FAI CHEUNG INVESTMENT COMPANY LTD v. PROFIT FORD (HONG KONG) INDUSTRIAL LTD

HCA 855/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 855 OF 2013

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1.  The plaintiff is the owner of a commercial building in Hung Hom, Kowloon. On 17 June 2011 the plaintiff entered into a Tenancy Agreement with the defendant for a four year term at a rent of $450,000. By summons pursuant to Rules of the High Court, Order 14.1, the plaintiff claims the defendant is in repudiatory breach of the agreement and seeks summary judgment for possession, mesne profits and damages.

2.  An Order 14 judgment will not be granted where the defendant satisfies the court that there is an issue or question in dispute which ought to be tried or that there ought, for some other reason, to be a trial.  It should only be granted in clear and obvious cases where the defendant has failed to show that he has any real or bone fide defence.  In the present case the defendant lodged an 11^th hour summons to amend the defence. The amendments were substantial.  The summons was opposed but I granted it prior to the commencement of the Order 14 hearing.  Whilst the amendments plainly fortified the defendant’s position they were not such as to guarantee the dismissal of the Order 14 summons.  Mr Victor Dawes, counsel for the plaintiff, did not seek an adjournment and very properly continued with the application.

Background

3.  The following matters were not in dispute:

(i) When the premises were let the occupation permit stated that the ground floor was to be used for “2 shops … and non‑domestic use” and the 14 floors above were “offices for non‑domestic use”.

(ii) It was known by both parties that the defendant’s plan was to convert the premises into a guesthouse or hotel.  The Tenancy Agreement specifically referred to this:

“(2) The Landlord agrees that the Tenant may, insofar as permitted by the laws of Hong Kong, apply to the government and relevant authorities for using the abovementioned property for the purposes of guest house/hotel operation during the tenancy period. All related procedures and/or license application shall be handled by the Tenant on its own with the Landlord’s best endeavours to assist. The Tenant shall also agree to bear all cost of this application…”

Pursuant to this clause the plaintiff signed a BA15 Notice authorizing a material change of use and a letter to the Town Planning Board in support of the defendant’s application for change of user.

(iii) The defendant took possession in early July 2011.

(iv) In April 2012 the plaintiff, through reports in the media, learnt that the building was already operating as a guesthouse in advance of all the necessary legal procedures having been completed.  In other words it was operating an illegal guesthouse.

4.  This Order 14 application was commenced 13 months later, on 15 May 2013.  An outline of the important events which occurred between April 2012 and May 2013 are as follows:

(a) In July 2012 the plaintiff engaged an authorized person to carry out a site inspection and prepare a report concerning the operation of the guesthouse in the premises.  It was common knowledge that extensive renovation works had been carried out.  The defendant has provided evidence that $4.29 million had been expended as part of the cost of these renovations.

(b) A ground floor restaurant commenced business sometime in mid 2012.  This amounted to a breach of the Tenancy Agreement.  Accordingly the plaintiff, in August 2011, applied to the Lands Department for an Offensive Trades Licence which was granted in November 2012, and the defendant was informed of the successful application in December 2012.

5.  On 19 December 2012, the plaintiff gave the defendant written notice of its grounds for termination of the Tenancy Agreement.  In outline they were:

1. operation of an unlicensed guesthouse;

2. breach of the occupation permit;

3. failure to submit building plans; and

4. carrying out structural alterations.

6.  The formal Termination Notice was served on 7 March 2013.

Is the claim unarguable?

7.  There are two main bases to the claim.  Firstly, Clause 15(1) of the Tenancy Agreement states as follows:

“(1) The Tenant shall not breach the purposes prescribed in the occupation permit. The Landlord does not guarantee that the abovementioned property can be used for any purpose, including but not limited to purposes such as guest house and hotel, except for purposes prescribed in the occupation permit.”

8.  It is not disputed that this clause has been breached.  However Mr Chan Hei Ching, counsel for the defendant, submits that it is at least arguable that this breach has been waived and/or acquiesced to.  The basis of this argument is that it was always the parties understanding that the premises were to be converted into a guesthouse.  Clause 15(2) of the agreement refers to this understanding. (Clause 15(2) has already been cited at paragraph 3(ii) on page 2 above)

9.  Moreover, the plaintiff conducted itself in accordance with Clause 15(2) by, for example, applying for the Offensive Trades Licence and by signing a BA15 form in support of a change of user.  Based on this support the defendant commenced costly renovations.

10.  Mr Chan further relies on an argument that the plaintiff has always accepted the rent and continues to do so.  However this argument has little force in view of the plaintiff’s solicitor’s letter dated 23 August 2013 accepting payments from the defendant “on account of mesne profits.”

11.  Mr Chan submits two further arguable defences to the breach of user claim as follows. 

12.  Firstly, the defendant will rely on an argument that the plaintiff has breached Clause 15(2) by pressurising the defendant into signing a formal tenancy agreement (a dispute of fact) before it would apply for the Offensive Trades Licence on the defendant’s behalf.  If a breach is established the ‘prevention principle’ would apply by which the plaintiff would be prevented from benefitting from its own wrong. 

13.  Secondly, the defendant will argue that the alleged breach does not go to the root of the contract and therefore is not repudiatory.  If the breach can be remedied by the removal of the user restriction the termination of the agreement is not an appropriate remedy.

14.  Unsurprisingly, Mr Dawes submits, succinctly, that these defences are unarguable.  In particular he submits that the defendant has not condescended as to particulars in support of estoppel by waiver and/or acquiescence.  Whatever factual disputes there may be it is unarguable, he submits, that the defendant has ‘jumped the gun’ in operating a guesthouse without the legal formalities being concluded.  It is now an illegal guesthouse and the landlord cannot tolerate that.

15.  The reason it cannot be tolerated is that it is open to the Building Authority to issue a notice requiring the cessation of the current use. Failure to comply with such a notice would constitute a criminal offence.

16.  In answer to the defendant’s argument that the plaintiff’s acceptance of rent constitutes a waiver, Mr Dawes submits that such a principle is inapplicable in this case because the breach of unlawful user is a continuing one and, as stated, monies paid after the initial breach are mesne profits.

17.  Finally, he rejects the submission that the breach is not a repudiatory one because an unlawful user would constitute a blot on title which would render the property unsellable.  It therefore goes to the root of the contract.

18.  The second matter relied by the plaintiff in support of summary judgment concerns the unauthorized building works which have been carried out and the failure to submit building plans.  Although the experts disagree about whether various building orders have been complied with, Mr Dawes notes that 13 of the many orders which have been registered remain unvacated.  Again, this would hamper any future sale and is therefore a serious breach.  Mr Dawes further complains that because of the unauthorized works the defendant is in breach of Clause 15(4) of the agreement which states:

“(4) The Tenant shall submit all engineering and renovation plans for approval by the Landlord prior to the commencement of renovation. The Landlord shall give the Tenant a reply within 14 days of receipt of such renovation plans.”

19.  In response Mr Chan submits that there are many fact sensitive issues with regard to the expensive alterations and renovations done by the defendant.  Differences of opinion between the experts cannot be overlooked and swept aside.  Moreover, existing breaches of building orders, if any, are capable of rectification and do not go to the root of the contract.

Decision

20.  The above is an outline of the differences between the parties.  The question now to be addressed is, in all the circumstances and applying the appropriate legal principles, should the defendant be denied his day in court? It is important not only to analyse each basis of claim individually, but also to consider the litigation as a whole.  One view of the entire matter could reasonably be stated as follows.  Both parties shared a common intention at the outset and the defendant properly embarked on an expensive renovation pursuant to that common intention.  The plaintiff started as a supporter of the venture but has become an opponent of it.  No criticism is made of this change of position because it came about after the media coverage in April 2012 brought the alleged illegalities of the venture to its attention.  Thereafter, as a responsible landlord it could not be seen to condone any imprudent cutting of corners by its tenant who was no doubt motivated by a desire to make the building into an income stream as quickly as possible.

21.  The defendant invites the court not only to find that the defences raised are at least arguable but also to consider their submissions in the context of the overall situation, namely, the nature of breaches, the disparity between the defendant’s potential loss and the plaintiff’s potential damages and the overall unconscionability of summary judgment against them.

22.  I have come to the conclusion that this is not a clear and obvious case in which justice requires summary judgment for the plaintiff.  The issues raised by the defence, in their amended defence and affirmation evidence fall into the category of “credible”.  It is plainly not a “sham” defence, neither is it “frivolous or practically moonshine”.  Once matters in dispute which are bona fides and credible have been established it is not for the court to further assess the prospects of success or failure based on affidavit evidence.

23.  I grant the defendant unconditional leave to defend and the plaintiff’s application to strike out the counterclaim is accordingly dismissed. I grant the plaintiff 28 days from the date hereof to file a Reply and Defence to Counterclaim.

24.  There will be a costs order nisi that the costs of this Order 14 summons be in the cause.