Plaintiff's staff with a view to lease the Premises; (2) the Plaintiff insisted on a minimum monthly rental of HK$70,000; (3) his friends took the view that the monthly rental of HK$70,000 was unreasonably high and thus had not leased the Premises from the Plaintiff.

17. Apart from a Mr. Man Hing Por, none of the other friends named by the Defendant had made any witness statement to support the Defendant's case. In any event, none of the Defendant's friends (including the said Mr. Man who had make a Witness Statement) who had allegedly contacted the Plaintiff have come forth to testify at this assessment hearing. Hence, the Defendant's evidence in this regard was, at the most, hearsay evidence. Since this Action was commenced before 1st June 1999, the abolition of the exclusionary rule in respect of hearsay evidence introduced by the Evidence (Amendment) Ordinance 1999 (No. 2 of 1999) has no application here. In the absence of Hearsay Notice and in view of the nature of the dispute, I do not think it is appropriate for this Court to take into account the hearsay evidence sought to be introduced by the Defendant.

18. In any event, Mr. Tang categorically denied that the Plaintiff had been contacted by the Defendant's friends as the Defendant alleged. According to Mr. Tang, if the Plaintiff's staff had received telephone enquiries about the Premises they would have passed the calls to him. Even putting aside the hearsay nature of the Defendant's evidence in this regard, I accept Mr. Tang's testimony. As stated above, the Plaintiff at the time had every incentive to lease out the Premises. Besides, by around June 2000, the Plaintiff had already reduced the asking rental for the Premises from HK$75,000 to HK$62,000. Hence, had the Defendant's friends really contacted the Plaintiff as the Defendant alleged, I saw no reason why the Plaintiff would have declined to negotiate with them.

19. Fourth, the Defendant relied on the fact that there were significant road works carried out by the Water Supplies Department at the vicinity of the Premises ("Road Works") since around June 2000 and continued throughout the remaining term of the Tenancy Agreement. Not only was unpleasant smell created, different parts of Castle Peak Road and Fuk Wing Street near the Premises were fenced off from time to time as a result of the Road Works. The Defendant therefore submitted that the Plaintiff's difficulty in leasing the Premises was not due to his fault since he had nothing to do with the Road Works. Rather, it was due to the adverse consequences created by the Road Works. The Defendant further submitted that the Plaintiff should claim against the Government for the loss and damage suffered as a result of the Road Works.

20. The Plaintiff did not dispute the adverse effects of the Road Works. Instead, the Plaintiff also relied on the Road Works to explain why it could not lease the Premises until June 2001. However, the Plaintiff submitted that the effects of the Road Works do not diminish the Defendant's liability for damages.

21. In my judgment, the Plaintiff submissions in this regard is correct. The basic principle in the assessment of damages is to put the Plaintiff in the position as if the Defendant had not repudiated the Tenancy Agreement. Had the Defendant not repudiated the Tenancy Agreement, he would have to continue to pay rent at the rate of HK$75,000 per month despite the commencement and continuation of the Road Works. Hence, I do not see how the Road Works can assist the Defendant.

22. Fifth, the Defendant contended that it was unreasonable for the Plaintiff to split the Premises into Shops A, B and C when putting them on the rental market. (See paragraph 10 of the Defendant's Witness Statement dated 24th March 2003.) I do not think this contention can withstand scrutiny since it is clear that the Plaintiff was at all material times prepared to lease the Premises either collectively or individually as Shops A, B and C. The mere fact that the Plaintiff had an asking rental for each of Shops A, B and C is neither here nor there.

23. Furthermore, I find Mr. Tang's explanation understandable. According to Mr. Tang, the Plaintiff decided to split the Premises into three shops because the Plaintiff would still have rental income from two tenants to pay for its mortgage even if the other tenant failed to pay rent. In short, the Plaintiff wanted to minimize the risk of having defaulting tenant. In view of the Plaintiff's mortgage repayment obligation, I do not think the Plaintiff's approach can be regarded as unreasonable.

24. Finally, the Defendant queried the reasonableness of the licence fee for Shop A. (See paragraph 11 of the Defendant's Witness Statement dated 24th March 2003.) Although the Defendant's Witness Statement has attached a report dated 29th August 2002 prepared by a Mr. Pang Chuck-hang ("Mr. Pang") of Larry H.C. Tam & Associates Ltd., Mr. Pang was not called to testify at this assessment hearing. In any event, as rightly pointed out by the Plaintiff's surveyor in the course of his examination-in-chief, there is no evidence as to Mr. Pang's qualification and expertise. In other words, apart from the Defendant's bare query, the Defendant has not adduced any evidence to show that the licence fee of HK$17,000 for Shop A was unreasonable in the circumstances of this case bearing in mind the adverse effects of the Road Works.

25. On the whole, the onus of proof on the issue of mitigation rested with the Defendant. If he failed to show that the Plaintiff ought reasonably to have taken certain mitigating steps, then the normal measure of damages will apply. (See: McGregor on Damages, 16th edn., para. 299.) Having considered the Defendant's contentions and the evidence before this Court, I find that the Defendant has failed to discharge his burden. Hence, I find that the Plaintiff is entitled to recover damages in the sum of HK$876,774.19, being the sum equivalent to the rent payable for the Unexpired Portion of the Tenancy Agreement.

Loss of Management Fees, etc.

26. The second head of the Plaintiff's claim is in the sum of HK$92,230.80. This is the loss of the management fees, rates and government rent payable and paid in respect of the Unexpired Portion of the Tenancy Agreement. The amounts in question are supported by the letter dated 3rd July 2002 from the Rating and Valuation Department and the letter dated 3rd July 2002 from Fullon Management Ltd. In my judgment, this head of claim stands on the same footing as the Plaintiff's claim for loss of rental income dealt with above. Hence, for the same reason, I find that the Plaintiff is also entitled to this sum of HK$92,230.80.

Costs for Rebuilding the Partition

27. Under clause 7 of the Tenancy Agreement, the Defendant was obliged to reinstate the partitioning at the Premises. It is the Plaintiff's case that the Defendant vacated the Premises without reinstating the partition. Hence, according to the Plaintiff, it had engaged its own contractor to do the work at the costs of HK$26,000. The Plaintiff, however, only produced a quotation in Chinese dated 26th April 2000. No invoice, debit note or receipt was produced by the Plaintiff. Mr. Tang in the course of his testimony explained that he paid this sum in cash and that he had not asked for any invoice or receipt.

28. The Defendant disputed this sum and suggested that the partitioning work had not been carried out by the Plaintiff. During cross-examination, the Defendant put it to Mr. Tang that the Defendant went pass the Premises about 6 months after he delivered possession of the Premises to the Defendant and noticed that everything inside the Premises remained the same. Mr. Tang denied this and stated categorically that the partitioning work had been done.

29. This claim for HK$26,000 is not a new one. In the documents adduced before this Court, this sum first appeared in a Statement of Account attached to the letter dated 16th May 2000 from the Plaintiff's solicitors Messrs. Gallant Y.T. Ho & Co. to the Defendant's then solicitors Messrs. Ong & Chung. (See pages 239 and 240 of the Hearing Bundle.) Notwithstanding this, there was no letter from the Defendant himself or his solicitors asserting that the partitioning work had not been done. Further, although the Defendant appeared in person at this assessment hearing, his Witness Statement dated 24th March 2003 was prepared with the assistance of his former solicitors Messrs. Ong & Chung. Not a single word was said in the Defendant's Witness Statement about this claim for HK$26,000. In particular, the Defendant's Witness Statement did not say anything about the incident where the Defendant allegedly went pass the Premises and noticed that the partitioning work had not been done as suggested by the Plaintiff. For these reasons and having observed the demeanour of both Mr. Tang and the Defendant, I prefer the testimony of Mr. Tang and I find that the Plaintiff had in fact done the partitioning work at the cost of HK$26,000.

Conclusion

30. In the circumstances, I find that the Plaintiff is entitled to damages in the total sum of HK$807,813.42. This sum is made up as follows:

Loss of Rent		HK$876,774.19
Loss of Management Fees, Rates & Government Rent		HK$92,230.80
Partitioning Costs		HK$26,000.00
	Less:
	Licence Fee (30/3/2001 to 9/4/2001)	HK$5,483.87
	Rental Deposit	HK$130,000.00
	Partial Repayment by the Defendant	HK$51,707.70
	Total:	HK$807,813.42

31. For the sake of completeness, I should mention that the above three sums to be deducted from the Plaintiff's claim are not in dispute.

32. Neither side has made any submissions on the question of interest. In principle, I see no reason why the Plaintiff should not be awarded interest on the damages payable by the Defendant. I therefore order that the Defendant do pay to the Plaintiff interest on the said sum of HK$807,813.42 at judgment rate from 9th April 2001 until full payment.

33. Finally, I make an Order nisi that the Plaintiff be paid by the Defendant the costs of and occasioned by this assessment (including any costs previously reserved) to be taxed if not agreed.