TAI HING ESTATES LTD v. LAM SHU YUK

HCA 694/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 694 OF 2005

____________

____________

______________

J U D G M E N T

______________

Introduction

1.  This is an application for summary judgment.  The parties hereto were parties to a tenancy agreement in respect of premises tenanted by the plaintiff to the defendant.  The plaintiff claims to recover vacant possession and reinstatement of the premises, mesne profits and other relief from the defendant upon the grounds that the term of the tenancy has expired.  But the defendant refuses to leave.  The defendant’s defence is that he has exercised his right to renew the tenancy and is entitled to stay on pending expiry of the renewed term or any renewal thereafter.  The plaintiff asserts that there is no renewal and that the defendant’s continued occupation is a trespass.

History

2.  The plaintiff at all material times has been the owner of the 1^st and 2^nd floors of a building known as the Tai Po Commercial Centre, at 152-172 Kwong Fuk Road, Tai Po, New Territories.  By a tenancy agreement dated 7 February 2002 (the tenancy agreement) the plaintiff let the whole of the 2^nd floor of the Tai Po Commercial Centre (the premises) to the defendant for a term of 3 years from 1 February 2002 at a monthly rental of $120,000, exclusive of rates and management fees.  Inter alia the tenancy agreement required the defendant to pay the rent, management and service charges in advance on the 1^st of each month and upon expiry of the tenancy deliver up the premises reinstated to their original state and repair.  In addition the defendant was required to put up a rental deposit of 3 months rent ($360,000) and a management fee deposit of 3 months management fees ($28,170).

3.  The tenancy agreement made provision for rights of renewal in the following terms:

“	First option year term
	The first option year commencing on 1st February 2005 and expiry on 31st January 2008 the rental rate fixed at HK$138,000.00 per month.
	Second option year term
	The second option year commencing on 1st February 2008 and expiry on 31st January 2011 the rental rate fixed at HK$158,700.00 per month.
	Option Year
	Tenant has to inform Landlord 6 months in advance by writing to exercise the option year term. The Tenant shall reply in writing to indicate whether they desire to take up the option term within one month from the date of the written notice issued by the Landlord.”

4.  There was also provision for rent free periods:

“	Rent free period
	Rent free period will be given on the month of 1st and 2nd and 25th of the tenancy period commencing on 1st February 2002 and expire on 31st January 2005, tenant responsible to pay the management fee and rate during the rent free period. No rent free period allowed for the option year renewal.”

5.  There was also a rider in the following terms:

“	RIDER 1
	Tenant allowed to have 30 days as a period commencing on 28th January 2002 to apply the change of use of the premises from relevant government department, tenant has the right to terminate the tenancy upon the disapproval of changing the use of the premises suitable for elderly care center from relevant government department on or before 26th February 2002. Upon the disapproval grant from government department within the allowed period, landlord has to refund all the deposit without interest back to tenant and Midland Realty shall have no commission both from the tenant and landlord for the service provided.”

6.  The reason for the rider derived from the defendant’s intention to run an elderly persons’ home and nursing home on the premises under the management of a company which I shall call for short Shun Fuk; he is a director and majority shareholder.  Such intended use required the consent of the Government, and the rider gave the defendant the right to pull out if such consent was not to be forthcoming.  In the event the Government gave its approval for a period to expire on 25 February 2005 by the grant of a “temporary waiver” so-called upon payment of an annual waiver fee of $132,000.  The parties by a separate deed varying the tenancy agreement dated 22 August 2003 agreed to share the cost of the waiver fee; in all other respects the tenancy agreement remained unaltered.

7.  To complete the picture I mention that in early 2003 the plaintiff entered into another tenancy agreement in respect of the 1^st floor of the Tai Po Commercial Centre which became part of the home and nursing home run by Shun Fuk.  This tenancy is separate and not the subject of any litigation or, to my knowledge, of a dispute between the parties.

8.  What is in dispute is the plaintiff’s claim that the defendant failed to exercise his right to renew the tenancy by giving the requisite notice under the tenancy agreement and was thereby on the date of termination liable to give up possession of the premises appropriately reinstated.  However the defendant has declined to comply despite repeated requests and demands; hence since 31 January 2005 and to date he has remained in possession and occupation and Shun Fuk continues to manage the premises (in conjunction with those on the 1^st floor) as an old age home and nursing home.  One of the features of that is that the Government’s temporary waiver permitting such use expired on 25 February 2005 exposing thus the plaintiff to the risk of liability for breach of the land use restriction.  In the event, the plaintiff has applied for and been granted a further 3 years temporary waiver upon payment of a further waiver fee.

9.  With the defendant refusing to move the plaintiff issued a writ on 19 April 2005.  The statement of claim recites the history I have already set out.  The claim is for vacant possession, reinstatement, mesne profits, indemnity in respect of management fees and rates, including in respect of any loss occasion by the operation by the defendant of an elderly care home post 31 January 2005 and/or damages.

10.  The order 14 summons followed.

The Application

11.  Evidence for the plaintiff was adduced by a Mr Eric Hui, who was and remains manager of the leasing department of the plaintiff and who has conduct of events.  He recited a history up to 15 July 2004, and at that point I revert to evidence adduced by the defendant.  On that date he sent a letter, written in Chinese characters, to the plaintiff, which he states was: “to show my intention to exercise my option pursuant to the Option Year Clause in the 2/F Tenancy Agreement for a further term of 3 years from 1^st February 2005.”  I reproduce the English translation:

“	(English Translation)
	Shun Fuk Home For Aged (Holding) Ltd.
	To:		Tai Hing Estates Limited
			Mr. Hui Kwong Wai
	From:		Shun Fuk Home For Aged (Holding) Ltd.
			Mr. Lam Shu Yuk
	Date:		15 July 2004
	Re: 2/F., Tai Po Commercial Centre, 152-172
	Kwong Fuk Road, Tai Po, New Territories
	The tenancy of the above-captioned property will expire on 31 January 2005. Based on the present situation, (i.e.) starting from last year until now, the Government has on many occasions, implemented a series of measures in deducting the comprehensive social security allowance by the Government as well as occurrence and the outbreak of SAR last year, many inmates and their family members have requested our company to reduce the (daily) maintenance charge. This has greatly increased our operation difficulties. In this severe competition environment, our occupation rate has fluctuating in the region between 50% - 60%. After thorough consideration, we propose the following:
	1.	the new rental be fixed at HK$90,000.00 per month exclusive of management fees and rates and for a term of 3 years from 1 February 2005 to 31 January 2008.
	2.	there shall be a rent-free period of 3 months to enable us to carryout interior renovation to the Home so as to provide a more comfortable environment to the elderly.
	Please contact myself at telephone number 9633-5888 for any response, many thanks to you if (the proposal) is accepted.
				(sd.) illegible
				______________
				Lam Shu Yuk
				Director”

There was no response from the plaintiff, at least no formal response.  The defendant sent another letter of 5 November of similar content, save that the rent he proposed was upped to $95,000.  It incorporated these words:

“	…… we urge the landlord to consider our proposal for renewal of the tenancy.  We hope to enter into a renewal agreement with you ……”

12.  The next sequence of events of note was an exchange of correspondence between the solicitors for the parties.  The first from the plaintiff’s solicitors of 31 December was to call for reinstatement of the premises, with the reminder that the tenancy agreement was due to expire on 31 January.  The defendant’s solicitors responded by claiming that the defendant’s notice of 15 July constituted an exercise of its option to extend the tenancy for another 3 years.  This was refuted by the plaintiff’s solicitors.  Then by letter of 1 February the defendant’s solicitors wrote again, part of which letter I repeat:

“	……
	With due respect, we take the view that the Letter of 15th July 2004 did serve as a notice to exercise our client’s First option of renewal of the tenancy for a further term of 3 years upon the expiry of the original term on 31st January 2005 under the tenancy agreement dated 7th February 2002 (“the Tenancy Agreement”).
	In page 6 and under the heading of Option Year of the Tenancy Agreement, it was provided that “Tenant has to inform Landlord 6 months in advance by writing to exercise the option your term”. The Letter issued by our client was on 15th July 2004, the original term expires on 31st January 2005, which is 6 months in advance as provided in the term of the Tenancy Agreement. The fact that our client exercised the option of renewal but at the same time requested for reduction of rental does not indicate or is construed as waiver of exercise of the option. Our client incured more than 3 million to renovate the premises for home for the aged, how could it be possible that our client would not exercise the option of renewal after the original term of 3 years.
	The heading Option Year then follows to provide that “The Tenant shall reply in writing to indicate whether they desire to take up the option terms within one month from the date of the written notice issued by Landlord”, but the Landlord has never given any written notice to the Tenant in this respect. Despite the failure of your client to reply to our client, our client further on 5th November 2004 wrote to your client for the matter of reduction of the rental, but your client has still failed to reply to our client’s letter.
	Since your client does not indicate to our client to reduce the rental, our client is prepared to pay the new rental of $138,000.00 per month as stipulated and agreed in the Tenancy Agreement and continue to lease the premises for further 3 years.
	Enclosed please find our cheque for $138,000.00 being rental for the month of February 2005. Kindly acknowledge receipt.
	……”

13.  That letter effectively encapsulated the defendant’s defence, and concluded the evidence.

The Issues

14.  These are straightforward:

(a)	on a proper interpretation can it be said that the defendant’s notice of 15 July constituted an exercise of his option to call for another term? If not,
(b)	was the plaintiff bound, prior to the termination of the tenancy, to call for an indication from the defendant concerning his intentions of whether or not to renew, giving him thus 1 month to respond?

Discussion

15.  Mr Tang for the defendant began his submissions by referring me to order 14 rule 1(1) RHC which provides for grounds upon which an application for summary judgment may be made, and paragraph 14/4/11 of the White Book which sets out the proposition that leave to defend should be given where the defendant raises substantial questions of fact which ought to be tried.  He went on to submit: “that the form of notice required no special format; as long as it gave 6 months’ notice and was in writing and was clear in content as to what it was intended to do”.  With that there can be no argument.

16.  Then Mr Tang referred to me authorities which now effectively prescribe the modern approach by which judges are to interpret documents that parties have entered into the meaning of which is subsequently disputed.  Amongst those he referred me to was Investors Compensation Scheme Limited v West Bromwich Building Society and Others [1998] 1WLR 896, a House of Lords case in which Lord Hoffmann said, after considering recent developments in interpretation of documents from the cases:

“	……
	The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows.
	(1)	Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
	(2)	The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
	(3)	The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. ……
	(5)	The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had ……”

17.  Applying this approach to the notice of 15 July 2004 upon which the defendant relies as being an exercise of his option to renew, Mr Tang invites me to consider the matrix of facts of which the notice was a part.  That includes all the surrounding circumstances, namely, that the defendant and Shun Fuk had expended a lot of capital to make the home comply, an investment that would not have been feasible unless the occupancy was long term, that reduced patronage rendered a reduced rental appropriate, that the other floor is also run as a home by Shun Fuk, that on his client’s account the parties may have fallen out; thus to find that it is at least arguable that a proper interpretation might lead to a finding favourable to the defendant.

18.  I come now to my findings.

The Result

19.  As Mr Leung for the plaintiff submitted, with which I agree, where the parties to a tenancy have contracted to provide for a right of a renewed terms, at the option of the tenant, the tenant in exercising that option must strictly observe the terms thereof.  Thus where the proposed renewed term spells out the rent that has to be paid, an exercise of the option to renew which proposes a new term at a lower rate is not a valid exercise; see Hill and Redmond’sLaw of Landlord and Tenant, para. 7701.  A Court of Appeal case referred to therein Mauray v Durley Chine (Investments) Ltd [1953] 2QB 433, though distinguishable on its facts, made that proposition quite clear.

20.  The reason for this is, I suggest, obvious.  Where, as here, the new rent is fixed, the parties have already contractually bound themselves to the terms, to be triggered by notice.  Thus, once valid notice is sent and received, the parties become committed to a new tenancy and all its terms.  But a notice purportedly given which incorporates proposed new terms requires acceptance or a counter offer; the parties will not be bound until there is acceptance.  If that is not achieved then neither side is committed and can walk away.  From the landlord’s point of view, he can hold the tenant to the obligation to vacate upon expiry of the tenancy.

21.  The so-called modern approach to interpretation of documents as set out by Lord Hoffmann does not make the defendant’s notice of 15 July a valid exercise of his option to renew when it is in reality an application for a new tenancy on novel terms.

22.  As to the second issue: the plaintiff did not give the defendant one month within which to decide whether or not to take up a new tenancy.  It could have done so, but chose not to.  And it was not compelled to.  The defendant’s position is not advanced because of that.

23.  The defendant has, as I find, no defence to the plaintiff’s claim, and I order judgment in terms asked for.

24.  I leave it to the parties to assess the quantum for the purpose of sealing the order.  As I understand, the loss can be quantified.  I fix the mesne profits at $138,000 per month.  Given that the defendant has been ready, willing and able to pay these, which represents the lion’s share of the recoverable loss, I do not include interest in my judgment, save post judgment at the judgment rate.  The deposits should be provided for.

25.  The defendant shall have a reasonable time by which to vacate and reinstate; I shall not fix a time and hope the parties can be sensible.  There shall be liberty to apply.

26.  Costs, nisi at first instance, are to the plaintiff.