RIDGE LTD v. GOLDEN CASTLE LTD

HCA122/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.122 OF 2005

------------------------------

---------------------

------------------------

J U D G M E N T

------------------------

1. This was an appeal against the order of Master Au-Yeung dated 29 June 2005.  I dismissed the appeal.  I now give reasons.

2. The plaintiff was the landlord and the defendant the tenant of premises at Unit C, 5^th Floor, Lane Crawford House, No.70 Queen’s Road Central, Hong Kong for a term of two years for the period from 1 March 2004 to 28 February 2006. 

3. The plaintiff claimed that the defendant failed to pay rent, service fees, rates and other outgoings for the premises, for the period from 1 November 2004 to 31 January 2005.  The total claimed was $176,312.45.  The plaintiff applied for vacant possession.  The learned master gave summary judgment for vacant possession, payment of the outstanding sum, mesne profits until vacant possession be delivered up, and other reliefs.  It is against this judgment that the defendant appeals, and seeks an order for unconditional leave to defend, or failing that, conditional leave to defend.

4. The defendant’s premises are on the 5^th floor of Lane Crawford House.  The Lane Crawford department store occupies the first to the fourth floors.  In early November 2004, renovations of the department store were commenced.  These involved, according to the defendant, the blocking of the staircases, passages and escalators leading from the entrances on the ground to the fifth floors.  This affected the defendant’s business and it lost profits. 

5. The main plank of the defendant’s defence, and of its appeal is that the plaintiff breached Clauses 1.1 and 3.1 of the tenancy agreement between the parties.  The defendant therefore has a legal or equitable right of set-off of its claim for losses arising from the plaintiff’s breach of covenants. 

6. There are other defences and the master dealt with them, but I will not set them out here, because it is not argued on the appeal that the master dealt with them wrongly.  This is a hearing de novo but the issues for decision are those which are argued before me. 

7. The main issue for decision here is that of set-off.  If there is a right of set-off and the counterclaim would extinguish the claim then leave to defend should be granted.  There is a secondary issue as to the reliability of the evidence of the quantum of the counterclaim but this only needs to be dealt with if there is a right of set-off and it is necessary to consider whether or to what extent the counterclaim might extinguish the claim.

8. Clause 1.1 gives the defendant the use in common with the landlord and other tenants of the public entrances, staircases, landings, lavatories and passages within the building, as necessary for the enjoyment of the defendant together with the use of the lifts, escalators and air-conditioning in the building during such hours as those services operate.  Clause 3.1 is the standard covenant for quiet enjoyment. 

9. As appears from evidence filed for the defendants, and in particular a letter dated 25 November 2004, the defendant’s complaint is that its customers, who would normally come up the stairs or escalators inside the department store to its premises, could not do so because of the renovation work.  The customers were also given the impression that the defendant had moved away.

10. The evidence of the plaintiff, which is not contradicted, is that while an internal staircase and internal escalators within the department store were blocked, customers could always get to the defendant’s premises on the fifth floor by using the public staircases and the office lifts within the building.  There was never any interference with access. 

11. There can be no dispute that the defendant did not pay rent and was in breach of the tenant’s covenant to pay rent.  This would enable the plaintiff to forfeit the lease.  The defendant could only obtain leave to defend if it could be shown to have a legal or equitable set-off of its claim for breach of covenant that would extinguish the claim for rent and hence the right to forfeiture.

12. The master made certain assumptions of fact in the defendant’s favour and considered that the defendant had an arguable case for breach of covenant for quiet enjoyment, and may be able to claim damages.  She went on to consider the question of set-off and held that there was no legal right of set-off of a claim for breach of the landlord’s covenant to give quiet enjoyment against a breach of the tenant’s covenant to pay rent. 

13. In arriving at this conclusion the master relied on the judgment of Chu J in Charmway Development Ltd v. Long China Engineering Ltd, HCA 54 of 2001.  In that case at paragraph 18 Chu J said, and I understand this to be well settled law and respectfully agree with it :

“Under the common law, the covenant to pay rent has been regarded as independent of the other covenants or obligations under a lease, including for example, the covenant for quiet enjoyment: Edge v Boileau & Ors [1885] 16 QB 117, see also Taylor v Webb, [1938] 2 KB 283.  A tenant’s obligation to pay rent is not dependent upon the compliance by the landlord of its obligations under the lease.” 

14. The master also considered the question of equitable set-off and held that it did not apply, as being insufficiently closely connected with the claim for rent. 

15. The defendant’s claim for damages is unliquidated, even though a figure has been given.  The amount of damages would be a matter for the award of the court after hearing evidence.  An unliquidated counterclaim may give rise to equitable set-off.   In British Anzani (Felixstowe) Ltd v. International Marine Management (UK) Ltd[1980] QB 137 it was held that the defendant could set off its claim for unliquidated damages for the repair of defective flooring against the plaintiff’s claim for rent provided that the defendant’s equity impeached the title to the plaintiff’s legal demand for rent.  There had to be a close connection so that it was only fair and just that the equity should be treated as going to the very foundation of the plaintiff’s claim.  In Esso Petroleum Co. Ltd  v. Milton [1997] 1 WLR 938, a licence case, it was held that for equitable set-off to apply the counterclaim must be at least closely connected with the same transaction as that giving rise to the claim; and the relationship between the claims must be such that it would be manifestly unjust to allow one to be enforced without regard to the other.  See the judgment of Simon Brown LJ at page 950.

16. In general, interference with quiet enjoyment requires some substantial physical interference with the enjoyment of the premises.  See Owen v. Gadd [1956] 2 QB 99.  Here there was no defect in the premises themselves.  There was no actual blockage of access.  At most there was inconvenience to customers who could not use the escalators and stairway within the store, but who could find another way in.  There may have been some loss of casual customers who just decided to have their hair done while they were shopping in Lane Crawford, but the defendant was an expensive hairdresser rather than a barber shop where casual customers “drop in”.  Its artistic director, Madam Chu, printed on her name card that “advance appointments would be appreciated”.  One would not expect casual trade to be a very important aspect of the business.  

17. In any event, it could not be said that the defendant could not do business, or that its business was so substantially interfered with by the landlord that it should not have to pay rent, as might be said if the flooring was defective or if the customers could not get into the premises.  

18. I do not see that, in all the circumstances of this case, the counterclaim is sufficiently closely connected to the claim, or that it would be manifestly unjust to allow the covenant for rent to be enforced without regard to the covenant for quiet enjoyment.  So set-off does not come into the picture.  If the defendant has a claim it must be pursued separately. 

19. As to the quantum of the counterclaim, it seems to me that the evidence is suspect.  Un-audited and audited accounts are produced.  The alleged loss of profits seems to be based on a sudden and unexplained increase of turnover in the ten-month period just before the renovation work started.  Further there are some figures in the accounts, such as those for the management fees, which are obviously wrong.  But in any event, the quantum of the counterclaim is not important since, on my finding, there is no right of set-off. 

20. The appeal was accordingly dismissed.