WO KEE ADMINISTRATION LTD v. HONCO MANAGEMENT LTD

HCSA 33/2024

[2024] HKCFI 3318

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO 33 OF 2024

(ON APPEAL FROM SMALL CLAIMS TRIBUNAL

CLAIM NO 23300 OF 2022)

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J U D G M E N T

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Background

1.  By a decision dated 3 April 2024 (“Decision”), Deputy Adjudicator Chau Ka-Yee in the Small Claims Tribunal (“Tribunal”) dismissed the Tenant’s claim for the return of deposit and ordered the Tenant to pay damages for breach of the tenancy agreement made between the Tenant and the Landlord dated 18 May 2020 (“Tenancy Agreement”).

2.  On 3 May 2024, the Tenant applied for leave to appeal against the Decision.

3.  On 3 July 2024, I granted leave to appeal on two questions of law formulated by the Tenant:-

a.  That the Tribunal erred in law in its interpretation of clause 2(w) and/or 2(b) of the Tenancy Agreement, by finding that the Tenant is in breach of its duty either to deliver up the premises upon expiration of the term in “good, clean and repair condition” or to keep the interior of the premises in “good, clean and working condition” (“Ground 1”); and

b.  That the Tribunal erred in law in the principles which were applied in the assessment of damages (“Ground 2”).

4.  The Tenancy Agreement is in respect of House 33B, Regalia Bay, 88 Wong Ma Kok Road, Stanley, Hong Kong (“Premises”) commencing on 16 June 2020 for a period of two years at the monthly rent of $90,000. Pursuant to clause 2(e) of the Tenancy Agreement, the Tenant paid $270,000 as deposit money to the Landlord. It is common ground that by subsequent agreement, the parties agreed that one month’s rent would be deducted from the deposit money, reducing the total deposit to $180,000 (“Deposit”).

5.  On 15 June 2022, upon the expiry of the Tenancy Agreement, the Tenant returned the Premises to the Landlord.

6.  On 23 June 2022, the Landlord informed the Tenant that the Premises were damaged and repairs were needed. Subsequently, on 8 July 2022, the Landlord informed the Tenant that the Landlord would not release the Deposit as the sum required to repair the Premises exceeded the amount of the Deposit.

7.  On 12 August 2022, the Tenant commenced proceedings in the Tribunal to seek the return of the Deposit. The claim was limited to HK$75,000 so as to fall within the jurisdiction of the Tribunal.

8.  By an amended defence and counterclaim, the Landlord claimed that it had spent $233,900 to repair a total of 22 damaged items in the Premises. It further claimed that the Tenant was liable to pay rent in the amount of $60,000 as the Tenant had returned the keys to the Premises 20 days after the expiration of the tenancy. In the premises, the Landlord claimed that it was not liable to repay the Deposit and counterclaimed for the sum of $91,600.

9.  At trial, the Tenant admitted liability for certain damaged items in the Premises, leaving the liability and quantum of 16 items contested and to be determined by the Tribunal.

Relevant Terms of the Tenancy Agreement

10.  Clause 2(b) requires the Tenant to keep the interior of the Premises in:-

“…good, clean and working condition and properly preserved and painted and so to maintain the same at the expense of the Tenant and to deliver up the same to the Landlord at the expiration or sooner determination of the term in good, clean and working condition. The Tenant shall pay special attention in maintaining the current new look condition of the interior floor at the ground level to avoid visible scratches or marks”

11.  Clause 2(w) requires the Tenant:-

“[q]uietly to yield up the said Premises at the expiration or sooner determination of this tenancy pursuant to Clause 4(a) of this Agreement in good, clean and repair condition...”

12.  Clause 11 states:-

“Special Conditions

11. The parties agree the followings:-

(a) The two fallen decoration beams in the living room will be restored at a later time before the Tenant moved in at the cost of the Landlord.

(b) The Tenant agrees to take the Premises as is condition for the Tenant early occupancy on a mutually agreed date. The Tenant will be taking care of the Premises cleaning work upon move in and when move out to a reasonable and tenantable condition.”

Grounds of Appeal

13.  The first ground for the appeal is that the Tribunal had erred in law in its construction of clause 2(w), by requiring the Tenant to deliver up the Premises according to a standard which was not justified on the proper construction of the clause and the obligation imposed on the Tenant thereunder, namely, without wear and tear, in a better condition, and in a condition which excludes damage owing to circumstances beyond the Tenant’s control. It is further contended that the Tribunal failed to apply the correct legal test in finding that there was a breach of clause 2(w), and had erred by failing to require the Landlord to prove the material facts necessary to establish breach, which facts include the condition of the Premises at the commencement of the tenancy, and the extent of deterioration of the Premises.

14.  All the grounds of appeal turn on the proper construction of “good, clean and repair condition” and “good, clean and working condition” under clauses 2(b) and 2(w). It is a striking feature of the Decision that the Deputy Adjudicator did not consider or attempt to define the meaning of these key terms of the Tenancy Agreement, which she found to have been breached by the Tenant.

15.  Despite the attempts made by Counsel for the Landlord to justify the findings made by the Tribunal, Mr Cheng was unable to point to any part of the Decision whereby the Deputy Adjudicator had compared the state of each damaged item by way of photos taken before and after the tenancy. Indeed, Mr Cheng confirmed at the hearing that no evidence exists as to the state of the Premises at the commencement of the tenancy. Without such evidence, and as Counsel for the Tenant pointed out, the Landlord simply cannot show that damage to each item was caused by the Tenant. On behalf of the Tenant, Mr Law argued that in order to show breach of clauses 2(b) and 2(w), the Landlord must prove deterioration: Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055 at 1059E.

16.  Of all the authorities cited by Counsel for the Tenant and Counsel for the Landlord, none relates to any tenancy agreement which contains a provision requiring the tenant to keep or deliver up premises in “good, clean and working condition”, or “good, clean and repair condition”. Most of the provisions refer to the obligation to keep premises in “good and tenantable repair and condition”, or in “good”, “substantial” or “proper” “repair and condition”.

17.  I pay heed to and agree with the observation made by Atkin LJ in Anstruther-Gough-Calthorpe v McOscar [1924] 1 KB 716, 729, that it is not useful to take a number of terms which may be found in different leases, treat them all as synonymous, and so impute to all of them a special meaning attached by authority to one of them.

18.  Yet, a review of the authorities would show that the courts have attributed various meanings and obligations attached to the duty to “repair” as found in leases and agreements, and as to what satisfies a “tenantable” condition.

19.  First and foremost, it is indisputable that the Tenancy Agreement has to be considered as a whole, and clauses 2(b), 2(w) and 11 should be construed in the context and read as part of one entire agreement.

20.  The obligation of the Tenant under clause 2(b) of the Tenancy Agreement is to keep the interior of the Premises in “good, clean and working condition”. In my judgment, “working condition” does not denote a very high standard. So long as the item or part of the Premises can work or function, the requirement is satisfied and the item or part of the Premises does not have to be perfect, nor entirely free from defect.

21.  Although clause 2(b) sets out the obligations of the tenant with regard to the maintenance of the interior of the Premises, and clause 2(w) describes the required condition of the Premises upon determination of the tenancy as “in good, clean and repair condition”, clause 11 sets out a special condition agreed to by the parties. Clause 11 highlights the fact that the Tenant took the Premises on “as is” basis for the Tenant’s early occupancy, and the covenant of the Tenant under clause 11(b) is to take care of the cleaning of the Premises upon moving in, and to move out of or vacate the Premises in “a reasonable and tenantable condition”. In my judgment, when considering the state of the Premises which the Tenant is obliged to deliver up upon the termination of the tenancy and when the Premises are vacated, clause 2(w) must be read in conjunction with clause 11, such that the “good, clean and repair condition” is only required to be “reasonable and tenantable”. The parties’ provision in clause 11, for the Premises to be vacated in “reasonable and tenantable condition”, denotes that at the time when the Tenancy Agreement was made, they envisaged and accepted that some damage would be sustained through the reasonable use of the Premises. To require the Tenant, at the termination of the tenancy, to return the Premises in a condition which is an improvement of the condition when delivered to the Tenant at commencement of the tenancy, without fair wear and tear through reasonable use, would be unreasonable and cannot be a fair reading of clauses 2 and 11.

22.  It is pertinent that “repair” was considered and explained by the court in Anstruther-Gough-Calthorp, at pp 733 and 734 of the judgment of Atkin LJ:

“There is a very full discussion of what is meant by “repair” in the judgments of Fletcher Moulton and Buckley L.JJ. in Lurcott v. Wakely with which I respectfully concur. Repair is not confined to houses; it applies to chattels, and it connotes the idea of making good damage so as to leave the subject so far as possible as though it had not been damaged. It involves renewal of subsidiary parts; it does not involve renewal of the whole. Time must be taken into account; an old article is not to be made new; but so far as repair can make good, or protect against the ravages of time and the elements, it must be undertaken.” (Emphases added)

23.  In the later case of Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055, the above “idea of making good damage” was referred to in the judgment of Gibson LJ, who accepted that it must first be proved that the building or premises in question were out of repair, so as to give rise to the obligation under the relevant covenant to put the building into repair. In Post Office, the covenant in question was expressed in wide terms, requiring the tenant “to keep in good and substantial repair … the demised premises and every part thereof”. Gibson LJ was clear in his finding that before such a repair covenant could be engaged, “disrepair” must first be proved. As Slade LJ also explained (on p1065):

“The only provision of the tenants’ covenants contained in the tenants’ underlease on which reliance has been placed by the landlords in argument is that which obliges the tenants to ‘keep in good and substantial repair… the demised premises and every part thereof’. The tenants cannot yet be under any obligation to do any work pursuant to this covenant unless the demised premises are at present out of repair. However, a state of disrepair, in my judgment, connotes a deterioration from some previous physical condition.” (Emphasis added)

24.  On behalf of the Tenant, Counsel has referred to passages in Malcolm Merry’s Hong Kong Tenancy Law (6^th edition, 2016), where the learned author sought to explain the meaning of a tenant’s obligation to repair, and the standard of repair described as “tenantable repair”. At page 152, the author explained that the obligation to keep premises in repair means remedying disrepair, but not improving the premises. The author further explained that the standard of “tenantable repair” varies with the length of the lease, the obligations to repair undertaken by the tenant and the landlord in other covenants, and the age, character and location of the premises at the time the lease was entered into.

25.  Counsel for the Landlord placed much reliance on Proudfoot v Hart (1890) LR 25 QBD 42 CA, where the observation was made by the Court as follows:

“Good tenantable repair appears to me to mean such repair as, having regard to the age, character and locality of the house, would make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it.”

26.  It was emphasized for the Landlord that the Premises in this case were in an elite and exclusive location, at Regalia Bay in Stanley, that the monthly rental was high at $90,000, and that the class of potential tenants of the Premises would be discerning with high demands as to what would constitute good and tenantable repair and condition. It was argued that the Tribunal was accordingly correct in finding the expenses claimed by the Landlord to have been necessary to put the Premises in a condition fit for the occupation of a reasonably-minded tenant of the class who would be likely to take a lease of the Premises.

27.  In the case of Burkeman v G E Capital Europe Limited [2002] E WHC 2863 (QB), the English Court took heed of the quality of the property leased, which was a substantial and attractive house standing in its own grounds, adjoining a golf course. The tenant’s obligations were to use the property in a tenant-like manner, an “absolute” covenant not to damage or injure the property, to preserve the fixtures, furniture and effects from being destroyed or damaged (reasonable wear and tear excepted), and to yield up the property at the end of the term “in the same clean state and condition as it was at the beginning”. In deciding on the landlord’s claim for dilapidations and in respect of defects which the landlord claims require extensive redecoration, the English court observed:

“Much has been made… on the quality of the property. What is said is that defects to a property of this category require extensive redecoration. They cannot be patched. That, of course, is right, but it is a somewhat two-edged observation. Any tenant moving into a property of this quality would expect, if not perfection, something approaching perfection. A landlord would, as previous experience … demonstrates, thus be required to do some works before tenants moved in. In any event, I re-emphasize that this was not a repairing tenancy. Any landlord letting property under a tenancy of this kind would expect to have to be decorate on a regular basis.”

On the above basis, the court allowed deduction for betterment when awarding the costs of works claimed by the landlord.

28.  The decision in Wong Kong Lee v Kung Cheung Fai, Patrick DCCJ 5693/2007, 21 December 2009, cited by Counsel for the Tenant, essentially followed the same approach, when the court construed a clause which requires the tenant to maintain the interior of the property in “good and tenantable repair and condition”. The observation made at paragraph 28 of the judgment was that:

“In determining the tenant’s repair responsibilities or extent in this regard, the court shall take into account factors such as the condition of the premises when they were handed over to the tenant at the beginning of the tenancy, the age and location of the premises, the length of the tenancy, and so on, and take into account what a reasonable new tenant would want from the premises, as well as the renovation work that the landlord usually has to carry out before reletting the unit (Lee Ho Seok v Kanvest Limited DCCJ 5074/2002; Burkeman v G E Capital Europe Limited [2002] EWHC 2863). The court also has to take into account that the tenant’s duty is only to repair, that is, to replace or repair or reinstate the incidental or auxiliary parts of the item, and not actually to renew or rebuild the whole item (see Halsbury’s Laws of Hong Kong, Vol 17 (1) para 255.306).”

29.  Following the above authorities, I accept the submissions made by Counsel for the Tenant, that the Tribunal had erred in law and on principles, by failing to consider and investigate the condition and state of the Premises when they were handed over to the Tenant on 16 June 2020, and by failing to consider the fact that the Premises had “aged” for 2 years since the commencement of the tenancy. By reason of its failure to consider and investigate the condition and state of the Premises at the commencement of the tenancy, the Tribunal had failed to consider whether the Landlord had adequately discharged its burden of proving that “repair” was necessitated by reason of deterioration from its previous state or condition, and had further failed to consider the extent of the deterioration and whether the damage was caused by the Tenant.

30.  As analyzed at paragraph 21 above, I agree with Counsel for the Tenant that a fair wear and tear exception ought to be implied either to give business efficacy to the Tenancy Agreement, or because it is obvious and goes without saying. The Premises were delivered on “as is” basis, and were not brand-new when the Tenant moved in. To require the Tenant to return the Premises to the Landlord, without any fair wear and tear, and without regard of deterioration caused by the reasonable use of the Premises, would be requiring the Tenant to deliver the Premises in an improved state. I accept Counsel’s submission, that under common law, a tenant is not liable to repair if the property “falls into disrepair through fair wear and tear or lapse of time, or for any reason not caused by him” (Hill and Redman’s Law of Landlord and Tenant, para 3349).

31.  The Tribunal thus erred in finding that the fair wear and tear exception did not apply when it considered the meaning of “good, clean and repair condition”, and in finding that the Tenant was responsible for all damage found at the expiration of the tenancy, irrespective of whether such damage was caused by fair wear and tear, or due to circumstances beyond the Tenant’s control, particularly in light of the fact that under clause 11 of the Tenancy Agreement, the Tenant was only obliged to deliver up the Premises in a “reasonable and tenantable condition”.

32.  The errors made by the Tribunal, in failing to consider the proper standards required by clause 2(b) and (w), and in failing to consider whether there was: (1) a state of deterioration from the commencement of the tenancy which required “repair” and which was caused by the Tenant; and (2) fair wear and tear, affected its findings on the damage and the costs to be borne by the Tenant. These included the findings made as to the scratches on the interior floor, the damage to the doors to the bedrooms, the window hinges and lightbulbs, the air-conditioner button, the kitchen cabinet, the light bulbs, the wooden flooring in the living room leading to the rooftop doorway, and the flooring of the master bedroom on the 3^rd floor caused by outdoor water seepage.

33.  I therefore allow the appeal on Ground 1 as summarized by Counsel for the Tenant, on the construction of clause 2 of the Tenancy Agreement.

34.  Having allowed the appeal on liability under Ground 1, it is not strictly necessary for me to consider Ground 2. But in case I am wrong in the above, I also consider that the Tribunal erred in its application of the principles for assessment of damages, by requiring the Tenant to return the Premises in near-perfect condition.

35.  The correct legal approach in assessing damages is set out by Mr S Brown QC in Burkeman v G E Capital Europe Limited [2002] EWHC 2863 (QB) (already summarised in paragraph 27 above). The Court continued to elaborate on the approach, as follows:-

“Finally, and I confess with no great enthusiasm, I turn to the question of decorations… Three years, however, had passed. Three years’ wear and tear was to accrue. This was, as everyone keeps emphasising, a prestigious property, commanding a large rental. Common sense, one's own experience and, indeed, the evidence, would suggest that a property would require to be redecorated perhaps every three or five years, a distinction being drawn between emulsioned areas, woodwork and wallpapering. Though it was fresh, it was not without defects. I have already made the point that if the Claimant succeeded in full for that figure of £21,000, she would be able to move a new tenant in every two or three years without expending another penny on the décor. That cannot possibly be right…

…

Thus, my task, properly expressed, unenviable though it is, is to identify and compensate, if anything can be identified consequent thereon, for the extra redecoration necessitated by the proven or admitted breaches.” (Emphasis added)

36.  The Tribunal did not apply the correct legal test in assessing damages. There was no discussion concerning the cost of redecoration the Landlord needed to spend in any event to refurbish the Premises, particularly one in such prestigious locality. It failed to give any consideration to the betterment of the Premises and the improvement brought about by the repairs made. It also did not apply a discount to the replacements paid for by the Tenant pertaining to 4 of the 16 damaged items.

37.  I therefore also allow the appeal on Ground 2.

Disposition

38.  For the reasons explained above, I allow the appeal and set aside the Decision.

39.  I remit the matter back to the Tribunal pursuant to s29(1)(c) of the Smalls Claims Tribunal Ordinance (Cap 338) and direct that a new hearing take place.

40.  Costs of these proceedings (including all costs reserved) are to be paid by the Landlord to the Tenant, with Certificate for Counsel.