PERFECT LAND IND CO (a firm) v. SKYCITY UNIVERSAL LTD

HCA227/2001
and HCA4473/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.227 OF 2001

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(Consolidated pursuant to the Order of Master J. Wong
dated 22 March 2002)

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J U D G M E N T

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BACKGROUND

1. The plaintiff is the owner of a residential house at No. 7A Manly Villa, 38 Ocean Park Road, Hong Kong. By a tenancy agreement dated 13 January 1997 the defendant became the tenant of the premises. At the defendant's request the tenancy was a five-year term tenancy (from 15 February 1997 to 14 February 2002) at a total rent of $11,160,000.00. The rent was payable by installments at the rate of $170,000.00 per month for three years, then $210,000.00 per month for two years.

2. During approximately the first three years of the agreement the rent was paid, albeit consistently late.

3. In 1998 and 1999 the landlord agreed to slight reductions in rent subject to conditions such as the immediate payment of arrears. The effect of these amendments were that the rent of $170,000.00 was reduced to $150,000.00 for a period, then to $160,000.00 for another period. (The reason for the increase from $150,000.00 to $160,000.00 was that the defendant continued to be late with payments and was in arrears).

4. On 26 January 2000 the defendant left the premises. It is his case that he left as a result of an oral agreement by which he voluntarily surrendered the premises back to the plaintiff and that he would not be liable to pay any further rent subject to an understanding that they would come to some future agreement about "sharing the losses".

5. The plaintiff does not agree. The plaintiff, by this action, is suing for the balance of the rent due under the tenancy plus damages.

6. After the defendant moved in to the house in early 1997, with the plaintiff's consent, he spent approximately $4,000,000.00 on alternations, including a swimming pool. It has transpired that some of these alterations, including the swimming pool, are illegal structures. As part of his damages claim the plaintiff is claiming the cost of re-instatement of the house and garden. He relies, inter alia, on clause 4(p) of the tenancy agreement which provides that :

"(p)

at the expiration or sooner determination of the said term to deliver up to the Landlord vacant possession of the said premises together with all the Landlord's fixtures and fittings and additions thereto in good and tenantable repair and condition (fair were and tear excepted) Provided That where the Tenant has made any alteration(s) or installed any fixtures, fittings or additions to the said premises with or without the Landlord's written consent the Landlord may at its absolute discretion require the Tenant to reinstate remove or do away with such alteration(s) fixtures fittings or additions or any part or portion thereof and make good and repair in a proper and workmanlike manner any damage to the said premises and/or the Landlord's fixtures and fittings therein as a result thereof before delivering up the said premises to the Landlord;"

7. The plaintiff also claims loss of rent after exercising his right of re-entry on 14 August 2001 arising out of the difficulties encountered in re-letting the premises due to its condition.

8. In a nutshell the defendant's case is that he left the premises by agreement with no future liabilities because :

(a)	there had been water leakage which the plaintiff had not remedied;
(b)	there was concern about the structural safety of the house because :
	(i)	it seemed to shake during a typhoon in 1999 and
	(ii)	the size of the basement was larger than permitted by the approved plans when the house was built in about 1982.

9. The defendant claims that the plaintiff released him from future rent and other liability under the contract in return for agreeing not to pursue the matter of the basement being bigger than it should have been.

10. The plaintiff's case on the other hand has always been that both the late payments of rent and the defendant's departure in January 2000 were due to his financial problems. He had signed the tenancy at the height of the property boom in early 1997 but after the ensuing financial crash later that year he was unable to sustain the very expensive terms that he had agreed to.

THE WITNESSES

11. Much of this case turns on the credibility and reliability of the key witnesses. The plaintiff's main witness was Mr Keith Lam Hon Keung, a director of the plaintiff company. The plaintiff owned two houses in Manly Villa and Mr Lam's family owned six more. Mr Lam lived in House No. 5, next door but one to the defendant, Mr Wu. Mr Wu is the chairman of a public listed company and was the sole witness for the defence.

12. Mr Lam's evidence was impressive and reliable. I found him to be an honest witness who gave clear and helpful answers. His version of events was consistent with common sense and had the ring of truth. The same cannot be said of Mr Wu. He frequently said he could not remember important matters. He consistently said he had simply passed correspondence on to his secretary because he did not understand English. Mr Lam had always put things in writing by a steady flow of correspondence seeking arrears of rent and making the plaintiff's position perfectly clear (and entirely consistent with the pleaded case). However, Mr Wu never responded in writing himself (and only on a very few occasions through his former solicitors). He said he spoke to Mr Lam about the written demands for rent and threats of legal proceedings being commenced but he ignored them because Mr Lam had said they were "just formalities". His evidence was vague and evasive. He was not a witness upon which I was able to rely. Where there were factual conflicts of evidence I consistently preferred the version given by Mr Lam.

LIABILITY

13. Counsel for the two parties, Mr Alfred Fung for the plaintiff and Ms Julie Chan Catton, for the defendant were in broad agreement about what were the key issues in the case. I will deal with each of them briefly.

(1) Was there any water leakage or structural defect in the property rendering it unfit for human habitation?

14. Mr Wu claimed the agreed rent reductions in 1998 and 1999 were because of water leakage. I reject this. Such water leakage as there may have been was clearly trivial and I find that Mr Lam's agreement to rent reductions was out of sympathy for Mr Wu's financial difficulties at the time.

15. Mr Wu's claimed concern about the structural safety of the house, citing "shaking" during a typhoon, and his claimed belief that it may have been due to the basement which was bigger than it should have been, hardly warrants further consideration. The plaintiff called evidence from a structural engineer, Mr Shum Lok-nin who testified that the safely of the home was not compromised by the basement. The house had been built in 1982 and the basement had been in its present form before Mr Wu had moved in. Mr Wu's "concern" was no more than an excuse to vacate in January 2000.

(2) Was there an oral agreement to terminate the tenancy in January 2000 and to "share the losses"?

16. This is the core of the defence. The documentary evidence and reliable oral evidence all goes against such an agreement. In January 2000 Mr Lam was still due over $4,000,000.00 in future rent. The only reason given by Mr Wu as to why Mr Lam would abandon his right to such a large sum was that Mr Wu agreed not to pursue the matter of the basement being bigger than it should have been and not to engage a structural engineer to investigate the matter. I find this to be a fanciful suggestion. I accept Mr Lam's evidence that he left because he felt he could no longer afford it. I accept that there had been discussion about the possibility of his leaving in late 1999. However, even though those discussions had been amicable, Mr Lam had said that should a sub-tenant be found at a lower rent, Mr Wu would still be liable for the difference.

17. His solicitors wrote clearly to this effect on 30 November 1999 :

" We are given to understand that you propose to early release yourself from all obligations under the Agreement by the end of January 2000. We are instructed to inform you that such act on your part do constitute unilateral repudiation of the Agreement and you are liable to pay our client all costs, damages and expenses covering the whole term of the said tenancy. However, you may reduce your liability (subject to our client's acceptance) by securing an immediate succession of the unexpired term of a tenancy to the captioned premises in no less favourable terms and conditions to client's claim against you for any other losses, costs, damages and expenses."

18. In the abundant correspondence from the plaintiff and its solicitors there is a consistent thread which makes it clear that the tenancy was not terminated on 26 January 2000, that the defendant remained liable for the rent thereafter and that he was obliged to re-instate the property to its condition prior to the alterations (some illegal) being made. I refer to extracts from just two as examples of there being no doubt as to the plaintiff's stance. One from before the date that Mr Wu left, the second from after that date.

19. On 4 January 2000 the plaintiff wrote :

"	1.	The landlord is prepared to accept any proposed new tenant at a rental of less than the agreed rent of the existing lease in the sum of $210,000.00 per month (exclusive of rates, maintenance fees or other expenses etc.) as from 15th February 2000 as long as the existing tenant agrees to make good the different of the two figures in question for the period of the unexpired term of the existing lease.
	2.	To reinstate the room and bath room facing South (i.e. facing the sea) to its original state before the existing tenant moves out or in case that the said tenant moves out before he reinstates the said room and bathroom, the landlord shall reinstate the same for and on his behalf, providing that the existing tenant shall pay the landlord such estimated costs for the said work plus 3 to 4 month's extra rental in lieu of time used for such reinstate work (construction work for reinstating the said room and bath room would expect to take at less 3 months).
	3.	To make good or repair the premises and to maintain all the fixtures/fittings therein in good condition and repair before the existing tenant moves out (please also consider that some length of time would be needed for carrying out the repair which such length of time will depend on the nature of the repair to be done)."

20. On 14 March 2000 the plaintiff wrote :

" With reference to the telephone conversation between your goodself and our Mr. Keith Lam about 2 weeks ago, as promised, we send you herewith a list concerning the necessary repair or maintenance or such re-instating items in respect of any 'addition or alteration' made by you to the premises in question together with a quotation therefor, submitted by E. C. L. Co., Ltd. (the proposed contractor) for your kind consideration.

It is always our wish to mitigate losses for all the parties concerned and therefore we try to help by sending you the said quotation. You could negotiate with the said proposed contractor direct or use your own contractor to do the necessary work mentioned-above as soon as possible. We would like to remind you that the sooner you make your decision the lesser amount of damages would be involved.

You would certainly appreciate that to make good or repair the said premises and/or to re-instate the said 'addition or alteration' items would take some time!

Further if the sooner the said premises is in a fair shape, then it is likely that it would be let out earlier as well as to have the chance to reach the existing asking rent of $210,000.00 per month so that you do not have to pay any rental difference for the period of the unexpired term of the existing lease as mentioned in the 2nd paragraph of our letter to you dated 4th January 2000. To be frank, the existing state of the house is devastating!"

21. After he left Mr Wu received many letters demanding the ever increasing arrears of rent. There is nothing in writing in reply which suggests that there had been an oral agreement. In evidence Mr Wu said he ignored them because Mr Lam had assured him they were "just formalities". A solitary letter from Mr Wu's solicitors in April 2000 said no more than they were "taking instructions". The next letter from the solicitors was 10 months later.

22. Further evidence against the existence of an oral agreement can be found in the attempts to reach a formal surrender agreement in late 2000. In an attempt to be reasonable Mr Lam offered to settle the matter in late 2000. Three surrender agreements were drafted. By the first Mr Lam was willing to terminate the tenancy in return for approximately $3,000,000.00 for arrears of rent and other expenses. By a subsequent one he agreed to reduce the sum to $2,500,000.00. Both were returned unsigned in spite of the fact that they had been preceded by negotiations which Mr Lam believed would be successful. Mr Wu had not claimed that he was liable for nothing or very little because of an oral agreement to terminate in January 2000.

(3) Was vacant possession in fact given on 26 January 2000?

23. The answer to this issue is that it was not, for a number of reasons.

(i)	At the time of Mr Wu's departure he or Mr Lam jointly wrote a handwritten note in Chinese which granted Mr Lam permission to enter the premises for the purpose of showing around prospective tenants. Had vacant possession been handed over this would not have been necessary.
(ii)	Mr Wu left his Ferrari motor car in the car park for a few months.
(iii)	Mr Wu's driver continued to reside in the premises.
(iv)	Mr Wu only handed over a single key to Mr Lam. There were other keys and a remote control for the garage which were not handed over at the time of Mr Wu's departure.

(4) If there was an oral agreement was it sufficiently certain to be enforceable?

24. In view of my finding of fact that there was no such agreement this issue is academic. Had it been a live issue I would have agreed with Mr Fung's submission that such agreement that there may have been was, at best, a vague agreement to agree matters in the future. Even on Mr Wu's case (which I reject) there was no consensus as to what "future losses" constituted or how they would be "shared" or whether Mr Wu would be liable at all if the property remained unoccupied for a long period. The defendant points to one payment of $210,000.00 made on 14 April 2000 as evidence of "sharing losses". The defendant is not able to say what "share" of what "loss" the particular figure of $210,000.00 represented. In fact, the truth is plain. $210,000.00 is one month's rent. It was not a "share of losses". It was part of the arrears. The plaintiff's written receipt says precisely this. The defendant never queried or disputed the terms of the receipt which states :

" Received from Mr. Wu Shao Zhang a sum of HK$210,000.00 being partial settlement for outstanding arrears of rental payment for the period between 1/1/2000 to 30/4/2000 in respect of House A7, Manly Villa, 38 Ocean Park Road, Deep Water Bay, Hong Kong.

Dated the 14th day of April, 2000."

(5) Equitable estoppel?

25. Paragraph 28 of the pleaded defence is as follows :

"Further or in the alternative the Defendant says that the Plaintiff has by its conduct discharged the Defendant from further obligations under the Tenancy Agreement and is thereby estopped from claiming from the Defendant arrears of rent and management fees."

26. The defence submits that even if the defendant was in breach of his tenancy agreement by vacating in January 2000 the plaintiff is estopped from claiming future rent. This plea, in so far as it is understood, faces two difficulties. Firstly, no details of the alleged conduct giving rise to the estoppel are pleaded. On this ground alone it cannot succeed. Secondly, the factual matters that are in dispute concerning the material time, have been resolved in the plaintiff's favour. Therefore the court's decision on the issues hitherto dealt with, must also dispose of the defendant's claim of equitable estoppel, as a matter of fact. No findings of "conduct" by the plaintiff have been made which would constitute the basis of an estoppel.

27. In short the following findings of fact result in the plaintiff succeeding on the question of liability.

(1)	There was no oral agreement to accept the surrender of the tenancy on or about 25 January 2000.
(2)	There was no oral agreement to share future losses.
(3)	Mr Wu's reason for leaving was due to his financial circumstances not water leakage or fears of structural safety.
(4)	Mr Wu knew that he remained liable under the terms of the tenancy agreement after his departure.
(5)	Vacant possession was not handed over on 26 January 2000.

28. I now turn to the more difficult question of quantum.

QUANTUM

29. I say it is more difficult because the plaintiff's summary of quantum comes to a total of $7,249,823.50. It is sad but true to say that when Mr Wu signed up for a five-year lease at the height of the property boom it turned out to be a very bad, with hindsight, foolish, decision. By turning his back on the agreement with two years still to run he now faces the possibility of a judgment for over $7,000,000.00 plus interest and costs.

30. The claim is made up as follows :

(a)	Arrears of rent under the contract up to 14 August 2001	3,875,000.00
(b)	Management fees $136,500.00
(c)	Rates	$56,295.00
(d)	Gas and electricity	$3,821.00
(e)	Loss of rent, etc. after re-entry on 14 August 2001	$1,345,897.50
(f)	Lost of re-instatement	$1,832,310.00
		$7,249,823.50

31. The arithmetic resulting in (a), (b) and (c) is not challenged. The plaintiff decided to re-enter on 14 August 2001. There can be no answer to these sums being due.

32. Item (d) is challenged. Items (e) and (f) merit further consideration.

RENT, ETC. AFTER 14 AUGUST 2001

33. The plaintiff is claiming a further five months (approximately) rent and other fees after re-entry on 14 August 2001. The argument being that the condition of the house and the illegal structures prevented its re-letting.

34. The duty to mitigate loss commenced at the time of re-entry. The premises had been empty for 19 months. In my judgment, the plaintiff should have taken steps (if necessary by seeking the defendant's consent) to render the premises tenantable as soon as reasonably possible. The plaintiff's claim therefore should be limited to a market rent for a short period of time. I allow $150,000.00 for two months (inclusive of management fees, etc.).

RE-INSTATEMENT

35. The figure of $1,832,310.00 is the estimated cost of replanting trees ($390,000.00) and removing illegal structures and other alterations ($1,442,310.00). Both figures are supported by written quotations.

36. The defendant has no answer to a claim for re-instatement but it should be proportionate. In deciding an appropriate figure I take into account two things. Firstly, the premises have now been re-let without the re-instatement which is being claimed having been done. Secondly, the defendant paid for some re-instatement in 2000 which cost $340,800.00.

37. In my judgment, $50,000.00 for new trees will suffice and a figure of $750,000.00 for other works is reasonable.

38. The total claim is therefore :

			$
(1)	(a) + (b) + (c)	-	4,067,795.00
(2)	(e)	-	300,000.00
(3)	(f)	-	800,000.00
			$5,167,795.00

COUNTERCLAIM

39. The defendant counterclaims three sums. Firstly, $210,000.00 which was paid in April 2000. This has already been taken into account under (a) above.

40. Secondly, $340,800.00 which was the cost of re-instatement done in 2000. This has been taken into account in (f) above.

41. Thirdly, $340,000.00 which was the original deposit paid at the time of signing the tenancy. I agree that credit should be given for this amount.

42. There will be judgment for the plaintiff in the sum of $4,827,795.00 plus interest at prime rate from 14 August 2001 and costs to be taxed if not agreed.