SUPER QUICK LTD v. KINGDOM POWER DEVELOPMENT LTD

CACV 369/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 369 OF 2004

(ON APPEAL FROM HCA NO. 3768 OF 2003)

______________

______________

_________________________________

REASONS  FOR  JUDGMENT

_________________________________

Hon Tang JA (giving the reasons for judgment of the Court):

1.  By a sale and purchase agreement dated 30 January 2003, the plaintiff (acting through receivers) sold the building at Nos. 22 and 24, Russell Street, Causeway Bay, Hong Kong (the building) to the defendant.

2.  Clause 12.2 of the sale and purchase agreement stipulated that the plaintiff was not obliged to transfer to the defendant any of the rental deposits held by the plaintiff.

3.  Clause 12.6 provided as follows:

“As from completion, the Purchaser as new landlord or new licensor (as the case may be) shall observe all the covenants terms and conditions contained in the Tenancies and perform all the obligations of the Vendor as landlord or licensor (as the case may be) under the respective Tenancies, and shall keep the Vendor fully indemnified against all actions suits expenses and claims on account of the breach or non-performance of the said covenants terms and conditions or any of them and against any subsequent claim by any of the Tenants against the Vendor for breach of the landlord’s or licensor’s obligations (as the case may be) under the respective Tenancies committed after completion or for the Purchaser’s failure to refund the rental deposits in respect of the Tenancies.”

4.  One such tenancy was the tenancy under which the plaintiff leased the ground floor, No. 24 Russell Street, an unit within the building (the premises) to Toport Investments Limited (the tenant) by a tenancy agreement dated 20 December 2000 for a term of two years from 1 July 2001 to 30 June 2003.  Under the tenancy agreement, rental deposit of $840,000 was paid by the tenant to the plaintiff.  Under clause 5.02 of the tenancy agreement, this rental deposit should be refunded to the tenant within 15 days of the termination of the lease.

5.  The tenant has surrendered the premises to the defendant.  There was a deed of surrender dated 11 April 2003 (the Deed) and Clause 3 provided:

“Notwithstanding anything contained in the Tenancy Agreement, the Landlord shall not be required to return to the Tenant any rental deposit paid by the Tenant under the Tenancy Agreement.  The Tenant hereby expressly waives all rights and claims against the Landlord (if any) for return of the said rental deposit or any part thereof.”

6.  The defendant was referred to as the Landlord in the Deed and the plaintiff as “the previous landlord”.

7.  Upon the defendant’s refusal to repay the deposit to the tenant the plaintiff has repaid the tenant on 8 October 2003.

8.  In this action, the plaintiff claimed against the defendant under clause 12.6 to be indemnified.

9.  Suffiad J gave summary judgment in favour of the plaintiff. 

10.  This is the defendant’s appeal. 

11.  As the judge has rightly pointed out the plaintiff’s obligation to repay the rental deposit did not run with the land.  Hua Chiao Commercial Bank v Chiaphua Industries Ltd [1987] 1 AC 99.  It follows, as Mr Yuen, who appeared for the defendant, has submitted the defendant was under no obligation to the tenant to pay or repay the deposit.

12.  Although the plaintiff acknowledged the receipt of various deposits in the sale and purchase agreement, it also provided that the plaintiff was not obliged to transfer any of the deposits to the defendant.  However, clause 12.6 provided that the defendant shall indemnify the plaintiff “for the (Defendant’s) failure to refund the rental deposit”.

13.  What was the practical object of clause 12.6 (all reference to clause 12.6 relates to rental deposits only)?

14.  According to the defendant clause 12.6 achieved nothing.  In other words, it was meaningless.  According to Mr Yuen clause 12.6 purported to transfer to the purchaser the obligation to perform all the covenants and obligations of the Landlord including the obligation to repay the deposit.  But that transfer was ineffective in that the obligation was not enforceable by the tenant against the defendant.  So the plaintiff remained liable to pay.  But since the defendant was under no obligation enforceable by the tenant to refund the deposit, the defendant could not come under any obligation to indemnify the plaintiff for a failure to do so.

15.  But what was the practical reality at the time of the sale and purchase agreement? 

16.  It was that the plaintiff was obliged to refund the deposit to the tenant unless someone else would do so.  Did anyone assume the obligation to do so?  We believe the defendant did and by clause 12.6.  Clause 12.6 would be meaningless otherwise. 

17.  Mr Yuen has referred us to the well-known words of Lord Hoffmann in Jumbo King Ltd v Faithful Properties Ltd & Ors [1999] 2 HKCFAR 279 at 296:

“But the overriding objective construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

That was the approach adopted by the judge.  It is also our approach.

18.  Mr Yuen submitted that “failure to refund” meant “failed to comply with the obligation to refund”.  He submitted that since the defendant had no obligation enforceable by the tenant to pay the rental deposit, the defendant had not failed to do so.  We believe clause 12.6 as it related to the rental deposit meant that if the defendant did not pay the rental deposit to the tenant, and the plaintiff paid the tenant as it was obliged to do so, then the plaintiff would be entitled to be indemnified by the defendant.  Failure in the context meant “omission to do” or non-performance.

19.  But Mr Yuen also relied on clause 3 of the Deed. 

20.  Mr Yuen accepted that the Deed cannot affect the interpretation of clause 12.6.  The Deed was made between different parties and made later than the Sale and Purchase Agreement.  Mr Yuen relied on clause 3 of the Deed as an express release by the tenant of the defendant’s obligation under the tenancy agreement (if any) to return the rental deposit to the tenant. But, the defendant was never under any obligation vis-à-vis the tenant to pay or refund the rental deposit. 

21.  More importantly, the tenant had not agreed under the Deed to release the plaintiff of its obligation under the tenancy agreement to return the rental deposit to the tenant.  That is so as a matter of the plain language of clause 3 of the Deed.  Moreover it is clear from the correspondence between the tenant and the defendant over the deposit that the defendant never asserted that the tenant had released the plaintiff of its obligation to repay the deposit under the tenancy agreement.  A short reference to the correspondence will suffice. 

22.  The first letter from the defendant’s solicitors to the tenant which is on file is dated 21 February 2003, written not long after the sale and purchase agreement, in which it was clearly said: “our client shall have no responsibility and/or liability in relation to the refund of the deposit to you”. 

23.  Then on 13 May, the defendant’s solicitors further wrote to the tenant’s solicitors as follows:

“Pursuant to all leading cases, …, your client has no right at all to seek our client’s refund of rental deposit, regardless whether your client has signed the Surrender Agreement.  Your client should ask for the refund of the rental deposit from (the plaintiff) in any event pursuant to such cases.”

24.  On 14 May 2003, the tenant’s solicitors wrote to the defendant’s solicitors as follows:

“We are well aware of the decided cases on the subject of rent deposits.  Our client thought that if your client would honour its obligation to Super Quick under Clause 12.6, then a direct refund of the rent deposit by your client to ours was the only logical and reasonable course to take.  It would of course be an entirely different matter if your client chooses to repudiate its obligations to Super Quick.”

25.  The only response to this letter was a letter dated 9 July 2003 written on behalf of the defendant by its legal manager is as follows:

“We refer to the letter issued by our solicitors, Messrs Preston Gates & Ellis on our behalf to you on 13 May 2003 (copy enclosed), and our position in relation to the return of rental deposit as clearly indicated therein remains firm and unchanged, and no reiteration is necessary herein.”

26.  Indeed, looking at the draft defence which was exhibited to the affirmation filed on behalf of the defendant in response to the application for summary judgment all that was pleaded in relation to the Deed was that “there was no failure on the defendant’s part to refund the rental deposit to (the tenant)” paragraph 11.

27.  Thus it is quite clear that it was not the defendant’s case that by the Deed, the tenant had in any way waived its right against the plaintiff to the refund of the deposit.  Unless clause 3 of the Deed had such effect, it is irrelevant to the plaintiff’s claim against the defendant.  The short and irrefutable point is that the effect of clause 12.6 was to ensure that whatever the position between defendant and tenant as a matter of privity of contract vis-à-vis the plaintiff, the defendant was bound to fulfil the obligation under the tenancy agreement and to refund the deposit.

28.  For the above reasons, we dismissed the appeal with costs to be taxed.