TAK SHING INVESTMENT CO LTD v. SMART CHOICE INTERNATIONAL LTD

HCA 588/2017

[2020] HKCFI 1317

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 588 OF 2017

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J U D G M E N T

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1.  The trial of this matter took place on 6 and 8 May 2020. The plaintiff (“P”) was represented by Mr Tim Wong. The Defendant (“D”) was represented by Mr Brian Tsui.

2.  The dispute relates to a tenancy by which P (as landlord) leased to D (as tenant) certain premises (the “Premises”) in Pennington Street, Causeway Bay, for non-domestic purposes.  The Premises comprise several floors of a building[1], which were used to house D’s shop selling toys and models.

3.  The subject tenancy agreement was dated 20 January 2014 (the “Tenancy Agreement”), and provided for a three-year tenancy from 15 November 2013 to 14 November 2016.  D had previously been tenant of the Premises since 2007, under two earlier tenancy agreements with P.

4.  It is common ground that: (i) by a letter from P’s solicitors dated 7 September 2015, P demanded from D outstanding rent, rates and interest under the Tenancy Agreement; and (ii) by a letter from D’s solicitors two days later, D indicated that it would surrender the tenancy and deliver keys to P, stating that the Premises were no longer suitable, D having repeatedly complained of bent and inclined floors following nearby construction work.

5.  Shortly thereafter, the keys were redelivered to P.  P eventually secured a replacement tenant for the Premises, by a tenancy agreement dated 17 October 2016 creating a three-year term from 1 November 2016 (the “Replacement Tenancy”).

6.  P claims that D repudiated the Tenancy Agreement, and seeks to recover unpaid rent and rates, plus certain other expenses.

7.  D accepts that from a certain point, rent and rates were not paid.  At trial, D invoked one defence, namely, that the Tenancy Agreement was discharged by frustration at common law[2]. D argued that the Tenancy Agreement was frustrated because of, in summary:

(1)  An incident in November 2014 during which a portion of pavement in Jardine’s Bazaar caved-in, resulting in the cordoning-off of certain road(s), and said to have led to reduced pedestrian flows (the “Jardine’s Bazaar Incident”); 

(2)  Alleged structural defects in the Premises said to be evidenced by: (i) cracks, caving-in and/or loosened bricks at the entrance to the Premises (following November 2014); and (ii) tilting of the floor to the second floor balcony (said to have been discovered in May 2015).

8.  Subject to one point on quantum, the sole issue is whether D has made good its defence of frustration. 

The law on frustration of leases

9.  The parties did not dispute the principles applicable to the frustration of leases.

10.  Generally, a contract may be discharged by frustration where something occurs after the formation of the contract which renders it physically or commercially impossible to fulfill the contract, or transforms the obligation to perform into one radically different to that which was undertaken when the contract was made[3].

11.  In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the House of Lords considered whether the doctrine of frustration is, in principle, applicable to leases at all, answering in the affirmative.

12.  However, the House of Lords reasoned that the circumstances in which leases will be held to have been frustrated are “exceedingly rare” (“hardly ever”: 692B per Lord Hailsham, 709F-G per Lord Russell).  There was apparently no reported English case in which a lease had been held to have been frustrated (692C-D).

13.  National Carriers concerned a ten-year lease of a warehouse, commencing in 1974.  In 1979, the street comprising the only vehicular access to the warehouse was closed by the local authority due to the dangerous condition of an opposite building, rendering the premises useless for the tenant’s purposes for a likely period of about 20 months.  The landlord sued for unpaid rent, which the tenant resisted on the basis that the lease had been frustrated.

14.  The House of Lords upheld summary judgment in the landlord’s favour, concluding that on the facts, there was not even a triable issue on frustration.  Although the tenant’s business would be severely dislocated by the period of closure (which would necessitate the use of alternative premises during that time), this did not approach the gravity of a frustrating event.  Out of a ten-year lease, the tenant would have lost under two years’ use of the premises, and there would still be nearly three years remaining in the lease thereafter.  The likely continuance of the term after the interruption made it impossible to contend that the lease had been brought to and end[4].

15.  National Carriers has been followed in Hong Kong.

16.  In Yung Kee Co v Cheung So Yin Kee [1983] 1 HKC 386, a fire destroyed the leased premises, less than three months before the end of a four-year tenancy.  A closure order was made, and the premises were wholly unusable for the remaining term.

17.  Nonetheless, Deputy Judge Chang QC applied the principles set out in National Carriers to hold that the tenancy agreement had not been frustrated, so that the outstanding rent was payable.  The temporal proximity of the fire to the end of the leasehold term was relevant, making it harder to argue that this was not what was bargained for, or that the entire substratum or subject-matter had disappeared: 394H-395A, D (emphasis original).  On the particular facts of the case, destruction of the premises at its tail-end was insufficient to frustrate the lease: 395I-396C.

18.  Li Ching Wing v Xuan Yi Xiong [2004] 1 HKC 353 concerned a two-year tenancy of a residential unit.  Several months into the tenancy, many residents of the relevant development were infected with SARS, causing the tenant to move out of the unit.  The Department of Health issued a ten-day isolation order for the residential block, resulting in the temporary evacuation of its residents.

19.  The tenant argued that the tenancy had been frustrated, but this was rejected on the landlord’s successful application for summary judgment.  Applying National Carriers, HH Judge Lok reasoned that the ten-day period during which the tenant was prevented from residing in the premises, was quite insignificant in the context of a two-year lease (§11). The outbreak of SARS was insufficient to significantly change the nature of the outstanding contractual rights or obligations as compared to what the parties could reasonably have contemplated when the tenancy agreement was executed. 

Evidence: general

20.  P called three witnesses: Mr Ma Kwan Pok (Manager of P’s Leasing and Property Management Department); Ms Cheung Sau Wai, Caroline (Property Manager of P); and Mr John Ng Wing Chi (Assistant Property Manager of P). 

21.  D called one witness: Ms Cheng Sui Wan (Manager of D).

22.  The witnesses’ evidence focused on the Jardine’s Bazaar Incident and the alleged structural defects.

23.  D’s sole witness, Ms Cheng, accepted that as manager of D, she was not present at the Premises on a day-to-day basis.  As elaborated below, it was apparent under cross-examination that Ms Cheng had little or no first-hand knowledge of certain of the key events, but rather relied substantially on what she had been told by colleagues. On these points, her evidence was therefore of limited use[5].

The Jardine’s Bazaar Incident: 17 November 2014

24.  It is common ground that on 17 November 2014, an incident occurred in Causeway Bay, during which a section of pavement in Jardine’s Bazaar caved-in, forming a hole around four metres deep, which caused injury to a pedestrian. 

25.  Ms Cheng (D’s witness) was cross-examined on this topic, including by reference to a press-release and newspaper articles describing the incident, and a map of the area. Significantly, she accepted that she had no independent knowledge of the Jardine’s Bazaar Incident, but was only relying on what she had been told by colleagues.

26.  By reference to newspaper articles, Ms Cheng accepted that the cave-in occurred around 9:13am on 17 November 2014 outside No. 54 Jardine’s Bazaar, as a result of which Nos. 54-58 Jardine’s Bazaar were cordoned-off by the authorities.  The location of the cave-in is some distance from the Premises[6].

27.  Ms Cheng was unable to dispute the newspaper account, including that by around 1pm on the same day, the vehicular part of Jardine’s Bazaar had been released from cordon, the Buildings Department (“BD”) and Highways Department (“HD”) had checked and confirmed there was no danger, and repairing work by filling in was complete by 9pm that night. 

28.  When pressed during cross-examination, Ms Cheng stated that she had been told by colleagues that the pedestrian part of Jardine’s Bazaar had remained cordoned for a longer period, and also that part of Pennington Street itself had been cordoned such that there was no access to the Premises from the southern side.  However, she accepted that she had no photographs or other direct evidence to support these assertions.  Further, when repeatedly asked how long this situation pertained, she said that she had no idea and could not remember.  She also ultimately accepted that even under the situation she described, customers could access the Premises from a different direction (via Yee Wo street).

29.  Mr Ma’s evidence, for P, was that after the caving-in incident, the HD cordoned off a section of Jardine’s Bazaar, but that only lasted until the same evening.  Following the incident and at D’s request, P’s representative attended the Premises to inspect.  P was of the view that there was no structural danger, installed a “tell-tale” device[7] to monitor any structural movements, and contacted the BD to follow up.

Alleged structural defects

30.  As noted above, D alleged structural defects in the Premises said to be evidenced by:  cracking, caving-in and/or loosened bricks at the entrance (following November 2014), and tilting to the floor of the second floor balcony (May 2015).  There was some suggestion by D that the alleged structural defects were connected to the Jardine’s Bazaar Incident and/or construction works which had occurred at sites nearby the Premises.

31.  There are a number of notable features of the evidence on alleged structural defects.

32.  First, no expert evidence was adduced.  In circumstances where the defence rests substantially on allegations of serious structural defects, one would ordinarily have expected D to adduce such evidence to support its position. 

33.  Second, and related, D’s sole witness Ms Cheng accepted that neither she nor any of D’s staff had any expertise in structural or architectural engineering; and further that D did not arrange for any person with such expertise to inspect the Premises.

34.  Third, in response to D’s complaints of structural concerns, P arranged for inspection(s) to carried out by the BD, whose conclusions appear in certain emails, and sit poorly with D’s position.

35.  The chronology includes the following:

(1)  On 26 November 2014, D sent to P two emails regarding a floor crack, floor cave-in and loosened bricks, at the Premises entrance, and attaching photographs. 

(2)  P’s witnesses gave evidence that in response, Mr Ng of P attended the Premises on 26 or 27 November 2014 to inspect, and installed a “tell-tale” to monitor structural movements.  Mr Ng accepted that he observed cracks at the entrance, some pavement caving-in, and loosened bricks.  P’s witnesses said that the BD inspected on 27 November 2014, and informed P that the cracks were due to decoration issues, and posed no structural danger.

(3)  P’s witnesses gave evidence of another inspection of the Premises by the BD on 5 February 2015. This was accepted in the Statement of Agreed Facts. 

(4)  By an email to P dated 18 May 2015, the BD referred to a joint inspection conducted on 7 May 2015.  The BD stated: as the horizontal crack between the wall and the ground surface was found as surface crack as per visual inspection and the overall condition of the external wall is fair, no further action would be taken by the BD at the moment.  However, as the BD noted that the crack was a live crack and there was change of the readings of the tell-tale installed, the BD would refer the readings to its structural consultant for comment.

(5)  On 15 May 2015, D sent an email to P referring to (inter alia) slight tilting on the second floor balcony, leading to rain water flowing to one side of the balcony and away from the drain, and asking P to inspect.  Ms Cheung (of P) gave evidence that in response, a contractor and a colleague from P’s Architectural and Structural Department were sent, and cement was added to the balcony floor to rectify the tilt[8].

(6)  By an email to the BD dated 7 July 2015, P followed up in respect of the email referred to at (4) above.  P also brought to the BD’s attention D’s complaint of uneven leveling at the second floor balcony, and D’s concern that the building structure might be badly affected by the adjacent construction site work and had become dangerous.  P attached photographs for the BD’s consideration and invited a further inspection if necessary.

(7)  By an email to P dated 17 August 2015 in response, the BD advised that its structural consultant had no structural comment on the tell-tale reading as it only monitored the joint between the stone finish and cracked concrete pavement.  The BD further indicated that its structural engineer had also checked the ground settlement monitoring readings provided by the registered structural engineer of the adjoining construction site up to January 2015, and found that the settlement was below the alert level such that no further action had been taken by the BD[9].

36.  It is therefore clear that in essence, the specific concerns which D raised as to the structural integrity of the Premises were referred by P to the BD, which inspected the Premises and caused relevant experts to consider readings which had been taken.  The BD’s conclusion was to the effect that there was no significant or imminent structural danger which would require the BD to take further action[10]. In addition, there was no evidence that anyone with suitable expertise had formed a contrary conclusion.

37.  In these circumstances, I consider that there is plainly insufficient evidence to support D’s case that there was some serious or significant structural danger in the Premises at the relevant time.  I accept Mr Wong’s submission, that D’s case on structural defects relies on speculation by laypeople, and runs contrary to the BD’s conclusions.

D’s emails preceding purported surrender of the tenancy

38.  I make further mention of two of the emails sent by D to P, prior to September 2015[11].

39.  In D’s email dated 15 May 2015 (referenced above), D referred not only to alleged structural issues, but also to reduced pedestrian flows following the Jardine’s Bazaar Incident and “sit-in and road blockage”, leading to reduced business and turnover.  D requested P to “help a small business tide over difficult times”.

40.  In a subsequent email to P dated 19 August 2015, D again referred to structural concerns which had been raised in recent meetings[12]. D stated that there were reduced pedestrian flows to D’s shop, that certain staff had left due to safety concerns which necessitated closure of some shop floors, and that business had dropped as a result.  In conclusion, D requested a 60% rent reduction for the remaining term, in light of the economic pressures which it faced.

41.  When questioned on these emails, Ms Cheng accepted that D’s business had been in part affected by the social movement in late 2014, but said that was not the only reason.  She stated that the major issue was structural problems, and that there genuine concerns about safety which caused staff to leave. Her evidence was that these factors, together with reduced pedestrian flows following the Jardine’s Bazaar incident, had severely impacted D’s business. She accepted that D had requested a 60% rental reduction.

42.  I consider these emails significant because they further suggest that, even on the face of D’s own complaints, the very high threshold for the frustration of a lease could not be met.  That D was willing to continue the tenancy at reduced rent, is indicative that there was no impossibility of performance or entire loss of substratum; but rather at most, disruption to D’s business affecting the expense or onerousness of D’s obligations under the Tenancy Agreement.  This is generally insufficient for frustration.

Conclusion on the defence of frustration

43.  In my judgment, D has clearly failed to make good its sole defence of frustration.

44.  As to the Jardine’s Bazaar Incident, even on Ms Cheng’s own factual account (which was hearsay), the resulting street closure did not entirely cut off pedestrian access to the Premises.  Further, Ms Cheng was unable to give evidence as to the duration of such closure (said by P’s witnesses to be limited to one day).  On any view, this fact-set does not come close to one which could frustrate the Tenancy Agreement: see the authorities cited above.

45.  As to the alleged structural defects, the complaint is disposed of by the BD’s conclusions which, in the absence of serious contrary evidence, I find reflect the facts: see above.  Further, even if D’s factual case on structural defects had been made good, this would likely have been insufficient to establish frustration: see authorities discussed above.

46.  In closing, Mr Tsui appeared to recognise these difficulties. He sought to overcome them by relying on the cumulative effects of D’s complaints on its ability to continue its shop business, considered in light of the purpose of the Tenancy Agreement as properly construed.

47.  In my view, this does not avail D. Even on its own case, there was no period of time when D was entirely unable to use the Premises, and D was apparently willing to continue the tenancy at reduced rent.  Compare, for example, National Carriers (supra), where severe dislocation to the tenant’s business was insufficient to raise even a triable issue on frustration.

48.  Mr Tsui also made some reference to clause 6(e) of the Tenancy Agreement, which provides for the suspension of rent (and potentially, termination) on the occurrence of certain events[13]. However, the pleaded Defence does not refer to this clause, and Mr Tsui did not appear to rely on it as providing a defence per se.  In the circumstances, I give it no further treatment.

Relief

49.  For the above reasons, D’s sole defence fails.  The consequence is that on 9 September 2015, D repudiated the Tenancy Agreement, and P is entitled to damages.

50.  The amounts sought by P were for: (i) lost rental payments from 1 October 2015 to 14 November 2016 (HK$1,360,133); (ii) lost payments for rates from 1 October 2015 to 31 October 2016 (HK$50,969); (iii) the agency fee (HK$125,000) and half share of stamp duty (HK$3,440) incurred by P for the Replacement Tenancy; and (iv) reinstatement costs (HK$339,100).

51.  P also claimed contractual interest at 7% per annum, under clause 18 of the Tenancy Agreement.

52.  Of these items, the only one to which D objected (save on the basis of the defence considered above), was item (iii).  Mr Tsui argued that P’s expenses associated with the Replacement Tenancy, would have been incurred in event. 

53.  On this point, I accept Mr Tsui’s argument, and accordingly disallow item (iii)[14].

Disposition

54.  There will be judgment for P in the amounts referred to at sub-paragraphs 50(i), (ii) and (iv) above.

55.  I will award simple contractual interest on those sums at 7% per annum from the due date to the date of judgment, following which there will be judgment rate interest on the principal sums up to the date of payment.

56.  I consider that costs should follow the event, and will order that D pay P’s costs of the action, to be taxed if not agreed.

57.  The orders as to interest and costs will be orders nisi, which will become absolute within 14 days, in the absence of any application to vary.