PROFESSIONAL BUILDERS INVESTMENT LTD. v. WABO LTD.

CACV 183/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 183 OF 2002

(ON APPEAL FROM HCA NO. 3869 OF 1998)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from the judgment of Deputy High Court Judge Muttrie given on 4 February 2002. The plaintiff was the purchaser of a large shop premises in Tsim Sha Tsui East. It made a claim under a clause in the sale and purchase agreement. That claim was for a declaration that the defendant was "liable to compensate the plaintiff for all loss and damage suffered by the plaintiff as a result of" the defendant's former tenant failing, refusing or neglecting "to exercise an option to renew its tenancy for another year on a full indemnity basis." There was also a claim for damages. The plaintiff had calculated its damages at $420,000 per month for the period from 1 December 1997 to 30 November 1998. The judge dismissed the plaintiff's claim. At the conclusion of the hearing, this court reserved its judgment.

The background

2. The plaintiff and the defendant entered into a sale and purchase agreement dated 25 March 1997 in respect of Shop 80 in New Mandarin Plaza, Tsim Sha Tsui East ("the property"). The sale price was $60 million. The sale was subject to an existing tenancy to a watch company. That tenancy had been in existence for some three years and it contained an option to renew the tenancy for a further period of one year. Whether that option to renew was enforceable matters not. The contract provided that the option to renew should be exercised not less than six months before the expiration day of the tenancy which was 30 November 1997. Although the rent under the existing tenancy was $420,000 per month, the tenancy agreement provided that if the tenancy were to be renewed the rental was to be "the then prevailing market rent exclusive of rates, air-conditioning and management charges and other outgoings". Under clause 31 of the sale and purchase agreement it was provided as follows:

"(a) If the existing tenant elects to exercise its option right of renewal under the Tenancy, it is the responsibility of the Vendor at its own costs and expenses to conduct negotiation with the existing tenant as to the applicable rent for the option period. The Vendor realises the standing instructions of the Purchaser and will use its best endeavour to strike for an increase of rental from the existing tenant at a minimum rate of 15% of the current rental.

(b) If the existing tenant elects not to exercise its option right or that on exercising its option right, there is no compromise between the existing tenant and the Vendor on applicable market rent whereas it is adjudged that the market rent for the renewal period falls below $420,000.00 per month, the shortfall in rental and/or damages suffered by the purchasers therefrom shall be compensated by the Vendor to the Purchaser on full indemnity basis.

(c) The Vendor is aware of the intention of the purchaser in sub-dividing the Property into such number of units as may be determined by the Purchaser and such partition would be physically carried out after the existing tenant has vacated the property. In any event, the Vendor will do all necessary acts and execute all necessary documents to facilitate and cope with the intentions of the Purchaser which include but are not limited to :-

(i) procure the existing tenant to enter into such corresponding numbers of new tenancy agreements as may be determined by the Purchaser for the option period respectively for the partitioned premises (if so required) with the Purchaser and/or its nominees, and

(ii) procure consent to be given by all relevant authorities/institutions with regard to such proposed sub-division

(d) The above are essential terms of the sale and purchase of the Property and the terms shall survive completion of the sale and purchase."

3. As the judge recorded, in late June 1997 the plaintiff's solicitors wrote to the defendant's solicitors inquiring as to whether the tenant had given notice of renewal and, if it had, the new rental. The defendant's solicitors replied that there were negotiations in progress. Completion took place on 3 July 1997. On 29 July 1997, the defendant's solicitors wrote to the plaintiff's solicitors that the tenant had not given any notice of renewal and that they considered that the tenant would not exercise its option to renew. The letter then went on to say that there was another intended tenant at a rental of $420,000 per month for one year and asked the plaintiff's solicitors to take instructions.

4. It was the plaintiff's case that due to faulty communication between the plaintiff's solicitors and the plaintiff, the plaintiff was never fully aware of the contents of that letter until much later. On 27 October 1997, the plaintiff's solicitors wrote to the defendant's solicitors informing them that the existing tenant had asked for an early determination and reserving their rights under clause 31 of the sale and purchase agreement. The defendant's solicitors did not reply to that letter or the subsequent letter but on 5 December and 8 December the plaintiff's new solicitors wrote to the defendant's solicitors informing them that the plaintiff had been unable to find a tenant. They claimed an indemnity under clause 31. The defendant's solicitors replied that a tenant had been offered at $420,000 per month and that had not been taken up. This action was commenced on 28 March 1998. By that stage, no tenant had been found which was acceptable to the plaintiff.

5. The plaintiff put its case, both in the pleadings and, indeed, even in this court, on the basis that it was entitled to a full indemnity of $420,000 per month for the whole period of a year commencing 1 December 1997 when the premises remained unlet. The defence was that the defendant had discharged its obligations by introducing a tenant which had been willing to pay at least $420,000 per month for one year, that the plaintiff was under an obligation to take all steps to let out or accept offers for letting the property either in its original form or in partitioned units, that the plaintiff should have taken all reasonable steps to avert any avoidable loss or damage and that because the plaintiff had acted in breach of the implied terms the defendant should be released from any further liability under clause 31(b) of the sale and purchase agreement.

The decision below

6. The judge considered the evidence relating to the potential rental at $420,000 per month which was mentioned in the letter of 29 July 1997. For a number of reasons he considered that proposal had not been realistic and from that finding there has been no appeal. The judge considered that there was an implied term of the contract that the plaintiff should take all reasonable steps to let out or accept offers to rent the property. In short, he came to the conclusion that on receipt of the letter of 29 July 1997, the plaintiff should have taken steps to try to let the premises thereby also mitigating any loss and that it had failed to do so. The judge considered that a new tenant could probably have been found either immediately or in the period up to 22 October 1997. He held that the rent that could have been obtained would have been such that the plaintiff would have suffered no loss.

This appeal

7. Before this court this appeal was conducted on a number of different alternative bases. In the first place, Sir John Swaine SC argued that the period between July and 1 December 1997 was too long for the plaintiff to have had the premises advertised in July anticipating a new rental commencing in December. On that footing it was argued that because the Asian financial turmoil had started on 23 October and the plaintiff had commenced marketing premises for rental in October but had been unable to secure a tenant until September 1999, then at a rent of $103,000 per month, the plaintiff was entitled to the full amount of $420,000 per month for a year commencing 1 December 1997. In the alternative it was said the plaintiff should at least be entitled to the shortfall between the likely market rent over the period 1 December 1997 to 30 November 1998 and $420,000 per month. Even then there was some ambivalence in the argument since it appeared that the evidence relating to the likely rent was that it was continuously dropping. It was argued that either the difference between a monthly rent for a yearly rental commencing 1 December 1997 and $420,000 per month should be the measure of compensation or alternatively the figure should be calculated on a monthly basis depending on what the going rental rate was each month. This latter argument would clearly have been a difficult calculation since it would seem that there was little evidence, at any rate which the judge accepted, which would have been the foundation for such a calculation.

The new argument

8. Sir John Swaine raised an alternative argument, which, as he put it, had not been lighted upon by those acting for the plaintiff before. It was most certainly not contained in the pleadings. It barely came even within the terms paragraph 8 of the Notice of Appeal. The point had only been coherently raised in the skeleton argument filed shortly before the hearing of the appeal. It was premised on the fact that Mr Patrick Lai, who was the surveyor who gave expert evidence on behalf of the defendant, had said in evidence that it would take at least two to three months to secure a potential client into a position of talking seriously about the letting. On that basis it was said that even if attempts to let out the premises had commenced at the end of July, by the end of October, it might be anticipated that a potential tenant might be in serious negotiations but that a lease would not have been secured. Basing himself on Mr Lai's evidence that the Asian financial difficulties might be said to have started on 23 October 1997, Sir John Swaine hypothesised that a prospective tenant in negotiation would have immediately abandoned negotiations and the plaintiff would have had to start looking for another tenant in late October.

The judgment below

9. In my view, the judge below was correct in approaching his decision on the basis that the obligation of the defendant to reimburse the plaintiff for the difference between the actual rent and $420,000 per month was predicated on the basis that the plaintiff would attempt to rent the property. It was quite clear that the previous tenant of the premises had to give six months notice of intention to renew. No doubt for that reason the plaintiff's solicitors had made inquiries in June as to whether there would be a renewal. Any difficulties of communication between the plaintiff's solicitors and the plaintiff cannot be laid at the door of the defendant. The defendant's solicitors acted properly in communicating with the plaintiff's solicitors by letter of 29 July 1997. Indeed had they attempted to write directly to the plaintiff that would have been a breach of etiquette if not improper. The question which the court must therefore ask itself is what rent would have been achieved had the plaintiff attempted to market the premises for rental on receipt of the letter of 29 July 1997. These premises were clearly large premises. As can be seen, the plaintiff had in contemplation dividing it into no less than four different areas. The chart of comparables in the same building which was produced in the court below contains only one other premises of similar size. The remaining premises are a great deal smaller.

10. Mr Chan, who appeared on behalf of the defendant, fairly pointed out that Mr Lai's statement was clearly one made in a very broad and general context. It would be wrong to take the reference to two or three months on an empirical basis.

11. Sir John Swaine took no issue with the fact that the judge approached the case on the basis that the plaintiff's efforts to rent the premises commenced in October 1997. In my view, the judge was justified in taking this approach. The evidence of the efforts to market the premises for rental at any time did not disclose what could be described as a whole-hearted effort. Mr Lai, the defendant's witness, had given evidence as to the steps that he would take and the information which he, as an estate agent, would pass on to a client if serious attempts were made to rent a property such as the present premises. He said that the landlord client would be kept informed of the steps which he took. This included going through a list of clients who would be suitable tenants, approaching them directly, as well as advertising and keeping copies of advertisements and so forth. Nothing of this sort apart from a late placard advertisement in October 1997 appears to have taken place. Certainly the evidence produced by the plaintiff fell very far short of the mark.

12. It should be appreciated that after 3 July 1997, the tenant became the plaintiff's tenant. It was quite clear from the evidence of Miss Lin Hsiang Mei, a director of the plaintiff, that she had contacted the tenant of the premises in early July inquiring whether it would wish to renew the tenancy. If the fact that that the tenant did not intend to renew the tenancy was not clear then, it certainly became clear by August and September. Miss Lin gave evidence (page 93 of the transcript) that the tenant did not pay the rent for August, that would have been due 1 August. In respect of the rent for September and October, it asked that the rent be deducted from its deposit.

13. The plaintiff's evidence as to their attempts to deal with the property was obscure; a reading of the transcript reveals a lack of precision in the answers which could only give rise to suspicions of evasiveness or worse. It is clear from the transcript that the property was put up for sale as well as rental, the asking price on the sale being between $58 million and $70 million. That price was perhaps not unrealistic at the time since a rental of $420,000 would give a return of 6% which is how Miss Lin said the price was calculated. Whilst it emerged from the evidence of Mr Wang Pei Yung, an employee of the plaintiff, that he had been in Hong Kong in late July and early August 1997 and had approached an estate agent, his inability to answer questions as to precisely what dealings he had with the estate agents over the relevant period gives rise to the suspicions mentioned above if not more. The effect of the plaintiff's evidence is perhaps best summarised in a short passage from the transcript of the evidence of Miss Lin at pages 88 and 89 of the transcript:

"MR CHIU: Yes. Maybe I just adduce that one short point, my Lord.

Q. Yes, Miss Lin, did you know the Hong Kong estate agents were in July -- by July 1997?

A. Yes, I knew them well.

COURT: Is it your evidence that you personally instructed any estate agent to sell or rent this property -- the property in this case, after your company had bought it?

A. Yes, I did, initially, I went to approach those estate agents which I had dealings before. What I mean, is that in the past, they also successfully handled my properties, and sometimes, they also approached me, talking about the buying -- talking about dealings - talking about property dealings.

COURT: Yes, but -- now, look, I'm trying to be specific here. I've just had your colleague going round and round the subject all yesterday, and I don't want you going round and round the subject all today. My question was, did you personally instruct any estate agent to sell all these -- this particular property? Now -- yes, I'm not asking what you usually did, I'm asking what you did about this property, do you understand?

A. Yes, I understand."

The reference to a colleague, was a reference to Mr Wang. Clearly the judge had formed a warranted unfavourable impression of his evidence.

14. In my view, the judge was justified in reaching the conclusion that the plaintiff had taken no proper steps to rent the property. In reality the receipt or non-receipt of the letter of 29 July was irrelevant because the plaintiff if not by then already, was very soon thereafter well aware that the tenant would not be renewing the tenancy. Indeed, since the contractual date for renewal had long since past, it would have been surprising if a landlord had been prepared to grant a new tenancy to a tenant who was dilatory, to say the least, in the payment of rent. The request to use the deposit for the payment of the September and October rent could only have been made in the context of the tenancy not being renewed. Yet, effectively, nothing was done to rent the property until October. In reaching the conclusion that the plaintiff had not made a proper attempt to rent the property after 29 July, no doubt the judge took into account the evidence from the plaintiff's own witnesses, admittedly not given in a very straight forward way, that attempts were being made to sell the property at a profit.

15. Having reached the conclusion that, if the plaintiff were to take advantage of its right to reimbursement for any shortfall in rent the plaintiff should have marketed the property, the judge's finding that the plaintiff had not done that was amply justified. The new hypothesis put forward by Sir John Swaine that even if the plaintiff had attempted to rent the property in a serious manner any prospective tenant would have abandoned negotiations after 23 October is itself fraught with difficulties. If a tenant were in serious negotiations, its course of conduct after 23 October would, in any event, depend upon what view it took at the time of the seriousness of the events of 23 October and the long term effect which they would have. To suggest that the prospective tenant would have abandoned negotiations altogether and simply dropped out of the picture is not one which a court would be likely to accept. It might be that a prospective tenant might seek a reduction in the proposed rent and that would be a possibility.

16. However, the judge took an overall view of the situation. The evidence before him showed that until October 1997 the property market appeared strong. The evidence showed a rising market. There appeared to be a healthy market for rentals. At that time an asking rental of $420,000 per month was within the bounds of reason. In those circumstances the judge's conclusion that if serious efforts had been made to rent the property a tenant would have been secured within a period of three months less one week from the 29 July was a conclusion to which the judge was clearly entitled to come on the evidence. It cannot be said that the judge had misunderstood the evidence or ignored any important evidence. There is therefore no basis for interfering with his decision. I would go further. I consider that his conclusion was reasonable in the circumstances. Mr Lai's evidence was that given the date of 22 October with a starting date for a rental for a year of 1 December 1997 the open market rental value would have been $420,000. The judge's conclusion that no loss had been shown obviously followed. In my view, this appeal should be dismissed.

Hon Le Pichon JA:

17. I agree with the judgment of the Vice-President.

Hon Kwan J:

18. I have had the benefit of reading in draft the judgment of the Vice-President. I was at one stage attracted to the new argument raised by Sir John Swaine on this appeal. It was submitted that the learned judge, in coming to the view that if the plaintiff had made efforts to rent the property at the end of July 1997, a new tenant could probably have been found at a rent close to HK$420,000 per month up to 22 October 1997, he had failed to give any or any sufficient weight to the evidence of the defendant's expert that it would take at least two to three months to find a potential tenant to talk seriously about the letting of this property. Having re-read the evidence, I am not persuaded that the judge is not entitled to draw the inference as he did on the totality of the evidence before him. I agree with the Vice-President that the appeal should be dismissed for the reasons given in his judgment.

Hon Rogers VP:

19. The appeal will therefore be dismissed with an order nisi in favour of the defendant.