XCHRX GRANDACE INVESTMENTS LTD. and Another v. BOLD CHAMPION DEVELOPMENT LTD. and Another

1996 No. A14149

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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INTRODUCTION

1. In this action, the Plaintiffs claim possession of retail premises in a shopping mall in Tin Shui Wai which they let to the 1st Defendant. They also claim mesne profits. They obtained summary judgment against both Defendants under Ord. 14. The Defendants now appeal, contending that they should be given unconditional leave to defend the action. Their Notice of Appeal was filed a few days out of time. That is said to have been due to wrong advice having been given to the Defendants about the time for appealing by their previous solicitors. There has been no prejudice to the Plaintiffs, and I therefore extended the Defendants' time for appealing.

2. The tenancy agreement was dated 15th November 1994. The term of the tenancy was for 3 years from 1st December 1993, and the rent was $150,000.00 a month. When the tenancy expired on 30th November 1996, the 1st Defendant refused to vacate the premises. It tendered the rent, the management charges and other sums which would have been payable to the Plaintiffs if the tenancy had continued, but the Plaintiffs refused to accept them.

THE NOTICE TO QUIT

3. The 1st Defendant's case is that the tenancy was one to which Part V of the Landlord and Tenant (Consolidation) Ordinance (Cap. 7) ("the Ordinance") applied, but that no proper notice to quit has been served. Accordingly, it remains entitled to continue in occupation of the premises until such time as a proper notice to quit is served and has expired.

4. Does Part V of the Ordinance apply to the tenancy? The basis on which the Plaintiffs contend that Part V does not apply is section 121(2)(a) of the Ordinance, which provides:

"This Part shall not apply to... a tenancy for a fixed term of 3 years or more the agreement for which contains no provision for earlier determination of the same other than for breach of any of the provisions of the agreement...."

There are two clauses in the tenancy agreement which the 1st Defendant claims provided for earlier determination of the tenancy other than for breach of any of its provisions. They are clauses 2(ab) and 4(a). Clause 2(ab) provides:

"The Tenant agrees with the Landlord... not to terminate the lease before its expiry date. In the event of early termination of this lease by the Tenant, the Tenant agrees to pay to the landlord all rental during the period from the date of the expiration of the lease before the Tenant vacates the premises without prejudice to any other claim the Landlord may have against the Tenant."

The fact that clause 2(ab) refers to the "early termination" of the tenancy does not mean that it provides for its early termination. I construe the words "provision for earlier determination" in section 121(2)(a) as meaning "provision permitting earlier determination". On that footing, clause 2(ab) does not provide for the earlier determination of the tenancy. On the contrary: in the first sentence, it prohibited the 1st Defendant from terminating the tenancy prior to its expiry, and in the second sentence it merely provided for what the 1st Defendant had to pay to the Plaintiffs in the event of the 1st Defendant acting in breach of the tenancy by terminating it before its expiry date.

5. Clause 4(a) provides:

"If the rent payable hereunder or any part thereof be unpaid for the space of fifteen days after becoming payable (whether legally or formally demanded or not), or if there shall be any breach or non-performance of any of the stipulations, conditions and agreements herein contained and on the part of the Tenant to be observed or performed, or if the Tenant being a corporation shall go into liquidation (save for the purpose of amalgamation or reconstruction), or if the Tenant shall suffer execution to be levied upon the Premises or otherwise on the Tenant's goods, then and in any such case it shall be lawful for the Landlord at any time thereafter to enter into and upon the Premises or part thereof in the name of the whole and thereupon this Lease shall absolutely determine but without prejudice to any outstanding breach by the Tenant of any of the terms of this Lease...."

Mr. Jat Sew Tong for the Defendants argues that two of the events referred to in this clause which would have entitled the Plaintiffs to terminate the tenancy do not amount to a breach of the tenancy, namely, the liquidation of the 1st Defendant, and execution being levied on the 1st Defendant's goods. He points out that the liquidation of the 1st Defendant does not mean that it is insolvent: it may, after all, be wound up voluntarily. He also relies on the words "or otherwise" as showing that execution on the 1st Defendant's goods elsewhere than at the premises would entitle the Plaintiffs to terminate the tenancy, even though that could not be a breach.

6. I reject that argument. Section 127 of the Ordinance provides that nothing in Part V of the Ordinance shall affect any condition providing for a right of re-entry in the event of "the tenant's business being wound up" (which, in the case of a corporate tenant, must include its liquidation, voluntary or otherwise) or in the event of "the tenant suffering execution to be levied" (which is not limited to execution at the suit premises). Accordingly, the two conditions relied on by Mr. Jat are, by virtue of section 127, expressly prevented from being capable of being relied on for the purposes of arguing that their inclusion in the tenancy agreement prevents Part V of the Ordinance from not applying to the tenancy. That was the reasoning of Briggs J. (as he then was) in Winning Enterprises Ltd. v. Peking Restaurant Ltd. [1971] HKLR 240, for coming to a similar conclusion, even though the terms of the relevant clause in that case were different.

7. Since, therefore, Part V of the Ordinance did not apply to the tenancy, the tenancy did not have to be terminated by a notice to quit pursuant to section 122. Although the Plaintiffs' agents claim to have served a notice to quit, a notice to quit was in fact unnecessary.

THE OPTION TO RENEW

8. The 1st Defendant's alternative case is that, in consideration of the 1st Defendant taking a tenancy of the premises for a term of 3 years, the Plaintiffs granted the 1st Defendant an option to renew the tenancy for a further 3 years on the expiry of the original term, and that the 1st Defendant exercised that option. The facts on which the 1st Defendant relies in support of this argument are that the option to renew was originally agreed between the 2nd Defendant, a director of the 1st Defendant, and Lo Chun Kit, a representative of the Plaintiffs' property agents. However, when the tenancy agreement was drawn up, the option to renew was not included in it. The 2nd Defendant mentioned that to Mr. Lo, who said that he would talk to the Plaintiffs about it. In his 1st affirmation, the 2nd Defendant added (in para. 16):

"[Mr. Lo] further promised me that if the Plaintiffs refused to grant the Right of Renewal to the 1st Defendant pursuant to the 1st Agreement as amended, they would compensate the 1st Defendant for [the loss] of such right."

In the event, the Plaintiffs did not relent. Since the 1st Defendant had already been in occupation of the premises for about a year by then, the 2nd Defendant feared that if the 1st Defendant refused to sign the tenancy agreement the Plaintiffs would commence proceedings for possession. For that reason, the 1st Defendant executed the tenancy agreement, even though it did not contain an option to renew.

9. On these facts, the Plaintiffs argue that such option to renew as the 1st Defendant may originally have been granted was lost when the 1st Defendant signed the tenancy agreement which did not contain the option to renew, and that the 1st Defendant has, at best, a counterclaim for damages for the Plaintiffs' failure to honour its contractual promise to compensate the 1st Defendant for losing the option to renew. That argument depends on the meaning of the words in the 2nd Defendant's 1st affirmation which I have quoted. Mr. Jat contends that what the 2nd Defendant was saying was that if the Plaintiffs insisted upon withdrawing the option to renew which had already been granted, the Plaintiffs would compensate the 1st Defendant for the loss of the option. Mr. Jat goes on to say that the Plaintiffs did not in fact withdraw the option. They simply refused to confirm in the written tenancy agreement that it had been granted. Accordingly, the 1st Defendant is not entitled merely to compensation for the loss of the option. The option not having been withdrawn, and the 1st Defendant having exercised the option, it is said that the 1st Defendant can resist the claim for possession on that ground.

10. I cannot go along with this argument. I read the 2nd Defendant as saying in the sentence in his 1st affirmation which I have quoted that if the Plaintiffs still refused to include the option to renew in the written tenancy agreement, the Plaintiffs would compensate the 1st Defendant for the loss of the option. That reading gives effect to the fact that the 2nd Defendant's conversation with Mr. Lo was in the context of whether the option to renew should be included in the written tenancy agreement: see paras. 15 and 17 of the 2nd Defendant's 1st affirmation. When I put to Mr. Jat in the course of argument that possible construction of what the 2nd Defendant had been saying, he realistically accepted that if that construction was my concluded view (and if Part V of the Ordinance was found not to apply to the tenancy), the 1st Defendant could not resist the claim for possession. Its remedy for what it alleges to be the Plaintiffs' failure to permit it to exercise its option to renew is a claim for damages.

RELIEF AGAINST THE 1ST DEFENDANT

11. Accordingly, the 1st Defendant has no defence to the Plaintiff's claim for possession of the premises. However, in addition the master gave the Plaintiffs judgment for damages and mesne profits to be assessed. "Mesne profits" is the term given to those damages awarded in favour of a landlord against a former tenant for the unlawful use and occupation of the premises once the tenancy has been determined. In this case, the Plaintiffs' claim for mesne profits comes under 5 heads. For three of those heads of claim, the mesne profits are fixed:

(i) management fees at the rate of $17,790.00 per month from 1st December 1996 until vacant possession is delivered up;

(ii) rates at the rate of $24,750.00 per quarter from 1st December 1996 until vacant possession is delivered up; and

(iii) payments towards the promotion fund at the rate of $2,372.00 per month from 1st December 1996 until vacant possession is delivered up.

However, for the other two heads of claim, the mesne profits had to be assessed. They are:

(iv) sums equivalent to the market rent of the premises from 1st December 1996 until vacant possession is delivered up; and

(v) utilities and other charges payable in respect of the premises from 1st December 1996 until vacant possession is delivered up.

I am unhappy about the use of the phrase "damages and mesne profits" in the judgment, because that suggests that they are different things. Accordingly, I propose to vary the judgment entered by the master by simply removing the words "and mesne profits".

RELIEF AGAINST THE 2ND DEFENDANT

12. The master made an order for possession of the premises against the 2nd Defendant as well as the 1st Defendant. That must have been a mistake, because no order for possession against the 2nd Defendant was claimed. That part of the judgment must therefore be set aside. However, the master also gave the Plaintiffs judgment against the 2nd Defendant for damages and mesne profits to be assessed. Was he right to do so?

13. The 2nd Defendant signed a deed of guarantee when the tenancy agreement itself was signed. That deed of guarantee provided as follows:

"In consideration of the Landlord having agreed at the Guarantor['s] request to accept the Tenant as tenant of the premises upon the terms of the Agreement, the Guarantor hereby covenant[s] with the Landlord that the Tenant shall pay the rents reserved on the day and in [the] manner contained in the Agreement and shall duly perform and observe all the covenants and conditions on the Tenant's part contained in the Agreement and that in case of default in such payment of rents or performance or observance of any of the covenants and conditions contained in the Agreement during the currency of the term created by the Agreement and also thereafter during such period as the Tenant remains in occupation of the premises the Guarantor will pay and make good to the Landlord on demand all loss damages costs and expenses thereby arising or incurred by the Landlord...."

Mr. Mok Yeuk Chi for the Plaintiffs argues that by this provision the 2nd Defendant undertook two separate obligations. First, he guaranteed the 1st Defendant's performance of its obligations under the tenancy agreement. Secondly, in the event of a default by the 1st Defendant of its obligations, the 2nd Defendant agreed to pay such damages as the Plaintiffs incurred as a result.

14. I accept this argument. Indeed, Mr. Jat did not seek to argue otherwise. It follows from what Lord Reid said in Moschi v. Lep Air Services Ltd. [1973] AC 331 at p. 345A-C, and applied to the law of landlord and tenant in Cerium Investments Ltd. v. Evans (1991) 62 P. & C.R. 203. When the 1st Defendant failed to vacate the premises on 30th November 1996, it was in breach of the tenancy agreement. Since the 2nd Defendant had guaranteed the performance by the 1st Defendant of its obligations, and since he had agreed to pay such damages as the Plaintiffs incurred as a result of that default, the 2nd Defendant is as liable to the Plaintiffs for damages as the 1st Defendant is.

15. Mr. Jat argued that no cause of action existed against the 2nd Defendant at the time of the issue of the writ, because it appears to have been served after the 1st Defendant had tendered a sum (which the Plaintiffs refused to accept) representing the current rent and outgoings. I reject that argument. The writ was issued on 10th December 1996, i.e. before the sum was tendered on 12th December 1996, and in any event the sum tendered took no account of the market rent of the tenancy by 1st December 1996. In that respect, I can take judicial notice of the fact that even between a landlord and an existing tenant, the market rent would inevitably have been in excess of $150,000.00 a month.

16. For these reasons, the monetary judgment against the 2nd Defendant must stand, with the deletion of the words "and mesne profits".