WELL CENTURY HOLDING LTD v. LEUNG KAM YU

HCA 1368/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1368 OF 2001

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J U D G M E N T

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1. This is an appeal from an order of Master J Wong on an application for summary judgment under Order 14. On that application judgment was given for the plaintiff for the sum of $400,980.00 with interest, damages to be assessed, and costs on a solicitor and own client basis. The proceedings arise out of a tenancy and were brought in respect of non-payment of rent, rates and charges.

2. The premises in question are the ground floor of a building known as Polly Commercial Building, 21-23A Prat Avenue, Tsimshatsui, and the tenancy the subject of this action was entered into by the defendant and the plaintiff's predecessor in title on 6 September 1999 by an agreement in writing for a term of three years from 1 August 1999 to 31 July 2002. The defendant was to use it as a food centre and the rent payable was $153,620.00 a month in addition to air-conditioning and management charges of $25,610.00 plus additional charges, and rates of $23,346.00, a month. It is not in dispute that the defendant failed to make payment of the charges and rates from 1 January 2001 and of the rent from 1 February 2001. These proceedings were commenced on 26 March 2001 claiming possession, the sum of $425,980.00 by way of arrears of rent, rates and charges to 31 March 2001, mesne profits, rates and charges to the date of possession, damages representing the loss of rent, rates and charges to the date the premises were relet, and any loss thereafter to the date of expiry of the tenancy. Possession was given up on 30 March 2001, so this part of the claim was not pursued by the plaintiff, although it was, rather oddly, included in the summons for judgment under Order 14.

3. In his defence filed on 20 April 2001, the defendant claims that the plaintiff was in breach of clause 3.01 of the tenancy agreement, the covenant for quiet enjoyment, in circumstances I will look at shortly, and counterclaimed for loss and damage, and the balance of the rental deposit after allowing for the unpaid rent and charges to the date of possession. However, before I deal with that aspect of the matter, I will first consider the question of law raised by Mr Chong for the defendant, that, the plaintiff having elected to forfeit the tenancy, he cannot claim damages for consequential loss thereafter.

4. The principle he relies on is that now accepted as the law in respect of tenancies in Hong Kong, that, unless the landlord can establish that the breach by the tenant of a term in the agreement is such as to amount to a repudiation of the contract, then he can only rely on any right of re-entry and termination provided for in the agreement, with no right to consequential damages for breach. He further contends that, once a landlord has elected to forfeit the tenancy, he cannot thereafter claim consequential damages, and that, in this case, the landlord has forfeited the tenancy by issue of the writ.

5. In this case the tenancy agreement contains the usual clause providing that the landlord can re-enter and determine the tenancy upon the rent remaining unpaid for 15 days, or any other breach of the terms of the agreement. The relevant part of the clause in this agreement reads as follows:

"4.01 If and whenever the rent hereby reserved or any part thereof shall be in arrears for 15 days whether the same shall have been legally demanded or not or if any term, condition or stipulation on the Tenant's part herein contained shall not be performed or observed or if ......

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it shall be lawful for the Landlord at any time thereafter to re-enter upon the said premises or any part thereof in the name of the whole and thereupon the tenancy hereby created shall absolutely determine but without prejudice to the right of the Landlord in respect of any breach by the Tenant of any terms, conditions or stipulations herein contained or to the Landlord's right to deduct all loss and damage thereby incurred from the deposit paid by the Tenant in accordance with Clause 4.10 hereof."

6. This clause in effect permits the landlord to re-enter and forfeit the tenancy for any breach by the tenant, however minor, such as briefly placing rubbish in a common area of the building (clause 2.42), or even failing to provide first class service to his own customers (clause 2.49). It could hardly be said, however, that such breaches could evince an intention not to be bound by the agreement and thus amount to repudiation, and the landlord would only be entitled to recover any payments due under the agreement to the date possession was given up. The breach complained of here is non-payment of rent and other charges. The questions that arise are whether that non-payment here amounts to a repudiation of the contract, and, if it does, can the plaintiff now rely on it.

7. From the numerous authorities on the point, it is clear that non-payment of rent can amount to repudiation, depending on the circumstances of the case. Some of these were reviewed by Deputy Judge Lam in the most recent case of Super Century Investments Ltd v. Advance Ltd & anor HCA 73 of 2002. He then referred to the Australian case of Shevill v. Builders Licensing Board [1982] 149 CLR 620 and said:

"25. At p. 625-7, Gibbs CJ observed that there were three situations under which a contract would be regarded as repudiated by a party,

(a) if one party renounces his liabilities under it - if he evinces an intention no longer to be bound by the contract or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way;

(b) if one party, although wishing to perform the contract, proves himself unable to do so, and the breach goes so much to the root of the contract that it makes further commercial performance of the contract impossible;

(c) if there has been a breach of a fundamental or essential term of the contract.

26. It seems that arguments in Shevill focused on the third ground. The first ground was obviously not applicable. The second ground was ruled out on the evidence (see p. 630, 633, 634). On the third ground, Gibbs CJ said at p. 627,

"It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease."

27. With greatest respect, this must be right. One can hardly imagine the law allowing a landlord to claim that a tenant is in repudiation merely because of a slight delay in payment of rent. Plainly, the term as to payment of rent cannot be a fundamental term. However, it does not mean that non-payment of rent can never be relied upon as an act of repudiation. It depends on the circumstances. If the circumstances were such that the non-payment makes the further commercial performance of the tenancy agreement impossible, that could be repudiation on the second ground."

8. Were the only matter before me here the non-payment up to the date of issue of the writ, I am bound to say that it must at least be arguable that this did not amount to repudiation as such, but would depend on the circumstances as found by the judge at trial, and if it was only this point under consideration, leave to defend must be given. However, the non-payment here is accompanied by other matters which, taken together with that non-payment, cast a different light on the situation.

9. These are two letters sent to the landlord by the defendant in February 2001. The first, dated 15 February, says that he cannot afford to pay the rent now because of serious loss in his business, and asks to be allowed to assign the tenancy. The second, dated 19 February, again proposes assigning the tenancy, and if that fails, to terminate the tenancy on 31 March, alternatively to terminate the tenancy and take it up again on different terms and lower rent until the landlord can find a new tenant. This is not, therefore, just a case of a tenant being in arrears, but admitting he can no longer continue at that rent and proposing to bring the existing agreement to an end. This is clear evidence of an intention to terminate the agreement and, together with the non-payment, must amount to repudiation.

10. The next question is whether the plaintiff can now rely on that repudiation. Mr Chong submits that the issue and service of the writ shows that the plaintiff has elected to forfeit the tenancy, rather than rely on repudiation, and such election cannot be retracted.

11. The question of whether reliance on a re-entry and forfeiture clause in a lease precluded a landlord from also claiming damages for repudiation was considered by Waung J in Sichant Investments Ltd v. Wong Kam Kei & anor HCA 3430 of 1994, where, after a thorough review of both the history of the development of the law on leases, and the authorities as to the rights of a landlord upon breach of agreement, he concluded that the two rights were not inconsistent. He also found that, although the plaintiff had exercised his right of forfeiture by issue and service of the writ, this did not preclude him from also claiming repudiation damages. The situation here is very similar. Although the plaintiff pleads the right to re-entry under clause 4.01 of the agreement, breach of the agreement by non-payment is also pleaded together with a claim for loss and damage arising from that breach. Nothing could be clearer. While the words "repudiation" and "evincing an intention not to be bound by the agreement" have not been used, it is clearly stated that there has been a breach of the agreement which has caused the plaintiff loss and damage. This in my view is wide enough to encompass a claim for loss of bargain arising from the unexpired period of the tenancy and damages.

12. I now turn to the defendant's pleaded defence and counterclaim and his contention that the plaintiff was in breach of the covenant for quiet possession. The background to this is that in late November 2000 the plaintiff's management agents wrote to the defendant notifying him that work needed to be done to reinstate ventilation air ducts from the basement beneath the property to the rear service lane, for which they required access to the leased premises. They claimed entitlement to access under clause 2.22 which required the tenant to permit the landlord to enter to carry out works, repairs or maintenance which needed to be done. It is debatable whether this clause covered the works, as the reason for them was that the landlord had let the basement to a tenant (the new tenant) to use as a Japanese restaurant, not that there were repairs needed, or some emergency. However, for the purposes of this judgment I do not need to decide that.

13. The defendant clearly was unwilling to allow access and any possible disruption to his business, but negotiations ensued, and an agreement was brokered by the plaintiff between the defendant and the new tenant to allow access on three occasions at times when the defendant's business was closed, at night and weekends, and on other terms including an indemnity by the new tenant for any loss and damage, cleaning up after the work, and payment by the landlord, the plaintiff, of $25,000.00 by way of deduction from the rent for the inconvenience to the defendant. The plaintiff was not a signatory to the written agreement, but was clearly involved at the time, and has not sought to say it was not bound by its agreement to deduct $25,000.00 from the rent. Indeed, at the hearing before the Master, it appears that the sum was conceded as the sum ordered to be paid by the defendant was the sum claimed less $25,000.00.

14. The first stage of the works was carried out between 16 and 18 December 2000, but the defendant claimed that the new tenant was in breach of the agreement by not properly cleaning the entrance hall. On 20 December he wrote to the plaintiff and further complained that the work was defective, although in what way he does not say, and that the false ceiling of the male toilet had fallen off. He claimed a loss of custom of 20%. He then went on to request the transfer of the tenancy to his company, so the shareholders could share responsibility, a reduction in rent of 20%, due to "difficulty in business", and a reduction in air-conditioning charges. There seems to have been no response to this request, or his complaints, and these were not raised again by the defendant until 26 March 2001, the day the writ herein was issued, when his solicitors wrote to the plaintiff claiming breach of the tenancy agreement on the ground of lack of quiet enjoyment.

15. Meanwhile, the defendant, through his solicitors, entered into correspondence with the new tenant, claiming breach of their agreement, nuisance through smoke and fumes coming from their premises and demands to reinstate the damage. They, not unreasonably one might be forgiven for thinking, pointed out that they had been denied access to complete the works, and there would be no problems such as those the defendant complained of if they were allowed to continue, which they offered to do at any time suggested by the defendant. This continued throughout December and January, during which time the defendant claimed other damage including an infestation of mice. I understand separate proceedings are in hand between the defendant and the new tenant arising out of this. By a letter dated 12 February 2001 the defendant's solicitors informed the new tenant's solicitors that the defendant had arranged workmen to carry out remedial works to mitigate his loss. There is no suggestion of any problem with the works after that, and the defendant's communications with the landlord prior to 26 March are only in respect of his poor business and requests for reductions and transfers of the lease because of that.

16. There can be no doubt that acts by another tenant can amount to breach of the covenant for quiet enjoyment where those acts were, as here, authorised by the landlord. However, the defendant has three hurdles to overcome. The first is that he agreed to the works which caused the problems, in an agreement which included an indemnity by the new tenant for any loss and damage, and a payment which the defendant agreed to accept for the inconvenience. In effect the disruption was with his consent, and in return for an agreed sum by way of liquidated damages. Secondly, any further damage not then envisaged was clearly a result of his refusal to allow the new tenant to continue with the work. Having accepted an indemnity for any loss and damage, it is difficult to see what objections there could be to such resumption of the work, where it would remove or at least alleviate the problems he complained of. Thirdly, having made no complaint to the landlord throughout the whole process, apart from copying the correspondence to them, after resolving the problem by engaging his own workmen and presumably restoring the status quo, he then embarked on his requests to the landlord for reductions in rent and charges, and transfer or termination of the tenancy, based solely on his poor business, without reference to any loss occasioned by the works. This is only consistent with the tenancy still being in force and having been affirmed by the defendant.

17. Any disruption there had been was prior to 12 February, there being no complaint of any since. Having affirmed the tenancy, had there been any breach by the landlord of the agreement before that date, he had clearly condoned it by continuing with the tenancy without complaint and claiming against the new tenant. A breach such as that alleged is not something a tenant can keep in reserve for a future occasion, to use if or when he decides that it is not convenient to continue with the tenancy, or if he needs an excuse to stop paying rent. If he is aware of a breach of the agreement, a tenant can either claim repudiation there and then, or accept and condone it, and continue with the tenancy. On the evidence before me, the latter is clearly what the defendant has chosen to do, at a time when he had solicitors acting for him and no doubt advising him of his rights. To try to raise the matter only when he is faced with proceedings to recover the arrears is too late.

18. The only other matter raised by Mr Chong was as to the amount of the judgment given by the Master. He says as this is not the sum claimed in the writ and the appeal should be allowed on this ground alone. This can only be an argument when judgment is given on some basis other than that pleaded in the statement of claim. The reason for the difference here is clear, that the sum of $25,000.00 agreed to by the plaintiff in December 2000 was deducted. As this was not stated to be a part judgment, nor leave given to defend as to the difference, it is equally clear that this was either conceded by the plaintiff or abandoned. There is therefore nothing in this argument.

19. I accordingly find that the Master was correct in his decision, albeit on slightly different grounds as the matter was not argued on the same ones before him. The appeal will accordingly be dismissed with an order nisi for costs to the plaintiff to be taxed.