THE CENTER (51) LTD v. RICHFU HOLDING GROUP LTD

HCA 1729/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1729 OF 2012

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JUDGMENT

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The application

1. This is the plaintiff’s application by way of summons dated 19 February 2013 pursuant to Order 29 rule 10 for interim payment and Order 14 rule 1 for summary judgment of its claims in the Amended Statement of Claim.

2. Mr. A. Tang, counsel acts for the plaintiff and Mr. F. Yim, counsel acts for the defendant.

3. The action was taken out by the plaintiff as the landlord of an office under a lease for the period from 1 July 2011 to 31 May 2013 to the defendant as the tenant, who, as according to the plaintiff, had been in breach of the lease for the payment of rents and the monthly charges.  The plaintiff had terminated the lease on 19 September 2012.  The defendant delivered up possession of the premises to the landlord on 11 October 2012.[1]

4. The plaintiff’s claims are as follows[2]:

On Liability and Quantum	On Liability, with Quantum to be assessed
(1)   Rent and Fees[3]	(4) Re-instatement Costs[4]
(2)   Contractual Interest[5]	(5) Loss of Rental[6]
(3)  Costs of the Distraint Actions[7]

Defendant’s admissions and disputes

5. The defendant admits liability and quantum for all the items under paragraph 2 of the summons except for 2(c) and 2 (h), which are subject to assessment.  By admission of the defendant, judgment is given to the followings:

a.  Final judgment as per paragraph 2(a), (b), (d), (e) (f),(g),(i) and (j); and

b.  Interlocutory judgment on paragraph 2(c) and (h).

6. The only dispute, apart from the assessment of those items above, is the issue of set-off, which the parties agree to submit to this court for determination today.

Discussion on set-off

7. The main issue for this court to determine in this hearing is whether the defendant can rely upon the defence of set-off of the rental deposit for the sum of $1,420,976.00.

8. The plaintiff relies upon clause 9 of the lease:

“9.1 The Tenant shall on the signing hereof deposit with the Landlord…to secure the due observance and performance by the Tenant of the covenants, terms and conditions herein contained…

9.3 Without prejudice to any other rights or remedies of the Landlord hereunder, in the event of any breach …by the Tenant of any of the covenants…the amount of the Deposit paid by the Tenant shall be deemed to have been reduced by an amount required to remedy any such breach…in which event the Tenant shall…deposit with the Landlord the amount by which the Deposit is deemed to have been reduced and if the Tenant shall fail to do so the Landlord shall forthwith be entitled to re-enter…and in which event the Tenant’s right to payment of a sum equivalent to the Deposit so reduced…shall be forfeited…

9.4 …the Deposit…shall be paid to the Tenant by the Landlord without interest within 45 days…after settlement of the last outstanding claim by the Landlord against the Tenant for any arrears of Rent, rates and other charges and for any breach non-observance or non-performance of any of the covenants, terms and conditions herein contained..”[8]

9. Mr. Tang further relies upon Mr. Merry’s textbook Hong Kong Tenancy Law to say that the rental deposit is paid as guarantee or pledge for the fulfillment of the tenant’s contractual obligations and the tenant is not entitled to use the rental deposit to set off the rents for the last two months of the tenancy.

10. He also relies upon a case of Deputy District Judge R. Cheung in Lau Mei Sze v Chan Wai Shing (DCCJ4629/2006, 29 March 2007), in which the learned Deputy Judge held that the tenant was not entitled to set off part of his obligations to make payment to the landlord against the rental deposit for the reason that the landlord had the right to hold on to the deposit, which was to be returned to the tenant within 30 days after the tenant had delivered up vacant possession of the premises to the landlord.  The time was not yet due for the landlord to return the deposit to the tenant.  The decision was, of course, based upon the terms of the tenancy agreement in that case.

11. Mr. Tang submits that based on the above legal principles, and given:

  i.  the outstanding claims on, inter alia, Re-instatement Costs and Loss of Rental; and

  ii.  the shady and evasive behaviour of defendant throughout these proceedings; 

justice demands that the plaintiff should be allowed to retain the deposit until those claims are properly dealt with.[9]

12. Mr. Yim does not dispute the legal authorities submitted by Mr. Tang on the issue of deposit.  However, he relies upon a judgment from the District Court dated 24 April 2007, Hoi Cheng Pan v Headstart Educational Group Ltd[10], the plaintiff’s counsel in the case had ran the same point at length[11]. However, the learned HH Judge Ng objected such view after detailed analysis[12] :

49. “…It is difficult to understand why, as a matter of law, in the assessment of damages the court should not take into account the deposit but must leave the plaintiff, if he succeeds in the claim, to receive payment of the assessment of the damages assessed and then refund the deposit 30 days later to the defendant, and if the plaintiff fails to do so the defendant would be obliged to pursue another claim for recovery of the deposit.”

Mr. Tang responds to the above authority, saying that it was decided on the proposition of assessment of damages for actual loss suffered by the landlord, who claimed for loss of rental income for the unexpired term of the lease, not limiting its claim to arrears of rent and mesne profits up to delivery of vacant possession of the premises and therefore the rental deposit should be taken into account for set-off.  He submits that the present action is that the plaintiff claims for the arrears of rent and mesne profits, similar to the case of Orient Bright International Limited v Hiang Kie Hong Kong Limited, CACV220/2004 (unreported, 11 May 2005)the deposit should not be used for set-off.

13. Mr. Yim’s reply is that according to the defendant, the defendant proposed to settle the case without coming to court by allowing the defendant to set off the claims against him.

14. It is through the argument and submissions to me this morning that I understand that the real issue of set-off between the parties is on the amount that exceeds the rental deposit and other outgoings under the judgment granted by admission of the defendant and the damages to be assessed.  In essence, the plaintiff is not objectionable to setting off all the liabilities of the defendant, including the damages after assessment, and return the balance, if any, to the defendant. But obviously, there will be no refund to the defendant since the rental deposit is insufficient to cover the amount of damages admitted so far.

15. This scenario clearly explains the situation in HH Judge Ng’s decision, which is that if the rental deposit is insufficient to cover the damages and yet there are other damages to be assessed, the plaintiff is entitled to hold on to the rental deposit until all the damages are assessed and quantified.  Upon assessment of the damages, the plaintiff should set off such damages from the rental deposit and return the balance, if any, to the tenant.

16. The plaintiff’s right to retain the rental deposit as security for the damage that it may suffer because of the defendant’s breach of the lease is an accrued right under the lease, which will survive after the termination of the lease.

17. Mr. Yim does not dispute the plaintiff’s accrued right.

18. In the circumstances, the defendant is entitled to set off its liabilities, including the damages subject to assessment, but only after the liquidated amount of the damages has been assessed.

19. I shall give judgment to the plaintiff as per paragraph 5 hereof.

20. As to the costs of this application, I have to take note of the parties’ argument today.  From their written submissions, it appears that the discussions are on the general right of set-off under the tenancy agreement, without making reference to the special circumstances of those cases cited in the written submissions.  The plaintiff’s case has special features in that the rental deposit is insufficient to cover the liabilities admitted.  In the circumstances, costs will still follow the event, but the quantum will be assessed under Order 62 rule 9B, taking into account of the circumstances. The costs for this application, including the costs reserved and today’s hearing (with counsel’s certificate) are assessed at $60,000.00 to be paid by the defendant within 14 days from the date hereof.

21. I shall now make an order in terms as follows:

a.  Judgment and interlocutory judgment as per paragraph 5 hereof; and

b.  Costs of this application as per paragraph 20 hereof.