DRAGONLAND TRADING LTD v. BEAU GESTE BEAUTYPLUS INTERNATIONAL LTD

HCA682/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 682 OF 2007

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RULING

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1. By Summons dated 3 July 2007, the plaintiff seeks summary judgment under Order 14, rule 1 of the RHC for :

(a)	a declaration that the sub-tenancy of the Ground and Mezzanine floors of 519 Hennessy Road has been duly and lawfully terminated by the plaintiff;
(b)	an order that the defendant deliver up to the plaintiff vacant possession of the said sub-let premises; and
(c)	an order that the defendant pays the plaintiff outstanding mesne profits and/or occupation fees for wrongful occupation of the sub-let premises after the expiry of the two Notices to Quit.

Background

2. The plaintiff is a company registered in Hong Kong, and for present purposes, can be taken to have, at the material time, possession of 1^st to 4^th floors and the main roof of 521 Hennessy Road as well as possession of the Ground to 4^th floors and the main roof of 519 Hennessy Road (hereinafter collectively referred to as “the Premises”).

3. 519 and 521 Hennessy Road physically form one building.

4. By an Agreement for Tenancy dated 14 May 2005 (“the Main Tenancy Agreement”) the plaintiff and the defendant agreed to enter a lease of the Premises for four years commencing 1 February 2006.  It also provided for a rent free period of 48 days from 15 December 2005 (“the Lease Rent Free Period”).

5. In the event that the plaintiff could not deliver vacant possession of the Premises on or before 15 December 2005, the Main Tenancy Agreement expressly made provisions that the Lease Rent Free Period shall not commence but shall be postponed to the actual day of the plaintiff delivering vacant possession and in which event, the commencement date of the lease of the Premises shall be postponed accordingly.

6. The reason for making provisions in the event that vacant possession could not be delivered by the plaintiff on or before 15 December 2005 was because the plaintiff was carrying out certain repair, maintenance and renovation works within the Premises which were expected to be completed by 14 December 2005.  The parties did anticipate that such works may be delayed and therefore made provisions in that eventuality for the commencement date of the lease to be postponed.

7. However, vacant possession of some parts of 519 Hennessy Road were available earlier.  As a result, the parties decided in the meantime, pending commencement of the lease under the Main Tenancy Agreement, some interim rental arrangement be made in respect of those parts of No.519 for which vacant possession could be delivered.

8. Accordingly, on the same date as the Main Tenancy Agreement (i.e. 14 May 2005), the parties also entered into an agreement for sub-tenancy (“the Sub-Tenancy Agreement”) in respect of a portion of the Ground and Mezzanine Floors of 519 Hennessy Road (“the Sub-let Premises”) at a monthly rental of HK$280,000 for a term of 4 months and 14 days commencing 1 August 2005 with a rent free period of 46 days from 15 June to 30 July 2005.

9. It was an express term of the Sub-Tenancy Agreement that the sub-tenancy of the Sub-let Premises would expire on 14 December 2005 provided that :

(a)	in the event the plaintiff not being able to deliver possession of the Sub-let Premises on or before 15 June 2005, the commencement of the term and rent-free period shall be deferred accordingly; and
(b)	in the event the Lease Rent Free Period shall commence on a date later than 15 December 2005, the Sub-Tenancy Agreement shall be extended to the date immediately before the commencement of the Lease Rent Free Period.

10. The plaintiff delivered and the defendant accepted possession of the Sub-let Premises on or before 23 June 2005.  Accordingly, the sub-tenancy commenced on 8 August 2005 (after 46 days of the rent-free period) and the defendant started paying monthly rent for the Sub-let Premises from 8 August 2005.

11. By 15 December 2005, the outstanding repair, maintenance and renovation works had not been completed and the Lease of the Premises had not been entered into between the parties.

12. Even as late as June 2006, correspondence were still flowing between the parties with the plaintiff requesting co-operation from the defendant to allow its contractors to carry out certain renovation works in the Sub-let Premises and the defendant seeking further information from the plaintiff as to such renovation works.

13. By July 2006, the defendant was seeking a full and exhaustive list of works which would be carried out together with description of measures to be adopted.

14. By letter dated 6 October 2006, the plaintiff formally notified the defendant to enter into the Lease on the basis that the outstanding works were practically completed as certified by the plaintiff’s Authorised Person and requested the defendant to enter into the Lease within 7 days.

15. By letter of 13 October 2006, the defendant replied to the effect that delivery of vacant possession was conditional upon the works being carried out to the satisfaction of the relevant Government authorities.

16. By a further letter of 18 October 2006, the defendant asked for proof that the works were carried out to the satisfaction of the Building Authority.

17. By letter dated 29 November 2006, the plaintiff’s solicitors purported to give Notice to Quit to the defendant in respect of the sub-tenancy.  In the same letter the plaintiff also informed the defendant that those breaches of the Main Tenancy Agreement alleged by the plaintiff to have been committed by the defendant and which were listed out in that letter, including the defendant’s wrongful failure to enter into the Lease, amounted to a repudiation of the Main Tenancy Agreement which the plaintiff accepts but without prejudice to (inter alia) its rights to claim damages.

18. By a further letter dated 27 December 2006, the plaintiff again gave Notice to Quit to the defendant for the Sub-let Premises under the sub-tenancy, and required the defendant to deliver up vacant possession of the Sub-let Premises at the expiry of such Notice to Quit.

19. In January 2007, the defendant was still requesting the plaintiff for a full and exhaustive list of works in respect of the Premises.

20. The Writ herein was issued on 4 April 2007 by the plaintiff claiming (inter alia) that the defendant was in repudiation of the Main Tenancy Agreement by failing or refusing to enter into the Lease despite the plaintiff’s repeated requests and demands to do so.  The plaintiff also claims (inter alia) that the defendant was in breach of the Sub-Tenancy Agreement and for the delivery up of the Sub-let Premises.

21. By its Defence and Counterclaim, the defendant denies that it has repudiated the Main Tenancy Agreement and avers that the defendant is ready and willing to enter into the Lease if the plaintiff is able to deliver vacant possession of the Premises but that the plaintiff has not been able to show that the works carried out by the plaintiff in the Premises has been done to the satisfaction of the relevant Government authorities.

22. By way of counterclaim, the defendant counterclaims against the plaintiff damages on the basis that the plaintiff has failed to deliver vacant possession of the Premises by 15 December 2005 or a reasonable time thereafter causing the defendant to suffer loss and damages and for which the plaintiff is liable.

Summary judgment application

23. The plaintiff’s application for summary judgment is only in respect of the sub-tenancy which the plaintiff says has been duly terminated by the two Notices to Quit and for delivery up of possession of the Sub-let Premises.

24. It is conceded by the plaintiff that the dispute between the parties relating to the Main Tenancy Agreement will need to go to trial since there are factual disputes involved.

25. However, in so far as the sub-tenancy is concerned, the plaintiff says that on the one hand, since the defendant has failed or refused to enter into a Lease for the Premises on the basis that the plaintiff is not in a position to deliver vacant possession, and on the other hand, the plaintiff is alleging that the defendant has repudiated on the Main Tenancy Agreement, it follows therefore that the sub-tenancy has, by operation of law, become a tenancy at will and since rental for the Sub-let Premises was paid by the month, one month’s notice to quit was sufficient to terminate the Sub-Tenancy Agreement.

26. In the circumstances, it is submitted by the plaintiff that the Sub-Tenancy Agreement has been validly and duly terminated by the two Notices to Quit and that there can be no defence to this part of the plaintiff’s claim nor any triable issue in respect of it.

Stance of the defendant

27. The stance taken by the defendant is that the Sub-Tenancy Agreement was part and parcel of the Main Tenancy Agreement and that the Premises was intended by the defendant as a single unit building for commercial purposes.

28. The defendant has expended huge sums of money on the Sub-let Premises with a view to taking up the Premises under the Main Tenancy Agreement.

29. It is still the intention of the defendant to take up the Premises upon the signing of the Lease under the Main Tenancy Agreement.

30. It cannot be right and would be inequitable for the plaintiff to be able to terminate the sub-tenancy and recover the Sub-let Premises pending the signing of the Lease under the Main Tenancy Agreement.

31. Moreover, the plaintiff is estopped from terminating the sub-tenancy by giving one month’s notice to quit while pending the signing of the Lease under the Main Tenancy.

Decision

32. It can be seen at once that the main difference between the parties in so far as this application is concerned is that on the one hand, the plaintiff’s submission is premised upon the basis that the Main Tenancy Agreement has already ended and is no longer extant, whereas, the defendant’s submission is predicated upon the Main Tenancy Agreement still being very much alive, and that the defendant is still expecting to enter into the Lease under the Main Tenancy Agreement.

33. That would seem to be the very crux of the dispute upon which this application for summary judgment hinges and the main difference between the parties in so far as this matter is concerned.

34. There can be no question but that at the outset it must have been the intention of both parties that the Sub-Tenancy Agreement was part and parcel of the Main Tenancy Agreement and that the sub-tenancy would merge with the Lease of the Premises once it was entered into under the Main Tenancy Agreement.

35. As long as the Main Tenancy Agreement was still alive and it was still possible for the parties to enter into the Lease under the Main Tenancy Agreement, I accept that it would not be open to the plaintiff to serve any Notice to Quit terminating the sub-tenancy.

36. Indeed the entirety of the legal points submitted by the defendant cannot be faulted if the Main Tenancy Agreement was still alive.

37. In this respect, it must be noted at the outset that the entirety of the plaintiff’s case is based on the defendant having repudiated the Main Tenancy Agreement by failing or refusing to enter into a Lease of the Premises despite repeated requests of the plaintiff to do so, notably by the plaintiff’s letter dated 6 October 2006.

38. On the other hand, the defendant has at all times pleaded in its Defence that the defendant was willing and ready to enter into the Lease if the plaintiff can deliver vacant possession to it upon the works having been approved by the relevant Government authorities.

39. In coming to a decision in this matter, I take note of the following matters.

40. By its letter dated 29 November 2006, the solicitors for the plaintiff after listing out the breaches alleged by the plaintiff in respect of the Main Tenancy Agreement including the defendant’s failure and/or refusal to accept possession of the Premises and/or to enter into the Lease, went on to state :

“

The [defendant] is therefore in breach of the [Main Tenancy Agreement].  All such breaches are regarded as repudiation of the [Main Tenancy Agreement].  Our client hereby accepts the [defendant’s] repudiation of the [Main Tenancy Agreement].  Without prejudice to the Notice to Quit hereinabove and the contention that the [defendant] has wrongfully refused to enter into the Lease, our client holds the [defendant] liable for all loss and damage caused by the [defendant’s] breach and repudiation of the [Main Tenancy Agreement] aforesaid.”

41. Even if this matter went to trial and that the defendant succeeded against the plaintiff hands down, all that the defendant would be able to get back would be damages as counterclaimed by it.  I cannot see that the defendant will be able to get an order from the court to the effect that the plaintiff will have to get the works approved in a certain manner and then to enter into the Lease pursuant to the Main Tenancy Agreement.

42. Indeed, specific performance of the Main Tenancy Agreement has not been sought by the defendant in its counterclaim.

43. It was pleaded in paragraph 41 of the Counterclaim that the plaintiff failed to deliver vacant possession of the Premises to the defendant by 15 December 2005 “or a reasonable time thereafter” resulting in the defendant suffering loss and damages for which the defendant holds the plaintiff liable.

44. All that the defendant would be entitled to if it succeeded on its counterclaim would be damages.  This is so despite the defendant pleading in paragraph 16 of the Defence and Counterclaim that it is ready and willing to enter into the Lease if the plaintiff is able to deliver vacant possession of the Premises to the satisfaction of the relevant Government Authorities.

45. Moreover, even if the defendant was in position to waive any delay on the part of the plaintiff, it was submitted by counsel for the plaintiff that the plaintiff has already nailed its colour to the mast and will not be prepared to do anything further in relation to the renovation works or obtaining any further government approval.  On the basis of what has already been done or not done, this case will have to be decided as to which of the plaintiff or defendant was in breach of the Main Tenancy Agreement.

46. The impasse or deadlock therefore between the parties, it would seem, cannot be broken as matters stand at present short of any compromise between them.

47. I therefore come to the conclusion that the plaintiff’s letter dated 29 November 2006, (which was given after a reasonable time having elapsed since their letter of 6 October 2006 requesting the defendant to enter into the Lease) effectively informed the defendant that by their wrongful refusal to enter into the Lease for the Premises, the Main Tenancy Agreement was put an end to by the plaintiff’s acceptance of the defendant’s repudiation.

48. Given the circumstances, it is impossible to come to any other conclusion but that the Main Tenancy Agreement must have ended, and is no longer extant between the parties.

49. Indeed, since the issue of the Writ, quite apart from the plaintiff’s liability for damages if the defendant succeeded in its counterclaim, there would be nothing to prevent the plaintiff from physically letting out to a third party those parts of the Premises not taken possession of by the defendant.

50. Furthermore, if I am correct in coming to the conclusion that the Main Tenancy Agreement is no longer extant as between the parties, it cannot, on that basis, be right for the defendant to unilaterally keep the Main Tenancy Agreement alive by pleading that it (the defendant) was at all times ready and willing to enter into the Lease if the plaintiff can deliver vacant possession of the Premises upon the renovation works having been approved by the relevant Government authorities.  The effect of that would be to create an indefinite sub-tenancy of the Sub-let Premises because of the impasse between the parties arising from their dispute.

51. Having come to the conclusion above that the Main Tenancy Agreement was put an end to by the plaintiff’s letter dated 29 November 2006, I am unable to accept that a valid Notice to Quit in respect of the Sub-let Premises can also be given in the same letter since it is paramount, in the circumstances of this case, that the Main Tenancy Agreement has to have ended before the sub-tenancy can, by operation of law, become a tenancy at will.

52. However in the context of this case, that is not fatal to the plaintiff’s case since a second Notice to Quit was given by the plaintiff dated 27 December 2006 and which I find to be a valid Notice to Quit in respect of the sub-tenancy.

53. As for the money expended by the defendant on the Sub-let Premises in anticipation of entering into the main Lease, the defendant will merely have to claim for same as being part of its damages in the event that the defendant succeeds in its counterclaim against the plaintiff for wrongful breach of contract.

54. Accordingly, there will be an order for summary judgment on the plaintiff’s Summons dated 3 July 2007 as follows :

(a)	order in terms of paragraphs 1 and 2 thereof;
(b)	the defendant do pay the plaintiff mesne profits and/or occupation fees in respect of the wrongful occupation by the defendant of the sub-let premises after expiry of the Notice to Quit dated 27 December 2006, to be assessed by the court with interests thereon at such rate and for such period the court shall deem just; and
(c)	costs of this application be paid by the defendant to the plaintiff, to be taxed if not agreed.