EVERCOT ENTERPRISE CO. LTD. AND OTHERS v. STEADFAST FASHION CO. LTD.

HCA 3273/2001

Headnote

Practice and Procedure - master's appeal - setting aside default judgment - landlord and tenant - landlord's right of forfeiture - whether demand for rent by landlord's agent and cheques received by landlord's agent for rent after right of forfeiture arose were unequivocal acts of forfeiture. Held, the effect of an act relied upon as waiver of forfeiture must be considered objectively without regard to the state of mind of the landlord or tenant. Reasonable prospect of success on defence of waiver shown. Appeal allowed.

HCA 3273/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3273 OF 2001

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J U D G M E N T

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1. This is an appeal against the decision of Master M. Rogers given on 5 December 2001 whereby he ordered that the defendant's application to set aside the default judgment entered by the plaintiffs against it on 21 September 2001 be dismissed.

2. At the hearing before the master the defendant contended that the judgment entered was an irregular judgment. However, at the hearing of this appeal Mrs. Chan, counsel for the defendant, who did not appear at the hearing before the master accepted that the judgment entered was a regular judgment. She accepted that a notice of intention to enter judgment dated 10 August 2001 was sent by post to the defendant at the address for service given by the defendant in its acknowledgement of service of the writ. At that time the defendant was not represented by solicitors. The defendant's solicitors filed a notice to act on 7 September 2001 at which time the time for serving a defence had already expired. The defendant's solicitors did not ask for an extension of time to serve a defence nor did they enquire from the plaintiffs' solicitors as to whether a notice of intention to enter judgment under O.19, r.8A had been served by them. Mrs. Chan did not dispute that the provisions of O.19, r.8A had been complied with as the evidence showed that the plaintiffs' solicitors had sent by post the notice of intention to enter judgment to the defendant. This was effective service of the said notice. The defendant, however, maintained that it had not received the said notice.

3. On 21 September 2001 the plaintiffs entered judgment in default of defence. As I have said it is accepted by Mrs. Chan that the judgment entered was a regular judgment. However, she pointed out that the summons to set aside the judgment in default was issued shortly thereafter on 4 October 2001. She also submitted that the judgment was entered in default because of the fault of the defendant's solicitors in failing to ask or apply for an extension of time to serve the defence out of time or in failing to enquire from the plaintiffs' solicitors as to whether a notice of intention to enter judgment under O.19, r.8A had been served. She submitted that this was the fault of the defendant's solicitors and not the defendant's fault. She relied on Dongguan Dongxiang Decoration Co. Ltd. v. Universal Right Ltd. [1999] 1 HKC 790 where it was held that a litigant should not suffer the consequences of any fault on the part of his solicitor or counsel provided no injustice would be done to the other party.

4. I am satisfied that when the defendant's solicitors decided to act for the defendant to defend these proceedings they should have enquired from the plaintiffs' solicitors as to whether a notice under O. 19, r.8A had been served on the defendant or they should have asked for an extension of time to serve the defence out of time. It seems to me that this was the fault of the defendant's solicitors and is a factor to be taken into account.

5. The relevant principles governing an application to set aside a regular judgment are well settled. These have been correctly set out by the master in his reasons at para. 13 :

“ It is common ground between the parties that the relevant principles for the court exercising its discretionary powers are those set out in note 13/9/16 of the Hong Kong Civil Procedure 2001, namely :

(1) The discretionary power of the court to set aside a default judgment is unconditional and the court should not lay down rigid rules that deprive it of jurisdiction.

(2) The court should not give too much weight to the defendant's conduct of the proceedings relative to the assertions of the defendant as to the merits.

(3) As regards the merits, it is not sufficient for the defendant to show merely an "arguable" defence that would justify leave to defend under order 14; it must have a "real prospect of success" and "carry some degree of conviction" - the court must form a provisional view of the probable outcome of the action."

6. The primary consideration is, of course, whether the defendant has a defence with a real prospect of success. It was held by Keith J (as he then was) in Korea Sonbak Shipping Co. v. Charter Harvest Shipping Ltd.[1994] 1 HKC 494 that the primary consideration is whether the defendant has a defence which is not merely arguable but has a real prospect of success though not necessarily a better than 50/50 chance of success.

7. As pleaded in the statement of claim the plaintiffs as registered owners of the premises known as Shops 1043-44 on Level One of Metro City Plaza II, Tsuen Kwan O in the New Territories ("the premises") let the premises to the defendant by a tenancy agreement dated 28 November 2000 for use as a retail shop. This was for a term of three years from 11 July 2000 to 10 July 2003 at the monthly rent of $109,380.00 payable in advance on the first day of each month exclusive of rates, management fees and charges. In breach of clause 3(ee) of the tenancy agreement the defendant on a date unknown to the plaintiffs sub-let the premises to one Honto Properties Limited without the plaintiffs' consent, knowledge or approval.

8. The plaintiffs' case is that the tenancy became liable to be forfeited and was forfeited by the plaintiffs as evidenced by the letter from their solicitors to the defendant dated 2 February 2001. It is also pleaded that alternatively, the defendant's tenancy was forfeited by the service of the writ. The plaintiffs claimed an order for vacant possession of the premises, arrears of rent, rates and fees for the period before the forfeiture of the tenancy and mesne profits thereafter.

9. Although a number of defences were advanced before the master including estoppel, Mrs. Chan has before me confined the defence to one of waiver of the plaintiffs' right to forfeit the tenancy agreement. She also submitted that the plaintiffs failed to serve an effective statutory notice under S.58(1) of the Conveyancing and Property Ordinance (Cap. 219) before forfeiting the tenancy.

10. There is no dispute that the defendant as tenant wrongfully and in breach of the tenancy agreement sub-let the premises. By a letter dated 2 February 2001 the plaintiffs' solicitor sent a letter to the defendant. It stated, inter alia, that :

“ Your aforesaid sub-letting of the said premises without our clients' consent knowledge or approval in breach of the said tenancy agreement is a breach which is incapable of remedy. The above acts or omissions on your part, or any of them entitle our clients to forfeit your tenancy. We hereby give you notice that our clients are exercising their rights of forfeiture by service of this letter.

You are hereby required to deliver up vacant possession of the premises and pay up all outstanding arrears within 7 days from the date hereof, failing which legal proceedings will be brought against you for the recovery of the said premises and of the amounts due and owing without further notice."

11. By a letter dated 8 February 2001 the defendant wrote to the plaintiffs' agent, Henderson Real Estate Agency Limited ("Henderson"), informing Henderson that the sub-tenant Honto Properties Limited was no longer at the premises and that the defendant was carrying on business there. Henderson was also informed that a cheque for the payment of outstanding rent from November 2000 to January 2001 had been prepared and asked for a meeting to be held on the following day, 9 February. The defendant asked for a reduction of rent as well and requested the meeting for 9 February. There was a "without prejudice" meeting on that day, 9 February 2001, between the defendant's representatives and Henderson's representatives.

12. There is a dispute of fact between the parties as to what occurred at this meeting and as to whether any agreement or consensus was reached between them at that meeting. Mrs. Chan, however, does not rely on what happened at the meeting as constituting any waiver of the plaintiffs' right of forfeiture. She relies on a letter from Henderson dated 9 February 2001 addressed to the defendant whereby a demand for rent, rates and charges for two months i.e. for January and February 2001 was made. This was emphasized by the Chinese text to be an important letter.

13. There is no evidence as to whether the letter from Henderson was sent before or after the meeting of 9 February 2001.

14. On 10 February 2001 the plaintiffs' solicitors wrote to the defendant referring to the meeting on 9 February between the defendant's representatives and the representatives of Henderson. They put on record that the acceptance of the cheque for the rent, rates and charges from November 2000 to 31 January 2001 was "without prejudice" to the plaintiffs' forfeiture of the tenancy as this was payment for the period before the forfeiture arose. They also informed the defendant that the cheque would be presented on that basis.

15. On 2 March 2001 the plaintiffs' solicitors also wrote to the defendant informing it that the plaintiffs would not present the cheque that Henderson had received for the rent, rates and charges for the period from 1 February 2001 to 28 February 2001 as the tenancy was forfeited on 3 February 2001. This cheque has not been produced in evidence. They also made a proposal that the cheque be presented for payment with that part from 1 February 2001 to 3 February 2001 being applied for outstanding rent before forfeiture and the balance as mesne profits from the 4 February 2001 to 28 February 2001. As no reply was received to this letter the cheque was not presented for payment. From the evidence it appeared that there were further "without prejudice" negotiations between the parties but no agreement was reached.

16. The evidence also shows that the defendant on 23 March 2001 delivered to Henderson a cheque drawn by the defendant and payable to Henderson for $136,930.40 being the rent, rates and charges for the month of March 2001. This was accompanied by a receipt prepared by the defendant asking Henderson to sign and chop the same. It was stated :

“ PLEASE SIGN AND CHOP FOR RECEIVED THE CAPTIONED CHEQUE FOR THE SETTLEMENT OF THE RENTAL FEE FOR THE ABOVE PREMISES, DETAILS LISTED AS FOLLOWING."

And the details that were provided were the month for which the rental fee, rates, air-conditioning and other fees were paid, making up the total of $136,930.40, the amount of the cheque. Someone from Henderson stamped the receipt with a rubber chop of Henderson thereby signifying receipt of the cheque.

17. On 9 May 2001 two further cheques were delivered to Henderson by the defendant with two accompanying receipts prepared by the defendant in a similar fashion as the one dated 23 March 2001. Someone from Henderson also stamped the said receipts with a rubber chop of Henderson thereby signifying receipt of the two cheques for the rental, rates and charges for the months of April and May 2001 respectively. The evidence shows that these three cheques received by Henderson for the rental, rates and charges for the months of March, April and May 2001 were not presented for payment. However they were never returned to the defendant.

18. Mr. Chan Kwai Man, the assistant general manager of marketing of Henderson in his first affirmation stated at para. 13 :

“ It is for the very same reason that there is no landlord and tenant relationship between the Plaintiffs and the Defendant and the Defendant's failure to agree to treat the earlier payment for the month of February 2001 as payment of mesne profits that the Plaintiffs' Agent did not present the cheques produced and shown in exhibit "YCHJ-7" for payment."

The exhibit "YCHJ-7" exhibited the said three cheques. There is, however, no explanation given by the deponent as to why Henderson accepted the cheques in the first place and why the cheques were never returned to the defendant. The evidence shows that there were further "without prejudice" negotiations between the parties which did not, as I have said, materialize in any agreement.

19. It is well settled that acceptance of rent which accrued due after the date on which the right to forfeit arose will waive the right to forfeit for any breach of which the landlord was aware on the date on which the rent fell due (para. 17.098 Woodfall on Landlord and Tenant Vol. 1).

20. In Segal Securities Ltd. v. Thoseby [1963] (1 Q.B. 887) it was held that even a demand could operate as a waiver. Since no distinction could be drawn between a demand and an acceptance of rent "without prejudice" by a landlord with knowledge of a breach, both being merely different forms of a notification by a landlord of his election not to avoid or forfeit the lease, a demand "without prejudice" as in the case of an acceptance of rent "without prejudice" operated as a waiver.

21. Mrs. Chan submitted that the letter of 9 February 2001 from Henderson to the defendant was an unequivocal demand for rent for a period which included the period after the right to forfeit arose. The letter demanded rent for two months from January to February 2001. Mr. Chow, counsel for the plaintiffs, submitted that this was not an unequivocal demand for rent but that the letter was issued and sent by mistake by a member of Henderson's staff who was unaware that the defendant's tenancy had been forfeited or that the defendant had by its letter dated 8 February 2001 stated that it had already prepared its cheque for the arrears of rent, rates and charges from November 2000 to January 2001.

22. It seems to me that the defendant has shown that it has reasonable prospects of success in showing that the said letter of 9 February 2001 from Henderson to the defendant was an unequivocal act constituting a waiver of the plaintiffs' right to forfeit. In Central Estates (Belgravia) Ltd. v. Woolgar (No. 2) [1972] 1 WLR 1048, it was held that the landlord's demand for and acceptance of rent through their agents with knowledge of the breach of covenant effected a waiver of the forfeiture. Lord Denning, M.R. said at p. 1052 :

“ So we have simply to ask: Was this rent demanded and accepted by the landlords' agents with knowledge of the breach? It does not matter that they did not intend to waive. The very fact that they accepted the rent with the knowledge constitutes the waiver. The position here is quite plain. The agents, who had full authority to manage these properties on behalf of the landlords, did demand and accept the rent with full knowledge. It may be that the instructions did not get down the chain of command from the partner to the subordinate clerk who issued the demands and gave the receipts for rent. That cannot affect, to my mind, the legal position. It comes within the general rule that the knowledge of the agent ― and of his clerks ― is the knowledge of the principal. A principal cannot escape the doctrine of waiver by saying that one clerk had the knowledge and the other received the rent. They must be regarded as one for this purpose. The landlords' agents knew the position and they accepted the rent with knowledge. That is a waiver.

I know that the judge found that the agents had no intention to waive, and finds also that the tenant knew they had no intention to waive. That seems to me to make no difference. The law says that if the agents stated in terms: "We do not intend to waive," it would not have availed them. If an express statement does not avail a landlord, nor does an implied one. So it does not avail the landlords here."

And Buckley L.J. said at p. 1054 :

“ In my judgment, the effect in law of an act relied on as constituting a waiver of a right to forfeit a lease must be considered objectively, without regard to the motive or intention of the landlord or the understanding or belief of the tenant."

23. As regards the three cheques accompanied by the receipts which were stamped with the rubber chop of Henderson, Mr. Chow submitted that the cheques were not presented for payment. He relied on para. 17.098 of Woodfall where it is stated :

“ It is considered that save in exceptional circumstances the receipt by the landlord of a cheque for the rent which he does not present for payment will not amount to a waiver."

The case of Official Solicitor v. Thomas [1986] 1 EGLR 1 is cited.

24. In that case the court held that there was a distinction between the tender of a cheque and payment of rent. The court there rejected a submission by the tenant that once the cheque had been delivered to the landlord in the ordinary way and subject to it not thereafter being dishonoured when presented for payment, the tenant had paid the rent represented by the cheque and that it was no longer due. That case, however, is distinguishable on its own facts. There the court was not considering waiver of a right to forfeit. The court was concerned with the validity of a notice to pay rent and whether the tender of a cheque and the mere receipt of the cheque had the effect of discharging the debt due. Here, however, the point is whether accepting the three cheques in March and May 2001 and acknowledging receipt by stamping the accompanying receipts for rent, rates and charges, albeit prepared by the defendant, were unequivocal acts of waiver. Also, here, there is not just the mere receipt of the cheques but the giving of the receipts as well. Henderson accepted the cheque on 23 March 2001 and the two cheques later on on 9 May 2001 and acknowledged receipt on the accompanying receipts. There is no evidence as to why the cheques were not returned but as was held in Central Estates (Belgravia) Ltd. v. Woolgar (No. 2) the effect of an act relied upon as waiver of forfeiture must be considered objectively without regard to the state of mind of the landlord or the tenant.

25. Thus, the correspondence between the parties and the subsequent negotiations between the parties are also irrelevant to the consideration of whether the acceptance of the cheques and the acknowledgment of the receipts for rent, rates and charges for the months of March, April and May 2001 viewed objectively were unequivocal acts of waiver. This is to be considered without regard to the state of mind of the landlord of the tenant or their understanding.

26. It seems to me that the defendant has shown that it has a reasonable prospect of success on the defence of waiver.

27. It seems to me that the master fell into error by relying on paras. 17.264 and 17.265 of Woodfall. In para. 33 he said this :

“ I have now had the benefit of reading the relevant paragraphs of Woodfall on Landlord and Tenant. The law is now as stated in paragraphs 17.264 and 17.265 of Woodfall:

"By a notice to quit given to a tenant ... his tenancy is determined on the expiration of the current [period]; and the so-called "waiver" of the notice creates a new tenancy, taking effect on the expiry of the old one."

See Freeman v. Evans and Fletcher & Co. [1992] 1 Ch 36 and the cases cited therein.)

"Acceptance by the landlord of rent due after the expiration of a notice may be evidence upon which the court will infer the creation of a new tenancy. However, in each case the question is, quo animo the rent is received, and what is the real intention of the parties."

(See Clarke v. Grant [1950] 1 KB 104; Land v. Sykes [1992] 1 EGLR 1; Javid v. Aqil [1991] 1 WLR 1007 and Brent LBC v. O'Bryan (1993) 65 P&CR 258, all following the line in Doe v. Batten).

28. It appears that he relied heavily on the second passage in Woodfall because in para. 34 he stated that the second passage from Woodfall quoted above was the more significant for the purposes before him. He also said in para. 34 :

“ The real question is ascertaining the real intention of the parties, taking it into account any acceptance of rent that has occurred."

29. With respect to the master the paragraphs that he relied on in Woodfall deal only with the question of waiver of a notice to quit and not with waiver of the right to forfeit. The determination of a tenancy by a notice to quit is different from the determination of a tenancy by forfeiture.

30. In Segal Securities Ltd. v. Thoseby, Sachs J (as he then was) said at p.898:

“ It is thus a matter of law that once rent is accepted a waiver results. The question of quo animo it is accepted in forfeiture cases is irrelevant in relation to such acceptance."

That passage was also quoted by Lord Denning M.R. in Central Estates (Belgravia) Ltd. v. Woolgar (No. 2) at p. 1052.

31. It seems to me that master fell into error in considering and ascertaining what the real intention of the parties was when it is clear on the law that the effect of an act relied upon as waiver of forfeiture must be considered objectively without regard to the state of mind of the landlord or the tenant.

32. In view of my finding that the defendant has shown a defence with a reasonable prospect of success it is not necessary to consider whether the letter of 2 February 2001 from the plaintiffs' solicitors constituted an effective S.58(1) notice under the Conveyancing and Property Ordinance (Cap. 219). This is a matter which will have to be resolved at trial. However, I would mention that Mrs. Chan in reply referred me to para. 8725 of Hill & Redman's Law of Landlord and Tenant where it is suggested that even in the case of an irremediable breach the tenant must be given time to seek legal advice. It is stated that :

“ It is submitted that at least seven days should be allowed, although five days has been held acceptable."

The notice of 2 February 2001 did not give the defendant any time to seek legal advice as by that letter the solicitors gave notice that the plaintiffs were exercising their rights of forfeiture by the very service of the letter. I have not come to any concluded view on whether the letter was an effective notice under S.58(1) of the Conveyancing and Property Ordinance as the matter will have to be resolved at trial.

33. Mr. Chow rightly submitted that a defendant who is able to demonstrate a defence which has a real prospect of success does not have an automatic entitlement to have the judgment set aside. The court will have regard to all the relevant circumstances in exercising its discretion. (note 13/9/13 Hong Kong Civil Procedure 2002). He submitted that as a fall back position the court should impose a condition that the defendant should pay the plaintiffs the sum of $1,780,199.20. This is for the use and occupation of the premises from February 2001 to February 2002.

34. The defendant has undoubtedly been occupying the premises without paying rent or mesne profits since February 2001. Mrs. Chan accepted that for the use and occupation of the premises the defendant should pay rent, rates and charges. She informed me that the defendant has always been willing to do so and is still willing to pay the outstanding arrears but requires one month to pay. It seems to me that it matters not for these purposes whether the sum is called arrears of rent, rates and charges or mesne profits. As Mrs. Chan has confirmed that the defendant is willing to pay for the use and occupation of the premises the sum of $1,780,199.20 within one month from today, it seems to me to be just that the setting aside of the judgment should be conditional on payment by the defendant to the plaintiffs of the said sum.

35. I allow the appeal and set aside the order of the master. I order that the default judgment be set aside provided that the defendant pays to the plaintiffs or their solicitors the sum of $1,780,199.20 on or before 9 March 2002.