CHEUNG HEI LAN v. DING GAM SHAN

HCA 1173/2020

[2021] HKCFI 3048

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1173 OF 2020

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REASONS FOR DECISION

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1.  This is the Defendant’s appeal against the order of Master Rita So dated 10 May 2021 (the “Order”)  entering summary judgment in favour of the Plaintiff for vacant possession of the property situated at and known as Flat D, E and F, 5/F, Lucky House, 18-24 Jordan Road, Kowloon (collectively referred to as the “Premises”)  with damages to be assessed on various heads of claim (including rents in arrears and mense profit).

2.  Mr Simon So appeared on behalf of the Plaintiff and the Defendant appeared in person.

3.  Upon hearing the Defendant and Mr So for the Plaintiff on 8 October 2021, I allowed the appeal in part with consequential costs orders and directions (the “Decision”). Here are my reasons for the Decision.

4.  First and foremost, by the Defendant’s written submissions dated 2 July 2021, the Court was informed that she had vacated the Premises.  Upon enquiry at the hearing before me, the Defendant said she had moved out of the Premises on 1 June 2021 but without surrendering the keys to the Plaintiff since she was unable to get in touch with the Plaintiff by phone.

5.  In any case, the Plaintiff also confirmed that she had re-entered and obtained possession of the Premises since 1^st September 2021.  Hence, the appeal herein is restricted to the judgment on liability in respect of the Plaintiff’s monetary claims.

Background

6.  The Plaintiff was the owner of the Premises which were operated as a guesthouse (the “Guesthouse”)  in respect whereof 2 guesthouse licences (ie one for Flats D and E and another one for Flat F)  had been issued by the Hotel and Guesthouse Accommodation Authority (the “Authority”)  to the Plaintiff pursuant to the relevant provisions under the Hotel and Guesthouse Accommodation Ordinance, Cap. 349 (the “Licences”).

7.  The Defendant is a PRC resident. At the material time, she was staying in Hong Kong to look after her young son who was a Hong Kong permanent resident. Pausing there, the Defendant explained in Court that after vacating the Premises, she stayed in various guesthouses moving from time to time together with her 10-year-old son, who was attending a local primary school. However, she was reluctant to give her current address of service to the Court claiming that she did not have the full address at hand.

8.  By an agreement dated 26 April 2017 and signed by the parties (the “Agreement”), the Plaintiff leased the Premises to the Defendant and allowed the Defendant to operate the business of the Guesthouse on her own account. In practical terms, the Plaintiff rented out the Premises to the Defendant along with a “sub-licence” to operate the Guesthouse, which, as will be explained below, was prima facie prohibited by law unless with approval of the Authority.

9.  The Agreement contained the following terms that are relevant to the current appeal:

(a)  Clause 1 (as amended by manuscripts on the second page): The Plaintiff leased the Premises to the Defendant for her to operate the Guesthouse for a period of 3 years from 1 May 2017 to 30 April 2020.  For the first year (1 May 2017 to 30 April 2018), the parties would not be allowed to terminate the Agreement (“死約”)  whereas for the following 2 years (1 May 2018 to 30 April 2020)  the parties might elect not to continue with the tenancy (“生約”).

(b)  Clause 2 (as amended by manuscripts on the second page): The rent for the first year was HK$48,000 per month, and the rent for the subsequent years was to be determined in accordance with market rate.

(c)  Clause 3: The Defendant was to pay to the Plaintiff HK$150,000 as deposit.

(d)  Clause 4: The rent was due on the 1^st day of every month, and there was a grace period of 9 days. If the rent was not paid by the 10^th day of every month, the Plaintiff could take this failure as a breach of the Agreement, forfeit the deposit and re-enter the Guesthouse[1].

(e)  Clause 8: If the Defendant operated the Guesthouse in such a way causing the License(s)  to be revoked, the Defendant was to compensate the Plaintiff at a sum of HK$1,000,000 per licence.

(f)  Clause 14: The Guesthouse was to be renamed from “嘉賓(禧昌)賓館” to “禧昌賓館” in 2018 when the Licenses were to be renewed, after which its name should not be changed again.

(g)  Clause 15: During the period of renaming of the Guesthouse, if the Guesthouse could not be operated for any reason, the Plaintiff would not charge any rent for that period and should pay to the Defendant an amount equal to the rent for such period as compensation. The Plaintiff would also be responsible for any fees related to the renaming of the Guesthouse.

10.  On the strength of the Agreement, the Defendant took over the premises and operated the Guesthouse in place of the Plaintiff.  However, the Plaintiff remained to be the holder of the Licenses on the record of the Authority at all material times.

11.  In or around October 2018, the Plaintiff left Hong Kong to emigrate to Australia.  Since then, the Defendant was unable to contact the Plaintiff to negotiate the rent for the remaining period of the Agreement pursuant to Clause 2.  However, she continued to operate the Guesthouse and continued to pay the original rent to the Plaintiff (HK$48,000 per month).

12.  Since September 2019, the Defendant stopped paying rent to the Plaintiff for reasons that will become apparent hereinbelow.  By a notice dated 12 March 2020, the Plaintiff asserted that the Defendant’s failure to pay rent constituted a breach of Clause 4 of the Agreement thereby giving rise to a right of forfeiture of the remaining deposit and demanded the Defendant to vacate the Premises.

13.  Despite this, the Defendant continued to occupy the Premises and/or failed to vacate the Premises and deliver vacant possession of the same to the Plaintiff. Nor did she pay the Plaintiff the rent in arrears or any mense profit.

14.  The Writ of Summons was issued on 14 July 2020. By a Summons dated 5 January 2021, the Plaintiff applied for Summary Judgment, which culminated in the Order after a hearing before Master So on 10 May 2021. Pursuant to the Order, Summary Judgment was entered in favour of the Plaintiff with damages to be assessed.

The Pleadings

15.  In the Statement of Claim, the Plaintiff pleaded that the Defendant was in breach of the Agreement and claimed for:

(a)  Arrears of rent;

(b)  Forfeiture of the deposit that the Defendant paid at the beginning of the tenancy period under Clauses 3 and 4;

(c)  Vacant possession of the Premises, and

(d)  Mense profits arising from the Defendant’s unlawful possession of the Premises since termination of the Agreement.

16.  As far as discernible from the various homemade defence, affirmations and/or submissions filed by the Defendant, the wide array of her complaints can be summarized as follows:

(a)  Since the Plaintiff failed to negotiate the amount of rent payable after leaving for Australia, there was not even a tenancy agreement in force after the first year of occupation of the Premises and therefore the Plaintiff cannot claim for any rent.

(b)  By reason of the social unrest since mid-2019 and COVID-19 pandemic thereafter, the original monthly rent of HK$48,000 under the Agreement was too high, and therefore the Plaintiff should repay some part of the rent to the Defendant.

(c)  The Plaintiff (or its agent)  attempted to sabotage the business of the Guesthouse through various unlawful means of harassment such as cutting off the utilities serving the Premises, leaving debt collection notices at the Premises to scare away potential customers, and throwing red paint over the doors, walls and floors of the office of the Premises to instill fear in the Defendant and her staff.

(d)  By reason of these alleged acts of sabotage or harassment, the Defendant suffered unparticularized loss and damage in the sum of HK$112,321.8 plus HK$15,000.

(e)  The Plaintiff has wrongfully claimed for and pocketed the HK$130,000 subsidy provided by the Government under the Licensed Guesthouses Subsidy Scheme amidst the downturn of economy during to the COVID-19 pandemic, which ought to have been given to the Defendant, who was the one actually operating the Guesthouse and bearing all the losses during the relevant period.

(f)  Under Clause 15, the Plaintiff has yet to compensate the Defendant for loss of business resulting from the change in the name of the Guesthouse. The Defendant claimed that some potential customers felt that they had been cheated because the name of the Guesthouse was not that as they were told at the time of their bookings, and therefore refused to take up accommodation despite having made the bookings.

17.  By reason of her catalogue of complaints as aforesaid, the Defendant refused to pay any rent since September 2019 and did not vacate the Premises until after the granting of the Order.

18.  The Defendant also wishes to counterclaim for the various sums stated hereinabove that she believes are due and owing to her by the Plaintiff.

The Order

19.  The substantive hearing of the application for Summary Judgment was heard before Master So on 10 May 2021, whereupon summary judgment was entered in favour of the Plaintiff. In essence, the learned Master found that:

(a)  The Defendant simply could not raise any arguable defence against the claims of the Plaintiff.

(b)  The Defendant’s many complaints against the Plaintiff were, at best, reasons for a counterclaim, which had nothing to do with the Plaintiff’s claims, especially the claim for vacant possession.

(c)  Many of the Defendant’s complaints were unsubstantiated or insufficiently substantiated by the documentary evidence adduced by the Defendant.

20.  In the premises, Master So entered judgment on liability in favour of the Plaintiff against the Defendant ordering (1)  the Defendant to return vacant possession of the Premises to the Plaintiff on or before 7 June 2021; (2)  damages to be assessed; (3)  costs of and occasioned by the application for Summary Judgment be paid by the Defendant to the Plaintiff.

21.  For the sake of completeness, the Plaintiff’s collateral application for interim payment under a separate summons was abandoned and accordingly dismissed by the learned Master with no order as to costs for which there is no appeal.

The appeal

22.  In his written submissions, Mr So drew my attention to a number of cases pertinent to the claim for vacant possession.  Since the Plaintiff has already re-entered the Premises, this part of the appeal is rendered academic.  I will however take this into account when it comes to consideration of costs.

23.  As to the monetary claims for rent in arrears and mense profit, the Plaintiff’s claim is on the face of it straightforward.  I agree with the learned Master that the arguments raised by the Defendant (as summarized in Paragraph 16 hereinabove)  will give rise to a counterclaim.

24.  That said, in so far as the Defendant is able to establish an equitable set-off arising from the complaints summarized in Paragraphs 16(b)  and (f)  above, I am of the view that it may afford a valid defence regardless of whether they are also pleaded as a counterclaim (see RHC O.18, r.17).

25.  Further, the Plaintiff admitted at the hearing before the learned Master that there was no evidence before the Court to allow any damages to be assessed. In the circumstances, I am of the view that it is not appropriate to enter judgment on liability in respect of the monetary claims particularly in light of the arguable defence of set-off, which arose out of the same transaction.

26.  At the hearing before me, Mr So readily accepted, and rightly so, that in addition to a counterclaim, there might well be an arguable defence by way of set-off arising from the same facts.

Illegality of the Agreement

27.  By way of background, it was my original intention to deal with this appeal on paper. However, upon further reading, I saw fit to invite further submissions on the issue of illegality and/or unenforceability of the Agreement due to the non-transferability of the Licences by operation of the various provisions of the Ordinance.

28.  All along, the Plaintiff sought to paint a picture that the Agreement was a mere tenancy agreement, and the Defendant, while making various complaints, did not seem to dispute that. However, on a proper analysis, the Agreement is far more than an ordinary tenancy agreement.

(a)  Clause 1 of the Agreement provided that the Premises would be leased to the Defendant for operation of the Guesthouse by the Defendant.

(b)  Further, Clause 8 of the Agreement provided that where the Licence(s)  were revoked by reason of any wrongful acts on the part the Defendant, the Defendant would be liable to pay the Plaintiff HK$1,000,000 per licence as compensation.

(c)  From this perspective, the Agreement was not a mere tenancy agreement, but one involving sub-letting or sub-licensing of the entire business of the Guesthouse to the Defendant, who was not the holder of the Licenses or any valid licence under the Ordinance.

29.  There was a major overhauling of the Ordinance on 1 December 2020. Thus the relevant provisions of the Ordinance applicable at the material time were that first enacted on 2 May 1991 (Ord. No. 26 of 1991), which came into force on 1 September 1991 (LN 217 of 1991).  Unless otherwise stated, all further references to the Ordinance in this Decision should be read as references to the previous version.

30.  To start with, s.5(1)  of the Ordinance states the following:

“(1)  Any person who on any occasion operates, keeps, manages or otherwise has control of a hotel or a guesthouse in respect of which neither of the conditions indicated in subsection (2)  has been satisfied commits an offence and is liable on conviction to a fine of $200,000 and to imprisonment for 2 years and to a fine of $20,000 for each day during which the offence continues.”

31.  Of the conditions provided in s.5(2)  of the Ordinance, the one relevant is:

“(b)  that a licence has been issued under section 8 in respect of the hotel or the guesthouse and is for the time being in force.”

32.  Section 8 of the Ordinance deals with the issuing of licenses.  Of particular relevance is s.8(2)(a)  which provides that in face of an application for a licence, the Authority may :

“[issue] to and in the name of the applicant, a licence for the hotel or the guesthouse imposing such conditions as he thinks fit”.

33.  Further, s.12 of the Ordinance makes it clear that:

“(1)  Except as provided in this section a licence shall not be transferable.

(2)  The Authority may, upon application to him in such form and manner as he may determine, and on cause being shown to his satisfaction, permit the transfer to another person of a licence until its expiration and such transfer shall be endorsed on the licence.”

34.  For one reason or another, the Licenses were not exhibited by the Plaintiff and hence not before the Court. That said, there is no reason to doubt that the requirements and procedure under s.12 of the Ordinance applied, regardless of whether they were also stated as a licensing condition.

35.  On the face of it, the Agreement is tainted by illegality in that the Plaintiff allowed the Defendant to operate the Guesthouse, and the Defendant did operate the Guesthouse pursuant to the Agreement while she was not the holder of a valid licence under the Ordinance contrary to s.5(1)  as read with s.5(2)  of the Ordinance.

36.  By the same token, the Plaintiff was prima facie in breach of s.12(1)  of the Ordinance by allowing the Defendant to operate the Guesthouse without approval of the Authority.

37.  In Edler v Auerbach [1950] 1 K.B. 359, the plaintiff (lessee)  obtained a lease from the defendant (landlord)  for use of certain premises as an office.  As it turned out, the purpose for which the plaintiff used the premises under the lease amounted to a breach of a statutory restriction as to user.  The plaintiff brought an action claiming recission of the lease and the defendant counterclaimed for arrears of rent.

38.  In essence, applying Alexander v Rayson [1936] 1 KB 169, Delvin J (as Lord Delvin then was)  held that (1)  it was the defendant’s intention that the law be broken through the operation of the lease since the defendant knew that the plaintiff’s use of the premises under the lease would involve breaching the user restriction; and (2)  the defendant was debarred by his own act from enforcing the lease or claiming for the rent in arrears.

39.  By a letter dated 25 August 2021, the issue of illegality and/or unenforceability of the Agreement was brought to the attention of the parties, who were invited to make further submission, and an oral hearing was directed.

40.  In a supplemental submission dated 5 October 2021, Mr So rightly acknowledged that the issue of “illegality” might afford an arguable defence and hence leave ought to be granted for the Defendant to defend the monetary claims.

Disposal

41.  For the reasons set out above, the Defendant’s appeal herein is allowed to the extent that the terms of the Order are varied and substituted as follows:

(a)  paragraph 2 thereof is reversed in that unconditional leave is given to the Defendant to defend all claims for damages, howsoever pleaded in the Statement of Claim;

(b)  paragraph 5 thereof is varied and substituted by an order that the Defendant do have leave to file a Defence and Counterclaim, if so advised, within 28 days from the date hereof.

42.  As to costs of the application for Summary Judgment in the court below, paragraph 4 thereof is varied and substituted by an order that (1)  the Defendant do pay ½ of the Plaintiff’s costs of and occasioned by the Plaintiff’s summons for Summary Judgment (dated 5 January 2021)  including the hearing on 10 May 2021, to be taxed if not agreed, with certificate for counsel and (2)  the remaining ½ of the costs of and occasioned by the Plaintiff’s summons be costs in the cause.

43.  Correspondingly, paragraphs 1 and 3 of the judgment entered on 10 May 2021 pursuant to the Order are varied in accordance with the terms set out paragraphs 41(a)  and 42 hereinabove.

44.  For the avoidance of doubt, paragraphs 1, 3, 6 to 9 inclusive of the Order remain intact, which had effect or, as the case may be, shall take effect accordingly.

45.  In addition, the Defendant was directed to provide her address for service to the Court Registry forthwith and serve on the Plaintiff all further documents to be filed with the Court in the action herein.

46.  As to the costs of the appeal, I take into account the fact that on the one hand, the Plaintiff has re-entered the Premises and/or obtained re-possession thereof as of 1^st September 2021.  Such part of the appeal has been rendered academic.  On the other hand, the Defendant is successful in obtaining unconditional leave to defend the monetary claims for the reasons set out hereinabove.  In the circumstances, I order that costs of the appeal be in the cause.  

47.  Lastly, I declined the Plaintiff’s application for summary assessment of the costs provided in Paragraph 42 hereinabove for the reason that there may well be mutual set off of legal costs as the matter progresses further.

48.  I have also directed that a Chinese translation of the Decision herein be prepared and provided to the parties in due course.