PO ON AUTO ACCESSORY CO LTD v. GRAND FAITH HOLDINGS LTD

HCA 180/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 180 OF 2010

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BETWEEN

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REASONS FOR JUDGMENT

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I. Background

1.  The Plaintiff was/is the registered owner of Ground Floor and Cockloft of No.108 Fa Yuen Street, Kowloon (“Premises”), and the Defendant was (and claims it still is) the tenant. Ms Olivia Fong (“Ms Fong”) and Mr Tsang Lap Shing (“Mr Tsang”) are respectively the director of the Plaintiff and the Defendant.

2.  According to Ms Fong, the previous tenant operated an arcade games shop at the Premises until she retired in/about November 2004.  Thereafter, the Defendant took over both the shop and the lease. The Defendant still operates an arcade games shop at the Premises.

II. Relevant tenancy agreements

3.  By a written tenancy agreement dated 1 December 2007 (“1^st TA”), the Plaintiff let the Premises to the Defendant for business purpose for a term of 2½ years from 1 November 2007 to 30 April 2010 at a monthly rent of HK$60,000.00 (exclusive of rates and management fees) (“Original Rate”) payable in advance clear of all deductions on the 1^st day of each calendar month.

4.  By a written tenancy agreement dated 31 May 2009 (“2^nd TA”), the Plaintiff let the Premises to the Defendant for business purpose for a term of 5 years from 1 April 2009 to 31 March 2014 at a monthly rent of HK$40,000.00 (exclusive of rates and management fees) (“New Rate”) payable in advance clear of all deductions on the 1^st day of each calendar month.

5.  Clause 10.10 of the 1^st and 2^nd TAs provides that “[the] parties hereto here-by agree to be bound by the special conditions (if any) contained in Part 7 of the Schedule hereto”.  Part 7 of the Schedule of the 2^nd TA provides inter alia as follows:

“Special Conditions: -

Effectiveness of Agreement

This Agreement is conditional upon full settlement of the overdue rent in the total sum of $400,000 owed by the Tenant to the Landlord under [the 1^st TA] by crediting the respective sum into the designated account no. XXX-XX-XXXXX-X at Bank of East Asia in accordance with the schedule stated as follows :-

(a)  Net deposit of old agreement and new agreement of $60,000 to be deducted from $400,000. $160,000 on or before 1^st June, 2009 and the remaining overdue balance of HK$180,000 by 18 monthly instalments of HK$10,000 each starting from June 1^st, 2009 to Nov 1^st, 2010 [“Instalments”] and in the event the Tenant defaults in making each of the aforesaid installments, this Agreement shall become null and void and ineffective notwithstanding signing of this Agreement by the parties. For the avoidance of doubt, the [1^st TA] shall continue to be effective and remain in its full force and effect.” (“Special Condition”)

III. Present application

6.  On 5 February 2010, the Plaintiff commenced the present proceedings to claim for (a) vacant possession of the Premises, (b) payment of arrears of rent in the total sum of HK$350,000.00, (c) payment of mesne profits at the Original or New Rate from 1 March 2010 until delivery up of vacant possession of the Premises, (d) alternatively to (b)-(c) above payment of the remaining Instalments in the total sum of HK$90,000.00, and (e) alternatively to (b)-(d) above damages to be assessed.

7.  The Plaintiff applied for summary judgment on 31 May 2010 (“Summons”), and filed 2 affidavits of Ms Fong in support on 31 May and 19 July 2010 respectively.  The Defendant filed an affirmation of Mr Tsang in opposition on 30 June 2010. The Summons came before me for hearing on 11 August 2010 (“Hearing”).

IV. Legal principles on summary judgment

8.  Both Mr Cheung, counsel for the Plaintiff, and Ms Man, counsel for the Defendant, have no quarrel over the relevant legal principles.  A plaintiff may invoke the procedure under Order 14 of the Rules of the High Court where there is no arguable defence to his claim or otherwise a triable issue.  In Ng Shou Chun v Hung Chun San [1994] 1 HKC 155, Godfrey J noted it is not appropriate to embark on a mini-trial of the action on affidavit evidence.  The court should ask itself the question whether what the defendant says is credible or believable.  If so, he must have leave to defend; if not, the plaintiff is entitled to summary judgment.

9.  It is further said in Hong Kong Civil Procedure 2010 Vol.1, para.14/4/14 at pp.234-237 that:

“Moreover, where the defendant sets up a bona fide counterclaim arising out of the same subject-matter of the action, and connected with the grounds of defence, the order should not be for judgment on the claim subject to a stay of execution pending the trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim …… Although a counterclaim is (for many purposes) a cross-claim, for the purposes of O.14 it ought to be treated as a defence.

On the other hand, the mere fact that the defendant has a counterclaim does not necessarily entitle him to leave to defend …… Where therefore there is clearly no defence to the plaintiff’s claim, so that the plaintiff should not be put to the trouble and expense of proving it, but the defendant sets up a plausible counterclaim for an amount not less than the plaintiff’s claim, the order should not be for leave to defend but should be for judgment for the plaintiff on the claim with costs, with a stay of execution until the trial of the counterclaim or pending further order. In a proper case …… the court may order payment into court of part of the claim with stay of execution pending the counterclaim. ……”

V. Parties’ case: alleged breach of the 1^st TA and consequent compromise

10.  There is no dispute that the Defendant has defaulted in paying rent under the 1^st TA. On 15 May 2009, the Plaintiff commenced HCA1209/2009 (“Old Action”) against the Defendant for inter alia arrears of rent from 1 October 2008 to 31 May 2009 in the total sum of HK$480,000.00 (ie HK$60,000.00 x 8 months, “Arrears”).  Thereafter, the parties reached a compromise to settle the Arrears and the Old Action (“Compromise”), and entered into the 2^nd TA. The following terms of the Compromise are not in dispute:

(a)  the 1^st TA would terminate on 31 March 2009;

(b)  the parties would enter into a new tenancy agreement for a term of 5 years from 1 April 2009 to 31 March 2014 at a monthly rent at the New Rate payable as from May 2009;

(c)  no rent would be payable for April 2009;

(d)  thus the Arrears payable to the Plaintiff would be adjusted to HK$400,000.00 (“Adjusted Arrears”) being HK$360,000.00 (ie HK$60,000.00 x 6 months) for the period from October 2008 to March 2009 and HK$40,000.00 for the month of May 2009;

(e)  of the deposit of HK$180,000.00 under the 1^st TA, HK$60,000.00 would be used to reduce the Adjusted Arrears to HK$340,000.00, and HK$120,000.00 would be the deposit for the new tenancy agreement;

(f)  of the reduced Adjusted Arrears of HK$340,000.00, HK$160,000.00 would be paid on or before 1 June 2009, and HK$180,000.00 would be paid by 18 monthly Instalments of HK$10,000.00 each from 1 June 2009 to 1 November 2010.

11.  The Defendant avers that the 2^nd TA is a separate contract outside the Compromise even though it was negotiated at the same time.  On the other hand, the Plaintiff claims that the parties entered into the 2^nd TA pursuant to and as part of the Compromise.  Notwithstanding such difference, the matters in paragraphs 12-13 below are not in dispute.

12.  On 31 May 2009, Ms Fong for the Plaintiff sent a letter to Mr Tsang for the Defendant enclosing the 2^nd TA. Such letter clarifies the terms of the Compromise (“31/5/09 Letter”) inter alia as follows:

“As agreed, you will pay me $160,000 ($120,000 first payment + $40,000 for the May, 2009 rental). The net deposit of $60,000 (net deposit of $180,000 of old agreement minus the new agreement deposit of $120,000) is to be deducted from the total rental you owe us. For the month of April, 2009, I have agreed to waive the monthly rental for your renovation purpose.

首要條件需簽定新租約。

月租$40000，租期5年，由2009年4月1日至2014年3月31日。

按金 : $180000 - $120000 = $60000(用作扣數)

1.  2009年4月1日 – 2009年4月30日為免租期

2.  先付$120000 + 5月租金$40000

3.  6月開始付$40000 + $10000直至2010年11月止

4.  2010年12月開始付$40000直至2014年3月(完約)。

Kindly settle the $160,000 ($120,000 and $40,000 May rents) to be paid on/before June 1, 2009.”

13.  The Defendant has duly executed the 2^nd TA dated 31 May 2009.  The terms of the 1^st and 2^nd TAs are almost identical save and except for (a) the contents in Parts 1-6 of the Schedule to the 1^st and 2^nd TAs and (b) the Special Condition which only appears in Part 7 of the Schedule to the 2^nd TA.  There is no dispute that the terms of the Compromise are fully set out in the Special Condition.

14.  Apart from the sum of HK$60,000.00 referred to in paragraph 10(e) above, the Defendant has made the following payments to the Plaintiff since 1 June 2009:

Date	Amount (HK$)	Amount (HK$)
1/6/09	160,000.00
16/6/09	50,000.00
15/7/09	50,000.00
21/8/09	50,000.00
7/9/09	10,000.00
5/10/09	90,000.00
2/11/09	50,000.00
1/12/09	50,000.00
4/1/10	50,000.00
1/2/10	50,000.00
		610,000.00
1/3/10	50,000.00
7/4/10	50,000.00
3/5/10	50,000.00
1/6/10	50,000.00	200,000.00
		810,000.00

VI. Parties’ case: alleged breach of the Compromise

(a) Plaintiff’s case

15.  The Plaintiff claims that on a fair reading of the Special Condition (a) the Instalments are to be paid on the 1^st day of each month and (b) time is of the essence.  In wilful or deliberate repudiatory breach of such requirements under the Compromise, the Defendant has failed to pay the monthly Instalments for the months of June to September 2009 on the 1^st day of each month.  The Plaintiff pleads that it is entitled to and has on 14 September 2009 through its solicitors written to the Defendant inter alia to accept the Defendant’s repudiation of the Compromise and/or Special Condition (“14/9/09 Letter”), but such letter has not been placed before me.  The Plaintiff adds that the Defendant cannot benefit from its own wrong by alleging any waiver of the requirements in (a)-(b) above.

16.  The Plaintiff claims that as a result the 1^st TA has been revived with full force and effect. In breach of the 1^st TA, the Defendant has failed to pay outstanding rent in the sum of HK$350,000.00 as follows:

Description	Amount (HK$)
Arrears of rent under 1st TA from October 2008 to May 2009	480,000.00
Less amount transferred from the deposit under the 1st TA	(60,000.00)
Less payment received on 1 June 2009	(160,000.00)
Less monthly Instalments of HK$10,000.00 each received for the months of June 2009 to February 2010	(90,000.00)
	170,000.00
Balance of rent receivable under the 1st TA from June 2009 to February 2010 at HK$20,000.00 per month (ie HK$60,000.00 – HK$40,000.00)	180,000.00
	350,000.00

17.  In Ms Fong’s affidavits, it is said that the Plaintiff is entitled to exercise its right of re-entry and to sue for the outstanding rent under the 1^st TA.  On 8 January 2009, the Plaintiff entered default judgment against the Defendant in the Old Action.  On 20 January 2010, the Defendant successfully applied to set it aside. The Plaintiff discontinued the Old Action on 4 February 2010 and commenced the present proceedings on the following day.

(b) Defendant’s case

18.  The Defendant claims that in the absence of any express stipulation as to time for payment it is to pay and has paid the Instalments within reasonable time on a monthly basis.  Since the Defendant has paid the Instalments for the months of June 2009 to June 2010 within reasonable time, there is no breach of the Compromise and/or Special Condition, and the 2^nd TA remains effective in superseding the 1^st TA.  Further or alternatively, by reason of the Plaintiff’s acceptance of payment of the Instalments (see paragraph 14 above), the Plaintiff is estopped from insisting that time for payment on the 1^st day of each month is of the essence.  The Plaintiff is therefore not entitled to demand immediate repayment of the outstanding balance of the Arrears and/or to seek vacant possession of the Premises.

VII. Parties’ case: alleged late payment of rent

19.  There is no dispute the Defendant has been late in paying rent for the months of June to September 2009 (see paragraph 14 above).  By a letter dated 17 August 2009 to Mr Tsang (“17/8/09 Letter”), Ms Fong has stated inter alia that “請每月一號交租，你已三個月，五、六、七月遲交租，如果再遲交的話，舊租約，即$60,000將會從新生效，我會以法律執行”.

(a) Plaintiff’s case

20.  Further or alternatively, if the 2^nd TA remains effective, the Plaintiff claims that the Defendant has been in wilful breach of the 2^nd TA for late payment of rent for the months of June to September 2009, and in view of clause 8.03 (“Clause 8.03”) of the 2^nd TA there is no waiver of such breach.  The Plaintiff is therefore entitled to forfeit and has forfeited the Defendant’s tenancy by the commencement of the present proceedings.  The Plaintiff further claims that relief against forfeiture for wilful breaches should only be granted in exceptional cases, and since the present case is not exceptional relief should be declined.

(b) Defendant’s case

21.  The Defendant has already paid the monthly rent at the New Rate for the months of June 2009 to June 2010, so there is no subsisting breach of the 2^nd TA.  In any event, by acceptance of rent the Plaintiff has waived its right to forfeit the Defendant’s tenancy for delay in paying rent for the months of June to September 2009.

VIII. Parties’ case: alternative claim for the remaining Instalments

22.  Further or alternatively, the Plaintiff claims against the Defendant for the remaining Instalments for the months of March to November 2010 in the total sum of HK$90,000.00 (ie HK$10,000.00 x 9 months).  The Defendant denies such claim.

IX. Parties’ case: illegal structures

23.  In late June 2009, Mr Tsang received 2 building orders dated 23 June 2009 addressed to the Plaintiff (“2009 BOs”). The 2009 BOs refer to 3 unauthorised building works, ie (a) a projecting structure attached to the shop-front on the external wall facing Fa Yuen Street (“Item A”), (b) a pavement structure erected to the shop-front facing Fa Yuen Street (“Item B”), and (c) a door opening formed in the staircase enclosure wall abutting on Fa Yuen Street (“Item C” or “Opening”).

24.  On 10 August 2009, Mr Tsang faxed to Ms Fong the 2009 BOs together with a quotation dated 3 August 2009 for certain repair works (“3/8/09 Quotation”).  By the 17/8/09 Letter, Ms Fong informs Mr Tsang inter alia that “[2009 BOs]已過期，你遲遲不通知業主(因屋宇處寄去我舊地址)，請立即按照[2009 BOs]立即採取施工，如果不合作，我會以法律方式追討責任”.  The Plaintiff claims that its solicitors by the 14/9/09 Letter to the Defendant have demanded inter alia for reinstatement of the Premises in compliance with the 2009 BOs, but such letter has not been placed before me.

25.  By a letter dated 18 March 2010 to the Plaintiff’s solicitors (“18/3/10 Letter”), the Defendant’s solicitors have (a) enclosed a copy notice dated 13 January 2010 from AGS Consultants & Spence Robinson Ltd (ie agent appointed by the Building Department) addressed to the owner/ occupant of the Premises that demands inter alia removal of further unauthorised building works found in the light well at the back of the Premises (“Item D”) within 30 days (“Notice”), (b) admitted that the Defendant has erected and subsequently removed Item A, and (c) continued to dispute responsibility for removal of Items B, C and D (collectively, “Illegal Structures”).

26.  The site inspection findings in the expert report on investigation of water leakage at the Premises prepared by KC Surveyors in April 2010 for the Plaintiff show that with reference to the approved building plans there has been an internal staircase between the ground floor and cockloft at the Premises (“Internal Staircase”) but it has been removed and replaced by a metal platform at the original slab opening (“Metal Slabbing”).

27.  Further, according to the expert report prepared by CB Richard Ellis Ltd in June 2010 for the Defendant, the Defendant admits it has replaced a pre-existing wooden door at the Opening of the cockloft to the common staircase (“Common Staircase”) that has fallen into a dilapidated condition with a steel door (“Steel Door”) when it moved into the Premises in 2004.  CB Richard Ellis Ltd concludes from the state of dilapidation of the structures in the Premises that the Metal Slabbing and the cover over the backyard (Item D) should have been done long before 2004, but there is no evidence to prove whether the Opening (Item C) and the intermediate step at the shop-front (Item B) were formed before or after 2004.

28.  On 11 June 2010, the Plaintiff’s solicitors wrote to the Defendant’s solicitors (a) to reiterate that it is the Defendant’s responsibility to remove the Illegal Structures and to reinstate the Premises, and (b) to reserve the Plaintiff’s right to remove the Illegal Structures and claim against the Defendant for reimbursement of such costs.  There has been no reply, so the Plaintiff has to write repeatedly to the Building Department for extension of time to carry out rectification works.

(a) Plaintiff’s case

29.  According to Ms Fong, when the Defendant took over the Premises in 2004 the cockloft was just a storage space for old chattels.  The Plaintiff claims it has never received any prior complaint about illegal structures at the Premises except for the occasion in/about April 2007 when the Building Department laid 2 summonses (“Building Summonses”) in the magistrates’ court against the Plaintiff for failing to comply with building orders served on 10 December 2003 (“2003 BOs”).  According to the summary of facts, (a) a visit to the Premises in May 2002 revealed 2 unauthorised building works, ie “在樓宇前面的外牆附建用以支撐冷氣機的支架” and “在樓宇前面的外牆附建搭建物”, (b) the 2003 BOs required removal of such unauthorised building works and reinstatement of the affected part(s) of the building in accordance with approved building plans, and (c) such unauthorised building works were still in place during further visits to the Premises between 2002 and 2006 (including a last visit on 21 November 2006).

30.  The Plaintiff claims that Items A, B and C are not mentioned in the above summary of facts, so they must have come into existence during the term of the Defendant’s tenancy.  Further, Ms Fong says that removal of the Internal Staircase has increased the usable floor area on the ground floor of the Premises to be enjoyed by the Defendant which explains the need to create the illegal Opening.  The Plaintiff also claims it does not have any prior knowledge of Item D before receipt of the Notice.  Further, even on the Defendant’s case (which the Plaintiff denies), to replace an existing illegal structure (ie the wooden door at the Opening) with something newer, stronger and more permanent (ie the Steel Door) is hardly a good answer to the Defendant’s breach of its tenancy obligations.

31.  Ms Fong claims the Building Summonses are the result of the Defendant’s failure to remove the relevant unauthorised building works and/or to inform the Plaintiff about the 2003 BOs in a timely manner.  The Plaintiff further claims that the Defendant has failed to mention the Notice until more than 2 months later.  The above shows that the Defendant has habitually failed to notify or delayed in notifying the Plaintiff about important notices or orders from government authorities.

32.  The Illegal Structures and the Steel Door are still in place at the Premises and have not been removed. The Plaintiff claims the Defendant is in breach of clauses 3.01 and 5.01 (“Clauses 3.01 and 5.01”) and/or paragraph 3 of Part 7 (“User Provision”) of the Schedule to the 1^st and/or 2^nd TAs.  The Defendant should not be allowed to benefit from its own wrong, so the Plaintiff is entitled to forfeit and has forfeited the Defendant’s tenancy by the commencement of the present proceedings.  The Plaintiff also suffers loss and damage being costs and expenses to be incurred after re-possession of the Premises for removing the Illegal Structures and for repairing/restoring the Premises to good and tenantable condition.

(b) Defendant’s case

33.  The Defendant claims that to the knowledge of the Plaintiff the Illegal Structures have been in existence prior to its tenancy at the Premises, and that the conclusions in the report by CB Richard Ellis Ltd prepared in June 2010 are consistent with the Illegal Structures having come into existence before 2004.  In August 2009, Mr Tsang faxed to Ms Fong the 2009 BOs together with the 3/8/09 Quotation for the Plaintiff to take remedial action, but no step has been taken to address or remedy the Illegal Structures to date.  The Defendant has since removed Item A to ensure compliance with the relevant building regulations.

34.  The Defendant claims it is bound to comply with Clauses 3.01 and 5.01 but denies any responsibility to remedy the Illegal Structures.  Mr Tsang is shocked by the 17/8/09 Letter which claims that the Defendant should bear such responsibility.  When Mr Tsang received the Notice in/about January 2010, he thought the Plaintiff had been similarly notified by the Building Department, so he merely followed advice from the Defendant’s solicitors to refer the Plaintiff’s solicitors to the Notice in the 18/3/10 Letter as a matter of prudence.

X. Parties’ case: water leakage problem

35.  In August 2009, Mr Tsang faxed to Ms Fong the 3/8/09 Quotation setting out suggested repair works for containing the water leakage problem and repairing consequent structural damage to the Premises for HK$13,500.00 and HK$5,000.00.  By the 17/8/09 Letter, Ms Fong replied by saying “業主是不須要負責內面結構維修，所以，我作為業主不會負責3.0) $13,500及 15.0) $5,000”.  In/about November 2009, Mr Tsang caused a technician to carry out some remedial works to stop the water leakage (ie “室內加建帆布而引入地下” and “地台做50mm去水位” for HK$3,500.00).

36.  By the 18/3/10 Letter, the Defendant’s solicitors states inter alia that (a) the Plaintiff has been informed of the water leakage problem before signing the 2^nd TA, (b) the Defendant has relied on the Plaintiff’s promise to deal with such problem by effecting necessary repairs to the Premises made during negotiations for the 2^nd TA (“Representation”), and (c) the Plaintiff has later reneged on such Representation.

37.  The Plaintiff has engaged KC Surveyors to identify the cause of the water leakage and to estimate the time when the water leakage has come into existence.  The expert report prepared in April 2010 opines that the water leakage has been caused by water trapped in the gap between the subject and adjacent buildings, which then seeps through defects on the external wall.  Although the surveyor cannot estimate the time when the water seepage came to exist, it considers that the defects have existed for considerable duration for evidence of significant water leakage to develop.

38.  The Defendant has engaged Building Diagnostic Consultants Limited to ascertain the cause of the water leakage. According to the expert report prepared in June 2010 pursuant to tests conducted at the Premises, “[it] is believed that signs of water seepage on the internal walls of the shop were induced by water penetration through the external wall after heavy rain”.

(a) Defendant’s case

39.  The Defendant claims that sometime in 2008 it notified Ms Fong of water leakage that caused structural damage to the walls, beams, ceiling and interior of the Premises, constant dampness, electricity outages, dangerous and unsightly dilapidation, and damage to arcade games machines, all of which caused disturbance to the Defendant’s arcade games business and to its quiet enjoyment and use of the Premises.

40.  At the time of negotiations for the 2^nd TA in/about May 2009, Mr Tsang brought up the matter of such defects and the need for extensive repairs to remedy the continuing problem, so the Plaintiff knew (a) the Premises were in bad repair, (b) there was water leakage problem, and (c) the walls/structure of the Premises were in poor and dilapidated condition.  At that time, Ms Fong orally made the Representation to Mr Tsang. Relying upon such Representation, the Defendant agreed to enter into the 2^nd TA which implemented the New Rate in light of the market rate to reflect (i) the economic downturn at the material time and (ii) the condition of the Premises especially the water leakage problem and the deteriorated structural condition of the Premises.

41.  Although Mr Tsang sent to the Plaintiff the 3/8/09 Quotation for remedial and repair works, Ms Fong by the 17/8/09 Letter has refused to deal with the water leakage and structural damage problems.  Mr Tsang has continued to contact the Plaintiff about necessary repair works to no avail.  The Plaintiff’s reluctance to repair has prevented the Defendant from carrying out renovation work at the Premises and has forced the Defendant to take only simple interim steps to alleviate the situation, eg carrying out the temporary works as referred in paragraph 35 above in/about November 2009.  Despite such temporary works, the Defendant continues to experience serious water leakage problem because the more extensive repairs required for rectifying the water leakage problem and repairing the structural damage to the Premises are within the duty of the Plaintiff as landlord but beyond the Defendant’s control.  Mr Tsang says that the state of the Premises verges on being dangerous so inspection and investigation into the problems are essential for determining what repair works should be undertaken.  But the Plaintiff unreasonably and unjustifiably denies any breach of its obligation to take such steps and to effect repairs, and has thereby derogated from its grant in breach of clause 4.01 of the 1^st and/or 2^nd TAs and/or the implied covenant for quiet enjoyment.

42.  The Defendant pleads a defence of set-off premised on its counterclaim for (a) an order that the Plaintiff do effect or cause to be effected works to remedy and rectify the water leakage problem and the structural damage to the Premises, and (b) loss and damages suffered as a result of such problems, including loss of value of the term demised to the Defendant to be assessed, costs of replacement of damaged arcade games machines of HK$14,000.00, costs of temporary repairs for water leakage of HK$3,500.00, and loss of profit from 2008 to end of February 2010 of HK$412,000.00.

(b) Plaintiff’s case

43.  The Plaintiff avers that it was only informed in August 2009 (ie after Mr Tsang faxed the 3/8/09 Quotation to Ms Fong) that (a) there was water leakage at the Premises and (b) certain parts of the Premises were not in good, clean and tenantable condition. Ms Fong denies having made the Representation whether as alleged or at all. If the Plaintiff has made the Representation, there is no reason why it has not been included as a term in the 2^nd TA.  Further, the Defendant should have asked the Plaintiff immediately and not over 2 months later in August 2009 for contribution for the cost of repair works.  Further, the Plaintiff also relies on the entire agreement clause in clause 10.07 (“Clause 10.07”) of the 1^st and/or 2^nd TAs to say that the Defendant should not be allowed to adduce evidence of the Representation by Ms Fong.

44.  The Plaintiff further avers there is no express or implied covenant on its part to carry out repair works, and Ms Fong has so informed Mr Tsang by the 17/8/09 Letter.  Rather, the Defendant is obliged under clause 3.03 (“Clause 3.03”) of the 1^st and/or 2^nd TAs to keep the interior of the Premises in good repair and to deliver up the Premises upon determination of the tenancy in good, clean and tenantable condition and repair.  The expert report by KC Surveyors prepared in April 2010 shows that the Defendant has failed to keep the interior of the Premises in good repair even though it has been given a rent-free period in April 2009 under the 2^nd TA for renovation purpose. In any event, clause 6.03 (“Clause 6.03”) of the 1^st and/or 2^nd TAs makes clear that the Plaintiff is not liable for loss and damage owing to water leakage.  But even if the Plaintiff is found to be so liable, it seeks to set off against such loss and damages so much of the sum to be indemnified by the Defendant under Clause 6.03 and/or such outstanding rent and/or mesne profits found due and payable to the Plaintiff as shall be sufficient to extinguish them.

45.  Further and/or alternatively, the Plaintiff claims that by reason of the Defendant’s failure to remedy the water leakage problem, the Plaintiff is entitled to forfeit and has forfeited the Defendant’s tenancy for breach of Clause 3.03 by the commencement of the present proceedings.  The Plaintiff also suffers loss and damages being costs and expenses for repair/restoration of the Premises to good and tenantable condition after re-possession.

XI. Issues

46.  From the above, it appears that the issues are as follows :

(a) whether the Defendant is in breach of the Compromise due to late payment of the Instalments;

(b) if so, whether the 2^nd TA has become null and void and the 1^st TA has been revived with full force and effect;

(c) if so, whether the Defendant is liable to the Plaintiff for loss and damages being outstanding rent under the 1^st TA in the total sum of HK$350,000.00;

(d) further or alternatively, whether the Plaintiff is entitled to forfeit the Defendant’s tenancy for late payment of rent for the months of June to September 2009 under the 2^nd TA, and if so, whether there should be relief against forfeiture;

(e) further or alternatively, whether the Plaintiff is entitled to forfeit the Defendant’s tenancy and claim for loss and damages over the Illegal Structures, and if so, whether there should be relief against forfeiture;

(f) further or alternatively, which party has the duty to remedy the water leakage problem and to repair the consequent damage to the Premises;

(g) if the duty in (f) above is on the Defendant, whether the Plaintiff is entitled to forfeit the Defendant’s tenancy and claim for loss and damages for failure to perform such duty, and if so, whether there should be relief against forfeiture;

(h) if the duty in (f) above is on the Plaintiff, whether the Defendant can raise any defence of set-off in answer to the Plaintiff’s claim.

47.  There are 3 sub-issues to (a) above, ie (i) what is the due date for payment for each of the Instalments, (ii) whether time is of the essence for payment of the Instalments on the due date, and (iii) whether the Plaintiff has waived any late payment of the Instalments.

48.  After hearing argument at the Hearing, I have made the following orders:

(a) interlocutory judgment on liability for damages to be assessed be granted in favour of the Plaintiff for the Defendant’s failure to remedy the water leakage problem and to repair the interior of the Premises as pleaded in paragraph 15 of the Statement of Claim (“Judgment”) ;

(b) the Plaintiff’s summary judgment application for other reliefs sought in the Statement of Claim be dismissed and the Defendant do have unconditional leave to defend in respect of the Plaintiff’s claim for such reliefs;

(c) costs of and occasioned by the Summons for which the Judgment has been granted be paid by the Defendant to the Plaintiff, and 20% of the time of the Hearing be apportioned for such purpose;

(d) costs of and occasioned by the Summons for which the Plaintiff’s summary judgment application has been dismissed be paid by the Plaintiff to the Defendant, and 80% of the time of the Hearing be apportioned for such purpose;

(e) there be certificate for counsel for the above costs orders;

(f) within 7 days after the Hearing, the parties shall respectively file and serve statement of costs pursuant to Practice Direction 14.3 for summary assessment of the above costs orders;

(g) within 7 days thereafter, the parties shall respectively file and serve succinct summary of objections to the other party’s statement of costs in bullet point format but each such summary shall not exceed half page;

(h) summary assessment of the above costs orders be adjourned to be heard before me in chambers (open to the public) with half hour reserved (“Costs Hearing”) ;

(i) the Plaintiff’s solicitors shall fix a date with the Listing Clerk for the Costs Hearing within 14 days after the Hearing not be heard before 28 days after the Hearing;

(j) within 28 days after the Hearing, the Plaintiff shall file and serve timetabling questionnaire;

(k) leave to the Defendant to file and serve updated timetabling questionnaire if so advised within 28 days after the Hearing;

(l) within 14 days thereafter, the parties shall file consent summons containing the agreed directions and/or timetable for the court’s consideration and approval or the Plaintiff shall take out case management summons, whichever is appropriate;

(m) liberty to apply.

49.  I have reserved my reasons for judgment which I now hand down.  As seen below, Mr Cheung has made a number of concessions at the Hearing. Such concessions have led Mr Cheung to abandon various reliefs sought under the Summons so that eventually the disputed matters fall within a small compass. Nevertheless, I hand down reasons in some detail to assist the parties in their further conduct of the present proceedings.

XII. Discussion

(a) Compromise

50.  The Defendant claims that the Compromise is a forbearance to sue so that upon complying with its terms the Plaintiff will no longer be able to sue for the Arrears under the Old Action or otherwise.  Although the Plaintiff denies the Compromise is any forbearance to sue, it admits that (a) by entering into the Compromise and complying with the terms of the Special Condition its claims against the Defendant under the Old Action for vacant possession of the Premises and/or for immediate payment of the Arrears have been settled (see paragraph 3 of the Reply and Defence to Counterclaim), and (b) upon signing the 2^nd TA at the end of May 2009 the 2^nd TA has effectively superseded the 1^st TA (see paragraph 6 of the Reply and Defence to Counterclaim).

51.  The Defendant does not dispute the existence or contents of the 31/5/09 Letter in its pleadings or evidence.  In my view, the reference to “首要條件需簽定新租約” in such letter and the enclosure of the 2^nd TA under cover of such letter for execution by the Defendant make it abundantly clear that entering into the 2^nd TA (as distinct from complying with its terms) is part of the Compromise.

52.  There is no dispute over the relevant legal principles.  “An unimpeached compromise represents the end of the dispute or disputes from which it arose.  Such issues of fact or law as may have formed the subject-matter of the original disputation are buried beneath the surface of the compromise.  The court will not permit them to be raised afresh in the context of a new action.  If the parties have agreed that their original dispute may be resurrected in certain circumstances then, of course, the position may be different”.[1]  “Generally speaking, therefore, an agreement of compromise will discharge all original claims and counterclaims unless it expressly provides for their revival in the event of breach”. [2]

53.  As Mr Cheung fairly accepts, the payment provision in the Special Condition concerns the Adjusted Arrears of which HK$160,000.00 has been duly paid and HK$180,000.00 is to be paid by way of the monthly Instalments.  The Special Condition provides that in the event the Defendant defaults in making each of the Instalments, the 2^nd TA shall become null and void and the 1^st TA shall continue to remain in full force and effect. Consequently, the Compromise is not an absolute release of claim or absolute forbearance to sue but a qualified one so that upon default by the Defendant certain consequences “shall” follow.  I am not persuaded that the authorities cited by Ms Man [3] take the position any further for they do not concern any express qualification for revival of compromised matters upon breach of the compromise.

54.  Thus, the key question is whether the Defendant is in breach of the Compromise and/or Special Condition by default “in making each of the aforesaid [Instalments]”.  The Plaintiff’s only complaint is that the Defendant has been late in paying the Instalments (see paragraph 14 above which shows that the Defendant has paid the Instalments for the months of June to November 2009 and January 2010 respectively on the 15^th, 14^th, 20^th, 6^th, 4^th, 1^st and 3^rd day after the 1^st day of the month).  The Instalments for the months of December 2009 and February 2010 have been paid on the 1^st day of the month.

55.  Initially, Mr Cheung submits inter alia that:

(a) a fair reading of the Special Condition shows that the Instalments are to be paid on the 1^st day of each month;

(b) the Instalments being overdue rent must be paid on the 1^st day of each month and in any event within 7 days after they shall become payable in view of clause 8.01 (“Clause 8.01”) of the 2^nd TA;

(c) the Defendant’s repeated late payments of the Instalments are “deliberate decisions to make payment as and when it pleases thus evincing an intention not to be bound by the tenancy agreement …… [so there] is clearly no triable issue on the issue of repudiation”.

56.  There is no express provision in the Special Condition that each of the Instalments is to be paid on the 1^st day of each month or that time for such payment is of the essence.  It merely provides that “the remaining overdue balance of HK$180,000.00 [be paid] by 18 monthly instalments of HK$10,000.00 each starting from June 1^st, 2009 to Nov 1^st, 2010”. It is a question of construction of the Compromise and/or Special Condition whether any stipulation as to time for payment is of the essence.  Normally, time stipulation is not of the essence in a non-mercantile contract unless the contract expressly so provides or the nature of the contract or the surrounding circumstances show that time should be taken to be of the essence. [4]

57.  Looking at the Compromise as a whole, the wording of the Special Condition and the contemporaneous clarification of the Compromise in the 31/5/09 Letter (ie “6月開始付……$10000直至2010年11月止” with no reference to payment of the Instalments on the 1^st day of each month), and in the absence of express stipulation as to time for paying the Instalments, the Defendant’s contention that the Instalments are to be paid within reasonable time each month is, in my view, both arguable and triable.

58.  I bear in mind that the purpose of the Compromise and/or Special Condition is to resolve and settle the dispute over the outstanding Arrears which have been overdue for some time.  In my view, in the absence of express stipulation for payment of the Instalments on the 1^st day of each month, it is arguable that the nature of the contract (ie the Compromise and/or Special Condition) does not call for payment of each Instalment strictly on the 1^st day of each month.  The following features are indicative of the triable nature of the Defendant’s stance:

(a) the purpose of the Compromise for the Defendant is to have time to pay the overdue Arrears which have been compromised into the Adjusted Arrears and for the Plaintiff is to ensure regular partial payment of the remaining balance of the Adjusted Arrears to progressively reduce and eventually extinguish the indebtedness;

(b) the arrangement for instalment payment of the compromised indebtedness is arguably for ensuring regular monthly payments rather than payments on the 1^st day of each month;

(c) clauses 1.01 and 2.01 (“Clauses 1.01 and 2.01”) of the 2^nd TA have expressly stipulated for payment of rent on the 1^st day of each month, but there is no similar express provision for payment of the Instalments;

(d) the Defendant has paid and the Plaintiff has accepted the so-called “late” payments of the Instalments from June 2009 to June 2010 notwithstanding the 17/8/09 Letter.

59.  In the course of the Hearing, Mr Cheung has conceded that for the purpose of the Summons it is arguable that the Instalments should be paid within a reasonable time and not necessarily on the 1^st day of each month, but he still maintains that the Defendant has failed to pay the Instalments within a reasonable time.  But on the affidavit evidence before me, I am unable to say it is so obviously clear that the Defendant’s payment of the Instalments in the manner set out in paragraph 14 above constitutes repudiation of the Compromise and/or Special Condition such that there is no arguable defence or triable issue.

60.  I do not agree with Mr Cheung’s suggestion that because the Instalments are overdue rent and some of them have not been paid within 7 days after the same shall become payable the Defendant is necessarily in repudiatory breach of the Compromise.  First, the Instalments are not rent due and payable under the 2^nd TA to excite Clause 8.01 of the 2^nd TA, which empowers the Plaintiff to forfeit the Defendant’s tenancy if rent under the 2^nd TA has been overdue for more than 7 days.  At best, they are overdue rent under the 1^st TA which has been outstanding for much longer than 7 days even before the execution of the 2^nd TA. Secondly, as admitted by the Plaintiff, the 1^st TA (including Clauses 1.01, 2.01 and 8.01 therein) has been superseded so long as the Compromise remains unimpeached.

61.  Mr Cheung next submits that the Instalments are so closely akin to rent payable under the 2^nd TA that I should adopt the period of 7 days after the 1^st day of each month in Clause 8.01 of the 2^nd TA as a reasonable period within which the Defendant must pay each monthly Instalment.  I disagree.  First, the nature of the Instalments being part of the Adjusted Arrears (ie compromised overdue rent under the 1^st TA) and of the payment envisaged in Clause 8.01 of the 2^nd TA being rent payable under such tenancy agreement is different.  Secondly, the period of 7 days after the 1^st day of each month in respect of non-payment of rent for the exercise of the right of re-entry or forfeiture under Clause 8.01 of the 2^nd TA is premised on rent being overdue for 7 days after the 1^st day of each month and not, as in the case of the Instalments as conceded by Mr Cheung for the purpose of the Summons, after expiry of reasonable time for payment.  In my view, it is arguable that Clause 8.01 does not aid interpretation of the time for payment of the Instalments under the Compromise and/or Special Condition.

62.  Since I have found there is an arguable defence as to whether there is any breach of the Compromise and/or Special Condition, I need not consider Mr Cheung’s submission that the Defendant’s repeated “late” payments of the Instalments are deliberate decisions to pay as and when it pleases and thus evinces an intention not to be bound by “the tenancy agreement”.

63.  However, in case I am wrong, I am still not with Mr Cheung on his submission for the purpose of the Summons.  First, the issue here is not whether the allegedly “late” payment of the Instalments is repudiatory of “the tenancy agreement” but whether it is repudiatory of the Compromise.  Secondly, the affidavit evidence before me is insufficient for drawing any obvious inference to the effect that the allegedly “late” payments are deliberate breaches that reflect an intention not to be bound by the Compromise.  After all, notwithstanding the so-called delay in payment, the Defendant has paid each Instalment within the relevant month without fail.  In fact, although the Defendant has not paid the monthly rent due on 1 September 2009 at the New Rate during that month, it has paid the Instalment on 7 September 2009.  This does not sit well with the suggestion that the Defendant has evinced an intention not to be bound by the Compromise and/or Special Condition.

64.  Thirdly, I am not persuaded that the case of Man Fu Wan v Tam Wah Hung also know as Tam Yan Hung HCA1418/2002, Mr Recorder Edward Chan SC (unreported, 27 February 2003) cited by Mr Cheung is of assistance.  The facts in that case are a far cry from those in the present proceedings.  In the present case, unlike Man Fu Wan, there is (a) only allegedly “late” payment rather than non-payment and (b) no clear admission of any conscious withholding of payment for any particular reason.  Further, the Defendant has always paid up.  For the purpose of the Summons, I am unable to draw any obvious inference from the Defendant’s conduct that there has been deliberate breach of the Compromise amounting to a clear repudiation.  This must be resolved at trial upon assessing the relevant factual matrix.

65.  But even assuming there is repudiatory breach of the Compromise, has the Plaintiff accepted such repudiation?  The Plaintiff pleads it has done so by the 14/9/09 Letter, but this has not been verified by Ms Fong’s affidavits, and such letter has not been placed before me.

66.  In light of the above, I am of the view there is an arguable defence that there is no breach of the Compromise and/or Special Condition, and I need not consider whether there is any revival of the 1^st TA.  It therefore follows that the Defendant must be given unconditional leave to defend the Plaintiff’s claim for loss and damages in the sum of HK$350,000.00 being outstanding rent allegedly due under the revived 1^st TA (see paragraph 11 of the Statement of Claim).

67.  Mr Cheung acknowledges there is no averment in the Plaintiff’s pleadings for forfeiture of the Defendant’s tenancy and/or for acceptance of repudiation of the allegedly revived 1^st TA.  In short, there is no pleaded cause of action premised on the 1^st TA to support the claim for recovery of vacant possession of the Premises.

(b) Late payment of rent under the 2^nd TA

68.  The Plaintiff complains that further or alternatively the Defendant is in breach of the 2^nd TA in that it has been late in paying rent for the months of June to September 2009 for 15, 14, 21 and 6 days respectively (see paragraph 14 above), so the Plaintiff is entitled to forfeit the Defendant’s tenancy under the 2^nd TA pursuant to Clause 8.01.

69.  The Defendant does not dispute that it has been late in paying such rent. Clauses 1.01 and 2.01 of the 2^nd TA provide that rent must be paid on the 1^st day of each month during the term of the tenancy, so the Defendant’s late payment amounts to breach of positive covenants under the 2^nd TA. But does the Plaintiff’s subsequent acceptance of the rent amount to waiver of or estoppel against any right to rely on such breach to forfeit the Defendant’s tenancy under the 2^nd TA?

70.  Mr Cheung agrees that acceptance of rent with knowledge of the breach is a classic example of an unequivocal act of such waiver or estoppel.[5]  There is no dispute that the Plaintiff has continued to accept rent after having notice of the aforesaid late payments[6], which have been deposited into the Plaintiff’s bank account with no suggestion that the Plaintiff having taken any steps to reject payment or to repay them as quickly as the circumstances permit or at all.[7]

71.  However, the Plaintiff relies on clauses 8.03 and 10.03 (“Clauses 8.03 and 10.03”) of the 2^nd TA to say that the Defendant cannot assert such waiver or estoppel.  I am not persuaded the first part of Clause 10.03 is applicable since it deals with waiver of the Plaintiff’s rights under the 2^nd TA “in respect of any continuing or subsequent breach or non-observance or non-performance or …… any such continuing or subsequent default or breach”.  Since the rent for the months of June to September 2009 has been paid, in my view any delay in payment must have been a once and for all rather than continuing or subsequent breach.

72.  The Plaintiff relies on Clause 8.03 which provides that acceptance of rent shall not be deemed to operate as a waiver of the Plaintiff’s rights to proceed against the Defendant in respect of any breach, non-observance or non-performance by the Defendant of any of its obligations under the 2^nd TA, and on the latter part of Clause 10.03 which provides that no waiver shall be inferred from or implied by anything done or omitted by the Plaintiff unless expressed in writing and signed by the Plaintiff.

73.  However, the effectiveness of such “no waiver” provision as set out in Clause 8.03 has been doubted:

“Written leases commonly contain a stipulation that acceptance of rent shall not be deemed a waiver of the landlord’s right to sue. It is doubtful if such clauses have much effect, since a waiver of its nature is based on events which occur after the lease has been entered into and the essence of which is an indication by the landlord that he has abandoned his rights and treats the lease as continuing. The idea, in short, is that he cannot both have his cake and eat it. To give effect to a “no waiver” clause in the lease would not only contradict the essence of waiver but would also use a term of the lease to save the very thing undermined by the waiver – another term of the lease. Furthermore, if the landlord’s act constitutes a waiver of the breach, it may also, presumably, constitute a waiver of his reliance on the “no waiver” clause.” [8]

“Some leases contain a contractual provision that breaches of covenant cannot be waived by any act of the landlord’s: such provisions are ineffective. Although such a clause has been held to be valid in the context of a lease of chattels, it is considered that such a clause would still be held ineffective in a lease of real property.” [9]

74.  Ms Man cites Expert Clothing Service & Sales Ltd v Hillgate House Ltd & anor [1986] 1 Ch 341, 359-360 in which Slade LJ recognised that acceptance of rent constituting waiver of the right to forfeit in respect of all breaches of covenant of which the landlord was aware at the time fell into a “special category”.  The learned judge reasoned that the established affect of acceptance of rent “is so clear that, whatever the circumstances of the case, it is probably not open to the landlord to submit that he has not waived the relevant breach”. [10]

75.  Similar sentiment has been expressed in Shing Yip Co Ltd v Lai Choi-wan [1978] DCLR 9 in respect of a “no waiver” clause similar to Clause 8.03. District judge Hooper (as he then was) said at p.13 that “[since] ‘it would seem to have been the intention of the parties that the Defendant should not be entitled to set up a waiver on this ground, that would seem enough to dispose of the defence’ argument on this matter”.

76.  Further, in respect of the latter part of Clause 10.03, I have referred both counsel to R v Paulson [1921] 1 AC 271, 282-283, which held that an acceptance of rent would also amount to a waiver even where the lease requires a waiver to be expressed in writing and there has been no express waiver in writing complying with the terms of the lease.

77.  Mr Cheung has not cited any authority in support of the viability of Clauses 8.03 and 10.03. In such circumstances, there must be an arguable defence that acceptance of rent by the Plaintiff amounts to waiver of its right to forfeit the Defendant’s tenancy for late payment of rent for the months of June to September 2009.  Indeed, Mr Cheung has eventually conceded this at the Hearing for the purpose of the Summons.

78.  But I am prepared to go further.  Even if I am wrong and the waiver argument does not constitute any arguable defence, it is still arguable that the Plaintiff cannot rely on the above breach to forfeit the Defendant’s tenancy under the 2^nd TA.

79.  There can be no doubt that the above breach has been remedied by the Defendant’s subsequent payment of rent for the months of June to September 2009.  After all, non-payment of rent, which must be a greater mischief than late payment of rent, can be remedied by subsequent payment.

80.  If the Plaintiff’s alleged forfeiture of the Defendant’s tenancy based on the above breach can be classified as forfeiture for non-payment of rent, then section 21F of the High Court Ordinance Cap.4 provides for a mandatory obligation to grant relief against forfeiture so that the tenant has not less than 7 days to pay the arrears together with expenses for restoring his forfeited tenancy interest before possession is to be returned to the landlord. [11]

81.  In the present case, all rent for the months of June to September 2009 has been paid before commencement of the present proceedings and all rent up to June 2010 has been paid to date, so I believe relief is arguably inevitable. I need say no more than to refer to the observations of Deputy High Court Judge A Ho SC in Chan Yung Sing & ors v Choi Ching Sing HCA4830/2002 (unreported, 30 May 2003) when dealing with the greater mischief of non-payment of rent:

“51. The third complaint relates to non-payment of rent for the month of December 2002. Whilst it is not disputed that rent for the month of December was not paid before the Plaintiffs forfeited the tenancy, Mr Mak did not really press this ground for the purpose of summary judgment, realizing obviously that relief would inevitably have to be granted on the basis that the Defendant did tender payment in the amount equivalent to monthly rental in the subsequent months.”

82.  If the Plaintiff’s alleged forfeiture of the Defendant’s tenancy based on the above breach can be classified as an exercise of the right of re-entry or forfeiture for breach other than non-payment of rent, then section 58(1) of the Conveyancing and Property Ordinance Cap.219 (“CPO”) applies so that such right “shall not be enforceable …… unless and until the lessor serves a notice – (a) specifying the particular breach complained of, and (b) if the breach is capable of remedy, requiring the lessee to remedy the breach; and (c) specifying the compensation, if any, which the lessor requires in respect of the breach, and the lessee fails, within a reasonable time thereafter, to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach”.

83.  I refer to the discussion in paragraph 100 below which confirms that the effect of section 58(1) of the CPO is to prevent a landlord from lawfully exercising his right to re-enter, whether by action or otherwise, unless and until a section 58(1) notice is served.  In the present case, it is highly arguable that the Plaintiff is not in a position to serve any section 58(1) notice for the above breach which has been remedied by subsequent payment of rent for the relevant months before exercise of the alleged right of re-entry or forfeiture by commencement of the present proceedings. I have referred counsel to the case of SEDAC Investments Ltd v Tanner & ors [1982] 3 All ER 646, which held that on the true construction of section 146(1) of the Law of Property Act 1925 (ie the English equivalent of section 58(1) of the CPO) a section 146 notice must be served in respect of a subsisting breach of covenant.  Without a subsisting breach, the landlord will be unable to satisfy the prerequisite to enforcement of his right of re-entry or forfeiture.

84.  Even assuming that the Plaintiff is able to cross such hurdle (which I am not satisfied that it can for the purpose of the Summons), I am persuaded it is arguable that relief against forfeiture will be granted.  I do not agree with Mr Cheung’s written submissions that I should debar the Defendant from relief on the basis that it has been wilfully dilatory in paying rent.

85.  Mr Cheung submits that “wilful breaches should not, or at least should only in exceptional cases, be relieved against, if only for the reason that the lessor should not be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations”.  Mr Cheung cites Woodfall’s Law of Landlord and Tenant Vol.1 para.17.166 and The Prudential Enterprise Limited & anor v P H Shek Ltd & anor HCA4911/1987, Rhind J (unreported, 19 August 1988) in support of the above proposition, and these authorities in turn refer to the guidance in Shiloh Spinners Ltd v Harding [1973] AC 691, 725.

86.  But subsequent case law has shown that “the fact …… a breach is wilful does not mean that relief should only be granted in an exceptional case”.[12]  In Southern Depot v British Railways Board [1990] 2 EGLR 39, 43, a case not cited by either counsel, Morritt J said as follows:

“There can be no doubt that the wilfulness of the breach is a relevant consideration and that the court should not in exercising its discretion encourage a belief that parties to a lease can ignore their obligations and buy their way out of any consequential forfeiture. But to impose a requirement that relief under section 146(2) should only be granted in an exceptional case seems to me to be seeking to lay down a rule for the exercise of the court’s discretion which the decision of the House of Lords in Hyman v Rose [1912] AC 623 said should not be done. Certainly Lord Wilberforce in Shiloh Spinners v Harding [1973] AC 691, [1973] 1 All ER 90 did not purport to do so in cases under the statute.

Accordingly, in my judgment, although I should give considerable weight to the fact that two out of the three breaches were wilful I am not required to find an exceptional case before granting relief from forfeiture.”

87.  On the affidavit evidence before me, I am unable to draw a clear and obvious conclusion that the Defendant’s late payment of rent for the months of June to September 2010 is wilful and/or deliberate.  Being late for 4 months without more does not necessarily lead to such conclusion.

88.  Further, the facts of The Prudential Enterprise Limited are a far cry from the present case where apart from late payment of rent (ie the breach itself) there is no clear or obvious affidavit evidence of any deliberate or wilful flavor to the delay in payment.  Still further, bearing in mind that (a) the Defendant has made good the breach by paying the rent for the months of June to September 2009 and also the monthly rent to date, (b) there being no evidence before me that the breach has caused any lasting damage to the Plaintiff, (c) the damage to the Plaintiff (if any) is arguably disproportionate to the advantage it will obtain if no relief is granted, and (d) the hardship that arguably will be occasioned to the Defendant if relief is refused given that its games licence is for running arcade games business at the Premises [13], I am persuaded it is arguable that relief from forfeiture will be granted.

(c) Alternative claim for the remaining Instalments

89.  In paragraph 13 of the Statement of Claim, the Plaintiff makes a further or alternative claim for the Instalments for March to November 2010 in the total sum of HK$90,000.00 (ie HK$10,000.00 x 9 months).  Mr Cheung submits that since there has been breach of the 2^nd TA due to late payment of rent for the months of June to September 2009, the Plaintiff is entitled to forfeit the Defendant’s tenancy under the 2^nd TA and claim for the remaining and as yet unpaid Instalments.

90.  Since (a) I have found there is an arguable defence to the Plaintiff’s claim of repudiatory breach of the Compromise on the part of the Defendant, (b) Mr Cheung has conceded that the Plaintiff will not seek forfeiture of the Defendant’s tenancy for late payment of rent under the 2^nd TA for the purpose of the Summons and (c) the Defendant has made monthly payment of HK$50,000.00 to the Plaintiff up to June 2010 that arguably comprises HK$10,000.00 for the Instalment and HK$40,000.00 for rent at the New Rate, the Defendant must also have an arguable defence to the Plaintiff’s claim for payment of the remaining Instalments.

(d) Illegal Structures

91.  The Plaintiff claims that the Defendant is in breach of Clauses 3.01 and 5.01 and the User Provision of the 1^st and/or 2^nd TAs for installing the Illegal Structures and/or the Steel Door at the Premises or causing them to be so installed.

92.  Mr Cheung in his written submissions goes on to argue that even assuming that such Illegal Structures and/or the Steel Door are not the Defendant’s responsibility, “the fact that it had caused illegal structures to be installed, further evinced its intention not to be bound by the tenancy agreement”.  It is difficult to understand the relevancy of such argument because the Plaintiff’s pleaded cause of action in relation to the Illegal Structures is not based on acceptance of repudiation but on breach of covenant supporting an exercise of the right of re-entry or forfeiture.

93.  Turning to the Plaintiff’s claim for forfeiture of the Defendant’s tenancy for illegal structures at the Premises, the Defendant admits that it has installed and subsequently removed Item A.  Hence, it is doubtful whether Item A amounts to a subsisting breach to support a section 58(1) notice being a prerequisite requirement for the exercise of the right of re-entry or forfeiture by the Plaintiff (see paragraph 100 below).  Mr Cheung refers to the 18/3/10 Letter, but whilst it refers to the Defendant’s awareness of the 2009 BOs and subsequent removal of Item A, it does not say whether Item A has been removed before or after commencement of the present proceedings on 5 February 2010.  In the end, Mr Cheung accepts that the Plaintiff will not rely on Item A for the purpose of the Summons.

94.  Turning to the Illegal Structures, there is factual dispute as to whether they pre-existed the Defendant’s occupancy of the Premises as tenant since 2004 or 2005, or whether they have been installed or caused to be installed by the Defendant during the term of its tenancy.  There is contradictory evidence from Ms Fong and Mr Tsang on this subject.  Although the 2003 BOs make no reference to the Illegal Structures (which fact the Plaintiff relies to suggest they have been installed during the Defendant’s tenancy), the Defendant’s surveyor CB Richard Ellis Ltd is unable to say whether Items B and C have been installed before or after 2004. I am unable to resolve such factual dispute by mini-trial on affidavits.

95.  This is especially so when the 2003 BOs may not be determinative of the issue. First, there is a lapse of almost a year between service of the 2003 BOs (10 December 2003) and the Defendant taking up the tenancy of the Premises (November 2004 according to the Plaintiff).  There is a possibility that the Illegal Structures may have been installed during such period, but much will turn on assessment of the relevant factual evidence and the credibility of factual and/or perhaps even expert witnesses at trial.  Secondly, although the summary of facts for the Building Summonses refers to visits to the Premises up to 2006, such summary of facts is concerned with the subject matter of the Building Summonses and not necessarily intended to be a comprehensive account of all site findings during those visits.  Thirdly, the Defendant’s surveyor CB Richard Ellis Ltd is of the view that judging from the state of dilapidation of the Premises, the removal of the Internal Staircase as well as the installation of the Metal Slabbing and the cover over the backyard (Item D) should have been done long before 2004.  This raises query as to whether the Opening (Item C) which the Plaintiff surmises to be the result of removal of the Internal Staircase has been made prior to 2004.

96.  In light of the above, the issue as to whether the Illegal Structures have been installed or caused to be installed by the Defendant during its tenancy of the Premises or whether they are pre-existing can only be resolved after assessing the evidence at trial.  Thus, in the course of the Hearing, Mr Cheung has abandoned reliance on the Illegal Structures for the purpose of the Summons, but insists that the Defendant’s admission of having installed the Steel Door is sufficient to establish breach of Clauses 3.01 and 5.01 and the User Provision of the 1^st and/or 2^nd TAs.

97.  But even assuming that the Steel Door has been installed or caused to be installed by the Defendant, I am not persuaded that I should grant summary judgment for forfeiture of the Defendant’s tenancy for breach of Clause 5.01 (which prohibits the Defendant from making, permitting or suffering to be made any alterations in or additions to the Premises without prior written consent of the Plaintiff).  For a covenant against making “alterations to the premises” in a lease of business premises, it has been held that “alterations” must be limited to alterations which affect the form or structure of the building.[13]  In my view, it is arguable that “additions” should also be given an ejusdem generis interpretation.  Plainly, the installation of the Steel Door as distinct from the formation of the Opening at the staircase enclosure wall (Item C) is arguably not an alteration or addition to the fabric of the Premises, especially when Mr Cheung abandons reliance on Item C for the purpose of the Summons.  In my view, whether the Steel Door amounts to breach of Clause 5.01 so as to justify the exercise of the right of re-entry or forfeiture and/or to support the claim for loss and damages for reinstatement of the Premises should be left for trial.

98.  But is there any breach of Clause 3.01 and the User Provision? These provisions require the Defendant to obey and comply with all ordinances regulations bye-laws rules and requirements of governmental or other competent authority “relating to the conduct and carrying on the Tenant’s business on the [Premises] ……” (Clause 3.01) or “in connection with the conduct of the Tenant’s business on the [Premises]” (User Provision).  Mr Cheung submits that because the user of the Premises (including the cockloft) is for business purpose, the Steel Door is necessarily in connection with or relating to the Defendant’s business on the Premises. But the Steel Door must have been installed for ingress to and egress from Premises. Quite irrespective of the nature or conduct of the Defendant’s business, an entrance to premises is plainly necessary whatever the nature of the use and occupation.  In my view, it is arguable the installation of the Steel Door does not amount to breach of Clause 3.01 and the User Provision.

99.  Even assuming that the Plaintiff is able to cross all of the above hurdles (which I disagree for the purpose of the Summons), it is arguable that the Plaintiff is still not entitled to forfeit the Defendant’s tenancy for lack of evidence to establish service of a section 58(1) notice prior to commencement of the present proceedings.

100.  In my view, it is trite that for forfeiture other than for non-payment of rent, the landlord must comply with section 58(1) of the CPO which provides that a right of re-entry or forfeiture shall not be enforceable unless the landlord serves a section 58(1) notice on the tenant.[15]  In Fox v Jolly [1916] 1 AC 1, 8-9, Lord Buckmaster LC said as follows:

“The effect of this sub-section is plain. The right of re-entry which the lessor enjoys on the breach of a covenant is not capable of being exercised against the lessee until the conditions in that sub-section have been satisfied. If such condition were not satisfied and entry were attempted at common law, such entry would be a trespass; if proceedings were instituted to obtain possession they would be instantly demurrable. That is the meaning of the phrase, “shall not be enforceable by action or otherwise.” Now the conditions precedent which the lessor must perform are these. He must serve a notice, and that notice must specify the breach of covenant which is the subject of complaint. That is, he must point out the covenant which he says is broken, and he mist specify the breach of which he complains. He must also call upon the lessee to remedy the breach, and if he requires compensation in money he must ask for it. After this has been done a reasonable time must elapse in which the lessee has the opportunity of complying with the requirements of the notice. It is only when this has been done, when the time has expired, and the work is incomplete, that the landlord can proceed to the assertion of his rights.”

101.  Although the 17/8/09 Letter requires the Defendant to commence works as specified in the 2009 BOs and warns that failure to cooperate will attract legal claim by the Plaintiff, it is arguably invalid as a section 58(1) notice vis-à-vis the Steel Door. Such notice must specify the breach to be remedied and the compensation required by the Plaintiff for any loss it has suffered as a result of the breach.[16]  But the 17/8/09 Letter arguably fails (a) to direct the Defendant’s attention to and/or require the Defendant to remedy the Steel Door (which is remediable if it is a breach) and/or (b) to require payment or compensation in money (since the Plaintiff seeks monetary compensation in paragraph 17 of the Statement of Claim).

102.  Although paragraph 10(d) of the Reply and Defence to Counterclaim pleads that by the 14/9/09 Letter the Plaintiff has demanded the Defendant inter alia to reinstate the Premises in compliance with the 2009 BOs, this has not been verified by Ms Fong’s affidavits and such letter has not been exhibited.  But even if I accept such plea, it is arguable that such letter still suffers from the same defects as the 17/8/09 Letter for the purpose of being a section 58(1) notice vis-à-vis the Steel Door.

103.  In the circumstances, Mr Cheung has eventually conceded at the Hearing that there is arguable defence to the Plaintiff’s claim for forfeiture of the Defendant’s tenancy for the alleged breach of covenant over the Illegal Structures and the Steel Door.  As for the remaining claim for loss and damages for costs and expenses for removal of the Steel Door and consequent repair and restoration of the Premises, I find there is an arguable defence and the Defendant is entitled to unconditional leave to defend on the above analysis.

(e) Water leakage and structural damage

104.  The Defendant pleads a defence of set-off and counterclaim for breach of the express and/or implied covenant for quiet enjoyment under the 1^st and/or 2^nd TAs as a result of the water leakage problem and consequent structural damage to the Premises.

105.  For the purpose of the Summons, it is common ground that there was/is water leakage at and damage to the fabric of the Premises.[17]  The cause of the water leakage is not definitively clear (even though the opinion of both parties’ experts are not too dissimilar – see paragraph 37-38 above), but the present issue is not what caused the problem and damage but who is contractually responsible for remedying the problem and carrying out repairs.  If the responsibility falls on the Defendant, it can hardly complain of breach of any express or implied covenant for quiet enjoyment as a result of its own failure to carry out remedial works.  Indeed, the Defendant as tenant may then be liable to the Plaintiff for breach of its repairing obligations.

106.  The Defendant says the duty to carry out repairs falls on the Plaintiff as a result of Ms Fong’s Representation at the time of negotiations for the 2^nd TA.  There is factual dispute between the parties as to whether Ms Fong made such representation, which cannot be resolved on affidavit.

107.  However, Mr Cheung has drawn my attention to the “entire agreement” provision in Clause 10.07 of the 1^st and/or 2^nd TAs:

“This Agreement set out the full agreement reached between the parties and no other representations have been made or warranties given relating the landlord or the Tenant or the said building or the [Premises] and if any representation or warranty has been given or implied the same is hereby waived.”

108.  On the face of Clause 10.07, the Plaintiff disclaims any pre-contract representation such that the Defendant cannot rely on any representation made in the course of negotiations for the 2^nd TA.  Ms Man does not challenge the reasonableness of Clause 10.07 on the basis of section 4 of the Misrepresentation Ordinance Cap.284 which incorporates the requirement of reasonableness under the Control of Exemption Clauses Ordinance Cap.71.[18]

109.  In Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611, 614, Lightman J said:

“The purpose of an entire agreement clause is to preclude a party to a written agreement from thrashing through the undergrowth and finding, in the course of negotiations, some (chance0 remark or statement (often long-forgotten or difficult to recall or explain) upon which to found a claim, such as the present, to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search, and the peril to the contracting parties posed by the need that may arise in the absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that, accordingly, any promises or assurances made in the course of negotiations (which, in the absence of such a clause, might have effect as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible ……; it is to denude what would otherwise constitute a collateral warranty of legal effect.”

110.  I have referred counsel to Wing Siu Co Ltd v Goldquest International Ltd (No 2) [2002] 4 HKC 420.  In respect of an entire agreement clause similar to Clause 10.07, Ma J (as he then was) said at p.429 as follows:

“ 20. Finally, I come to Ms Ismail’s reliance on cl 5(8) of the lease: the entire agreement clause. The clause states as follows:

‘This Lease sets out the full agreement reached between the parties and no other warranties or representations express or implied have been made or given by the Landlord or by anybody on its behalf relating to the Building or the Premises and if any such representation or warranty has been given or implied the same is hereby withdrawn and is deemed to have been withdrawn immediately before the execution of this Lease.’

21. The lease was made subsequent to the alleged collateral contract. Quite apart from its terms being completely inconsistent with the existence of the alleged collateral contract, in my view, Ms Ismail is right when she says that cl 5(8) operates to prevent the defendant from relying on this defence. Although the clause does not in terms exclude the applicability of any previous agreements or promises, I am of the view that it is sufficiently wide to cover any reliance on the alleged collateral contract. In Intreprenneur Pub Company (GL) v. East Crown Ltd [2000] 2 Lloyd’s Rep. 611, Lightman J had to deal with a clause that was more or less only stated that the written agreement in that case constituted the ‘entire agreement’ between the parties: see 613(1). Like cl 5(8) of the lease, there was no express exclusion of previous agreements or promises. The learned judge held, however, that the words in that case were sufficient to exclude the application of any alleged collateral contract: see 614(1)-615(1). With respect, the reasoning of Lightman J in Intreprenneur is compelling and I follow it. The nature of a collateral contract (or collateral warranty as it is sometimes called) is that it involves an assurance or warranty: see Chitty at para 12-101. The words ‘representation or warranty’ contained in cl 5(8) are apt in my view to cover collateral contracts.”

111.  Ms Man does not seek to dispute the above legal principles.  I am not persuaded that the Defendant has any arguable defence or any arguable set-off arising from any sustainable counterclaim based on Ms Fong’s Representation during negotiations for the 2^nd TA.

112.  Secondly, the Defendant argues that the Plaintiff has a contractual duty to remedy and/or repair the water leakage problem and the consequent structural damage to the Premises.  As Ms Man accepts, there is no express stipulation in the 2^nd TA that imposes any such repairing obligation on the Plaintiff as landlord.  In fact, clause 3.03 of (“Clause 3.03”) of the 1^st and/or 2^nd TAs places the burden of keeping and maintaining the interior of the Premises in good, clean, tenantable, substantial and proper repair and condition squarely on the Defendant.  This also echoes the duty on the part of the Defendant to yield up the Premises at the expiration or sooner determination of the tenancy in good clean and tenantable repair and condition under clause 3.19 of the 1^st and/or 2^nd TAs.

113.  Ms Man has not cited any authority in support of the Defendant’s contention.  I have referred counsel to Hill & Redman’s Law of Landlord and Tenant Vol.1 para.A[3261] which states that as regards the duty on the tenant to repair and maintain the “interior” of the Premises without qualification, such obligation “may extend to all parts of the interior (whether or not these parts are included within the “structure” of the premises)”.

114.  Further, quite irrespective of any repairing covenant on the part of the tenant, in the absence of express contractual obligation, a landlord’s obligation in relation to the fabric of premises demised are very limited.  I have also referred counsel to Li Ching Wing v Xuan Yi Xiang [2004] 1 HKLRD 754 where Judge Lok said as follows at pp.562-563:

“ 20. Secondly, it is doubtful whether the court should imply such a term in the Tenancy Agreement. Indeed, the nature of an implied covenant to repair a leased property is very similar to that of an implied covenant as to habitability. The learned authors of Woodfall: Landlord and Tenant (2003) had the following to say in respect of these covenants:

In general, there is no implied covenant by the lessor of an unfurnished house or flat, or of land, that it is or shall be reasonably fit for habitation, occupation, or cultivation, or for any other purpose for which it is let. No covenant is implied that the lessor will do any repairs whatever. Nor is there an implied obligation that the house will endure during the term, even though fair wear and tear is excepted from the tenant’s covenant to repair. A landlord is not liable in his capacity as landlord to his tenant for defects in the premises demised rendering them dangerous or unfit for occupation, nor for personal injury to the tenant caused by such defects, even though the landlord is aware of their existence. He is under no duty to warn the tenant of such defects. At common law a landlord who lets a house in a dangerous state is not liable to the tenant, or to a sub-tenant, or to the tenant’s customers or guests. (at para. 13.001)

The learned authors of Hill & Redman’s Law of Landlord and Tenant (2003) Vol.1 also said the following:

The common law has traditionally been reluctant to imply obligations in respect of repair against a landlord where the parties had entered into a contractual relationship in which it was open to the parties to make such provision but they failed or chose not to do so. Thus, the general rule is that, in the absence of express stipulation, or of a statutory duty, the landlord is under no liability to put the demised premises into repair at the commencement of the tenancy, nor, normally, is he under any such liability during the continuance of the tenancy. (at Division A para.6342)

There are, of course, exceptions to these general rules, but none of them is applicable here. Hence, in the absence of express stipulation in the Tenancy Agreement, I do not think that the court should imply a term requiring the plaintiff to repair the Premises.”

115.  Again, Ms Man does not seek to challenge the above legal principles. In light of the above legal principles and in the absence of any express stipulation of duty to repair on the part of the Plaintiff as landlord, I am not persuaded by the Defendant’s contention that the water leakage problem has become so serious that it is beyond the ambit of the Defendant and falls within the scope of duty on the part of the Plaintiff.  There is no arguable defence or arguable set-off against the Plaintiff’s claim for loss and damages being costs and expenses for repair and restoration of the Premises to good and tenantable condition as a result of the water leakage problem and consequent damage to the Premises.

116.  In any event, I am persuaded that clause 6.03 of the 1^st and/or 2^nd TAs precludes any claim by the Defendant against the Plaintiff for loss and damage caused by or through or in any way owing to water leakage to support any arguable defence of set-off.  Further, clause 3.07 of the 1^st and/or 2^nd TAs goes further to require the Defendant to be wholly responsible for and to indemnify the Plaintiff as landlord for any loss and damage or injury caused to person or property whether directly or indirectly (a) through the defective or damaged condition of any part of the interior of the Premises or (b) through or in any way owing to water leakage.

117.  I am therefore satisfied that the Defendant is in breach of Clause 3.03 for failing to repair and remedy the water leakage problem and/or the damage to the Premises, and is therefore liable to the Plaintiff for loss and damages as a result.  

118.  The remaining matter is whether in light the above analysis the Plaintiff is entitled to forfeit the Defendant’s tenancy for such breach.  At the Hearing, Mr Cheung has conceded there is no evidence of service of any section 58(1) notice in respect of such breach which is not disputed to be remediable.  In such circumstances, the Plaintiff’s claim for forfeiture for such breach is in the words of Lord Buckmaster LC in Fox “instantly demurrable”.  In the course of the Hearing, Mr Cheung eventually accepts that the Plaintiff cannot seek summary judgment for forfeiture of the Defendant’s tenancy on this ground.  In the circumstances, there is no need for me to go further to consider the issue of relief against forfeiture.

_____________________

[1]     Foskett, The Law and Practice of Compromise, 6th ed (2005) para.6-01 at p.107

[2]     Foskett (supra) para.8-09 at p.154

[3]     Crowther v Farrer (1850) 15 QB 677, Chitty on Contracts 13th ed Vol.1 para.3-047 at pp.280-281 and Hughes v Metropolitan Ry (1877) 2 App Cas 439, 448

[4]     Lewison, The Interpretation of Contracts (2007), para.14.13 at pp.536-538

[5]     Evercot Enterprise Company Ltd & ors v Steadfast Fashion Company Limited formerly known as Bess Fashion Creation Company Limited HCA3273/2001, Sakhrani J (unreported, 8 February 2002) at para.19

[6]     see also the 17/8/09 Letter

[7]     Woodfall’s Law of Landlord and Tenant Vol.1, para.17.098.1 at p.17/42

[8]     Merry, Hong Kong Tenancy Law, 4th ed (2003) pp.148-149

[9]     Hill and Redman’s Law of Landlord and Tenant Vol.1 para.A[4843]

[10]   see also State Securities plc v Initial Industry Ltd [2004] All ER (D) 317 (Jan), per Mr Jonathan Gaunt QC

[11]   Bullen v Tam Yee Ni [1998] 2 HKC 207

[12]   Woodfall (supra) para.17.167

[13]   Merry (supra) pp.145-147

[14]   Woodfall (supra) para.11.258

[15]   Merry (supra) p.144 and The Annotated Ordinance of Hong Kong – Conveyancing and Property Ordinance Cap.219, 2010 Reissue para.[58.22] at p.315

[16]   Lock v Pearce [1893] 2 Ch 271

[17]   report by KC Surveyors prepared in April 2010 for the Plaintiff and report by Building Diagnostic Consultants Limited prepared in June 2010 for the Defendant

[18]   Green Park Properties Ltd v Dorku Ltd (2001) 4 HKCFAR 448, 454-455