XCHRX ZENUNA LTD. v. JINGDOU TRADING CO. LTD. AND ANOTHER

HCA2130/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2130 OF 2001

----------------------

-----------------------

-------------------------

J U D G M E N T

-------------------------

1. This is an appeal by Gold Decade Investments Ltd., the 2nd defendant against the Master's decision and order of 3 September 2001 granting the 2nd defendant conditional leave to defend the action of Zenuna Ltd., the plaintiff, upon payment by the 2nd defendant of $84,092.85 into court by 10 September 2001.

2. The undisputed facts are that the plaintiff let to Jingdou Trading Company Ltd., the 1s defendant, shop premises in the development known as Times Square, shop no. 512 ( "the Premises" ) for a term of three years commencing 28 May 1999 at a monthly rent of $52,722.00 in the 2nd year of the tenancy, increasing in the 3rd year of the tenancy to $55,444.00 together with air-conditioning charges at a monthly rate of $1,519.70, service charges at a monthly rate of $1,336.00 and promotional charges at a monthly rate of $434.20 payable in advance on the 1st day of each calendar month. The 1st defendant rented the Premises for the purposes of operating a boutique selling ladies' fashion.

3. The Tenancy Agreement between the plaintiff and the 1st defendant ( "the Tenancy Agreement" ) contained an absolute covenant against assignment, subletting, sharing, parting with possession or transfer of the Premises or any part and against permitting or suffering any arrangement or transaction whereby any person who was not a party to the tenancy obtained the use, possession, occupation or enjoyment of the Premises ( "covenant against subletting" ). It also contained provision for the plaintiff to re-enter the Premises should the rent or any part be unpaid for 14 days or if the 1st Defendant failed to observe or perform any of its obligations.

4. The 1st defendant having failed to pay the rent due on 1 March 2001, the plaintiff issued distraint proceedings. A Warrant of Distress was issued on 2 April 2001 for HK$52,772.00 which was executed at the Premises on 25 April 2001 where the 1st defendant's goods were seized but of a value insufficient to cover the amount. On 3 May 2001, the plaintiff again seized goods under the same Warrant.

5. It was then for the first time that a Mr Joseph Yu produced to the bailiff a number of documents. These were a copy of a Business Registration Certificate issued on 26 April 2001 showing the 2nd defendant as carrying on business of a boutique in the name of 'SIDE ONE' at the Premises, a copy agreement in Chinese between the 1st defendant and the 2nd defendant dated 1 April 2001 whereby the 1st defendant let the Premises to the 2nd defendant for a term of one year commencing 1st April 2001 at a monthly rent of HK$52,772.00, rent receipts issued by the 1st defendant showing payment of rental for the months of April and May and a memorandum dated 1 April 2001 recording the sale and transfer by the 1st defendant to the 2nd defendant of the stock and tools of trade on the Premises for a sum of HK$50,000.00.

6. Although the boutique appears to have been operating under the name 'SIDE ONE' from the 26 or 27 April 2001, there is no suggestion that the plaintiff was aware of the agreement between the 1st defendant and the 2nd defendant until the 3 May 2001 when the plaintiff sought to execute the Warrant for Distress a second time.

7. On the 4 May 2001, solicitors for the 2nd defendant wrote to the plaintiff's solicitors seeking the return of the goods seized by the bailiff on the ground that they belonged to the 2nd defendant not the 1st defendant and enclosing a copy of the sub-tenancy agreement between the two defendants.

8. By letter dated 14 May 2001, the plaintiff's solicitors gave notice to the 1st defendant under section 58 of the Conveyancing and Property Ordinance that the tenancy and deposit were forfeited for breach of Section V(21) of the Tenancy Agreement for permitting or suffering the 2nd defendant to obtain the use, possession, occupation or enjoyment of the Premises since 1 April 2001.

9. The plaintiff then issued proceedings on 15 May 2001 against the 1st and 2nd defendants. Against the 1st defendant, the plaintiff relied on the 1st defendant's breach of covenant and failure to pay rent and claimed possession, unpaid rent and mesne profits until vacant possession. The plaintiff's case against the 2nd defendant was that it remained in the Premises as a trespasser since 1 April 2001 and the plaintiff claimed vacant possession, mesne profits, air-conditioning, service and promotional charges with effect from 1 April 2001 to 31 May 2001 totalling $112,468.57 with interest and mesne profits and the other charges from 1 June 2001 until delivery of vacant possession, alternatively damages to be assessed.

10. The plaintiff sought summary judgment against both defendants and final judgment was entered against the 1st defendant on 9 July 2001. The plaintiff also issued a summons under Order 29, rule 10 seeking interim payments against both defendants. Against the 2nd defendant, the plaintiff sought an order that the 2nd defendant pay the sum of $171,202.47 on account of the 2nd defendant's use and occupation of the Premises and further continuing interim payments of $58,733.90 on the 1st day of each calendar month commencing 1 July 2001 until further order for mesne profits and the other charges. At the same time as the 2nd defendant was given conditional leave to defend, the Master dismissed the plaintiff's application for interim payments against the 2nd defendant with costs to the 2nd defendant.

11. The 2nd defendant's case is that it should have been given unconditional leave to defend because as a matter of law, it cannot be liable to the plaintiff for damages for trespass prior to the forfeiture of the tenancy by the plaintiff, the plaintiff having no entitlement to possession prior to that date. As to the claim for possession and for damages in respect of use and occupation after the date of writ, the 2nd defendant's case is that the plaintiff cannot be entitled to such relief as a matter of fact, because the 2nd defendant ceased to be in occupation of the shop at a date before issue of the writ. It is accepted that the plaintiff forfeited the tenancy by the issue and service of the writ.

12. Since the condition which the Master imposed for leave to defend was payment into court of a sum which represented the unpaid rent at a date prior to forfeiture of the tenancy, it is argued, the 2nd defendant could not possibly be liable to the plaintiff for that sum and the Master ought to have granted unconditional leave to defend.

13. The plaintiff seeks final judgment alternatively an order that the 2nd defendant be given leave to defend conditional on it paying mesne profits and other incidental charges. Since the hearing is de novo, I am free to make any order which can be made on the hearing of an application for summary judgment. In addition, it seems to me that as the Master dealt at the same time with the plaintiff's application for interim payment, I may also make an order under that application if I consider it appropriate to do so notwithstanding that the plaintiff has not appealed against the dismissal of that application.

14. I therefore consider separately whether the 2nd defendant has an arguable defence to the plaintiff's claim for damages for use and occupation prior to the issue of the writ and an arguable defence to the claim for possession and damages for use and occupation after the issue of the writ. The latter depends on whether the 2nd defendant has raised a triable issue on the facts.

Damages before forfeiture

15. On the point that the plaintiff is not entitled before forfeiture to obtain damages for trespass on the ground that the plaintiff is not in possession, I have been referred by Mrs Dora Chan on behalf of the 2nd defendant to a number of authorities. The relevant authorities on which she relies include paragraphs 18-10, 18-11, 18-26 and 18-27 of Clerk & Lindsell on Torts, 18th Ed. in Chapter 18 on Trespass to Land and Dispossession. In particular, she refers to the statement in paragraphs 18-27 to the effect that a landlord who is entitled to re-enter on the termination of a lease may after entry sue for any trespass after it came to an end.

16. Elliot v. Boynton [1924] 1 Ch. 236 is authority for the proposition that as against a tenant in possession, the landlord is only entitled to mesne profits from the date of the writ and not from the date of the breach of covenant giving rise to the landlord's right to re-enter. The later case of Canas Pty Co. Ltd. v. K.L. Television Ltd. [1970] 2 QB 433 only overruled that case in part, the effect being that the date of service and not issue of writ is the date when the landlord re-enters and from which mesne profits should run. The rest of the decision in Elliot v. Boynton still stands.

17. As is clear from the course of the argument in that case ( at p. 239 ) and the judgments, a distinction is to be drawn between the landlord's cause of action against one who is a trespasser committing a wrongful act from the start and a tenant. Pollock M.R. said ( at p. 247 )

"...after entry there is a relation back to the actual title as against a wrongdoer, and in such a case a plaintiff can, as against a wrongdoer, maintain an action for trespasses committed before his entry...In the present case, however, the defendant was in possession under the lease, and was entitled to remain in possession unless and until some act was done by the lessor to put an end to the lease. The issue of the writ therefore was essential to alter the possession of the tenant. Until his voidable lease was determined he had a right to remain where he was."

and Lord Justice Warrington at p.250

"But it is said that the re-entry when made relates back to the previous breach of covenant giving the right to re-enter, and thus enables the lessor to recover mesne profits as from the date of such breach, and I must therefore deal with that argument. In considering this part of the question it must be borne in mind that damages by way of mesne profits cannot be given for breach of the covenant not to underlet. The damages are given for a different wrong altogether namely, the withholding of possession after the determination of the lease, and this wrong was committed upon and not before the service of the writ. If then the doctrine of relation were resorted to in this case the result would be to turn into a wrongful act that which at the time it was done was no wrong at all namely, the remaining in possession under and by virtue of the lease until it was determined by the lessor's election to avoid it. The case mainly relied upon by the appellant in support of his contention was that of the Ocean Accident and Guarantee Corporation v. Ilford Gas Co. and particularly the observations of Collins M.R., but it must be remembered that in that case the doctrine of relation was resorted to for the purpose of establishing the right of a particular plaintiff ( in that case a mortgagee who had not come into actual possession till after the commission of the wrong sued upon ) to recover damages for that which was unquestionably a wrong act, and not for the purpose of converting into a wrong an act which was rightful at the time it was done. In my opinion, therefore, in the present case the doctrine of relation cannot be resorted to so as to antedate the wrongful possession of the defendant, and to make it begin with the original breach of covenant."

18. The position therefore appears to me that in respect of the period prior to service of writ being the date of re-entry, the plaintiff could not have recovered damages for trespass against the 1st defendant notwithstanding that the sub-letting to the 2nd defendant was in breach of covenant. The question is whether for these purposes the 2nd defendant is to be treated as a trespasser 'ab initio' or in the same way as the 1st defendant against whom mesne profits could only be recoverable from the date of re-entry.

19. It is at the very least arguable that as against any person in possession of the premises as subtenant of the 1st defendant, albeit an unlawful subtenant, the plaintiff had no right of action in trespass until that re-entry and thus no right to damages in respect of any period prior to that date. It is notable that nowhere in any of the authorities to which I have been referred is there any suggestion that a landlord can take possession proceedings against an unlawful subtenant as a trespasser while the lease between the landlord and the principal remains in existence. The implication is that even an unlawful sub-tenant is not to be regarded as a trespasser; instead, the landlord's remedy is to forfeit the lease, which forfeiture will be effective against both tenant and subtenant entitling the the landlord to mesne profits from the date of service of writ against tenant and subtenant if possession is not given.

20. Mr. Patrick Szeto for the plaintiff referred me to the case of Silcock v. Farmer (1882) 46 LT 404 and a number of sections in the Conveyancing and Property Ordinance Cap.219 including sections 39, 40 and 41. However, the plaintiff's claim as pleaded against the 2nd defendant is not one for enforcement of a covenant in the lease between the plaintiff and the 1st defendant which the Plaintiff seeks to enforce against the 2nd defendant, whether it be the covenant against subletting or the covenant for rent. Nor is it a claim for damages for breach of covenant since mesne profits are not available as damages for a breach of covenant to sublet (per Warrington LJ in Elliot v. Boynton as cited above).

21. On an application for summary judgment under Order 14, I ought to consider whether the 2nd defendant has any defence to the claim as pleaded not any claim which the plaintiff could raise by way of amendment. The plaintiff could have pleaded its case in the alternative and could have applied to amend before the resumed hearing before me. In the circumstances, I do not think it right to consider this appeal on the basis of a possible amendment to the Statement of Claim which is yet to be formulated.

22. The 2nd defendant should have unconditional leave to defend that part of the plaintiff's claim for damages for mesne profits in respect of the period from 1 April 2001 up to the date of service of the writ.

The Evidence on the Claim for Possession and Mesne Profits from service of writ

23. Mr Joseph Yu, the manager of the 2nd defendant who was duly authorized to make an affirmation on its behalf deposed that it was upon Mr Tong, a director of the 1st defendant, representing that the plaintiff would consent to a subletting of the Premises by the 1st defendant to the 2nd defendant that the subtenancy agreement was entered into. The 2nd defendant appears to have entered into the subtenancy without such consent having been obtained and to have taken possession of the Premises without assuring itself that such consent had been obtained.

24. Mr Yu further deposed that during negotiations for the return of the seized goods, the plaintiff's management company threatened to sue the 2nd defendant for the wrongful subletting and demanded that the 2nd defendant vacate the Premises; otherwise, action might be instituted against the 2nd defendant by the plaintiff. In paragraph 13 of his affirmation of the 7 July 2001, the 2nd defendant's case was put thus :

"For fear of getting involved in the dispute between the plaintiff and the 1st defendant, the 2nd defendant decided to quit the said premises and subsequently moved out and returned the keys to Mr Tong of the 1st defendant on around 13 May 2001."

25. In response, the plaintiff filed evidence that neither the 1st nor 2nd defendant had informed the plaintiff of the 2nd defendant moving out on 13 May 2001 and that the Premises were open for business, that the 2nd defendant was still using 'SIDE ONE' as a trading name and that as at the 15 May 2001 when a sealed copy of the writ was posted up at the main entrance of the Premises, they were still being operated under the trading name of 'SIDE ONE' and that this state of affairs continued.

26. At the hearing before me, both parties filed further evidence. The plaintiff's evidence was to the effect that goods were still being sold under the label 'SIDE...1' at the Premises as recently as 19 September 2001 and that the Premises were still in business under the signboard 'SIDE...1'. In answer, the 2nd defendant's solicitor, Mr Raymond Ng was authorized to make an affirmation on the 2nd defendant's behalf on information and documents provided to him by Mr Joseph Yu.

27. Essentially, the 2nd defendant's additional evidence is to the effect that a company called Billion Victory Ltd is now trading at the Premises in the name of 'Side 1' and selling some fashion items bearing the brand name of 'Side 1' there. This is said to be pursuant to an agreement whereby the 2nd defendant sold its stock with the brand of 'Side 1' to that company along with all the tools of trade such as cashier machine, hangers, brand labels, models etc. for the price of HK$80,000.00 and handed over the shop on 13 May 2001 to that company. A document in Chinese dated 12 May 2001 was produced with the 2nd defendant named as 'Transferor' and Billion Victory Ltd as 'Transferee', signed by both with the 1st defendant as witness. The document records that the transfer is not to include the three months' deposit already paid to the 1st defendant and that Billion Victory Ltd agrees to return HK$182,811 being three months' deposit to the 2nd Defendant on 18 May 2001.

28. In order to explain why the 2nd defendant did not simply vacate the Premises when the plaintiff threatened proceedings, the 2nd defendant, through its solicitor, says that when the 2nd defendant wished to move out, the 1st defendant objected to the termination of the tenancy agreement and refused to return the rental deposit unless the 2nd defendant could find a replacement tenant. Not wanting to lose the deposit, the 2nd defendant had no alternative to find a new tenant for the 1st defendant.

29. In addition, the 2nd defendant's solicitor produces what he describes as an application to the Commissioner for Inland Revenue but which is in fact a notice dated 10 September 2001 to the Commissioner of Inland Revenue of cessation of the 2nd defendant's business of trading as 'Side 1' with effect from 13 May 2001. The explanation given for the late notice of cessation of business, which pursuant to section 8(2) of the Business Registration Ordinance should be given within one month of cessation of business is as follows :

"Since the 2nd defendant was busy looking for a new shop for its fashion business, it only managed to cancel its business registration no. 22181521 on 10 September 2001."

Whether leave to defend on the balance of the plaintiff's claim

30. All of this evidence is intended to show that the 2nd defendant is no longer in occupation of the Premises. The 2nd defendant did not mention any of these transactions between itself and Billion Victory Ltd nor the 1st Defendant's insistence that the 2nd defendant find a replacement tenant in the affirmation made on its behalf by its manager, Mr Joseph Yu on 7 July 2001. All that Mr Yu deposed was that the 2nd defendant decided to move out and returned the keys to Mr Tong of the 1st defendant on or around 13 May 2001. Yet, according to the evidence now put in, all of these transactions had taken place before Mr Yu made his affirmation.

31. The impression given by Mr Yu's affirmation was that the 2nd defendant had simply moved out leaving the Premises empty and that therefore there was no basis for the plaintiff to seek a possession order and mesne profits for the 2nd defendant's continued use and occupation.

32. Although I accept that it is inappropriate on an Order 14 application to conduct a mini-trial on affidavits, there are a number of features in the 2nd defendant's evidence which, if true, are astonishing.

33. The first, I have already mentioned, namely, the fact that these transactions between the 2nd defendant and Billion Victory Ltd were not mentioned by Mr Yu at all in his evidence. Mrs Chan for the 2nd defendant sought to explain that this evidence was simply in response to the Plaintiff's evidence as to the carrying on of a business in the name 'Side 1'; in other words, the 2nd defendant had to explain why business was being carried on in that name at the Premises after the 2nd defendant had allegedly vacated the Premises. However, this was not new nor was it something which could have taken the 2nd defendant by surprise.

34. Secondly, while the 2nd defendant says that it was threatened with proceedings by the plaintiff, when it allegedly moved out, it did not inform the plaintiff that it was doing so nor did it inform the plaintiff that somebody else would be selling stock and using the trade name 'Side 1' at the Premises who was nothing to do with the 2nd defendant. If the very thing which the 2nd defendant feared was suit brought by the plaintiff, it is astonishing that the 2nd defendant did not take the elementary step of telling the plaintiff what had happened.

35. Thirdly, the Chinese document dated 12 May 2001 does not appear on its face to be a transfer of business; it purports to be a sale of items including stock carrying the label 'Side 1' and an assignment of the sub-tenancy. Yet the arrangement was that the shop name of 'Side 1' should be retained. Thus, inevitably to the world at large and anyone who made a search at the Business Registry, the proprietor of this business would be the 2nd defendant and any liability arising from the sale of the goods or from the occupation of the Premises would appear to be that of the 2nd defendant. Yet, according to the 2nd defendant, it was prepared to let another totally unrelated party use and trade under its business name.

36. Fourthly, on the 2nd defendant's case, the 1st defendant had represented to the 2nd defendant that the plaintiff would consent to a subletting. Yet when the 2nd defendant sought to give up the subtenancy and to recover the deposit, instead of relying on this representation and the fact that the 1st defendant had sublet in breach of covenant which in turn led to the threat of proceedings by the plaintiff, the 2nd defendant says that it had no alternative but to accept the 1st defendant's refusal to return the deposit and therefore to find a substitute subtenant. The 2nd defendant cannot have wanted for legal advice since as early as 4 May 2001, the 2nd defendant had solicitors who wrote to the plaintiff protesting the seizure of the stock on the Premises which was said to belong to the 2nd defendant.

37. Fifthly, the reason given for not giving earlier notice of cessation of business trading as 'Side 1' is frankly incredible. If the 2nd defendant was continuing to look for shop premises to carry on its fashion business, why was the 2nd defendant giving notice of cessation of business at all?

38. Looking at the evidence as a whole, I find the 2nd defendant's evidence verges on the incredible and that there is good ground for believing that this part of the defence is a 'sham' defence. In the circumstances, the appropriate order is to give the 2nd defendant leave to defend the plaintiff's claim for possession and for mesne profits from the date of service of the writ conditional upon the 2nd defendant paying into court the amount of rent and all other charges from the date of service of writ up to the date when this judgment is handed down.

39. As in essence, the 2nd defendant is in substance unsuccessful in its appeal, I make an order 'nisi' that the 2nd defendant pay the plaintiff's costs of this appeal. The appeal is allowed to the extent that the original condition imposed by the Master for leave to defend is varied as set out above.