CROCODILE GARMENTS LTD v. THE PRUDENTIAL ENTERPRISES LTD

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H E A D N O T E

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    The liability of a landlord to refund deposits paid by his tenants to secure performance of their obligations remains his liability (unless the terms of the tenancy agreement provide otherwise ) as well after as before an assignment of the reversion and does not become, on assignment of the reversion, the liability of the assignee of the reversion (Hua Chiao Bank v. Chiaphua Limited [1987] AC 99 followed.)

1988 of No. A6152

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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Godfrey, J.

1. By a Tenancy Agreement dated 1st May 1983, the Defendant ("the original landlord") let to the Plaintiff ("the tenant") some basement shop premises in the Prudential Centre, 216-228A Nathan Road, Kowloon ("the premises") for a term of 6 years commencing on 14th March 1983. The Tenancy Agreement included, as Section XI the following provisions, under the heading "DEPOSIT":

"(1) To secure the due observance and performance by the Tenant of the agreements, stipulations and conditions herein contained and on the Tenant's part to be observed and performed, the Tenant shall pay to the Landlord a deposit as set out in Part VIII of the First Schedule hereto and the Tenant shall also furnish the Landlord with a properly executed Bank Guarantee in a form acceptable to the Landlord for a sum set out in Pant VIII of the First Schedule hereto. The said deposit shall be retained by the Landlord throughout the said term free of any interest to the Tenant and in the event of any breach or non-observance or non-performance by the Tenant of any of the said agreements, stipulations or conditions aforesaid, the Landlord shall be entitled to terminate this Agreement in which event the Landlord may deduct from the deposit the amount of any monetary loss incurred by the Landlord in consequence of the breach, non-observance or non-performance by the Tenant in which event the Tenant shall, as a condition precedent to the continuation of the tenancy, deposit with the Landlord the amount so deducted and, if the Tenant shall fail so to do, the Landlord shall forthwith be entitled to re-enter on the said premises and to determine this Agreement in which case the deposit may be forfeited to the Landlord as hereinbefore provided.

(2)     Where under this Agreement, the aggregate of rental and management fee and air-conditioning charges payable shall at any time exceed the amounts so payable on the commencement of this tenancy, the Tenant shall forthwith

(a)    pay to the Landlord such further sums as will be necessary to maintain the deposit at two months' rental and management fee and air-conditioning charges;

(b)    furnish the Landlord with such additional Bank Guarantee as will be equal to one month rental and management fee and air-conditioning charges as would from time to time be payable.

(3)     Subject as aforesaid the said deposit shall be refunded to the Tenant by the Landlord without interest and the Bank Guarantee(s) returned to the issuing bank(s) within thirty days after the termination of this Agreement and the delivery of vacant possession of the said premises to the Landlord [the original draft continued "or within thirty days of the settlement of the last outstanding claim which the Landlord may have against the Tenant in respect of any breach, non-observance or non-performance of any of the agreements, stipulations or conditions herein contained and on the part of the Tenant to be observed and perform, whichever is the later"; but these words were struck out of the Tenancy Agreement as executed].

PROVIDED HOWEVER that the Landlord may prior to refund of the deposit and the return of the Bank Guarantee(s) require the Tenant to produce the rates receipt covering the whole of the said term of tenancy hereby granted or other evidence satisfactory to the Landlord showing that the Tenant had paid all rates for the said term".

2. The amount of the deposit set out in Part VIII of the First Schedule to the Tenancy Agreement was HK$103,032. The amount of the Bank Guarantee there set out was HK$51,516.

3. Further to these provisions (including what were referred to in argument as "the top-up provisions") the tenant paid the original landlord, during the currency of the Tenancy Agreement, HK$160,272 by way of deposit, and provided the original landlord with Bank Guarantees for the payment of HK$80,136.

4. By an assignment dated 10th March 1987 and made between (1) The original landlord; and (2) The Prudential Mall Limited, originally Sanibel Limited ("the assignee of the reversion") the original landlord assigned to the assignee of the reversion land which included the premises. This assignment was accompanied by a letter dated 12th February1987 addressed by the assignee of the reversion to the original landlord, referring to " the Commercial Portion" of Prudential Centre (which included the premises), and expressed in the following terms:

" IN CONSIDERATION of your payment to us as purchaser of the above property the sum of HK$11,103,377.15 being the rental deposit held by you under the tenancy of the Commercial Portion of the above property, we Sanibel Limited, hereby agree and undertake the following:-

1.    To refund the rental deposits to each and every tenant of the Commercial Portion of the Prudential Centre pursuant to the respective terms of the tenancy thereof; and

2.    To indemnify you against all claims and demands any of the said tenants may make against you for refund of the said rental deposits or any part thereof pursuant to the provisions contained in the respective terms of tenancy agreement."

5. By a consent order made on 18th April 1988, the tenant came under an obligation to give up possession of the premises to the assignee of the reversion; and, on 26th May 1988, it did so.

6. On the same day, 26th May 1988, the tenant requested the original landlord to refund all the security deposits and to return to the issuing banks all the bank guarantees issued to the original landlord under the Tenancy Agreement, within 30 days. The original landlord has refused to do so. Because of the arrangements it had made with the assignee of the reversion, as evidenced by the letter of 12th February 1987, it regards the liability to do so (if any) as that of the assignee of the reversion. But the assignee of the reversion asserts a right to keep the deposits, and the bank guarantees, on the ground that the tenant has failed to perform its obligations as to re-instatement of the premises upon termination of the tenancy contained in the Tenancy Agreement.

7. The tenant does not accept any of this. The tenant says that, now that the tenancy has been terminated, it is entitled to the refund of the deposit, and the return of the guarantees; and that it is the original landlord which is liable to the tenant to make that refund and return.

8. The tenant has accordingly instituted this action against the original landlord, and it has applied for summary judgment. The Master refused the tenant's application, noting " it is at least arguable that the [tenant] should seek to recover deposit and bank guarantees form [the assignee of the reversion] to whom benefit of the tenancy has been assigned by the [orginal landlord]".

9. The tenant now appeals.

10. The question for me on the appeal is whether the point noted by the Master is, as he held, arguable (no other point was argued before me). If it is, the Master was right to give the original landlord (as he did) unconditional leave to defend the action. If it is not, the Master was wrong so to do.

11. In my judgment, the Master was wrong. The point is unarguable. The liability to repay the deposit, etc. is that of the original landlord. The payment of the deposit, etc. Made by the tenant to the original landlord under the provisions of Section XI created a liability on the part of the original landlord to refund the deposit, etc. to the tenant, who became when the payments were made to the original landlord a prospective and, in a sense, contingent creditor of the original landlord. The original landlord's liability was prospective, because it did not arise until the end of the term; and it was contingent, because in the event (but only in the event) specified in Clause 1 of Section XI, the deposit was liable to forfeiture, and, of curse, if so forfeited, the liability to refund it would not arise. The specified event to which I have referred (there is only one) is the failure of the tenant, as a condition precedent to the continuation of the tenancy, depositing with the landlord the amount deducted by the landlord from the deposit of any monetary loss incurred by the landlord in consequence of a breach, non-observance or non-performance by the tenant of the tenant's agreements, stipulations and conditions. The tenancy has now come to an end, without the happening of that event. The liability, originally prospective, is therefore now a present liability; it is no longer either future or contingent. And it is the original landlord's liability.

12. At the date of the assignment of the reversion the Tenancy Agreement was still subsisting. But it was not open to the original landlord to assign to the assignee of the reversion what was then a prospective liability on the part of the orignial landlord. You can assign the benefit of a debt or liability. But you cannot assign the burden, unless the terms of the original contract under which the debt or liability arises expressly entitles you to do so (which, was not here the case) or unless statute allows it (for example, the burden of a landlord's covenants passes to an assignee of the reversion).

13. On 12th February 1987 the original landlord paid over to the (eventual) assignee of the reversion the sum mentioned in the letter of that date, and took an indemnity form the assignee of the reversion against any claim by the tenants in that connection. This correctly reflected the legal position. As between the tenants and the original landlord, the original landlord remained liable to the tenant to refund the tenants' deposits. As between the original landlord and the assignee of the reversion, the assignee of the reversion became liable to indemnify the original landlord if the original landlord was called on to repay the deposits, etc. to the tenants.

14. I come to these conclusions unassisted by authority. But in fact my conclusions are supported by the decision of the Privy Council in Hua Chiao Bank v. Chiaphua Limited [1987] A.C. 99. And the view taken by the Master is, in my judgment, inconsistent with that decision. The only relevant cases subsequent to it in point of time which were cited to me were Kumar v. Dunning [1987], 3 W.L.R. 1167 and Swift Investments Limited v. Combined English Stores Group PLC [1988] 3 W.L.R. 313. I find nothing in either the former or the latter case (in which the Hua Chiao Bank case was cited in argument) to cause me to take a different view from the one I have expressed. (But I should add, to avoid confusion, that this present action is concerned only with deposits, etc. paid or given to the original landlord. Although what follows is obiter dictum, I now record that, in my opinion, if in a case like this an assignee of the reversion calls on the tenant, subsequent to the date of the assignment, for the contemplated "top-up", the would be entitled to do so. The Swift case shows that the benefit of the tenant's covenant to provide the " top-up" runs with the reversion.

15. As it is, the only point argued before me was that the liability to repay the deposit, etc. paid to the original landlord rests, not with the payee, the original landlord, but with the assignee of the reversion; in other words, as Mr. Michael Thomas Q.C., for the original landlord, put it in argument: "The tenant has sued the wrong person".

16. It follows from what I have already said, that, in my judgment, this point is a bad point. The tenant has sued the right person, not the wrong one.

17. Order 14 Rule 3(1) provides that unless, on the hearing of an application under the Order, the defendant satisfies the court that there is an issue or question in dispute which ought to be tried or that ought for some other reason to be a trial of the case, the court must give judgment for the plaintiff. I find myself therefore constrained to reverse the decision of the Mtaster; to allow this appeal; and to declare that the tenant is entitled to judgment upon its claim against the original landlord.