WONG WAI MING v. SAI KUNG FLEA MARKET & BBQ PARADISE CO., LTD

HCA2289/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2289 OF 2008

-----------------------

-----------------------

-----------------------

J U D G M E N T

-----------------------

1.  This is the defendant’s appeal against the Order of Master Ho made on 22 December 2008, ordering the defendant to make interim payment into court under Order 29 rule 12 of Rules of the High Court, cap.4A.  By consent of the parties, the plaintiff’s application for summary judgment was adjourned to be heard together with the appeal.

2.  However, on 14 January 2009, upon dismissing the defendant’s application for stay of the interim payment order and on account of the defendant’s failure to comply with the interim payment order, Master de Souza entered judgment for the plaintiff on the claim with costs.  Further, an order to enforce the order for possession of the premises in question was issued on 20 February 2009.      

3.  At the hearing, counsel agreed that it would only be necessary to consider the plaintiff’s application for summary judgment if the defendant’s appeal against the interim payment order were successful.  Further, although the defendant had not lodged any appeal against Master de Souza’s order and judgment, Mr Lam for the defendant asked that if the appeal against the interim payment order was allowed, the defendant be given leave to appeal against the judgment out of time. Mr Ng for the plaintiff fairly did not argue otherwise.

The facts

4.  The action arose out of a tenancy in respect of a shop premises located at Ground Floor, 35 Man Tai Street, Hung Hom, Kowloon, Hong Kong (“the Shop”).  The plaintiff is the registered owner of the Shop and the defendant became his tenant of the Shop under a tenancy agreement dated 1 February 2008 (“the Tenancy Agreement”).

5.  Under the Tenancy Agreement, the Shop was let to the defendant for a period of three years commencing from 1 February 2008 and at the monthly rent of HK$98,000 (exclusive of rates, management fees and air-conditioning charges) which is payable in advance on the first day of each month.  The defendant is given a two-month rent free period from 1 February 2008 to enable decoration work to be carried out to the Shop.

6.  Several provisions in the Tenancy Agreement are relevant to the present appeal and they are set out below:

(1)  Under clause 2(a), the defendant agreed to pay the rent on the days and in the manner as provided in the Tenancy Agreement “without any deduction or set-off whatsoever”.

(2)  Under clauses 2(b), (c) and (d), the defendant agreed to pay the rates, air-conditioning charges and the management fee.

(3)  Under clause 4(a), if the rent, rates, management fee remain unpaid for 15 days after falling due or if the defendant persistently fails to pay rent, the plaintiff may re-enter upon the Shop and terminate the tenancy.

(4)  Under clause 4(a)(ii), default in payment of rent, rates, management fee will attract an interest of 1.5% per month.

(5)  Under clause 2(p), the defendant agreed to use the Shop for the specific purpose set out in Part V of the First Schedule, which provided the user to be “as a shop for lawful and licensed business purpose only”.  It further provided that the plaintiff gave no warranty as to the fitness of the Shop for the purpose specified in Part V of the First Schedule. 

(6)  Under clause 2(e), the defendant agreed to keep the interior of the Shop, including, inter alia, the flooring and interior plaster and ceilings and drains and pipes of and in the premises or exclusively serving the Shop in complete tenantable repair and condition (fair wear and tear excepted).

(7)  Under clause 3(c), the plaintiff agreed to use his best endeavour and exercise his rights under the Deed of Mutual Covenant to procure the manager of the building to keep the exterior and the main structure of the Shop in a proper state of repair and condition.

(8)  Under clause 6, in the event of the Shop being damaged or destroyed as to be rendered inaccessible or unfit for occupation or use, then the rent or a fair portion of it according to the nature and extent of the damage sustained, shall be suspended and cease to be payable until the Shop shall again be rendered accessible or fit for occupation and use.

(9)  Under clause 11, all legal costs and expenses incurred by the plaintiff in demanding payment of rent and/or other legal proceedings shall be paid by the defendant on a full indemnity basis.  

7.  It is common ground that the defendant has not made the following payments under the Tenancy Agreement:

(1)  Rent as from 1 October 2008;

(2)  Management fee as from 1 May 2008 at the monthly sum of $1,350;

(3)  Rates as from 1 October 2008; and

(4)  Air-conditioning charges as from 17 October 2008.

8.  It is also not in dispute that the rent for August and September 2008 was not paid on the first day of the month, but the cheques for the rent were only delivered to the plaintiff on 11 August and 16 September 2008 respectively.

9.  In late October 2008, the plaintiff issued distraint for rent proceedings in the District Court under DCDT4224/2008.  The sale proceeds of the goods seized by the bailiff were, however, insufficient to cover the costs and expense of the distraint proceedings. 

10.  The defendant has replaced the lock of the Shop after the bailiff had executed the warrant of distress.  After the bailiff posted the notice of proceedings dated 22 January 2009 on account of the order for possession in the 14 January 2009 Judgment, the defendant put up wooden boards to seal off about two-thirds of the front entrance of the Shop.  As of the day of the appeal hearing, the defendant has not delivered up the Shop to the plaintiff.   

The plaintiff’s claim

11.  On 12 November 2008, the plaintiff issued the writ herein, claiming for possession of the Shop, arrears of rent and mesne profits and also the outstanding rates, management fees and air-conditioning charges as well as damages for breach of contract.

12.  The plaintiff’s pleaded case is that the defendant’s failure to pay rent amounted to wrongful repudiation of the Tenancy Agreement, which he accepted by the issuance and service of the writ. Alternatively, the plaintiff exercised his right of re-entry and forfeited the tenancy on account of the defendant’s non-payment of rent.

The defence and counterclaim

13.  The defendant’s defence as stated in the Amended Defence and Counterclaim, is that:

(1)  The plaintiff was in breach of clause 3(c) of the Tenancy Agreement.

(2)  The plaintiff was also in breach of two implied conditions, namely,

(a)        that the Shop would be fit for the purpose stated in Part V of the First Schedule of the Tenancy Agreement.

(b)       that there would be no real danger to human safety in the Shop.

(3)  It was further an implied condition that in case of real danger to human safety, the plaintiff would take remedial action as soon as possible, and as long as the danger remained or the Shop remained unfit for the purpose it was let, no rent or related expenses would be payable. 

(4)  The defendant is entitled to a set off arising out of the counterclaim.

14.  As to the counterclaim, it is made up of:

(1)  Costs of the renovation and decoration of the Shop and its furniture, fixtures and chattels, the amount of which is to be assessed.

(2)  Loss of use of the Shop from April to September 2008, represented by the rent for the six months in question.

(3)  Loss of wages in the amount of HK$780,000. 

15.  The central plank of the defendant’s defence and counterclaim is that because of real risks to human safety, the Shop is unfit or practically unfit for being used as a restaurant or generally for occupation or use.  In the pleading and the affirmations of its director, Madam Chan Lai King, filed in connection with the interim payment and/or summary judgment applications, the defendant referred to the following matters as substantiating his case that the Shop is unfit for occupation or use:

(1)  There were incidents of concrete falling from the ceiling of the dining area, female toilet and kitchen area of the Shop. They took place on 9 April, 13 July and 29 September 2008 respectively. Thereafter, there was further falling of concrete from the ceiling.

(2)  Water leakage and seepage at the walls and ceilings of the dining area and kitchen area of the Shop.  This first happened during a typhoon on 19 April 2008.

(3)  On raining days, waste or greasy water over-flowed from the draining wells in the kitchen and toilet of the Shop, causing flooding and bad odour. This problem was first raised by the defendant in a letter dated 19 May 2008 to the plaintiff and the management office of the building. 

16. The defendant further relies on:

(1)  A letter dated 30 September 2008 from the Buildings Department, recording that concrete and plaster spalling and cracking were found during inspection by the department. 

(2)  An inspection report of the Food and Environmental Hygiene Department (FEHD) dated 2 October 2008. The inspector observed that there was sagging of concrete at various places of the Shop and advised Miss Chan to temporarily suspend the restaurant business, to carry out structural inspection and to effect repairs to the ceilings of the Shop. 

17. I pause here to point out that it is not clear from the pleading and materials before the court what is the basis for the allegation of breach of clause 3(c) of the Tenancy Agreement.  This is also not relied on by the defendant in opposing the interim payment application and in this appeal. Additionally, it is to be observed that the implied conditions pleaded are incompatible with the express terms of the Tenancy Agreement.  First, the implied condition that the Shop would be fit for the purpose as stated in the Tenancy Agreement is contrary to clause 2(p), which provided that the plaintiff gave no warranty as to fitness of the Shop for the purpose specified in the Tenancy Agreement.  Second, the implied condition that no rent or related expense is payable for as long as the Shop remains unfit for the purpose it was let is not only contrary to clause 2(p), but also contrary to clause 2(1)(i), which provided that rent should be paid without deduction or set off.     

Order 29 rule 12(b)

18. It is common ground between counsel that for an interim payment order to be made under Order 29 rule 12(b) of Rules of the High Court, two pre-conditions have to be satisfied.  They are:

(1)  The plaintiff’s action has included a claim for possession of land; and

(2)  If the action proceeds to trial, the defendant will 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: see Winsworld Properties Ltd v. Chance Full International Development Ltd (unreported) HCA4161/2002 para.9 and Maxon Investment Ltd v. Sino Leader (Asia) Ltd (unreported) HCA2322/2003 para.7.

19.  In the context of the second pre-condition, while the court cannot at an interlocutory stage resolve dispute of facts on affidavits, it is entitled to have regard to the apparent strengths and weaknesses of the parties’ case and evidence and to form a provisional view on the merits of the defence put up by a defendant.

20.  In the present case, there is no dispute that the first pre-condition is met. The dispute between the parties turns on the second pre-condition, i.e. whether the defendant would be liable to pay the plaintiff a sum of money in respect of use and occupation of the Shop during the pendency of the action, even if the final judgment was made in favour of the defendant. 

Clause 6 of the Tenancy Agreement

21.  The thrust of Mr Lam’s submission is that by reason of clause 6 of the Tenancy Agreement, the defendant is not liable to pay rent as from October 2008 onwards and that having regard to its defence of a set off arising out of the counterclaim, the second pre-condition is not satisfied.

22.  Clause 6 reads as follows:          

 “In the event of the premises or any part thereof at any time during the term being damaged or destroyed by any cause whatsoever (not attributable to the act or default of the Tenant) so as to be rendered inaccessible or unfit for occupation or use then the rent hereby reserved or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended and cease to be payable until the premises shall again be rendered accessible or fit for occupation and use Provided that (a) the date of expiration of the term hereby granted shall not be postponed; (b) the Landlord may but is not obliged to repair or reinstate the premises; and (c) if the premises are not reinstated and rendered accessible or fit for occupation and use in the meantime, either the Landlord or the Tenant may at any time after three (3) months from the occurrence of the damage or destruction, give to the other of them notice in writing to determine the tenancy hereby created and thereupon the same and everything herein contained shall cease and be void as from the date of the occurrence of the damage or destruction  but without prejudice to the rights and remedies of either party against the other in respect of any antecedent claim or breach of the stipulations terms and conditions herein contained or of the Landlord in respect of the rent payable hereunder prior to the coming into effect of the cessation to pay rent.” 

23.  The argument of the defendant runs as follows: By reason of the falling concrete, water seepage and leakage and over-flowing of waste water caused by blockage of the light wells, the Shop had since October 2008 become unfit for occupation and use either generally or specifically as a restaurant such that clause 6 applies and rent has ceased to be payable.

24.  Two things should be stated at the outset. The first is that clause 6 was not pleaded in the Amended Defence and Counterclaim and also not raised in the arguments before Master Ho.  Second, for the purpose of this appeal, it is not necessary for me to form a concluded view on the merits of the defence based on clause 6.  A provisional assessment suffices.

25.  Several points should be said about the construction and application of clause 6.  First, the suspension or cessation of the obligation to pay rent only arises if the premises or part thereof were damaged or destroyed so as to be rendered inaccessible or unfit for occupation or use.  Second, the unfitness for occupation or use is not confined to unfitness for occupation or use for the purpose specified in the Tenancy Agreement in light of the wordings used.  Third, the landlord has no obligation to repair or reinstate the premises.  Fourth, either party may after three months from the occurrence of the damage or destruction, give written notice to terminate the tenancy.  Fifth, the clause is without prejudice to either party’s claim or liability for breach of the terms of the Tenancy Agreement before the occurrence of the damage or destruction. 

26.  Insofar as the defendant relies on clause 6 to say that the second pre-condition for an interim payment order is not met, there are two major difficulties that he has to overcome.  The first relates to whether it can show that the Shop or any part of it was damaged or destroyed so as to render it inaccessible or unfit for occupation or use.   Plainly, the Shop has not been destroyed and is not inaccessible.  But has it been damaged so as to be rendered unfit for occupation or use?  “Damaged” is an ordinary English word and should be given its ordinary and plain meaning.  A thing is damaged when it is injured so as to diminish its value or usefulness: Shorter Oxford English Dictionary 6^th edition (2007) vol.1 599.  Mr Ng submitted that the word “damaged” should be read in line with the word “destroyed”, thus denoting the involvement of an external force, such as a fire or mud slide or the like.  There is force in this submission.  

27.  It is also relevant to note that under the Tenancy Agreement, there is no express provision obliging the plaintiff to repair or maintain the Shop.  At common law, there is in general no implied covenant by the landlord to carry out repairs: Woodfall’s Law of Landlord and Tenant vol.1 para.13.001.  On the other hand, the obligation to pay rent is a condition that goes to the root of a tenancy agreement. Further, clause 2(a) of the Tenancy Agreement expressly provided that the rent should be paid without deduction or set off.  Having regard to these considerations, it will not be the contractual intention that clause 6 will apply to minor or ordinary types of problems arising from want of repair or dilapidation.  For clause 6 to apply, the premises must be in a seriously damaged state.

28.  However, the matters relied upon by the defendant as supporting the application of clause 6 are essentially in the nature of want of repairs.  Indeed, it is Mr Lam’s submission that the problems with the falling concrete and water leakage were the results of fair wear and tear such that the defendant is not obliged to effect repair and maintenance work since its obligation to maintain in clause 2(e) of the Tenancy Agreement does not apply to fair wear and tear.

29.  The reports of the experts from both sides also shed light on the nature of the problems on the Shop.  Dudley Surveyors Limited, the expert engaged by the plaintiff, had conducted an inspection of the Shop on 19 September 2008.  Its report dated 3 October 2008 concluded that there was no major or extensive concrete spalling and the Shop was structurally sound.  While it recommended repairs be carried out to deal with the concrete defects, it considered that the work would only require one to two days and could be done outside business hours.  As to the water leakage problem, it was of the view that as the problem originated outside the Shop, pending the necessary repairs by the Incorporated Owners and the building manager at the podium level, the water collection metal channels already installed on the Shop would be an effective measure to drain away the water during heavy rainfall.  The defendant’s expert, Compton Consultants, conducted an inspection at an earlier time on 21 July 2008.  Although it took a more serious view of the problems found on the Shop, it estimated in its report dated 26 September 2008 that the repairs would require 13 to 21 days to complete.  In my view, the available expert evidence goes to negative any suggestion that the Shop is in a seriously damaged stated.

30.  Further, even assuming that clause 6 is capable of being applied to want of repair, it is also questionable whether the Shop can be said to have been damaged since October 2008 and to the extent of being unfit for occupation or use at all.  The expert reports certainly do not support this.  In addition, much of the matters complained of either happened or existed before October 2008.  Despite these incidents, the defendant had been operating the restaurant business continuously since the commencement of the tenancy and only ceased business in October 2008. The evidence does not show that the Shop (or any part of it) was not or could not be opened for business on any day before October 2008.  The defendant places great reliance on the inspection report of FEHD dated 2 October 2008 and the suggestion of temporary suspension of business contained in it.  However, when read in context, the suggestion was in connection with the advice to conduct inspection and remedial work.  The report is no evidence that since October 2008, the Shop has become unsafe or unfit for general occupation or use.

31.  The second major difficulty facing the defendant is that even if clause 6 applies, only the obligation to pay rent is suspended.  The clause is without prejudice to the plaintiff’s right to claim for breaches of the Tenancy Agreement that occurred before October 2008. The clause does not excuse the defendant from its other contractual obligations, including payment of management fees. It is not in dispute that the defendant has since May 2008 failed to pay management fees.  Mr Lam argued that the defendant is entitled to set off the outstanding management fee from the counterclaim.  For reasons that I will come to in the latter part of this judgment, the merits of the counterclaim are in doubt.

32.  Moreover, clause 6 does not preclude the plaintiff from claiming mesne profits against the defendant.  The non-payment of management fees, rates and air-conditioning charges constitutes breaches and repudiations that entitle the plaintiff to terminate the Tenancy Agreement.  Although the present pleaded case of the plaintiff is that the tenancy had become terminated or forfeited by non-payment of rent, there is no difficulty for the plaintiff (if the action were to proceed further) to amend to also rely on non-payment of management fees, rates and air-conditioning charges.  If clause 6 applies, it only means the defendant does not have to pay rent.  It does not entitle him to hold onto the Shop for as long as it likes or until the expiration of the tenancy.  It is clear from the evidence before the court that the defendant has retained exclusive possession of the Shop since October 2008.  It continues to assert possession even after the distraint proceedings and after judgment for possession was entered against him.  The defendant explains that this is because it hopes to continue with the restaurant business after the Shop is repaired.  But the plaintiff has no obligation under clause 6 to repair or reinstate the premises.  Further, the letters from the plaintiff ’s solicitors before the action indicated that the plaintiff was prepared to carry out repair works and to leave the liabilities to be sorted out later. One would have expected the defendant to agree to have the Shop repaired if it were genuinely waiting to resume business on the premises.  Further, the fact that it is counterclaiming for the costs of capital investments (i.e. costs of renovation, decoration and furniture and fittings) is directly at odds with the claimed intention of resuming business in future.  That aside, the fundamental point is that it is not open to the defendant to hold onto the Shop and deprive the plaintiff of possession of it, without having to pay for it.  It does not matter that the defendant has not put the Shop to any active or actual use.  This is so even if the Shop were indeed damaged so as to be rendered unfit for occupation or use.  If the defendant wishes to retain possession of the Shop despite all the complaints it has about its condition, it has to pay a fee for the possession.  The plaintiff’s right to claim for mesne profits will not be defeated by clause 6.      

33.  All in all, the defendant’s argument that the second pre-condition for an interim payment order is not met because of clause 6 of the Tenancy Agreement, to put it mildly, must be open to serious doubts.

Defence of set off

34.  I turn finally to the defence of set off based on the counterclaim.  As noted above, the counterclaim for the costs of renovation, decoration and that for the furniture, fittings and chattels is incompatible with the claimed intention of resuming business in future.  This part of the counterclaim is also not quantified.  The defendant had put up a summary of start-up costs and expenses which is in the total amount of HK$1,398,759.13.  This is a secondary document and the underlying supporting documents had not been put before the court.  As to the counterclaim for loss of wages, there is no breakdown or any documentary support for it.

35.  In my view, the factual and legal basis for the entire counterclaim is in doubt.  It would appear from the affirmations and Mr Lam’s submissions that the counterclaim is premised on the Shop being unfit for occupation or use since the commencement of the tenancy.  But this is contrary to the evidence, which shows the defendant had operated a restaurant on the Shop until October 2008.  Mr Lam argued that the Shop was “practically” unfit for occupation or use.  However, the reality is that the Shop had been used as a restaurant until October 2008.  Mr Lam also argued that in light of the problems, it was possible that on some days, the Shop was unfit for occupation or use.  Again, there is nothing in the affirmations of the defendant to show that the Shop could not be opened for business on any day before October 2008.  And since the Shop had been occupied and used as a restaurant, it would not be open to the defendant, as a matter of law, to counterclaim for the capital investment, loss of use of the premises and loss of wages, let alone a set off.

36.  In any case, having regard to the absence of express obligation to repair on the plaintiff’s part in the Tenancy Agreement, the common law position that there is in general no implied covenant to repair as well as clause 6 of the Tenancy Agreement which provides that the plaintiff is not obliged to repair in the event the clause applies, the legal basis for the counterclaim is further put in doubt.

Conclusion

37.  For the reasons set out above, Master Ho was plainly correct in ordering the defendant to make interim payments.  He had also taken into account and further struck a proper balance between the interests of both parties when he ordered the payments to be paid into court.

38.  Accordingly, I dismiss the defendant’s appeal against the interim payment order.  It follows that I need not consider granting leave to the defendant to appeal against the judgment entered by Master de Souza on 14 January 2009.  It further follows that no order needs to be made on the plaintiff’s application for summary judgment save that the costs be part of the costs of the action. 

39.  Applying the normal rule of costs follows event, I make an order nisi that the defendant pays the plaintiff the costs of this appeal and of the application for interim payment before the Master, including all costs reserved.  Having regard to clause 11 of the Tenancy Agreement, the costs will be taxed on indemnity basis if not agreed.