XCHRX WING HANG BANK LTD. v. FAST KING LTD. AND OTHERS

HCMP3404/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3404 OF 2000

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D E C I S I O N

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1. This is an appeal by the 6th defendant against the order of the Master made on 26 June 2001, dismissing his application to set aside the Order for possession and the Writ of possession and fieri facias combined in respect of the property known as Shop A Ground Floor Kwai Lai Building, Nos. 29-35 & 39-45 Shek Yam Road, Kwai Chung, New Territories ("the Property").

Background

2. By a legal charge dated 11 June 1998 ("the Legal Charge"), the Property was mortgaged by the 1st defendant to the plaintiff to secure certain banking facilities granted by the plaintiff to it. At the same time, four personal guarantees were given by the 2nd to 5th defendants as securities for the banking facilities.

3. The Legal Charge was subject to two tenancies. One of them was a two years tenancy granted by the 1st defendant to the 6th defendant under a tenancy agreement dated 25 February 1998, which commenced on 20 February 1998 and expired on 19 February 2000 ("the 1st Tenancy"). The Property was let for business purpose. It is thus common ground that Part V of the Landlord and Tenant (Consolidation) Ordinance, Cap.7 ("the Ordinance") applies to the 1st Tenancy. Under section 122(1) of the Ordinance, no tenancy shall cease without a written notice of termination being served, unless the tenant gives up possession or surrenders his tenancy in exchange for a new tenancy. It is also common ground that neither the 1st defendant nor the 6th defendant has served any written notice of termination as prescribed by section 122(1)(c) of the Ordinance.

4. The 1st defendant defaulted in its payment obligations under the Legal Charge. As a result on 12 July 2000, the plaintiff commenced these proceedings by Originating Summons under Order 88 Rules of the High Court, claiming for an Order for possession against the 1st defendant and for money judgment against the 1st to 5th defendants.

5. On 25 October 2000, judgment was entered for the plaintiff against the 1st to 5th defendants. On 19 January 2001, the plaintiff obtained a Writ of possession and fieri facias combined. The plaintiff attempted execution of the Writ on 9 March 2001.

6. On 18 April 2001, the 6th defendant applied to be joined as a defendant and for an order setting aside the Order for possession and the Writ of possession and fieri facias combined. On 26 June 2001, after hearing submissions, the Master granted the joinder but dismissed the setting aside application. The 6th defendant now appeals against the order of dismissal.

The issues

7. The 6th defendant's ground for setting aside is that he has a meritorious defence to the plaintiff's claim for possession. His defence runs as follows. As a result of the 1st defendant's failure to issue notice of termination, the 1st Tenancy did not cease upon the expiration of its term, but was continued by operation of the Ordinance. The 6th defendant therefore remains in possession under a tenancy, which is a statutory continuation of the 1st Tenancy. The plaintiff who is bound by the 1st Tenancy, is similarly bound by this statutorily continued tenancy. Further, being a continuation of the 1st Tenancy, it is not a new tenancy for which the plaintiff's prior written consent is required under clause 7.01(x) of the Legal Charge. Alternatively, if the court finds on the fact that a new tenancy was created after 19 February 2000 and that it is invalid as against the plaintiff since no consent has been given for it, then the new tenancy cannot operate as a valid surrender of the 1st Tenancy. The 6th defendant is therefore entitled to remain in possession under the 1st Tenancy as continued by the Ordinance.

8. For the plaintiff, it is argued that the 6th defendant remains in possession after 19 February 2000 not under a continuation of the 1st Tenancy, but pursuant to a new tenancy agreement. The new tenancy does not bind the plaintiff because no prior consent was given by the plaintiff. The creation of the new tenancy, however, brought about a surrender of the 1st Tenancy by the operation of law, and the 1st Tenancy is thereby terminated. Alternatively, the plaintiff says that even if there is a continuation of the 1st Tenancy, the plaintiff is not bound by it having regard to the wordings in clause 7.01(x) of the Legal Charge.

9. The issues to be determined at this appeal are therefore :

(1) whether, on the evidence, a new tenancy was created after 19 February 2000;

(2) if the answer to (1) is in the affirmative, whether, as a matter of law, the new tenancy has brought about a surrender and termination of the 1st Tenancy; and

(3) if the answer to (1) is in the negative and that the 1st Tenancy has been continued by statute, whether the continued tenancy binds the plaintiff.

I shall deal with these issues in turn.

A new tenancy?

10. As is expected, there is no evidence from the 1st defendant as to the circumstances leading to the 6th defendant remaining in possession after the expiration of the 1st Tenancy. The evidence of the 6th defendant on this is contained in paragraph 6 of his 1st affirmation filed on 26 April 2001. It reads :

"In about or about February 2000 when the Tenancy Agreement was due to expire, I discussed with one Mr Yeung of the 1st Defendant for a new tenancy. Yeung initially asked for an increase of $1,000 for rental per month. However, realising that the market condition were poor, Yeung told me that I could stay at the Premises at the old rent and the 1st Defendant would reassess the market condition at a later stage and let me know the time when a new tenancy agreement would be required."

The plaintiff does not dispute this part of the 6th defendant's evidence. The only question is the inference to be drawn from the evidence.

11. In my view, it is plain from the 6th defendant's evidence that :

(1) the 1st and 6th defendants had a discussion on the grant of a new tenancy.

(2) the 1st and 6th defendants had reached no agreement on any increase in rental.

(3) the 1st defendant agreed that the 6th defendant could stay on the Property at the same rent, but he had indicated that he would review the rent at a later time.

12. The only and indeed irresistible inference to be drawn from these basic facts and the fact that the 6th defendant remains in possession of the Property is that the 1st and 6th defendants had agreed that, pending a review of the market rent by the 1st defendant, the 6th defendant could continue to rent the Property at the old rent.

13. The 6th defendant has stated in his 3rd affirmation filed on 9 July 2001 in support of his application for stay of execution that although there were negotiations between him and the 1st defendant, they "were unable to reach any new tenancy agreement, written or oral" (paragraph 6(b)). This assertion cannot stand in the light of his earlier affirmation and the other evidence. It is clear from his 1st affirmation that the 6th defendant wanted to continue renting the Property, to which the 1st defendant had no objection. The only matter on which there was no consensus was whether there should be an increase in the rental and the rate of the increase. However, the 1st defendant had expressly allowed the 6th defendant to stay on and to pay the old rent. That was acted upon by the 6th defendant, who remains in possession and pays the old rent. There can be no doubt that there was an agreement between the 1st and 6th defendants that their landlord and tenant relationship would continue, albeit that there may be a revision in the rent at a later stage. There is thus an agreement for a new tenancy with the rent remains the same in the interim pending a review of the market condition by the 1st defendant.

14. Mr Pow for the 6th defendant argues that there is no legally binding agreement for a new tenancy. Firstly, it is said that there was no consensus ad litem. The analysis of the evidence in the preceding paragraphs points clearly to an agreement of minds between the 1st and 6th defendants. Secondly, it is submitted that the agreement is uncertain in its terms in that the term or length of the tenancy has not been agreed. I do not agree. The essential elements for a tenancy agreement are the property, identity of the parties and the rent. All these were clearly identified. It matters not that no fixed term had been prescribed. Periodic tenancies are recognized and enforced by the law. The fact that the rent is expressed to be paid on a monthly basis will mean that the tenancy is a monthly tenancy. Thirdly, it is argued that it would be inconsistent with the previous dealings between the 1st and 6th defendants for the tenancy to be agreed orally. Hence the absence of a written agreement is indicative of there being no tenancy agreement. This argument has ignored the evidence of the 6th defendant that the 1st defendant had expressly said that it would notify the 6th defendant when he would be required to sign the written tenancy agreement. The parties had contemplated that a tenancy agreement would be signed in due course. There is thus no inconsistency between the previous practice and the dealing in question.

15. In considering whether the evidence supports the creation of a new agreement, it is important to note that it is not the 6th defendant's evidence that he was aware of the provisions in section 122(1) of the Ordinance and the need for a notice of termination before the 1st Tenancy will cease. This being the case, it is apparent that he remains in the Property after 19 February 2000 because of what the 1st defendant told him, namely, he could stay on the Property at the old rent. It is not a case that he stays on because of his awareness that the 1st Tenancy has not ceased despite the expiration of its term or that he is holding over without the consent of the 1st defendant. Accordingly, the irresistible inference is that a new tenancy agreement has come into being.

Termination of the 1st Tenancy by surrender?

16. It is common ground that the creation of a new lease amounts to a surrender of an existing lease by operation of law, if the new lease is to begin during the currency of the existing lease : Woodfall, Landlord and Tenant para.17.023 at p.17/10. It is also common ground that in order to operate as a surrender of an existing tenancy, the new lease must be valid. Thus a surrender by the grant of a new lease is subject to an implied condition that the surrender should be void if the new lease should fail, in which case the old lease remains in force : Woodfall, supra, Doe & Biddulph v. Poole (1848) 11 QB 713, Knight v. Williams [1901] 1 Ch.256.

17. What counsel differ is whether the latter principle should apply in determining the rights between a mortgagee and a tenant. Mr Pow says that it should, relying on the judgment of Danckwerts J in Barclays Bank Ltd v. Stasek & Anor [1957] 1 Ch. 28. Mr Lam, on the other hand, submits that the principle should not apply to a case involving mortgagee and tenant, and that the case of Stasek should not be followed.

18. In Stasek, a landlord, having granted to the defendants a weekly tenancy of rooms on the first and second floors of his house, created a legal mortgage over the house in favour of the plaintiff. The mortgage was subject to the weekly tenancy and excluded the landlord's statutory powers of leasing without the plaintiff's consent. Thereafter, the landlord, without obtaining the plaintiff's consent, granted a new tenancy to the defendants in respect of the rooms on the second floor only. The first tenancy therefore came to an end. In the following year, the landlord, again without the plaintiff's consent, further let to the defendant's rooms on the second floor thereby effecting a surrender of the second tenancy by operation of law. Subsequently, the plaintiff obtained an order for possession against the landlord but the defendants claimed that they were entitled to remain. Danckwerts J held that the second tenancy being granted without the plaintiff's consent, was ineffective as against the plaintiff, the surrender by operation of law of the first tenancy was also ineffective, so that the tenants were entitled to occupy the rooms comprised in the original tenancy.

19. On the face of it, the facts in Stasek case are on all four with the facts herein. The only noticeable difference is that the original tenancy in Stasek was a periodic tenancy whereas the 1st Tenancy in this case is a fixed term tenancy. This, as Mr Lam rightly acknowledges, is immaterial. What Mr Lam seeks to argue is that the reasoning underlying Danckwerts J's judgment is faulty.

20. In his judgment, Danckwerts J after referring to the old authorities and the principle that where a second lease is ineffective in law, then the surrender through operation of law of the original term is ineffective, concluded that he must apply the principle to the circumstances of the case before him. He then went on to say as follows :

"Now I turn to the argument of the bank in the present case, when they claim that they are entitled to recognize the surrender but not to recognize the new tenancy. It seems to me that that argument cannot succeed because there is no surrender except through the new tenancy. It is a surrender by operation of law simply because the new tenancy cuts through the old. If the old is not cut short because the new tenancy is not operative, then the old tenancy remains, and there is no effective surrender. In the present case it is claimed that the new tenancy was not effective against the bank unless the bank, of course, chose to affirm and recognize it. Consequently, so far as the bank is concerned, there seems to me to have been no effective surrender of the tenancy created in August, 1947."

21. It appears from the above passage that Danckwerts J was of the view, and indeed influenced by this view, that a mortgagee bank having chosen not to affirm and recognize the new tenancy, should not be allowed to turn round and recognize the surrender of the old lease, which could only come about through the new tenancy. In Mr Lam's submissions, this view of the bank not being entitled to adopt an inconsistent stance is based on an erroneous presupposition that the mortgagee bank has a real choice regarding the new tenancy. It is erroneous because the new tenancy, granted without the mortgagee's consent, is, as against the bank, a nullity in law : The Banque de L' Indo Chine v. Mitcheel (1928) 23 HKLR 44 at 46. It is void and not voidable so that there is no question of the bank choosing between whether to affirm it or not to recognize it. I agree that it is not a question of the bank having an option in the matter. It is true that the bank can opt to take on the tenant as its tenant thereby creating a new tenancy between them, but that is different from confirming or ratifying or recognizing the tenancy created between the mortgagor and the tenant : Stroud Building Society v. Delamout (1960) 1 WLR 431 at 434, see also Typhoon & Research Ltd v. Seapower Resources International Ltd and Anor (unreported) DCCJ No.5911 of 2001 at paragraphs 26 and 27.

22. But taking the matter one step further, can the decision in Stasek be supported on other grounds? In my view, the matter ought to be approached by examining the considerations underlying the principle that, as between a landlord and a tenant, a surrender by operation of law should be void if the new lease should fail in law. The starting point is to recognize that the foundation of the doctrine of surrender by operation of law is estoppel : Woodfall, supra, paragraph 17.018 at p. 17/8. If there is a new arrangement which a tenant is asserting by his conduct, then he is estopped from denying that the landlord was capable of entering into that new arrangement because the old tenancy subsisted. It is for this reason that the tenant cannot deny that the old tenancy has been surrendered and gone : See Foster v. Robinson (1951) 1 KB 149, 155 per Evershed MR cited in Woodfall, supra, paragraph 17.023 at p.17/10. It also follows that where the new arrangement is invalid, there is no reason to prevent the tenant from going back to the old tenancy. As observed by Erle J in Doe & Biddulph v. Poole supra at p.643 :

"we can discover no reason why an implied surrender may not also be taken to be conditioned to be void on a given event. As the surrender is by implication only, it is equally open to imply a conditional or an absolute surrender : and, where the implication of a conditional surrender prevents injustice and gives effect to the real intention of the parties, the true spirit of the law requires that implication to be made, and forbids an implication leading to the contrary consequences. The implication of a condition, that the surrender should be void in case the new grant should fail, appears to us to be free from objection ... This construction would not interfere with the mutual estoppel from a deed between lessor and lessee; the doctrine would not apply till the new term had been defeated by title paramount, and all estoppel was removed."

23. Clearly, the whole purpose and the underlying objective of the principle is one of preventing injustice by giving effect to the intention of the parties. The question is : will it serve the interest of justice by extending the principle to the determination of the rights between a mortgagee and a tenant?

24. The first point to note is that such an extension of the principle can lead to inconvenient and even odd results. In the Stasek case itself, by reviving the original lease, which the parties to it had treated as having ended five years ago, the tenants had to move out of their existing rooms and return to rooms comprised in the original tenancy. As Danckwerts J himself recognized, this produced odd results. It is also possible that an old lease cannot as a matter of fact be revived because the premises involved had been physically altered so that the subject matter of the old lease is no longer available for letting or occupation : See Carroll v. Manet and Bank of India 79 P.S.C.R. 173 at 186 paragraphs 54 and 55.

25. Secondly, the discussion of implying a conditional surrender for the purpose of preventing injustice and giving effect to the intention of the parties has no application in a mortgagee and tenant situation. There is no direct relationship nor dealing between a mortgagee and a tenant unless and until there is default by the mortgage. There is no room for implying a mutual intention that the surrender of a good lease should be conditional upon the grant of a good lease.

26. Thirdly, there is no injustice once it is appreciated that a tenancy granted in breach of a mortgage is a nullity insofar as the mortgagee is concerned. There is no justification in the criticism that a mortgagee is adopting an inconsistent stance by not recognizing the new tenancy on the one hand, yet asserting, on the other hand, a surrender based on the creation of the new tenancy. Mr Pow argues that there is no prejudice to the mortgagee in that it is open to him to take step to terminate the original lease by, as in this case, serving a notice of termination. This argument however ignores the right of a mortgagee to obtain possession of the mortgaged property forthwith upon default in payment by the mortgagor. There is no reason why his right should be deferred to that of the tenant when, as in the present case, he has no means of knowing the grant of a new tenancy and has not consented to it. A tenant, on the other hand, is in a position to establish whether the landlord is entitled to grant a tenancy or whether he has obtained the necessary consent for the creation of a tenancy by conducting a search at the Land Office.

27. In my view, justice does not demand that, as between a mortgagee and a tenant, where a new lease is ineffective by reason of it being granted in breach of the mortgage, the surrender through operation of law of the old term, to which the mortgage is subject, should be held to be ineffective. I therefore do not feel able to follow the decision in Stasek.

28. In the present case, the granting of a new tenancy upon the expiration of the 1st Tenancy results in a surrender of the 1st Tenancy through operation of law. Despite that no notice of termination has been served by the 1st defendant, the surrender operates to bring an end to the 1st Tenancy. The new tenancy, being granted without the prior written consent of the plaintiff, cannot bind the 6th defendant. There is accordingly no basis for setting aside the order for possession and the Writ of possession and fieri facias combined.

Does the statutorily continued tenancy bind the plaintiff?

29. As a result of my conclusion that the 1st Tenancy cannot be continued by the operation of section 122(1) of the Ordinance, there will be no need to decide whether the plaintiff is bound by the statutorily continued tenancy. I will therefore only mention my views on this issue briefly.

30. Clause 7.01 (x) of the legal charge reads :

"the Borrower will not, without the prior written consent of the Lender and then only in conformity with any conditions whatsoever the Lender may reasonable impose, part with the use, occupation or possession of the Property in any way whatsoever whether by way of letting, sub-letting, sub-dividing, lending, sharing, assigning or other means whereby any person other than the Borrower obtains the use, occupation or possession of the Property, irrespective of whether any rental or other consideration is given for such use, occupation or possession save and except the letting and tenancy existing at the date hereof under which the property is let at the monthly rental of HK$18,800.00 per month and the Borrower will not agree to any deduction of rent or grant any new tenancy without the consent in writing of the Lender first had and obtained and the Borrower undertakes to notify the Lender in writing of any change in the terms of the letting and tenancy." (emphasis added)

31. Mr Lam's argument is that clause 7.01(x) is indicative of the plaintiff accepting to be bound only by "the letting and tenancy existing" at the date of the mortgage, which for the present purpose means the 1st Tenancy. Hence the part of the clause prohibiting the mortgagor from parting with possession of the Property by way of letting, ... or other means whereby any other person obtains the use, occupation or possession of the Property should be read as including a prohibition against the failure or omission to serve a notice of termination under section 122(1) of the Ordinance. In Mr Lam's submission, there is no room for implying that the plaintiff's consent under the mortgage extends to a continuation of the 1st Tenancy by operation of section 122(1).

32. I agree that the intention manifested by clause 7.01(x) is that the plaintiff only accepts to be bound by the 1st Tenancy and not any other tenancy not yet in existence and to be created. However by accepting to be bound by the 1st Tenancy, the plaintiff must be taken to have agreed to be bound by all the rights and liabilities attached to the 1st Tenancy. One of these rights and liabilities is that conferred by section 122(1) of the Ordinance. It cannot be that the plaintiff does not accept or consent to the statutory requirement of serving a six months notice of termination. Accordingly, the plaintiff must be bound by the legal consequences that flow from the failure to serve a notice of termination.

33. As to the part of the clause on prohibition against alienation, as Mr Pow observes, the failure to serve a notice of termination does not have the result of enabling any person to obtain the use, occupation or possession of the Property. Its effect is to enable the 6th defendant, who has already had the use, occupation or possession of the Property, to remain in use, occupation or possession. There is in short no parting with the use, occupation or possession on the part of the 1st defendant consequential upon the failure to serve a notice of termination. It is therefore not open to read into clause 7.01(x) an implied obligation on the part of the 1st defendant to serve a notice of termination or to take step to prevent a continuation of the existing tenancy by operation of statute.

Conclusion

34. For the reasons set out above, I am of the view that the Master is correct in dismissing the 6th defendant's application to set aside the Order for possession and the Writ of possession and fieri facias combined. The appeal is accordingly dismissed with costs to the plaintiff against the 6th defendant, to be taxed if not agreed.