FAR EAST CONSORTIUM LTD v. FULL WEALTHY INTERNATIONAL LTD

HCA 2080/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2080 OF 2005

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J U D G M E N T

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1.  This is an appeal from the order of Master Au-Yeung given on 15 March 2006 in respect of 2 applications by summons.

2.  The first summons was the one dated 22 November 2005 taken out by the defendant for an order that the writ of summons indorsed with the statement of claim be struck out and the plaintiff’s action be dismissed.  The second summons was the plaintiff’s O.14 summons dated 29 November 2005 for summary judgment for vacant possession of the premises known as Portion B and Portion C on the Ground Floor of Far East Bank Tsuen Wan Building at Nos 135, 137/143 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong (“the premises”) and for rent and/or mesne profits to be paid until delivery of vacant possession.

3.  On the defendant’s summons the Master made an order that the same be dismissed with costs with a certificate for counsel to the plaintiff.  On the plaintiff’s summons, she made an order that the defendant do deliver up vacant possession of the premises to the plaintiff.  She also ordered that the defendant do pay to the plaintiff rent and/or mesne profits at the rate of HK$105,000 per month from 15 March 2006 to the date of delivery of vacant possession.  She also made an order for costs of the action including the plaintiff’s O.14 application by summons with a certificate for counsel to be paid by the defendant to the plaintiff.  The costs of the hearing before the Master were ordered to be split in the ratio of 50:50 for each summons.

Background

4.  The plaintiff is the registered owner and the landlord of the premises.  By a tenancy agreement dated 30 August 2004 made between the plaintiff as landlord and the defendant as tenant (“the tenancy agreement”) the premises were let to the defendant for the operation of a hairdressing salon for a term of 3 years commencing from 8 March 2004 to 7 March 2007 at the monthly rental of HK$105,000 for the 1^st and 2^nd years of the term and HK$110,250 for the 3^rd year of the term.

5.  The previous tenant at the premises was Wealthy Win (Asia) Ltd.  The defendant and Wealthy Win (Asia) Ltd. has common shareholders and directors.  The same hairdressing salon under the trade name “Trendy Salon Hair & Beauty” has been operating at the premises at all material times.

6.  The tenancy agreement contained the following break clause at clause 2 (a) of the Fourth Schedule (“the break clause”):

“Notwithstanding any provisions therein contained in this Agreement, the Tenant hereby agrees with the Landlord that if at any time during the term of this Agreement, the Landlord shall be desirous of demolishing and rebuilding the said Building or to carry out any other substantial alteration or additional works to the said Building which may adversely affect the use and occupation of [the premises] in a material way the Landlord shall be entitled to terminate this Agreement by giving to the Tenant not less than 6 months’ notice in writing to expire at the end of a calendar month.  Upon the expiration of such notice, the term of this Agreement shall absolutely cease and determine and this Agreement shall become null and void save and except for any antecedent breach of the terms of this Agreement by either party hereto and the Tenant shall deliver vacant possession of the said premises to the Landlord forthwith as though the term of this Agreement had expired by effluxion of time.”

7.  On 14 January 2005 the plaintiff’s Board of Directors passed a resolution in respect of the building where the premises were situate.  Para. 4 of the Board minutes of the meeting held on 14 Jan 2005 provided that:

“The Chairman reported that the management has proposed to renovate the Far East Bank Tsuen Wan Building (the “Building”) situated at Nos. 135,137/143 Castle Peak Road, Tsuen Wan, New Territories, from a commercial property to a hotel.  Substantial alteration works will be carried out on the Building for renovation approximately on or before 1 August 2005.

After careful considerations, IT WAS UNANIMOUSLY RESOLVED THAT:-

(1) it was bona fide and in the commercial interest of the Company to renovate and alter the Building from commercial property to a hotel; and

(2) the renovation and substantial alteration of the Building to a hotel is and be approved.”

8.  There can be no doubt that the premises would be adversely affected by the plaintiff’s renovation proposal.  Pursuant to the resolution, the plaintiff served a notice to quit (“the NTQ”) dated 21 January 2005 on the defendant under the break clause to terminate the tenancy on 31 July 2005.

9.  However, after the NTQ had been served but before its expiry the defendant was in arrears of rental payment to the plaintiff.  This led to the plaintiff commencing proceedings on 30 April 2005 against the defendant under HCA 774 of 2005 (“the earlier action”) for vacant possession of the premises and for rent and/or mesne profits with interest and costs.  By the statement of claim in the earlier action the plaintiff pleaded that by reason of the non-payment of rent the defendant repudiated the tenancy agreement which was accepted by the plaintiff by the issue and service of the writ whereupon the tenancy was determined (para 8).  It was also pleaded that further or in the alternative by reason of the non-payment of rent the defendant’s tenancy of the premises was liable to be forfeited and was forfeited to the plaintiff by the issue and service of the writ (para 9).

10.  After the earlier action had been instituted, the defendant paid up all the arrears of rent for April and May 2005.  This was done on 13 May 2005.  Subsequently, the defendant paid the monthly rent to the plaintiff.

11.  The defendant filed its defence in the earlier action on 15 June 2005.  By its defence the defendant denied that the plaintiff was entitled to forfeit the tenancy.  The defendant relied on a representation given that the plaintiff would not enforce the rights of forfeiture under the tenancy agreement provided that the defendant did not owe the plaintiff an amount equivalent to 2 months’ rental or more.  It is alleged that there was reliance on  the representation and that the plaintiff was estopped from enforcing his rights under the tenancy agreement.

12.  By summons filed on 13 September 2005 in the earlier action the plaintiff took out an O.14 application for summary judgment.  That was eventually dealt with by Master Lung on 24 November 2005 who dismissed the plaintiff’s summons.  However, before this the plaintiff had commenced this action by filing the writ of summons with the statement of claim on 21 October 2005.

13.  The earlier action has not yet been determined and is still on foot.

14.  As I have said, on 22 November 2005 the defendant took out its summons to strike out the writ of summons and statement of claim and to dismiss the plaintiff’s claim in this action or to stay further proceedings.  On 29 November 2005 the plaintiff took out an O.14 application for summary judgment in this action.  Both those applications came before Master Au-yeung on 15 March 2006 and it is against her order made in respect of those summonses that the defendant seeks to set aside on appeal.

15.  I propose to deal with the plaintiff’s O.14 application first. 

The plaintiff’s O.14 application

16.  The relevant principles applicable to O.14 applications are well-known and clear.  The threshold onus is on the defendant to show that there is a triable issue in order to obtain unconditional leave to defend.

17.  It is also useful to bear in mind what Godfrey J (as he then was) said in Unic Co. v Centus Development Ltd [1988] HKC 643 at 647:

“The power to give summary judgment under Order 14 is intended to apply only to cases where there is no reasonable doubt that the Plaintiff is entitled to judgment and where therefore it is inexpedient to allow the Defendant to defend for mere purposes of delay: see Jones v Stone [1894] AC 122.

As a general principle, where a Defendant shows that he has a fair case for defence or reasonable grounds for setting up a defence, or even a fair probability that he has a bona fide defence, he ought to have unconditional leave to defend.  Leave to defend must be given unless it is clear that there is no real substantial question to be tried, or that there is no dispute as to the facts or law which raises a reasonable doubt that the Plaintiff is entitled to judgment.  Order 14 is not intended to shut out a Defendant who can show that there is a triable issue applicable to the claim as a whole from laying his defence before the court, nor to make him liable in such a case to be put on terms of paying into court as a condition of leave to defend.”

And in Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225 Godfrey JA (as he then was) said at 228:

“Unless it is obvious that the defence put forward by the Defendant is ‘frivolous and practically moonshine, Order 14 ought not to be applied’ : see Codd v Delap [1905] 92 LT 510, per Lord Lindley at 511”

Any triable issue?

18.  The defendant seeks to raise 3 triable issues:

(1) that the plaintiff by serving the writ in the earlier action has elected to determine the tenancy.  That being so, the plaintiff cannot rely on the terms of the tenancy in particular, the break clause to determine the tenancy on the expiration of the NTQ;

(2) that there was no bona fide desire on the part of the plaintiff when it served the NTQ to carry out substantial alteration or additional works to the building under the break clause;

(3) that a promissory estoppel arises against the plaintiff because the plaintiff’s representative William Hui Wing Yiu gave an assurance to the defendant’s director before the execution of the tenancy agreement that the plaintiff would not exercise the break clause unless the plaintiff wanted to demolish and rebuild the building where the premises were situate and the defendant has acted on this assurance to its detriment.

19.  On issue (1), it is clear that the effect of issuing and serving a writ for forfeiture of a lease is the same as the effect of a re-entry by the landlord; in each case the lease is determined (Billson & Others v Residential Apartments Ltd [1992] A.C. 494 at 535 per Lord Templeman).

20.  In Wheeler v Keeble (1914), Ltd [1920] 1 Ch 57 it was held that the issue of a writ to recover possession was an unequivocal determination of the lease on the part of the plaintiffs who were the lessees and that it was not open to them to move for an injunction on the footing that the lease was still subsisting.

21.  Younger J after citing the relevant authorities said at 63:

“……accordingly it is not permissible for the plaintiffs in this action-based as it is on the determination of the lease-either in the writ itself or in any proceedings subsequent to the writ to claim relief on the footing that the lease is a subsisting lease, the terms of which continue to be binding on the defendants.  In my opinion therefore the plaintiffs are not entitled to obtain the injunction which they ask by simply referring to the terms of the lease.  If they are entitled to an injunction at all it must be apart from the terms of the lease and solely in respect of their own interest in the premises and of some irreparable injury which may be sustained by them through the acts of the defendants on the plaintiffs’ own property in case those acts are allowed to continue.”

22.  In Associated Deliveries Ltd v Harrison and Another (1984) 50 P. & C.R. 91 it was held that service of a writ seeking possession on forfeiture for breach of covenant to repair operated as a decisive election to forfeit and put an end to the term of the lease in question.  The relevant moment of determination of the lease and notional re-entry into the premises was the date of service of the writ rather than the issue and as from the date of service of the writ a landlord was entitled to recover mesne profits or damages for trespass and not rent under the lease.

23.  Dillon LJ said at 99:

“In the present context of forfeiture proceedings the estoppel is the other way, as was pointed out by Parke B. in Jones v Carter, in that the landlord having elected to forfeit the lease by the unequivocal act of serving proceedings for possession, is estopped from treating the term of the lease and the covenants in the lease as still on foot for the purpose, in Jones v Carter of suing the tenant for rent.”

24.  The Court of Appeal in Associated Deliveries Ltd applied Jones v Carter (1846) 15 M & W 718 and Wheeler v Keeble.

25.  Also, in Civil Service Co-operative Society v McGrigor’s Trustee [1923] 2 Ch 347 Russell J observed  at 358 that the authorities established that the issue and service of a writ in ejectment was such a final election by the landlord to determine the tenancy that a subsequent receipt of rent was no waiver of the forfeiture.

26.  Mr Lam, for the plaintiff, did not accept that the service of the writ in the earlier action had the effect of determining the tenancy as a matter of law.  He submitted that the tenancy was in a twilight period until the matter was determined and that the matter has not yet been determined.  He also referred to s.21F of the High Court Ordinance (Cap. 4) and submitted that as the defendant had paid rent he was entitled to statutory relief against forfeiture even if the plaintiff succeeded in its claim based on forfeiture in the earlier action.

27.  Mr Lam relied on what Parker LJ said in Liverpool Properties Ltd v Oldbridge Investments Ltd [1985] 2 E.G.L.R. 111 at 112:

“The position of a tenant under a lease subject to forfeiture for breach of covenant, when there is no issue but that the breach has taken place, is somewhat obscure.  There is a period of limbo during which it cannot be predicated for a certainty whether the lease will ever truly come to an end, for if there is a counterclaim for relief in an action for forfeiture and that counterclaim for relief succeeds and any conditions are complied with, the original lease continues.  It is only when the forfeiture is operated by physical re-entry that there is a determination of the original lease.  In such circumstances, if a separate claim for relief succeeds, there is then a new and separate lease upon the same terms and conditions as the old.  But when the forfeiture is sought to be effected by action and the counterclaim succeeds, the original lease is reinstated as if nothing had happened.

That suggests strongly that the intervening position is one of very considerable complexity.  It has been ventilated in a number of cases.  In certain instances it is clear that the tenant, despite a forfeiture effected by the issue and service of the writ, preserves an interest in the premises and for certain purposes may properly say that the tenancy survives.”

28.  Lord Parker LJ was, however, in the passage cited above dealing with the position of a tenant, not the landlord in the intervening period.

29.  It is significant that the defendant has not claimed relief against forfeiture but has defended the earlier action on the basis that the plaintiff was not entitled to forfeit the tenancy because the plaintiff was estopped from so doing.  There is no counterclaim for relief against forfeiture.  Further, under s.21F(3) of the High Court Ordinance it is only when the Court at trial is satisfied that the lessor is entitled to enforce the right of re-entry or forfeiture that the statutory relief against forfeiture for non-payment of rent comes into play.  That time has not yet come as the earlier action is still on foot and has not yet been determined.

30.  It seems to me that the plaintiff’s stance in the earlier action was clear.  Paras 8 and 9 of the statement of claim in the earlier action made it plain that the plaintiff elected to forfeit the lease by reason of the non-payment of rent by the defendant and that the tenancy has been determined.

31.  It is also clear that the defendant was treated by the plaintiff as a trespasser as from that time.  This is confirmed by para 4 of the reply of the plaintiff in the earlier action where it is pleaded that the payment of rent received by the plaintiff on 13 May 2005 “was treated in law by the [plaintiff] as mesne profits”.

32.  The NTQ had already been served prior to the service of the writ in the earlier action on or about 30 April 2005.  But the NTQ had not expired by then.  It would only expire on 31 July 2005.  However, the plaintiff’s stance was that it had already determined the tenancy and the plaintiff treated the defendant as a trespasser as from the service of the writ in the earlier action.

33.  It seems to me that it is at the very least reasonably arguable that:

(i) the plaintiff having elected to determine the tenancy such was an irrevocable election on the part of the plaintiff;

(ii) the plaintiff cannot rely on the terms of the tenancy agreement after such determination on or about 30 April 2005;

(iii) By seeking possession under the break clause and the NTQ served thereunder in this action the plaintiff is relying on the terms of the tenancy agreement which it cannot do.  Although the NTQ was served in January 2005 before the determination of the tenancy by the service of the writ in the earlier action, the plaintiff is relying on the terms of the tenancy agreement to recover possession in this action namely, the break clause.  It is the break clause which gives the right to the plaintiff to recover vacant possession as it provides that:

“Upon the expiration of [the NTQ] the term of this Agreement shall absolutely cease and determine and this Agreement shall become null and void save and except for any antecedent breach of the terms of this Agreement by either party hereto and the Tenant shall deliver vacant possession of the said premises to the Landlord forthwith as though the term of this Agreement had expired by effluxion of time.”

34.  I am satisfied that there is a triable issue on issue (1).  That being so, the defendant should be given unconditional leave to defend the action.

35.  As this matter will have to be resolved at trial, it is unnecessary and undesirable that I should express a view on the submissions made in respect of issues (2) and (3).  I bear in mind what Litton JA (as he then was) said in Man Earn Ltd at 230:

“In my judgment, all that the judge was called upon to do-and all that he should have done-was to have stated in a few words why he concluded that the plaintiff had failed to satisfy him that the defendant had no defence.  Any observations beyond that were unnecessary and otiose.”

The defendant’s striking out application

36.  The ground relied on by the defendant to strike out the writ and statement of claim and to dismiss the action or stay further proceedings is that the writ and statement of claim is frivolous and vexatious or is otherwise an abuse of the process of the court.

37.  It is trite that it is only in plain and obvious cases that the court should exercise its summary power to strike out a pleading.

38.  In my judgment the defendant has failed to show that this is a plain and obvious case in order to succeed in its application.  The defendant’s case is that the plaintiff is not entitled to seek possession of the premises relying on the break clause in this action during the pendency of the earlier action.

39.  The claim for possession in the earlier action was on the basis that there has been a forfeiture of the tenancy agreement and that the tenancy agreement has been determined.  The claim for possession in this action is on an alternative and different basis namely, on the basis of the break clause and the NTQ served under the break clause.  This cause of action had not accrued at the time of the issue of the writ in the earlier action.  For that reason, Master Lung, correctly in my view, dismissed the plaintiff’s O.14 application in the earlier action on 24 November 2005.  It is clear that the plaintiff’s O.14 application in the earlier action was based on the break clause and the NTQ served thereunder which matters were only pleaded in the reply but not in the statement of claim in the earlier action as this cause of action had not yet accrued at that time.

40.  It seems to me that there is no reason why a landlord cannot rely on more than one ground of termination at the same time.  As stated at para 18/7/12 of the Hong Kong Civil Procedure 2006:

“Either party may in a proper case include in his pleading two or more inconsistent sets of material facts and claim relief thereunder in the alternative….”

41.  It also seems to me that there is no reason why both actions cannot be consolidated.

42.  The defendant has failed to establish that this is a plain and obvious case for the court to exercise its summary power to strike out the writ and statement of claim and for dismissal of the plaintiff’s claim in this action or for a stay of further proceedings.

Conclusion

43.  The appeal against that part of the Master’s order granting summary judgment to the plaintiff for vacant possession of the premises, rent and/or mesne profits and costs of the action including the plaintiff’s O.14 application with certificate for counsel is allowed and that part of the Master’s order is set aside.  The appeal against that part of the Master’s order dismissing the defendant’s summons dated 22 November 2005 with costs and with certificate for counsel to the plaintiff is dismissed.

44.  I grant unconditional leave to the defendant to defend this action.

45.  I also make an order nisi for costs as follows:

(1) the costs of the plaintiff’s O.14 application before the Master to be costs in the cause with a certificate for counsel;

(2) the costs of the appeal against that part of the Master’s order dealing with the plaintiff’s O.14 application are to be costs to the defendant;

(3) the costs of the appeal against that part of the Master’s order dealing with the defendant’s summons dated 22 November 2005 are to be costs to the plaintiff;

(4) the costs of the appeal should be split in the ratio of 2/3 in respect of the plaintiff’s O.14 application and 1/3 in respect of the defendant’s striking out application.  This seems to me to be appropriate in view of the time spent on each application at the hearing of the appeal.

(5) the Master’s order splitting the costs of the hearing before her in the ratio of 50:50 for each summons is to remain.