CHEUNG YU CHUN KATHERINE v. SPLENDID YIELD LTD

DCCJ 3646/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3646 OF 2014

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D E C I S I O N

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1.  The plaintiff (“Cheung”) as tenant claims against the defendant (“SYL”) as landlord for misrepresentation and breach of tenancy agreement. SYL denies the claim and counterclaims for, among other things, possession of the let premises and rent in arrears. This is the application by SYL for summary judgment on the counterclaim, or alternatively interim payment of the monthly rent or mesne profits pending trial of the action.

BACKGROUND

2.  Both parties referred to and relied on the contemporaneous correspondence between solicitors for the parties, which documented the background of the dispute.

3.  SYL was the registered owner of the ground floor and cockloft at No.32 Yik Yam Street, Happy Valley.  By a written tenancy agreement dated 27 June 2012 (“the Tenancy Agreement”),SYL agreed to let and Cheung agreed to rent the cockloft for a term of 5 years from 15 October 2012 to 14 October 2017 at the monthly rent of HK$20,000.  The mandatory duration of the tenancy lasted until 14 October 2014[1]. The rent was payable on the 15^th day of the month in advance[2].

4.  The Tenancy Agreement provides, among other things:

Clause 7

“If the Rent and/or any charges payable by the Tenant hereunder of any part thereof shall be unpaid for seven (7) days after the same shall become payable (whether legally demanded or not) or if the Tenant shall commit a breach of any of the terms and conditions herein contained, it shall be lawful for the Landlord at any time thereafter to re-enter the Premises whereupon this Agreement shall absolutely determine and the Landlord may deduct any loss or damage suffered by the Landlord as a result of the Tenant’s breach from the Security Deposit without prejudice to any other right of action or remedy of the Landlord in respect of such breach of the Tenant.”

Clause 8

“Provided that the Tenant shall have paid the Rent and other outgoings on the days and in the manner herein provided and observe and perform the terms and conditions herein contained and on the Tenant’s part to be observed and performed, the Tenant shall peacefully hold and enjoy the Premises during the Term without any interruption by the Landlord.”

5.  By notice dated 19 June 2014 (“the Building Order”), the Building Authority ordered that SYL as the owner to demolish unauthorised building works (“UBW”) consisting of:

(1)  a structure at the rear yard on the ground floor (which was occupied by a shop); and

(2)  the metal frames supporting the mechanical parts attached to the structure on the cockloft facing the rear lane.

6.  The Building Order was brought to the attention of Cheung in early August 2014. SYL requested Cheung to remove her furniture and fittings in the area created by the UBW on the cockloft level so that rectification work could be carried out.

7.  Correspondence between the parties’ solicitors ensued.

8.  By their letter dated 18 August 2014 about, among other things, Cheung’s solicitors complained about the interference with Cheung’s enjoyment of the cockloft during the tenancy.  It was alleged that the cockloft when let comprised such space that stretched across the area above the shop below and extended to the top of the rear yard on the ground floor.  Further, the metal frames attached to the cockloft facing the rear lane were there to support the mechanical plants (practically the condensers of the split-type air-conditioners).  The total gross space of the cockloft in such condition was approximately 800-900 sq. ft.  The requested removal from such space on the cockloft level, she complained, would significantly reduce the gross area that she rented by approximately 150 sq. ft.  By further letter dated 26 August 2014, Cheung also put on record that the UBW in the cockloft were existent from the outset of the Tenancy Agreement.

9.  By letter dated 28 August 2014, SYL through solicitors pointed out that there was indeed the space at the rear of the cockloft.  Cheung apparently used the space for storage and rest area of her employees.  Cheung also affixed an additional metal frame for the purpose of housing the compressor of split-type air-conditioner which served the cockloft.  However SYL argued that no reasonable business tenant would have taken the structures constructed in such manner to be proper and lawful part of the cockloft.  Cheung was said to have used such structures and the extra space so created at her own risk.

10.  By her solicitors’ letter dated 10 September 2014, Cheung pointed out that prior to entering into the Tenancy Agreement, SYL through its agents had warranted that the space and the metal frames mentioned above were part and parcel of the cockloft let under the Tenancy Agreement, and that they were legally compliant and fit for the operation of her massage business.  Now the situation amounted to effective interference with her quiet enjoyment and SYL’s derogation from grant.

11.  On 23 September 2014, Cheung issued the writ herein and notified SYL’s solicitors of the same.

12.  Before the writ was served, Cheung through solicitors made proposal to SYL by letter dated 7 October 2014. She proposed to temporarily move out of the cockloft on or before 31 October 2014 to allow SYL to carry out the rectification work required by the Building Order. She inquired whether SYL would (a) agree to a rent- free period until she repossessed the cockloft after the rectification work; and (b) undertake to bear all the costs and damages incurred by her as a result.

13.  By letter dated 15 October 2014, SYL’s solicitors explained that their contractors proposed to commence building work on 20 October 2014 but that they would not need to access to the cockloft. SYL refused to pay Cheung’s damages whether as claimed or at all.

14.  On 18 October 2014, the writ herein, amended, was served on SYL.  The amended writ was indorsed with the claim for rescission for misrepresentation; further or alternatively damages for misrepresentation or breach of covenant for quiet enjoyment and non-derogation from grant.  There was also an alternative claim generally for damages for breach of the Tenancy Agreement and injunctive relief.

15.  SYL responded by its solicitors’ letter dated 21 October 2014 (sent on 23 October 2014).  It contended that Cheung was in breach of clause 2 of the Tenancy Agreement for partitioning the Premises into 8 rooms and erecting a toilet with drainage pipes without its prior written consent (“the Interior Alterations”).  SYL gave notice pursuant to section 58 of the Conveyancing and Property Ordinance, Cap.219 (“CPO”) demanding her to remedy the breach within 14 days, failing which SYL would forfeit the Tenancy Agreement and recover vacant possession of the cockloft without further notice.  Further, in the light of that, SYL decided to postpone the work required  under the Building  Order until after Cheung had remedied her breach by reinstating the interior of the cockloft.

16.  Nevertheless, on 12 November 2014, Cheung’s solicitors wrote to SYL’s solicitors suggesting that she was prepared to hand over the keys to the cockloft to SYL on 15 November 2014 on condition that the cockloft would be preserved in a state consistent with the same condition as and when she moved out.

17.  In response, SYL’s solicitors wrote on 13 November 2014 that it had issued a specially endorsed writ against her for recovery of vacant possession of the cockloft.    It therefore would not accept that Cheung had the right to remain there.  It was prepared to accept the keys only on the basis that she was voluntarily delivering up vacant possession.

18.   By letter dated 14 November 2014, Cheung’s solicitors repeated their client’s stance that the keys to the cockloft were returned strictly on a temporary basis. They still sought to extract from SYL its undertaking to return the cockloft to her once the building work required by the Building Order had been completed and to treat the interim period as rent-free.

19.   SYL’s solicitors wrote back on the same day. Referring to the previous correspondence, SYL reiterated its position that it would only accept the keys to the cockloft on the basis that Cheung was delivering up vacant possession.

20.  Disregarding the stance of SYL, Cheung, through her solicitors, proceeded to return the keys to the cockloft to SYL’s solicitors and repeated the request for SYL’s undertaking to return the cockloft to her when the work under the Building Order had been completed. This was met with rejection by SYL’s solicitors, who also rejected the keys on 17 November 2014. By its solicitors’ letter, SYL reiterated that Cheung had no right to continue occupying the cockloft. Nor would SYL give the undertaking she sought.

21.   Pausing here, one notes that since the kicking off of their negotiation in relation to the UBW, both Cheung and SYL had considered that the tenancy was subsisting. The negotiation took the turn when Cheung issued the writ and SYL responded by complaining about her alleged breach of the Tenancy Agreement by the Interior Alterations. This brought about SYL’s notice pursuant to section 58 of the CPO, and eventually action in DCCJ 4336/2014 for, among other relief, recovery of vacant possession. It was on the basis of such forfeiture of tenancy that the conditional return of the keys to the cockloft by Cheung was rejected.

22.  The situation took another turn on 5 December 2014, when SYL discontinued the action in DCCJ 4336/2014.  It transpires from its pleading subsequently filed herein that allegedly unbeknownst to SYL, the Interior Alterations had been removed.  SYL accepted that the abovementioned breach of the Tenancy Agreement had been remedied.  Hence its decision to discontinue that action.

23.  3 days later, on 8 December 2014, SYL’s solicitors wrote to Cheung’s solicitors demanding the rent payable on 15 November 2014, failing which it would forfeit the tenancy and commence proceedings to recover the vacant possession of the cockloft.

24.  Paying no heed to the demand, Cheung proceeded to file her statement of claim in this action.  SYL filed its defence and counterclaim.  Cheung’s reply and defence to counterclaim followed.

THE DISPUTE

25.  Cheung’s claim gives rise to the following dispute in respect of liability:

(1)  Whether the space created by the UBW on the cockloft level and the metal frame structures attached to the cockloft facing the rear lane located at the same level formed part of the cockloft being let;

(2)  Whether SYL through its agent represented to Cheung prior to entering into the Tenancy Agreement that the above formed part of the cockloft and legally so;

(3)  Whether SYL was in breach of the covenant for quiet enjoyment and non-derogation from grant;

(4)  Whether SYL was guilty of misrepresentation;

(5)  Whether SYL has trespassed the cockloft by entering there and taking photographs during the tenancy in 2014.

26.  As mentioned, Cheung claims that the Tenancy Agreement is still binding and subsisting.  Rescission of the Tenancy Agreement, which was claimed in the endorsement of claim, is no longer pursued in the statement of claim.  For the alleged misrepresentation, Cheung claims damages.

27.  The parties did not seek to argue that the above issues could be resolved factually at this stage.

28.  As to the counterclaim, SYL’s demand for rent came 3 days after it had discontinued the action in DCCJ 4336/2014.  The demand made sense only if the tenancy was subsisting upon the discontinuance of that action.  That was indeed SYL’s stance.  The counterclaim is thus based on the forfeiture of the then subsisting tenancy on the ground of Cheung’s non-payment of rent since 15 November 2014.

29.  It is against the above background that SYL seeks summary judgment on the counterclaim.

SUMMARY JUDGMENT

30.  According to O.14, r.3 of the Rules of the District Court, summary judgment may be given unless there is issue or question that ought to be tried or that there is some other reason that the matter ought to proceed to trial.

Preliminary points

31.  In resisting SYL’s application, Cheung takes a couple of preliminary points.  She argues that the application is defective; and SYL’s stance is inconsistent.

32.  Cheung argued that the application by SYL is defective for non-compliance with O.14, r.2.  The rule requires the application to be supported by affidavit verifying the facts on which the claim, or the part of a claim, to which the application relates is based, and stating that in the deponent’s belief that there is no defence to that claim.  Cheung argued that SYL failed to verify its pleaded case for the purpose of the application.

33.  Cheung referred to the pleading in the counterclaim of, among others, her alleged breach of covenant to pay rent since 15 November 2014, which constituted the causes of action for SYL’s counterclaim.  On such basis, SYL claims to forfeit the tenancy by the service of the counterclaim.  This was verified by SYL’s affirmation.

34.  However, Cheung took issue that SYL also repeated its defence to her claim at the beginning of the counterclaim.  This literally included what SYL pleaded in the defence of Cheung’s claim, namely, Cheung’s failure to remedy the breach as a result of the Interior Alterations in the cockloft and SYL’s alleged forfeiture of the tenancy by letter dated 6 November 2014 or alternatively commencement of the action in DCCJ 4336/2014.  This was not verified by SYL’s affirmation for the present purpose.

35.  Cheung also took issue as to what SYL relies on to terminate the Tenancy Agreement.  She understood that for the purpose of the counterclaim, SYL is alleging both the earlier alleged failure to remedy the breach of the covenant against unauthorized alterations in the cockloft and the non-payment of rent since 15 November 2014.  As to the former, SYL is alleging forfeiture by letter dated 6 November 2014 or alternatively the commencement of the action in DCCJ 4336/2014.  As to the latter, SYL is alleging termination by the service of the counterclaim herein.  They, she argued, were inconsistent stances.

36.  I do not agree with how Cheung read her opponent’s pleading.  To begin with, Cheung pleaded the notice under section 58 of the CPO and the action in DCCJ 4336/2014 as particulars of the alleged breach of the covenant for quiet enjoyment and non-derogation from grant on the part of SYL.  Both acts of SYL were said to be wrongful.  In answer to that, SYL sought to justify the section 58 notice and thus the action in DCCJ 4336/2014.  SYL continued to plead the change in circumstances, including the discovery that the breach complained of in DCCJ 4336/2014 had, unbeknownst to it, been remedied.  Hence its discontinuance of that action. On this basis, SYL denied the alleged breach of covenant for quiet enjoyment and non-derogation from grant.

37.  SYL demanded the rent since 15 November 2014 in arrears from Cheung soon after the discontinuance of the action in DCCJ 4336/2014.  At that point of time, the stance of both parties again coincided in that the tenancy remained subsisting.  This, as Mr Chan for SYL confirmed in court, had to be the stance of SYL.  That the defence, comprising what SYL pleaded in denial of the alleged breach of covenant for quiet enjoyment and non-derogation from grant as explained above, was repeated at the beginning of the counterclaim does not give rise to inconsistency with what SYL proceeded to plead in its counterclaim.

38.  Reading the pleading to suggest that SYL is somehow claiming to have forfeited the tenancy both in November 2014 and by the service of the counterclaim in January 2015 is simply neither natural nor fair in the circumstances.  In same line, the apparent lack of verification by affirmation of its defence to the claim for breach of covenant cannot be fatal to SYL’s application.

39.  Cheung argued that SYL’s application is also defective for another reason.  That was brought about by her claim for rescission of the Tenancy Agreement indorsed with the amended writ.  By its supporting affirmation, SYL contended that such claim evinced the intention not to be bound by the Tenancy Agreement and thus amounting to repudiation.  Such repudiation was said to be accepted by the service of the defence and counterclaim or alternatively by its letter dated 31 August 2015.  This, Cheung argued, gave rise to further inconsistency in SYL’s stance as to the basis on which and the time at which the tenancy was said to have been terminated.

40.  Reference to Cheung’s claim for rescission as a ground for SYL’s claim did not actually exist in the pleading.  That is not surprising, as the claim for rescission was no longer pursued in the statement of claim.  After the close of pleadings in February 2015, the parties through their solicitors were still engaged in negotiation with a view to resolving the dispute.  It was not until 31 August 2015 when SYL’s solicitors somehow decided to put on record that Cheung’s claim for rescission indorsed in the amended writ was being taken as repudiatory breach of the Tenancy Agreement, which SYL also accepted by that letter.

41.  As SYL may only seek judgment on the basis of the pleaded counterclaim, which was forfeiture of the tenancy for non-payment of rent by the service of such pleading, the reference in the subsequent affirmation to the additional (alternative) ground is superfluous.  In any event, SYL’s solicitors made clear in the letter in August 2015 that such additional ground was without prejudice to the defence and counterclaim.

42.  It should be abundantly clear to counsel in court that rescission by Cheung once alleged, and thus the alleged repudiatory breach of Tenancy Agreement, was not the ground SYL relies on for the termination of the tenancy and its counterclaim.

43.  It was also submitted on behalf of Cheung that there is an important distinction between forfeiture for non-payment of rent and the termination of the Tenancy Agreement by acceptance of repudiation.  It was argued that Cheung would have had the statutory right to seek relief from forfeiture in the former case, which would not be available in the latter case.  I disagree, because SYL is seeking to exercise the contractual right to terminate the tenancy and to re-enter the cockloft let pursuant to clause 7 of the Tenancy Agreement.

44.  In the circumstances, Cheung’s argument that the application is defective or SYL’s stance was inconsistent is not accepted.  Whilst SYL’s pleading may not be the most straightforward, Cheung should also have no difficulty in knowing the basis of the counterclaim to meet.

Substantive defence to the counterclaim

45.  Cheung claims she has been out of possession of the cockloft since 15 November 2014, and she was and still is entitled to cease paying rent until possession of the cockloft was returned to her after SYL’s completion of the work required under the Building Order.  Cheung contends[3] that SYL had accepted and agreed to such proposal of hers.  To such extent, the Tenancy Agreement was said to have been varied.  In any event, she had allegedly acted to her detriment in reliance of the unequivocal representation by the correspondence or conduct of SYL, and therefore SYL is estopped from denying the arrangement.  This was what Cheung refers to as the repair arrangement.

46.  Alternatively, Cheung raises the defence of set off to the counterclaim[4].

The alleged repair arrangement

47.  This is what Cheung described in her affirmation as her primary defence to the counterclaim.

48.  The contemporaneous correspondence mentioned above refers.  It was on 7 October 2014 when Cheung first proposed to move out of the cockloft, and inquired whether SYL would agree to a rent-free period until she resumed possession after the work required under the Building Order had been completed.  The reply by SYL’s solicitors dated 15 October 2014 could only suggest that the proposal was not accepted.

49.  By their letter dated 21 October 2014 (sent on 23 October 2014), SYL’s solicitors demanded Cheung to remedy the alleged breach of the Tenancy Agreement by removing the Interior Alterations, and pending that, SYL would postpone the work required under the Building Order.  SYL could only be expecting Cheung to remain in possession of the cockloft if she was to carry out the interior reinstatement.

50.  Then there came Cheung’s letter dated 12 November 2014.  It contained no mention of the proposal for rent-free period.  SYL’s reply by its solicitors’ letter dated 13 November 2014 had to be its rejection of any existing proposal. By her solicitors’ letter on the following day, 14 November 2014, Cheung repeated her proposal to return the keys to the cockloft strictly on a temporary basis and conditional upon SYL’s undertaking to return the keys upon completion of the work required under the Building Order and to suspend the obligation to pay rent until then.  The reply by SYL through solicitors on the same day referred to their previous correspondence.  In a nutshell, the proposal was not accepted.

51.  It was therefore Cheung who unilaterally returned the keys to SYL on 15 November 2014 regardless of the rejection by SYL of her proposals so far.  SYL through its solicitors refused to accept the same and returned the keys to Cheung on 17 November 2014.

52.  Had there been the alleged repair arrangement reached by the time of the service of the defence and counterclaim, one would have expected Cheung to say so in response to SYL’s most recent proposal. On the contrary, Cheung’s solicitors in their letter dated as late as 18 February 2015, replied, among other things, that she would actively consider the proposal, and inquired whether she would have to pay rent during the time when the building work was underway.

53.  Plainly, SYL had never agreed to Cheung’s proposal, be it the one contained in her solicitors’ letter dated 12 November 2014 or in any of her previous and subsequent letters.  Nor had SYL made any representation, by correspondence or conduct, that it had or would unequivocally accept her proposals.  Her decision to vacate from the cockloft and to return the keys was unilateral without reliance on such representation as alleged.

54.  In her argument, Cheung also referred to the correspondence between the parties subsequent to the close of pleadings in February 2015. By their letter dated 12 February 2015, SYL’s solicitors proposed that Cheung delivered possession of the cockloft to enable it to remove the UBW, and upon completion of that, the possession of the cockloft would be returned to her. Cheung said that was precisely what she had previously proposed, only too late. But there is nothing sinister about that, as SYL’s solicitors made clear in their letter that the proposal was made without prejudice to the parties’ respective positions in this action (which were set out in the pleadings). Such stance was reiterated by the letter from SYL’s solicitors dated 27 February 2015.

55.  The claim for rescission is no longer pursued.  Cheung now claims that the Tenancy Agreement is still binding and subsisting, which, if accepted, would be for both parties to it.  The only basis on which she claims that the tenancy continued whereas the covenant to pay rent was suspended was the alleged repair arrangement.  Against the contemporaneous evidence, the alleged repair arrangement as defence to the counterclaim lacks credible, if at all, factual footing.

Set-off

56.  The pleading of the defence of set off is bare.  This is premised on the so-called doctrine of mitigation.  Cheung relies on what she pleaded in respect of the alleged repair arrangement discussed above[5].  She also repeats[6] what she pleaded in the statement of claim[7] in respect of the alleged misrepresentation on the part of SYL.  Albeit pleaded, the defence of set-off was not at all mentioned in Cheung’s affirmation.

57.  No more needs to be said about the reliance on the alleged repair arrangement for the purpose of the defence of set off.  What remains is whether the claim on the ground of misrepresentation affords a valid defence of set off against the counterclaim.

58.  Referring to Qiyang Limited & Ors v Mei Li New Energy Limited & Ors HCA 420/2011 (5 March 2013)[8], per To J, Mr Lam for Cheung argued that the hurdle which the defendant has to overcome to obtain summary judgment against a defendant on the counterclaim under O.14, r.5 is higher than that which a plaintiff has to discharge in obtaining judgment against a defendant on the original claim under O.14, r.1.

59.  What To J said in the above case was based on the practical observation that in most cases, the defendant applying for judgment on the counterclaim would have already had the details of the original claim before him.  To obtain judgment, the defendant would have to establish that the original claim is unsustainable or not bona fide or, even if not unsustainable, wholly unconnected with the counterclaim.  At the end of the day, To J[9] was still referring to the classes of orders as summarized in Hong Kong Civil Procedure 2016 (Vol.1) at §14/4/14.

60.  Modifying for the purpose of illustrating a scenario where the defendant applies for summary judgment on the counterclaim and the plaintiff puts forward the original claim in defence as if it were a counterclaim to the counterclaim, To J summarised:

“(1))  where the plaintiff can show an arguable set-off, equitable or otherwise, he is entitled to leave to defend to the extent of the set-off;

(2)  where the plaintiff sets up a bona fide counter-counterclaim to the defendant's counterclaim arising out of the same subject matter as the action and connected with the grounds of the counter-counterclaim, the order should not be for judgment on the counterclaim, subject to a stay pending trial of the counter-counterclaim, but should be for unconditional leave to defend the defendant's counterclaim, even if the plaintiff admits the whole or part of that counterclaim;

(3)  where there is no defence to the counterclaim but a plausible counter- counterclaim of not less than the counterclaim is set up, judgment should be for the defendant on the counterclaim with costs stayed until trial of the counter- counterclaim; and

(4)  where the counter-counterclaim arises out of a separate and distinct transaction or is wholly foreign to the counterclaim, judgment should be for the defendant with costs without a stay.

The court has no discretion in cases falling under class 1 but to grant leave to defend. But, because of the lack of clarity between classes 2, 3 and 4, the court has freedom to respond to the perceived justice of the individual case.”

61.  Both sides cited Charmway Development Ltd v Long China Engineering Ltd [2001] 3 HKC 515.  There Chu J (as she then was) recited[10] the common law principle that the covenant to pay rent is independent of the other covenants or obligations under a lease.  It is generally no defence in saying that the tenant is not obliged to pay rent or the landlord is not entitled to rent by reason of alleged breach of the tenancy agreement on the landlord’s part.  The principle applied to the facts of that case where the obligation of the tenant to pay rent was not expressed to be subject to or conditional upon compliance by the landlord of its obligations thereunder.

62.  In the present case, Cheung’s obligation to pay rent (under clause 1) was not expressed to be subject to or conditional upon SYL’s compliance of its obligation thereunder.  The obligations of SYL as the landlord during the term of the tenancy expressed in the Tenancy Agreement were that to refrain from any interruption of Cheung’s peaceful holding and enjoyment of the let premises, which was expressed to be conditional upon Cheung’s payment of rent (under clause 8), and that to keep and maintain the structural parts of the let premises in proper state of repair upon notice of defect from her (under clause 9).  As far as the terms of the Tenancy Agreement and Cheung’s obligation to pay rent are concerned, I make the same observation as that in Charmway Development Ltd.

63.  In Charmway Development Limited, Chu J also observed (obiter)[11] that the tenancy agreement in did not permit set-off on the rent.  The claim was for unliquidated damages and therefore there was no right to legal set-off either.  I say the same in the circumstances of the present case.

64.  The defence in the present case boils down to equitable set-off.  Referring to the often cited authorities of Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938 and Dole Dried Fruit & Nut Co v Trustin Kerwood Ltd [1990] 2 Lloyd’s Rep 309, Chu J in Charmway Development Limited highlighted[12] the relevant question to ask: whether the claim and counterclaim are sufficiently closely connected so that it would be manifestly unjust to enforce one without regard to the other. Woodfall’s Law of Landlord and Tenant (2015) Vol.1 at §7.114 also has this to say:

“......It was at one time thought that a cross-claim could not be set off against a claim for rent. However this is not the modern law. A cross-claim may be set-off against a claim for rent, even if it is unliquidated, provided that it arises under the lease itself, or directly from the relation of landlord and tenant, or out of an agreement for lease......”

65.  In this context, Mr Lam for Cheung referred to Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501.  There the tenants complained about periodic flooding from the landlord’s retained portion of the building that disrupted the tenants’ business causing loss and damage.  The tenants ceased payment of rent (which was supposed to be payable in advance) and the landlord commenced proceedings for, amongst other things, possession and rent in arrears.  The tenants relied on equitable set-off in defence.  There were unchallenged findings of the tenants’ damages exceeding the rent in arrears.  The sole issue and thus ratio of the appeal case was what (in a tenancy agreement) would be required to exclude the tenant’s right of equitable set-off.  Such right, if not so excluded, was actually undisputed in that case.  Behind the parties’ consensus on the applicable legal principles was the case of British Anzani (Felixstowe) v International Marine Management [1980] QB 137, which was also the case accounting for the summary in Woodfall cited above.

66.  Neither party in the present case specifically referred to British Anzani.  The tenants there complained about serious defects in the floor of the warehouses due to inadequate design, which caused the tenants to evacuate the building for certain period, and thereafter only part of the floor of the warehouses could be used.  The landlord brought proceedings to recover, amongst other things, possession and rent in arrears. The tenants put forward the defence of set-off by their claim for damages for breach of the landlords’ covenant to repair, which were quantified to be exceeding the landlords’ claim. There were O.14 proceedings but it was ordered that the tenants were given leave to defend, and that their entitlement to set-off in the circumstances of the case was to be tried as a preliminary issue.  It was therefore accepted by the landlords that for the purpose of such trial, the tenants had a genuine and bona fide cause of action for their claim for damages.

67.  Considering the authorities and arguments in some detail, Forbes J in British Anzani observed[13] that the essential attribute of a valid equitable set-off is that the equity must go to the very root of the plaintiff’s claim.  His Lordship concluded that[14]:

“A consideration of all these cases leads me to the conclusion that except in cases of distress or replevin equity has never refused to interfere to protect a tenant whose landlord was bringing proceedings based on non-payment of rent, if the tenant had a bona fide cross-claim for unliquidated damages against the landlord, provided that he was not covered by an existing common law remedy and that the ordinary rules pertaining to equitable set off were obeyed. I referred to these earlier in this judgment and they are as succinctly put by Parker J in The Teno [1977] 2 Lloyd’s Rep 289, 297:

“... where the cross-claim not only arises out of the same contract as the claim but is so directly connected with it that it would be manifestly unjust to allow the claimant to recover without taking into account the cross-claim there is a right to set off in equity of an unliquidated claim.”

His Lordship emphasized the qualification[15]:

“ While I am satisfied that it is proper in principle to allow that a cross-claim could be effective as an equitable set off against a claim for rent, it by no means follows that such a defence is available in all circumstances. The important qualification is that the equity must impeach the title to the legal demand, or in other words go to the very foundation of the landlord’s claim. This seems to me to involve consideration of the proposition that the tenant’s cross-claim must at least arise under the lease itself, or directly from the relationship of landlord and tenant created by the lease......”

68.  Forbes J concluded[16] that in the circumstances of that case, it would be manifestly unjust to allow the landlords to recover the rent without taking into account the damages which the tenants had allegedly suffered through the landlords’ failure to perform their part of the agreement.  Besides the adequate connection between the transactions giving rise to the claim and the cross-claim, there was also the fact that the landlords’ breach was said to render the premises unfit at least in part for the purpose for which they were let.

69.  Back to Charmway Development Ltd, the tenant’s complaint was that the landlord had failed to designate or cause the manager of the building to designate part of the external wall of the building for it to put up advertising signs.  It also complained that the metal gate at the street entrance of the building was closed after midnight when its café was still open for business.  Chu J found the requisite close connection between the claim for damages for breach on the part of the landlord and the landlord’s claim for non-payment of rent to be lacking.  What caused Chu J to so conclude was this[17]:

“ In the present case, although the claim and counterclaim both arise out of the tenancy agreement, there is insufficient connection between the claim for damages for breach of cl 10(ii) of the special conditions and of the covenant for quiet enjoyment and the counterclaim for rent. The alleged breaches have no bearing on the state and condition of the premises. The alleged breaches also in no way compromise or deny the plaintiff’s right to the use and occupation of the premises, for which the rent is paid.”

70.  In this regard, reference was also made during submissions to Glorigate Limited v Poon Siu Wo HCA 1176/2014 (15 April 2015), per DHCJ B Chu (as she then was).  It should be noted that there the illegal structures were never really identified[18] and the tenant expressly agreed to take possession on an “as is” basis[19].  Perhaps more importantly, whilst the abovementioned question for equitable set-off highlighted by Chu J in Charmway Development Ltd was asked[20], the actual consideration, at least arguably so, seemed to have remained that of whether landlord’s entitlement to rent was conditional upon its compliance with its obligations under the tenancy agreement, instead of whether there was sufficiently close connection between the tenant’s claim and the landlord’s claim[21] for the purpose of equitable set-off.

71.  Cheung’s case is that the tenancy was agreed at the contractual rent upon the understanding that the space created by the UBW formed part of the cockloft being leased, be it a matter of express warranty or representation (which allegedly turned out to be false).  Whilst that may or may not have impacted on the overall state and condition of cockloft, about 17% of the area would have to be carved away as a result of the removal of the UBW.  On this basis, her use and occupation at the agreed rent may be said to be compromised or denied to that extent.  This is the window in which the claim for damages for misrepresentation as to the premises let or derogation from grant of such nature is said to form the basis for equitable set-off.  Such case as now formulated, in my view, should not be rejected outright at this stage.

72.  Mr Chan for SYL submitted that even so, there was no basis for asserting that SYL’s claim would be extinguished by the damages claimed by Cheung, in the absence of any particulars or formulation of such claim.  Indeed the defendant has the burden to particularize the amount of his set-off or to specify or indicate how it is made up or calculated, so that the court has the necessary materials on which to make the proper order in a summary judgment application: see Hong Kong Civil Procedure 2016 (Vol.1) at §14/4/14 (p.273).  In both Connaught Restaurants Ltd and British Anzani, there was indeed actual finding or at least quantification of the tenant’s damages exceeding, and thus extinguishing, the rent claimed by the landlord.

73.  In British Anzani, Forbes J had this to say[22]:

“......A set off of unliquidated damages is a defence to so much of the claim as is represented by the eventual amount of the award made. If the defendant in some way limits his damages to a sum less than that claimed, then it is obvious that there is no defence to the balance over and above the sum so limited and, no doubt, summary judgment could be obtained for this balance. But where the damages claimed to be set off are at large and it is claimed bona fide, as is here admitted, that they over-top the claim, then even though not precisely quantified, it seems to me that the set-off amounts to a complete defence to the whole claim.”

74.  In Charmway Development Ltd, Chu J also observed[23]:

“It is also to be noted that the statement of claim contains no particulars for arriving at the amount of damages claimed by the plaintiff, being $2.5 million. The affirmation filed in opposition to the summary judgment application also contains no details of how the sum is reckoned or estimated. Mr Mok, in the course of his submissions, explains that the plaintiff has difficulties in quantifying its loss. The point therefore is this: even if the plaintiff establishes a right to the claim for damages, its claim may or may not exceed the counterclaim.”

75.  In the present case, Cheung claims damages[24], which are also said to include (but not limited to) costs incurred in continuing the business, loss of profits where such continuation became impossible, disruption to normal business operation and general inconvenience caused by SYL’s breach and trespasses.  No particulars or quantification was actually given in the statement of claim or the defence to counterclaim.  Nor was the same provided by way of her affirmation in opposition of the summary judgment application.

76.  During the hearing, Mr Lam for Cheung referred to the correspondence and suggested that his client has been suffering loss of use of the cockloft since 15 November 2014, reduction in usable area and loss to business.  He submitted that it is at least reasonably arguable that such loss and thus damages would exceed the rent in arrears, which by the time when the counterclaim was served amounted to 2 months’ rent or HK$40,000.

77.  As far as the loss of use of the cockloft is concerned, this was put forward as the result of the alleged repair arrangement, which allegedly suspended the rent payment obligation.  As discussed, the alleged repair arrangement is contradicted by the correspondence and lacks any credible factual footing.  Cheung’s vacating from the cockloft on 15 November 2014 was but her unilateral decision made on her own terms.    Any alleged business loss as a result of such loss of use would be met with the same answer.  Wasted expenditures that Mr Lam suggested could only be an alternative notion on the same premise.  Cheung literally stopped paying rent upon moving out.  No assertion regarding the other business expenditures has actually been made.  As to the alleged loss of use of 17% of the premises and its perceived impact in the form of perhaps alleged overpaid rent or loss to business, Cheung again provided no projection of quantum.

78.  In the absence of proper formulation and projection of such claim for essentially anticipated loss yet to arise from a continuing tenancy, it is uncertain how it can be accepted that Cheung would be entitled to such sum that would exceed SYL’s demand for rent when the counterclaim was served.

79.  In Charmway Development Ltd, similar dissatisfaction expressed by the court led Chu J to refrain from concluding that the tenant should have unconditional leave to defend.  The condition imposed by the master for the rent in arrears and periodical payment of an amount equivalent to the monthly rent was thus maintained.

80.  In the present case, whilst I do not rule out the defence of equitable set-off between SYL’s claim for rent and Cheung’s claim for damages (as presently presented), there is, contrary to Mr Lam’s submission, no basis put forward in discharge of his client’s burden to show that SYL’s entire claim and thus its entitlement to demand for rent would be be extinguished.  As the materials stand at this stage, Cheung has not satisfied me that her defence to SYL’s entitlement to demand for rent will be a complete one.

INTERIM PAYMENT

81.  The application was taken out pursuant to O.29, r.10.

82.  Reference was made to O.29, r.11(1)(c), whereby the court must be satisfied that the plaintiff would obtain judgment for substantial damages against the defendant before ordering such payment.  The threshold is high so that virtually the defendant has no arguable defence: see Guo Jing Jing v Art Master Investment Ltd HCA 1008/2009 (11 December 2009) at §88, per Au J. If the defendant has an arguable defence that would have warranted unconditional leave to defend, there would effectively be no valid basis for ordering interim payment: see Wong Sau Kam v Shum Yuk Fong & Ors, HCPI 798/1998 (1 December 2000) at p.10, per Suffiad J.

83.  However, in the context of claim for possession of land, r.12(b) provides:

“If, on the hearing of an application under rule 10, the Court is satisfied –

......

(b) that the plaintiff’s action includes a claim for possession of land and, if the action proceeded to trial, the defendant would be held liable to pay to the plaintiff a sum of money in respect of the defendant’s use and occupation of the land during the pendency of the action, even if a final judgment or order were given or made in favour of the defendant;

......

the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely.”

84.  What underlies r.12(2)(b) is that whether or not the defendant eventually succeeds, he would in any event be liable to pay for use and occupation of the land that the plaintiff would have been entitled to recover: see HKCP at §29/12/3.  Unless the defendant claims to be entitled to use and occupy the land effectively free in any event, the rule applies.

85.  Cheung unilaterally moved out of the cockloft and returned the keys to SYL’s solicitors by letter on 15 November 2014.  Cheung argued that SYL was taken to have accepted the keys and return of possession by reference to the chop of its solicitors on the letter enclosing the keys.  I reject that proposition.  What the solicitors for SYL did could only be an acknowledgement of receipt of the letter instead of unequivocal acceptance of its contents including the return of the keys.  The unilateral and conditional return of the keys was rejected and returned by SYL on 17 November 2014.

86.  The real debate is whether Cheung has had the use and occupation of the cockloft since.

87.  As to Cheung’s unilateral removal out of the cockloft, I refer to what Chu J (as she then was) in Maxon Investment Ltd v Sino Leader (Asia) Ltd, HCA 2332/2003 (6 July 2004) said[25]:

“Use, as counsel accepts, is a matter of fact and it can take any form. The case of Newcastle City Council v Royal Newcastle Hospital illustrates that leaving a piece of land unused in what is said to be virgin state can also amount to use and occupation. What is more important is to have regard to the intention underlying Order 29, rule 12. Essentially, interim payment is to ensure that a plaintiff would not be deprived of money that he would be entitled to recover from the defendant. On that basis, it becomes irrelevant whether the nature of payment is in the form of a license fee, rent or mesne profits. Equally, it is irrelevant whether there is exclusive use or occupation and how the land is used and occupied. In my view, it would be defeating the purpose of the interim payment rule if a defendant can escape liability for interim payment by holding onto the land on the one hand, and on the other hand, not carrying out any substantial activities on the land.”

88.  Submission was made specifically to seek to distinguish the Newcastle City Council case referred to by Chu J above from the present case on the facts.  But Chu J merely referred to the English case as an illustration instead of a source of the relevant legal principle.  The generality of what Her Ladyship followed in saying above should in no way be compromised.

89.  This leads to the next question, namely, whether Cheung is holding onto the cockloft notwithstanding her unilateral removal.  There is no dispute that a tenant retains control over the property if the keys to it are kept by itself or its agent, and it matters not whether it physically occupies the property: see Prime Win Enterprises Ltd v Nova Management Consultants Ltd [2004] 2 HKC 587 at §§13-17; Mutual Luck Investment v Yeung Chi Kuen (No.1) [2003] 1 HKC 47 at §137.  As to this, Cheung is pleading helplessness about SYL’s refusal to accept her return of the keys to the cockloft.

90.  The situation has to be understood against its background.  As mentioned, Cheung had all along offered and attempted to deliver possession of the cockloft subject to the conditions that, apart from the rent-free period, the premises was to be preserved in a state consistent with the same condition as when she moved out[26], and that it was on a temporary basis for the specific purpose of enabling SYL to undertake the work required under the Building Order.  Possession would have had to be returned to her upon the completion of such work[27].  In other words, save and except for the purpose of such work by SYL, Cheung expected no one to deal with or trespass the cockloft or its condition.  That was not mere helplessness as asserted.

91.  In Prime Win Enterprises Ltd (above), the court could not say as a matter of fact that had the landlord gone to collect the keys, it would have been the tenant’s instruction to the management office to be at liberty to release them[28].  In a different way, Cheung was never prepared to release the keys other than on her such terms.  By asserting the alleged repair arrangement, Cheung leaves one with no doubt about her such stance.  The delivery of the keys to the cockloft or the making of them available to SYL on her such terms was not relinquishment of control over the cockloft.  It was exactly in those circumstances that SYL refused to accept the return of the keys.

92.  As Chu J said in Maxon Investment Limited (above)[29], it is not a requirement under O.29, r.12(b) that to be liable for interim payment, the use and occupation has to be that of the tenant or licensee exclusive of the owner.

93.  As SYL sees it, in view of the dispute and Cheung’s stance, it would be entitled to obtain vacant possession by an order of the court instead of self-help and, pending the court’s determination, should be entitled not to be deprived of payment for Cheung’s continued assertion of control over the cockloft.

94.  Set-off between the claim and the counterclaim is an express consideration to be taken into account in the exercise of discretion to order interim payment.  On the materials put forward at the moment, notwithstanding the possibly viable defence of equitable set-off between SYL’s claim for rent and Cheung’s claim for damages for misrepresentation, there is no basis for believing that SYL’s claim would be extinguished.  The contrary belief that SYL would be entitled to payment for the retention of Cheung’s asserted control over the cockloft, despite the set-off, follows.

95.  The best particular that Cheung manages to put forward is the loss of 17% of the area of what she allegedly contracted to occupy.  All considered, for the purpose of interim payment, 50% of the contractual monthly amount, ie HK$10,000, should be fair.

CONCLUSION AND ORDER

96.  Insofar as this is necessary, Cheung effectively has leave to defend the counterclaim; and the issues of SYL’s entitlement to terminate the tenancy and the entitlement of either party to possession of the cockloft remain alive.  However Cheung shall pay SYL by way of interim payment the periodical amount at the abovementioned rate for and on account of Cheung’s use and occupation of the cockloft since 15 November 2014, as and when the rent under the Tenancy Agreement would have become due and payable monthly, until conclusion of this action.

97.  As to costs, I make a nisi order that SYL has half of its costs of the application, to be taxed, if not agreed with certificate for counsel.  The order will become absolute in the absence of application in 14 days to vary.

98.  The above discussion may cause the parties to revisit how they put forward their respective cases (and the necessary evidence) before further proceeding.  For that, any application or case management summons for directions shall be taken out within 21 days.

99.  I thank counsel for their assistance.