LIN HEUNG TEA HOUSE & BAKERY (a firm) v. CORAL KING LTD.

HCA 19563/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 19563 of 1998

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

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

JUDGMENT

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

Procedural background

1. The two parties to these actions are Coral King Ltd. and Lin Heung Tea House & Bakery (a firm). I shall refer to Coral King as "the Landlord" and Lin Heung as "the Tenant".

2. In July 1998, the Landlord commenced High Court Action No.9849/98 against the Tenant for forfeiture. In November 1998 however, the Tenant commenced a separate action against the Landlord, HCA No.19563/98, for return of rental deposit and other relief.

3. In January 1999, Registrar Chu ordered that the two actions be consolidated, with the latter action to be the lead action.

4. In November 1999, the actions were tried before a deputy judge who made certain orders, some in favour of the Landlord and some in favour of the Tenant.

5. The Tenant appealed against some of those orders. The Landlord did not cross-appeal but in March 2000, the Court of Appeal set aside all the orders made by the deputy judge and ordered a re-trial.

Representation

6. As a matter of completeness, I should record that at the commencement of the re-trial, the Landlord, which is a limited company, applied for leave to be represented by its director Mr Lam Wing Hong ("Lam").

7. Although the application should have been made earlier to the Registrar pursuant to Order 5 rule 6(3) of the Rules of the High Court, it would not have been to anyone's benefit to delay the re-trial for the application to be made to the Registrar, so I heard the application.

8. Order 5 rule 6(3) requires a company to justify the making of such an application and to prove that "for lack of resources or for other good reasons", it could not otherwise be heard. Mr Lam produced a draft affirmation and supporting materials which showed that the company has not been able to meet the instalments for a large mortgage loan and has been incurring substantial interest. After considering those documents, I was satisfied that the company does not have the cash resources to instruct lawyers. Accordingly I gave leave for the Landlord to be represented by Mr Lam.

Factual background

9. Before I set out the issues between the parties, it may be helpful to narrate the factual background.

10. It is common ground that in January 1996, the parties entered into a written Tenancy Agreement for Shop No. 2 on the Ground Floor of No.77 Wanchai Road, Hong Kong.

11. The Tenancy Agreement was typed in Chinese, signed by both parties and stamped in January 1996. The term was from 16 January 1996 to 15 March 1998. The rent was $50,000 a month (exclusive of rates and management fees), to be paid before the 22nd of each month. The rental deposit paid was $150,000. No management fees were agreed. (In fact, no debit note for management fees was issued to the Tenant during the entire period of its occupancy of the premises).

12. It is common ground that in November 1997, there were 2 meetings between Lam of the Landlord company and Mr Ngan Chuen Fai ("Fai") and Mr Ngan Cham Kwan ("Kwan") of the Tenant firm, when negotiations for a renewal of the tenancy took place. It is not disputed that no agreement was reached at the 1st meeting.

Issue (1) - Was there an oral agreement to renew the tenancy?

13. The 1st issue in these actions is whether at the 2nd meeting, an oral agreement to renew the tenancy had been made.

Landlord's case

14. It is the Landlord's case that at the 2nd meeting in November 1997, there was an oral agreement for a renewal of the tenancy for a further term of 18 months from 1 April 1998 to 30 September 1999 at the rental of $65,000 a month.

15. The Landlord also says that it was further agreed that the half month rental from 16 March 1998 (after expiry of the fixed term) to 31 March 1998 would be calculated at the rate of the old rental (i.e. $25,000 for the half month), and that the Tenant could serve 2 months notice to terminate the tenancy at any time during the new term.

Tenant's case

16. The Tenant denies that there was any agreement. The Tenant admits that at the 2nd meeting in November 1997, the terms referred to above had been discussed, but Fai's authority was (to Lam's knowledge) limited to agreeing rent at $60,000 and he had no authority to agree rent at $65,000.

17. Since rent at this figure could only be decided by Fai's father, there was no agreement at the 2nd meeting as alleged, nor any agreement made thereafter because Fai's father did not agree to rent at $65,000 a month.

18. The parties' respective positions were articulated in their respective solicitors' correspondence in April 1998: - the Landlord alleged that there was an oral agreement for a renewal of the tenancy at $65,000 a month, and the Tenant denied that there was any agreement. The Tenant continued to tender rent at $50,000 a month.

Events leading to litigation

19. Both parties agreed that Part V of the Landlord and Tenant (Consolidation) Ordinance, chapter 7 of the Laws of Hong Kong, applied to the tenancy. The effect of s.122(1) is that, save for the exceptions stated (which do not apply here), a written notice of termination is required to determine a business tenancy. If the landlord wished to determine the tenancy, he is required to give 6 months notice. If a tenant wished to determine the tenancy, he is required to give 1 month's notice.

20. It is common ground that no notice of termination was given by the Landlord. On 5 June 1998, the Tenant through its solicitors gave notice to terminate the tenancy on 15 October 1998.

The 1st action

21. Within days of this notice being given, the Landlord issued proceedings (the 1st action) for forfeiture on the ground of non-payment of the increased rent from 1 April 1998 under the alleged oral agreement. The Tenant defended the proceedings.

22. On 15 October 1998 (the date stated in its Notice of Termination), the Tenant moved out of the premises. Subsequently however, the Landlord alleged that the Tenant had failed to reinstate the premises to their original state. The Tenant then caused its contractors to do reinstatement works, which the Tenant alleged were completed on 30 October 1998. It is common ground that the premises were re-let from 15 November 1998.

The 2nd action

23. On 17 November 1998, the Tenant issued proceedings (the 2nd action) for return of the rental deposit of $150,000. It also claimed repayment of rates and Government rent.

24. The Landlord in its Defence and Counterclaim denied that the Tenant was entitled to the return of the deposit on the ground that the tenancy had been forfeited.

25. It also claimed that the Tenant was indebted to it for arrears of rental/mesne profits at $65,000 a month from 1 April 1998 to November 1998 (less interim payment of $300,000), and management fees of $55,752 (being management fees for 341/2 months from 16 January 1996 to 30 November 1998 at $1,616 a month).

26. The Landlord also pleaded an unparticularized claim for damages on the ground that it was unable to re-let the premises immediately after 13 November 1998 because of the Tenant's failure to reinstate the premises, the evidence being that the premises were re-let on 15 November 1998.

27. At the re-trial, after the Tenant had closed its case, and after Lam had given his evidence in chief, the Landlord applied to amend the Defence and Counterclaim to add a new head of claim for the estimated cost of reinstatement in respect of items that the Tenant had allegedly failed to dismantle. I refused the application as it was made far too late and the reason given by Lam to explain the delay was unsatisfactory. The Tenant had already called its evidence on reinstatement twice (at the trial before the deputy judge and again at the re-trial) without the Landlord raising this new head of claim, and it would have been oppressive for it to be faced with a new claim and to have to call evidence on reinstatement a third time.

Analysis of 1st issue

28. The evidential burden in respect of the 1st issue whether an oral tenancy agreement had been made is on the party who asserts there was such an agreement i.e. the Landlord.

29. The Landlord's case is founded upon Lam's evidence of an oral agreement in November 1997, which he says is evidenced by a document containing Fai's handwritten amendments to a draft of the January 1996 written Tenancy Agreement.

30. It is common ground that at the 2nd meeting, the terms for a renewal of the tenancy had been discussed between Lam of the one part and Fai (accompanied by Kwan) of the other part.

31. The crux of the issue is whether, when Fai's authority was (to the knowledge of both parties) limited, any agreement was, or could have been, made.

Limit of Fai's authority known to Lam

32. The Tenant is a firm comprising 2 surviving partners, Ngan Tung Chun and Ngan Chi Yan.

33. Fai is the son of Ngan Tung Chun. He is also the manager of the restaurant section of the Tenant firm, which is located in Central.

34. Kwan was the manager of the bakery branch at the premises in question. He was related to the owners of the Tenant firm but he was only an employee. Although he had on instructions made overtures to Lam for negotiations, Lam had declined to negotiate with him and had asked that Fai see him for negotiations.

35. It is not disputed that at the 1st meeting, when the parties discussed the rent for a renewal of the tenancy and Lam proposed to increase the rent from $50,000 to $70,000 a month, Fai told Lam that his authority to agree a new rent was limited to $60,000 a month, and that anything higher than that would have to be referred to his father. However the Landlord insisted on $70,000 a month and no agreement was reached at that 1st meeting.

No agreement by authorised representative of Tenant

36. The 2nd meeting was called by the Landlord. At that meeting, Lam reduced the asking rent to $65,000. However that was still beyond Fai's authority.

37. Fai's evidence, which I accept, was that when he reiterated that he could not go beyond $60,000 as that was the limit of his authority, Lam told him to go back and consult his father.

38. Lam's own evidence, both in chief and in cross-examination, in fact supports Fai's lack of authority to agree to rent of $65,000. Lam said that at the end of the 2nd meeting, Fai said that he needed to seek his father's direction and that was how the meeting ended. Nothing relevant occurred thereafter until March 1998.

39. That was the extent of the Landlord's evidence of what had happened in November, when according to the Landlord, the oral agreement was made.

40. In those circumstances, since there was no-one at the meeting who had the authority to agree to $65,000 on behalf of the Tenant, there could not have been any agreement binding on the Tenant. Even though Lam and Fai were able to agree on other terms (i.e. the commencement date, the notice period and the rental for the period between 16 March and 31 March 1998), one of the most important terms of the tenancy - the rent - had not been agreed.

41. In the light of the above, I find that the Landlord's case of an oral agreement in November 1997 fails.

Draft evidencing proposed terms of new tenancy

42. At the re-trial, the Landlord placed some emphasis on an unsigned document, which was a photocopy of a draft of the January 1996 tenancy agreement on which Fai had added handwritten amendments. The amendments were of the proposed new term (from 1 April 1998 to 30 September 1999), the notice period for termination and the rent of $65,000. I shall refer to this document as "the Draft".

43. Lam's evidence was that the photocopy of the Draft had been delivered to him between 15-17 March 1998 by Kwan, together with a cheque for $25,000, and that Kwan asked him to type up the new tenancy agreement as soon as possible.

44. Lam cross-examined the Tenant's witnesses in detail on the Draft, such as whether it was written at the 2nd meeting, and how a photocopy was provided to the Landlord. Fai and Kwan both testified that Fai had written the amendments on the Draft at the meeting in November 1997 for Lam's confirmation, so that Fai would be able to revert to his father with those proposed terms. However they could not distinctly recall how the photocopy had been sent to Lam.

45. Their inability to recall when and how the photocopy had been sent may be said to provide some support for the Landlord's allegation of Kwan visit's to Lam on 15-17 March 1998 when (according to Lam) Kwan also delivered a cheque and asked him to type up the agreement.

46. However, it is important to note that it is not the Landlord's case that an agreement to renew the tenancy could be inferred from Kwan's conduct on 15-17 March 1998. The Landlord's case is that an oral agreement was reached with Fai at the 2nd meeting in November 1997. This is pleaded in paragraph 4 of the Defence and Counterclaim. This is also the Landlord's case as asserted by its solicitors in correspondence which started as early as 29 April 1998. At the previous trial, Lam had at one stage testified that the agreement had been reached at the end of February 1998, but he said in cross-examination at the re-trial that that was a lie and at the re-trial, he consistently asserted that the agreement had been made orally at the meeting with Fai in November 1997.

47. Therefore, Lam's evidence of Kwan's conduct in mid-March 1998 does not assist the Landlord's pleaded case that an agreement to renew the tenancy was made orally in November 1997.

48. In any event, I reject Lam's evidence of Kwan's alleged visit on 15-17 March 1998. His allegation that Kwan had asked him to type a new Tenancy Agreement along the lines of the Draft was never put to Kwan in cross-examination. This alleged request was never referred to in the correspondence from the Landlord's solicitors.

49. Whilst paragraph 11 of Lam's Witness Statement does contain such an allegation, it goes on to say in paragraph 12 that on 15 March 1998, he (Lam) typed a new Tenancy Agreement along the lines of the Draft. However, when one examines the typed new Tenancy Agreement, it is different from the Draft in that the commencement date of the term is 16 March 1998, not 1 April 1998.

50. At the re-trial, Lam tried to explain how this inconsistency arose by saying that he had typed the Tenancy Agreement around 27 March 1998 (not 15 March 1998) after Fai told him that his (Fai's) father did not agree to rent at $65,000. Lam said he therefore deliberately typed the commencement date as 16 March instead of 1 April to facilitate "negotiations" with the Tenant.

51. However, that belies the Landlord's case that there was already an agreement with the Tenant. If there was already an agreement, there would have been no need for "negotiations".

52. It can thus be seen that the Landlord's case is inconsistent and Lam's evidence is unreliable. I accept Fai's evidence that the typed Tenancy Agreement was sent to him on about 16 March 1998. I find that the Landlord sent this typed Tenancy Agreement (with the commencement date starting 16 March instead of 1 April as discussed in November 1997) in an attempt to pressurize the Tenant into agreeing to the Landlord's asking rent of $65,000, as the Tenant had not agreed thereto. This was what Lam meant by facilitating his "negotiations" with the Tenant.

Payment for half-month

53. As stated above, Lam's allegation was that Kwan had visited him on 15-17 March 1998 with the Draft and a cheque for $25,000, i.e. half of the monthly rent under the January 1996 Tenancy Agreement.

54. I shall refer to this cheque as "the 1st cheque" as it is now clear that during the month of March 1998, 2 cheques, each of $25,000, were sent by the Tenant to the Landlord. The 1st was dated 16 March 1998, drawn on the Hua Chiao Commercial Bank and was signed by Fai's father. The 2nd was dated 27 March 1998, drawn on the Yien Yieh Commercial Bank and was signed by Fai. The 1st cheque was presented on 25 March 1998. The 2nd cheque was presented in July 1998 after arrangements made through solicitors.

55. I have considered whether the sending of the 1st cheque supports the Landlord's case. If there was no agreement for renewal and the tenancy continued under Part V, rent should have been payable for 16 March to 15 April 1998, and that rent should have been $50,000. So why did the Landlord only pay half a month's rent on 16 March 1998?

56. In this regard, I accept Fai's evidence that the Tenant was, before the end of March 1998, still hoping that the Landlord would agree to renew as from 1 April 1998 at a rent of $60,000 per month. The Tenant had not wished to give up the shop after only 1 term, as it had spent some money for its decoration. Consequently, before Fai's father left Hong Kong between 1-10 March 1998, he had caused the 1st cheque to be sent for only the half-month 16 - 31 March 1998.

57. In the light of this evidence from the Tenant which I accept, I find that the sending of the 1st cheque for only $25,000 on or about 16 March 1998 does not support the Landlord's case that an oral agreement had been concluded.

58. As for the 2nd cheque, Fai's evidence was that the 2nd cheque was sent in ignorance of the 1st cheque. He said he was not aware that his father had caused the 1st cheque to be sent before leaving Hong Kong. He and his father had discussed the question of renewal during their long-distance conversation after he received the typed Tenancy Agreement from the Landlord, but they had not discussed the payment of rent. He was therefore anxious to pay what he thought was outstanding rent for March. Fai's evidence was not shaken in cross-examination. It was supported by the covering letter which stated that it was the "outstanding rental for the month of March 1998". These words would normally be regarded as meaning the period ending 31 March 1998.

59. Even if those words "the month of March 1998" were regarded as meaning "16 March to 15 April 1998", that would only mean that Fai was trying to make up the difference between the rent payable under the statutory continuation of the fixed term ($50,000) less what had been paid under the 1st cheque ($25,000). This is entirely consistent with there being no agreement for renewal.

No notice of termination given by Landlord

60. I have also considered the fact that the Landlord had not given 6 months notice to the Tenant under Part V, which may be regarded as consistent with the understanding that there was an agreement to renew. A prudent landlord anxious to secure the best return for himself in a rising market would give 6 months notice punctually if the tenant has not agreed on a renewal, so that he could obtain vacant possession of the premises for re-letting as soon as possible.

61. I find however that in the present case the Landlord did not do so because it thought the Tenant would give in and pay $65,000 rent. Lam said in cross-examination that he thought the Tenant was sincere in its negotiations for renewal, and he said they were very close because there was only $5,000 difference between his asking price ($65,000) and what the Tenant was prepared to pay ($60,000). Further, it is evident that the Landlord company was not well-organized. It appears to be run by only Lam and his wife, and the lack of organization is apparent from the fact (as can be seen later) that management fees for the building were not demanded until some 3 years after tenants were let into occupation.

Conclusion on 1st issue

62. In conclusion, I find that there was no oral agreement in November 1997 as alleged by the Landlord as, to its knowledge, Fai had no authority (and did not purport to have authority) to agree the rent it sought, and so, no concluded agreement to renew was, or could have been, made. The Landlord's case on the 1st issue therefore fails. Accordingly, the Landlord is not entitled to any rent or mesne profits at $65,000 a month as claimed.

Issue (2) - Reinstatement and delivery up of possession

63. The 2nd issue centres around the question whether reinstatement had been required and if so, when. The Tenant has made interim payment of $300,000 for the period 16 April 1998 to 15 October 1998. It is not disputed that on 15 October 1998, the Tenant left the premises and delivered the keys to Lam's sister on his instructions.

64. The Landlord's allegation is that the Tenant had failed to reinstate the premises. By its solicitors' letter dated 26 October 1998, the Landlord stated that reinstatement works should be done to restore the premises to their original state and that mesne profits would be charged for that period. The Landlord has also pleaded an unparticularized claim for damages on the ground that it was unable to re-let the premises immediately after 13 November 1998 because of the Tenant's failure to reinstate the premises.

65. The Tenant admits that reinstatement works were at first not done, but it says that that was pursuant to an express understanding with the Landlord. I accept that evidence. Kwan's evidence was that before 15 October 1998, Lam had told him that only moveable items needed to be taken away. Lam was also interested in acquiring the new split-type air-conditioning units which the Tenant had installed and had asked these not to be taken away as he was getting an estimate on their value.

66. The fact that the Landlord had asked the Tenant only to take away moveable items is evidenced by an open letter from the Tenant's solicitors to the Landlord dated 14 October 1998 which stated amongst other things :-

"We are instructed to place on record that as a result of discussions, an agreement is reached between you with our client that :-

(1) Upon delivery of vacant possession to you tomorrow afternoon by handing over the keys of the premises, our client is not required to demolish or dismantle any structures, partitions and/or decoration erected by our client during the tenancy.

(2) You agreed to purchase the air-conditioning unit belonging to our client at a price to be agreed. ...

If the above does not set forth accurately the agreement between you with our client, please do notify us or our client in writing so as to avoid any possible litigation in the future."

67. It is difficult to conceive of a clearer statement than that. The agreement referred to in the letter has not been disputed by the Landlord. It certainly did not notify the Tenant or its solicitors of any inaccuracy as requested.

68. Indeed, Lam admitted in cross-examination that he wanted the option whether to take over the Tenant's decorations. It is obvious that it was only around 23 October 1998 that he decided that he would require reinstatement after all, and the Tenant's solicitors were notified by an open letter from the Landlord's solicitors on 26 October 1998.

69. In the light of the above, it is clear that the Landlord had waived any right to reinstatement on the Tenant's delivery of possession.

70. To avoid litigation, the Tenant caused its contractors to reinstate the premises after 26 October 1998. Notwithstanding that, the Landlord cannot charge the Tenant mesne profits for that period of reinstatement. As it had waived reinstatement, the works done by the Tenant subsequently was work done only at the request of the Landlord, not because the Tenant was obliged to do so under the tenancy agreement.

71. Therefore the Tenant's occupation of the premises after 15 October 1998 for the purposes of reinstatement at the Landlord's request was not for its own benefit, but for the Landlord's. In these circumstances, the Landlord cannot be entitled to mesne profits from the Tenant for the period when its contractors returned to the premises to effect reinstatement works.

Issue (3) - Management services

72. Finally, there is the issue of management services. It is clear from the January 1996 Tenancy Agreement that both parties expected that there would be management fees.

73. Indeed, Mr Chain counsel for the Tenant has not submitted that it has no liability at all for any management services. Such a submission could not be made in the light of the evidence of Kwan, the manager of the bakery branch at the premises in question, who admitted that management services such as flushing water and common area lighting had been supplied to the premises.

74. However, no agreement had been made as to the amount of management fees during the tenancy. It would appear that at the time the January 1996 Tenancy Agreement was signed, the building had just been developed and the management fees had not yet been determined. Thereafter, until October 1998, when the Tenant left the premises, no management fees had been demanded by the Landlord or the manager of the building.

75. In the circumstances, the Landlord would be entitled to a quantum meruit for management services it had provided, or had caused its agent to provide.

76. It would appear that the manager of the building is a company called Chasefair Property Management Ltd, a company run by Lam's wife, Madam Tam Fung Har. She gave evidence that management fees have been set at $2.50 per square foot for upper floor units in the building which used the lift service, and at $2.00 per square foot for the shop units which did not use the lift service. She did not give evidence on the area of the shop premises in question here, but she produced a debit note for these premises dated 13 July 1999 (exhibit D-2), as well as a cheque dated 22 February 2000 issued by the tenant of the adjacent shop in the same building in payment for management fees from March 1996 to February 2000 (exhibit D-1).

77. This debit note dated 13 July 1999 was for the period 16 January 1996 to 15 November 1998. The charge for the entire period is stated as $1,800 per month. However this is at variance with the Landlord's pleadings which claim management fees at $1,616 per month for the same period. This was also the figure stated in Lam's Witness Statement. No evidence was given on behalf of the Landlord for this discrepancy between its pleaded case and the debit note.

78. The debit note produced (exhibit D-2) was also erroneous in that the period "16 January 1997 to 15 November 1998" was stated as "11" months when it should have been 23 months. The ensuing calculation was also erroneous.

79. As for the cheque issued by the adjacent tenant, this was in the amount of $66,000. However, it is difficult to determine from this what the management fee was because (i) Madam Tam gave evidence that this tenant had set-off certain unspecified expenses which that tenant had paid and (ii) there was no evidence as to the area of this adjacent shop, which may have been different to that of the premises in question.

80. Although the Landlord's evidence on the cost of management services is incomplete, the upshot of it all is however that management services had been provided to the Tenant, and that in determining the fees for the shops, a deduction had been made for the fact that they did not require the lift service. The evidence was also that the tenant of the adjacent shop had paid the management fees charged by the management company, albeit after setting off other expenses.

81. There was no cross-examination of Madam Tam challenging the reasonableness of the $2 per square foot charge, nor was there cross-examination that this did not translate into $1,616 (or $1,800) a month for this shop. Having said that, no explanation was provided by Madam Tam for the increase of $184 a month from the rate pleaded in the Defence and Counterclaim and asserted in the Witness Statement.

82. Taking all the above into account, I would assess the quantum meruit for management services at $1,616 a month for the period from 16 January 1996 to 15 October 1998 when the Tenant left the premises. As I have found above, the Tenant returned to do reinstatement works at the request and for the benefit of the Landlord, who had waived that requirement. I see no reason why the Tenant should be liable to pay for management services during that reinstatement period. The Tenant did not do the reinstatement works before 15 October 1998 because the Landlord had indicated that it did not require the works to be done.

83. I find therefore that the Landlord is entitled to $53,328 ($1,616 x 33 months) as quantum meruit for management services provided.

Agreed items

84. At the re-trial, the parties had agreed that the Landlord should repay to the Tenant Government rent of $2,292 and 5/6 of the rates of $6,547 paid by the Tenant.

Order

85. I would therefore order that the Landlord pay to the Tenant the following amounts:-

(1) $150,000 being return of the rental deposit,

(2) $2,292 being repayment of Government rent,

(3) $5,455.83 being repayment of 5/6 of the rates

with interest thereon at prime rate (from time to time) + 1% from the date of the writ to date of judgment, and at judgment rate from date of judgment to date of payment.

86. I would order that the Tenant pay to the Landlord $53,328 being the quantum meruit for management services, with interest thereon at prime rate (from time to time) + 1% from the date of the Defence and Counterclaim to date of judgment, and at judgment rate from date of judgment to date of payment. The claims contained in paragraphs (a) and (c) of the Counterclaim are dismissed.

87. As the bulk of the time used at the re-trial concerned the 1st issue whether there was an oral agreement, and as the Landlord could have issued proceedings in other tribunals for the quantum meruit for management services, I would make an order nisi that the costs of the action be to the Tenant to be taxed if not agreed. The effect of such an order nisi is that if no application is made within 14 days to vary that order, it will become an absolute order of the Court.