KAM KEE (HOLDINGS) LTD. v. RICHEON CO. LTD. AND ANOTHER

HCA 8163/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8163 OF 1998

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J U D G M E N T

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By a written agreement dated 16 August 1997 ("the Agreement") made between the 1st Defendant as the vendor and the Plaintiff as the purchaser the 1st Defendant agreed to sell and the Plaintiff agreed to purchase the shop situated at the Ground Floor of Pak Cheung Building in Mongkok, Kowloon ("the Property") for $22,800,000.00 subject to and with the benefit of an existing tenancy ("the Tenancy") yielding $75,000.00 per month rental for a term of two years to expire on 22 August 1999. Completion, it is not disputed, was to take place at or before 5 p.m. on 16 February 1998.

2. By the end of 1997, the property market had fallen and it was around that time that the Plaintiff raised and maintained a number of requisitions or queries on title. All the requisitions are no longer relevant except for two matters. First, it was alleged that a roller shutter installed at the entrance to the Property protruded about 5cm into the airspace of adjacent land belonging to the government. Secondly, the tenant under the Tenancy quitted the Property on 4 February 1998 and the Plaintiff charged the 1st Defendant with re-taking possession of the Property without leaving the Plaintiff the right to hold the tenant liable under the Tenancy. As can be expected, the Plaintiff refused to pay the full balance of the purchase price by the deadline for completion and the 1st Defendant treated such as repudiation of the Agreement. Thereafter, the 1st Defendant transferred the Property to the 2nd Defendant and the Property has been re-let since around April 1998 for $72,500.00 per month rent.

3. According to evidence from the Defendants, which is not contradicted, the tenant under the Tenancy had fallen into arrears on payment of rent and the Property was made subject of a Prohibition Order issued by the magistracy for illegal use for a restaurant business. On 4 February 1998, the 1st Defendant received, inside an envelop delivered to its offices, the keys to a padlock for locking the roller shutter, a signed note from the tenant stating that he quits and a copy of the said Prohibition Order. The management of the 1st Defendant, unable to contact the tenant through mobile telephone, went to inspect the Property. Apart from arranging for the Property to be cleaned up, work was undertaken to replace the roller shutter complained of by a new one which does not protrude outside the entrance of the Property. Hence the objection on the old roller shutter, if valid, has been dealt with satisfactorily. Solicitors then acting for the 1st Defendant informed those acting for the Plaintiff by a letter dated 11 February 1998 of the "unilateral surrender" by the tenant and that the Property would be conveyed "with vacant possession" to the Plaintiff. Thereafter followed correspondence between solicitors on the issue of whether the 1st Defendant had breached the Agreement by re-taking possession. And this is the issue I have to decide.

4. Mr Chain, counsel for the Plaintiff, contended that by replacing the roller shutters and purporting to convey "with vacant possession", the 1st Defendant had re-taken possession of the Property and denied the Plaintiff as beneficial owner of the Property the right to hold on to the Tenancy. Moreover, having breached the Agreement as aforesaid, it was wrong for the 1st Defendant to insist on completion with payment of the full balance of the purchase price. The Plaintiff, argued counsel, was entitled to a reduction in price. Until the question of how much reduction was justified had been resolved, the Plaintiff was not bound to complete as scheduled.

5. Mr Ho, counsel for the Defendants, argued that there was no breach. The 1st Defendant did not re-take possession of the Property. Even if there was breach of the Agreement by re-taking possession, the 1st Defendant was ready, willing and able to put up substantial performance. The Plaintiff wrongly failed to complete by the appointed time. Hence the 1st Defendant was entitled, after the appointed time, to treat the Plaintiff as having repudiated the Agreement.

6. Both counsel agreed that had the 1st Defendant done anything that effectively terminated the Tenancy, the 1st Defendant would be at fault. See Rafeety v. Schofield [1897] 1 Ch.D. 937. So far as the "surrender" is concerned, counsel also agreed that the following extract from Hill and Redman's Law of Landlord and Tenant as good and applicable law:-

"Sub-Sect. 2. - Surrender by Operation of Law

375. Delivery of possession. - A surrender by operation of law, or implied surrender, occurs where one party does, and the other assents to, an act which is inconsistent with the continuance of the lease or tenancy. Delivery of possession by the tenant to the landlord and his acceptance of possession effect a surrender by operation of law. The surrender in this case depends upon the agreement by the landlord and tenant that an end shall be put to the term, and upon the change of possession in pursuance of such agreement. The change of possession is essential. A parol licence to quit will not of itself operate as a surrender; but where the tenant gives up possession in pursuance of the licence, and the landlord accepts it, the surrender by operation of law is complete. The surrender is effectual although the landlord accepts possession under a mistake induced by the tenant, provided that the tenant's conduct is not fraudulent. An implied surrender may be effectual under the Settled Land Act, 1925.

There is a delivery of possession sufficient to effect a surrender when the tenant returns the keys of the premises, and the landlord accepts them with the intention of changing the possession. But the consent of the landlord to the delivery of the keys is essential, and it is not sufficient that they are delivered to his servant who does not return them. If there is no consent at the time, the surrender is not complete until the landlord takes possession in such a manner as to estop him from denying that the tenancy is at an end. He does not thus take possession by attempting to relet the premises, nor by entering to do necessary repairs, nor by making occasional use of a part of the premises. But if, after the tenant has quitted the premises, the landlord relets them to another tenant who goes into occupation, this will effect a surrender from the time of reletting, unless the landlord gives notice to the tenant that the reletting is on his account."

7. Counsel differed, inter alia, in these respects. Mr Ho suggested that the 1st Defendant never intended to re-take possession and nothing done by the 1st Defendant as revealed in the evidence before the court should be treated as the 1st Defendant having re-taken possession. Thus there was no effective surrender by operation of law. Mr Chain, on the other hand, contended that the changing of the roller shutters per se was an overt act of re-taking possession and, in any event, solicitors then acting for the 1st Defendant had admitted, as agent for the 1st Defendant, that the 1st Defendant had re-taken possession by stating in their letter to those acting for the Plaintiff that the Property would be conveyed "with vacant possession".

8. In my judgment, a landlord does not have to re-take possession of the property let in order to do any work on the property. Thus, the changing of the roller shutters, whether the tenant was still in occupation or not, cannot in the absence of intention to do so be treated as re-taking possession. However, although there is uncontradicted evidence that the 1st Defendant did not intend to re-take possession, its solicitors did state that "vacant possession" would be delivered which ex hypothesis must mean that the 1st Defendant had taken possession. Lawyers are presumed Humpty Dumptys. They must mean what they say especially when they say it in legalese. With respect, I cannot agree with Mr Ho for the 1st Defendant that "vacant possession" are mere words. So, even if the 1st Defendant did not re-take possession, it admitted so through its appointed agents. I must, therefore, consider the fall back position relied upon by Mr Ho.

9. Mr Ho said that, even if the Tenancy had been terminated and so the Property did not carry the benefit of the Tenancy, conveyance of the Property with vacant possession to the Plaintiff would be substantial performance. And substantial performance must be accepted. See Goldful Way Development Ltd v. Wellstable Development Ltd [1999] HKLRD 563 and Max Smart Ltd v. First Super Investment Ltd [1999] 519. To re-inforce his argument, Mr Ho pointed out that the Tenancy, for its then remainder term at time of completion, was worth $75,000.00 x 18 months = $1.35 million at most. Contrast the expected rental income with the purchase price of the Property at $22.8 million, one can hardly fail to see what the Plaintiff was really buying. Hence, conveyance of the Property with vacant possession would give the Plaintiff substantially (over 95%) what it bargained for.

10. Mr Chain obviously realized that he was not on strong ground when it comes to percentage performance. But he cites the example of title being rightly rejected when there is a memorial registered against a property for arrears of managements fees for only a few thousand dollars. With respect, the example is untenable. A registered charge is a blot on title no matter what the amount of debt giving rise to the charge. In the present case, there was simply no problem with title.

11. Mr Chain had a stronger point. He said that whatever the worth of the Tenancy terminated by the 1st Defendant to the prejudice of the Plaintiff's rights as beneficial owner, there was a dispute over reduction of price and until the dispute had been resolved the 1st Defendant could not insist on payment of the full balance of the purchase price at completion. With respect, there may not be justification for any reduction if the short performance is de minimis. Even if there ought to be a reduction, the Plaintiff cannot claim set off. It is trite law that the amount must be fixed to insist on set off at performance. In the present case, it would be plain exaggeration to say that the Plaintiff stood to lose benefits of over a million dollars as a result of possession re-taken by the 1st Defendant. Often there is nothing to be gained by holding on to the Tenancy when the tenant has bolted. To re-take possession in the circumstances may well be obligatory to mitigate losses. Moreover, the Property could be re-let, as it has been, for new income that reduces the loss. There is evidence that the net loss in rental after re-letting is merely $2,500.00 per month. It defies ordinary sense of justice to allow the Plaintiff to refuse to complete a $22.8 million transaction because it may be entitled to a reduction of anywhere between $300,000.00 and $1,350,000.00!

12. Mr Ho also submitted that there is nothing in this case to find breach of a fundamental term. The term "subject to and with the benefits of" existing tenancy in the circumstances of this case cannot be regarded as a fundamental term. I respectfully agree.

13. The solicitors then acting for 1st Defendant issued a letter, after the Plaintiff failed to pay the balance of the purchase price by completion time, accepting repudiation by the Plaintiff of the Agreement. Since time is of the essence in commercial matters in general and in conveyancing contracts in particular, they were fully entitled to do so.

14. Accordingly, the Plaintiff's action is dismissed. There is judgment for the Defendants on the counterclaim with damages to be assessed and costs to be taxed if not agreed.

15. I take this opportunity to thank both counsel for their courtesy, assistance and expeditious conduct of this case.