WIN GLORIES LTD v. MAJORLUCK LTD

CACV 506/2018

[2019] HKCA 1226

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 506 OF 2018

(ON APPEAL FROM LDPE NO 824 OF 2017)

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JUDGMENT

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Hon Cheung JA:

1.1.   I have the benefit of reading the judgment of Yuen JA with which I respectfully agree. I would like to add the following observations of my own. It is by now well‑established that the Court may employ both the contextual and textual approaches in contractual interpretation in any given situation. As Lord Hodge JSC in Wood v. Capita Insurance Services Ltd [2017] AC 1173 stated:

‘ 13 Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. ...’

1.2.     This approach was followed by this Court in Eminent Investments (Asia Pacific) Limited v. DIO Corporation CACV 207/2016 ([2019] HKCA 606) [7.4]).

1.3.     The context of this case is that, first, the Tenant is operating the only wet market in the building and is required under the Tenancy Agreement to carry out onerous tasks in the maintenance and upkeep of the wet market as detailed by Yuen JA at [8.3].  Second, on the other hand, the other tenants in the other commercial parts of the building (i.e. the non -wet market area) are not required to assume such onerous tasks.  Third, the tenants in the non-wet market area are expressly required to pay management fees. 

1.4.     Turning to the text of the Tenancy Agreement, it is totally silent on the obligation of the Tenant to pay any management fees.  Mr Anthony Chan for the Landlord argued that it is irrelevant if the obligation to pay management fees is not expressly stated.  I disagree.  The term ‘management fees’ is so commonly used in tenancies and other land matters in Hong Kong that the lack of provision for it is clearly an indication that it was never intended to be charged in the first place.  The contrast between the Tenant’s position and that of the other tenants cannot be more revealing, particularly, as Yuen JA pointed out, when the Tenant is entitled to charge management fees from its own licensed stall‑operators which clearly is a reference to the expenses incurred by the Tenant in the maintenance and upkeep of the wet market. 

1.5.     Further in respect of the ‘joint charges’ which the Landlord argues gives it the right to charge management fees, the clause is also silent as to the nature of these joint charges and to which part of the building these joint charges are related to.  Given the earlier part of Clause 3 has specifically identified the type of charges, I am of the view that it does not cover the management fees which relate to the common parts of the building.  Given the context and text of the Tenancy Agreement, I agree with Mr Thomas Lai that it has not been intended that the Tenant is to pay for the management fees because of the obligations that it has already assumed for the maintenance and upkeep of the wet market.

Hon Yuen JA:

2.1.     This is an appeal by the respondent in LDPE824 of 2017 (“the Tenant”) from a Judgment of the Lands Tribunal1 given on 17 November 2017 (“the Judgment”).  In the proceedings, the applicant (“the Landlord”) had sought vacant possession of a traditional wet (or fresh) market (“the Premises”) which occupied part of a shopping centre in Sha Tin, on the ground that the Tenant had failed or refused to pay a sum charged by the Landlord as the Tenant’s proportion of “joint charges”. 

2.2.     The Tribunal ordered that:

(1)     subject to (3) below, the Tenant do deliver vacant possession of the Premises to the Landlord;

(2)     the Tenant do pay the Landlord arrears of joint charges for the period from 1 June 2016 to 31 August 2017 in the sum of $543,839.23;

(3)     if the Tenant should on or before 12 December 2017 pay to the Landlord all the arrears of the joint charges stated in (2) above, the Tenant be relieved from the forfeiture incurred, and the lease of the Premises be reinstated.

3.  Leave to appeal was given by this court2 on 24 September 2018.

Background

4.1.     The Premises occupy part of the ground floor of a commercial/car park block also known as Kam Ying Shopping Centre (“the Building”), which comprises a total of 3 storeys of commercial premises above an underground car park. 

4.2.     There is annexed to this Judgment a copy of a plan which had been attached to the Tenancy Agreement in question (“the Tenancy Agreement”).  The Premises are coloured in the plan. 

Access to the Premises and use of common parts

5.1.     There is one factual matter that should be clarified first from the plan.  It had been stated in the grounds of appeal (§3.1.6) that “the floor plan of the Tenancy Agreement ... clearly shows that the wet market [the Premises] has its own internal toilets and corridors with direct access to the open street, and that the building’s lift lobby, lift, staircases, store rooms and other common parts are all irrelevant to the market and segregated by partition walls”.

5.2.     However, at the hearing of this appeal, Mr Lai counsel for the Tenant acknowledged that this was factually incorrect.  There are only 3 points at which one can access the Premises, and at all of them, one must first pass along the common corridors of the Building.  Accordingly, contrary to the Tenant’s statement in the grounds of appeal, there is no direct access from the Premises to the open street.  In order to access the Premises, stall-operators and shoppers must first pass along the common corridors of the Building.

5.3.     Further, stall-operators wishing to transport goods unloaded from lorries parked in the underground car park would need to use the lift lobby, lifts or staircases (shown on the left of the Premises on the plan).  So, again it is not the case that the common parts are “all irrelevant to the market”. 

5.4.     These factual circumstances are relevant to the interpretation of the clause in question in this appeal.

Other factual background

6.  It is common ground that the Building had been developed, together with a public housing estate nearby, by the Housing Authority. 

7.  In 2006, the Building was assigned to Link Properties Ltd (“Link”). 

8.1.     On 9 March 2016, the Tenancy Agreement in question was made for a term of 6 years from 1 October 2015 to 30 September 2021.  The Tenant was required to operate a “traditional market” in the Premises for its licensees to provide commodities and services from stalls operating therein. 

8.2.     To do so, the Tenant had to observe and fulfil services quality and operational standard requirements (“services quality requirements”) set out in the “Fresh Market Standard Operation Guidelines” set out in Annex II of the Tenancy Agreement3.  This comprised of 8 chapters setting out the Tenant’s obligations in respect of its operation of the Premises as a self-contained entity in accordance with the landlord’s requirements.    

8.3.     Under those Guidelines, the Tenant as the “Single Letting Market Contractor” 4 or “Market Operator”5 is required to manage the Premises6 and the stall-operators7, maintain facilities8, provide staff for cleaning9 and security10, conduct promotions11 and submit reports to the landlord on matters such as site safety and health12.

9.  On 31 May 2016, Link assigned the Building to the Landlord, who appointed Guardian Property Management Ltd (“the Manager”) as the manager of the Building.

10.1.     On 1 June 2016, the Manager requested the Tenant to pay an amount described as “management fee”.  The Tenant refused to do so as the Tenancy Agreement did not contain a clause stating an obligation to pay any “management fee” or “management charge”.  The Tenant said that it had not been required by Link to make any such payment before.   

10.2.     In response, on 18 July 2016 the Landlord wrote to the Tenant setting out Clause 3 of Section II of the ‘Tenant’s Obligations’ in the Tenancy Agreement (“Clause 3") which provides as follows:

“The Tribunal agrees with the Landlord as follows:

...

Charges 3. To pay all existing and future water, rates, electricity, telephone, gas and other utility charges payable in respect of the Premises and all charges for meters and all standing charges13 and deposits, and a fair proportion of any joint charges as determined by the Landlord or the manager for the time being of the Building or such part thereof as shall be owned by the Landlord) (the ‘Manager’)”. (Emphasis added).

11.  The Tenancy Agreement did not contain a definition of “joint charges”.  The primary issue in this appeal is whether the term “joint charges” includes management expenses such as the Manager’s staff costs, and cleaning charges, maintenance and repair costs, and gardening and decoration costs incurred for the common parts14 (for convenience, I shall refer to these as “usual management expenses”).

12.  The Tenant’s continued refusal to pay the “joint charges” led to proceedings being commenced in the Lands Tribunal in August 2017.

The Tribunal’s Judgment

13.1.     In the Tribunal, the Tenant argued first that the ejusdem generis canon of construction should be applied so that “joint charges” must be of the same class as utility charges15. This argument was rejected by the Tribunal as the utility charges referred specifically to charges “in respect of the Premises”, and it considered that accordingly these charges were of a different class from “joint charges”16.

13.2.     The Tenant further argued that since there was no definition of the term “joint charges” in the Tenancy Agreement, under the contra proferentum canon of construction, it should be construed against the party who made the document i.e. the Landlord.  This argument was also rejected by the Tribunal as this principle was only applicable to situations of ambiguity, and in the view of the Tribunal, there was no uncertainty in the term17.

13.3.     The Tenant further relied on the fact that Link had never demanded “joint charges”, a fact which was known or reasonably available to both parties.  The Tribunal however found that that did not mean that such charges would not be made in the future, accepting the Manager’s evidence that it would take some time to work out a fair proportion chargeable to the Tenant18.

13.4.     The Tenant also relied on differences between the Tenancy Agreement in question and earlier tenancy agreements for other commercial spaces in the Building where there were express obligations for the tenant to pay a “management fee”19 or a “management charge”20.  The Tribunal however found that the letting of the Premises was different from those of other commercial spaces like shops, for which a management charge could be more readily calculated or apportioned21.

13.5.     The Tribunal decided that “joint charges” may comprise what I have referred to above as “usual management expenses”.

13.6.     As to whether the amount charged to the Tenant was a “fair proportion” as stipulated in Clause 3, the Landlord had explained in a letter dated 12 June 2017 that it had taken the total expenditure for the common areas of the Building (“the multiplicand”) and multiplied it by the fraction of 4,678 sq. ft22 over 24,174 sq. ft.23 (“the multiplier”).  The Tribunal considered that the joint charges so determined by the Landlord was a “fair proportion”24.

13.7.     As a result, the Tribunal made the order set out in §2.2 of this Judgment.

Appeal

14.  On appeal, the Tenant’s arguments may be summarised as follows:

(1)     applying the ejusdem generis principle of construction, the term “joint charges” refers to “other expenses ... in the nature of utilities under joint meter accounts”25;

(2)     the word “joint” indicates that “the moneys involved must be on joint liability of at least two different users”, and management fees are not “joint” as they are common expenses; fees are different from “charges”; and “if the term ‘joint charges’ is capable of meaning different things, such as management fees on the one hand and joint utility charges (or even unidentified and unknown other non-management joint charges) on the other hand, the application of the [contra proferentum] rule against the [Landlord] means that the term must not or ought not to be held to mean management fees”26;

(3)     with regard to the factual matrix, 10 points set out in §3 of the Notice of Appeal provided a “clear hint that the parties would not have understood ‘joint charges’ to mean ‘management fees’”27;

(4)     also with regard to the factual matrix, differences in wording in other tenancy agreements indicated that if the Landlord had meant “management fees”, that term would have been used28;

(5)     the apportionment was not fair29.  

Discussion

15.1.     The approach to be adopted in the interpretation of contracts has been clearly set out by the Court of Final Appeal in Jumbo King Ltd v Faithful Properties Ltd30.  Lord Hoffmann NPJ held:

“... construction of a document ... is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve”.

15.2.     In the more recent case of Arnold v Britton31, Lord Neuberger, President of the UK Supreme Court, emphasized that the interpretation of a contractual provision, including one as to service charges, involved identifying what the parties had meant through the eyes of a reasonable reader, and generally that meaning was most obviously to be gleaned from the language of the provision.  He held:

“15. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the relevant background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’ ... And it does so by focussing on the meaning of the relevant words ... in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease; (iii) the overall purpose of the clause and the lease; (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed; and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions. ...”

15.3.     As for (v) commercial common sense, Lord Neuberger cautioned against over-emphasizing this aspect, and set out 7 factors which may be summarized as follows:

(1)     the reliance placed on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision32;

(2)     while the less clear the words, the more ready the court can depart from their natural meaning, that does not mean the court should search for “drafting infelicities” in order to depart from the natural meaning33;

(3)     commercial common sense should not be invoked retrospectively; it is only relevant to the extent of how matters would or could have been perceived by reasonable people in the position of the parties, at the time the contract was made34;

(4)     the court should be slow to reject the natural meaning of a provision as correct, simply because it appears to be imprudent for one side35;

(5)     the court can only take into account matters which existed at the time the contract was made and which were reasonably available to both parties36;

(6)     if an event has occurred subsequently to the contract which was plainly not intended or contemplated by both parties, and if it is clear what the parties would have intended, then the court will give effect to that intention37;

(7)     service charge clauses are not subject to any special rule of interpretation38.

16.  Applying those principles to the present case, the natural and ordinary meaning of clause 3 is, in my view, that the Tenant is liable:

(1)    singly to pay all the “water, ..., electricity, telephone, gas and other utility charges” used for the Premises solely (and in the case of rates, the charge demanded by Government for the Premises solely); and

(2)     singly to pay all accessory charges (such as for meters, or minimum payments and deposits) that go with the charges at (1); and

(3)     jointly (meaning with others) to pay the types of charges at (1) and (2) which are not used or demanded for the Premises solely (in other words, the common parts); and for these “joint” charges, the Tenant’s liability is to pay a “fair proportion” thereof, which proportion is determined by the Landlord or its agent.

17.  As noted above, there is no definition of “joint charges” in the Tenancy Agreement, but with respect to the Tribunal, there is a clear genus of the charges in (1) and (2), as they are third party charges for utilities and rates.  Utilities charges would also be incurred (eg for lighting and cleaning), and rates would also be payable to Government, for the common parts, and it is clear in the context that this was what was meant by “joint charges” for which the Tenant (whose stall-operators and shoppers have to use the common parts) would be liable to pay a fair proportion.  In this connection I do not accept the submission of Mr Lai, the Tenant’s counsel, that charges under joint meter accounts were intended.  On its own case, there were no such facilities39.   

18.  If on the other hand, as Mr Chan, counsel the Landlord, submitted, the term “joint charges” is not confined to utilities and rates charges demanded by third parties, the question would then be: “what sort of charges” and “charges demanded by whom”?  It is relevant40 to note that the term “management fees” was specifically used in the Tenancy Agreement.  This is in relation to the fees that the Tenant is permitted to charge the licensee stall-operators: see Section IV cl.19(d)(viii) which relate to licence fees, rates, air-conditioning charges and management fees41. In my view, a reasonable reader noting the parties’ choice to use the term “management fees”42 (within the four corners of the same document) to mean that specific sort of charge demanded by a manager, would conclude that the parties would not have chosen to use the nebulous term “joint charges” to mean the same thing. 

19.1.     As construed in §16 above, the Tenant would be liable to pay a fair proportion of charges such as charges demanded by the Water Authority for water used for cleaning the common parts, or for watering plants in the common parts, but not for the costs incurred by the manager in employing cleaners or gardeners, which would usually be included in “management fees”.  On this aspect, the tenancy agreements for Taste of Asia and Holy Fortune, both made before the Tenancy Agreement in question, are relevant, for they indicate that there was no difficulty hiving off the charges charged by the utility companies from the usual management expenses. 

19.2.     In these tenancy agreements, the tenants are expressly obliged to pay, not only a “fair proportion of any joint charges” for utilities, but also a “management charge”43.  It is not suggested that the Tenant was aware of the contents of these agreements, and so these are not circumstances known or assumed by both parties when the agreement in question was made44, but it shows that utility charges (eg the water used for cleaning the common parts) could be hived off from management expenses (eg the cost of cleaning staff).

20.  Mr Chan, counsel for the Landlord, submitted45 that where there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense.  However, as Lord Neuberger said in Arnold, the reliance placed on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision46 and the court should be slow to reject the natural meaning of a provision as correct, simply because it appears to be imprudent for one side47.  In any event, it is not inconsistent with business common sense for the Tenant to be exempted from paying the usual management expenses, when the parties were aware that the Tenant was itself obliged to employ management staff and incur costs in managing the market and stall-operators under the comprehensive services quality requirements imposed by the landlord as set out in the Guidelines referred to above48.

21.1.     Finally, on the issue of “fair proportion”, on the construction of cl.3 discussed in §16 above, the Tenant would be liable to pay a fair proportion of the utilities and rates charges for the common parts, but not management expenses such as staff costs.  It would follow that the multiplicand49 used to arrive at the sum demanded by the Landlord would have to be reduced.  As far as the multiplier is concerned (i.e the ratio of internal floor area in the Premises to that in the Building), the Tenant has submitted that it is unfair on the following grounds: (a) the yield for the Premises is higher per square foot than that for the premises occupied by Holy Fortune, Taste of Asia and Very Nice; and (b) the Tenant and its visitors “never or seldom had the need to use the lifts, the staircases or any other common parts of the commercial block”.

21.2.     In relation to (a), this was apparently not a matter which was raised before the Tribunal, and fairness is a matter of mixed fact and law; and in relation to (b), the factual basis for this submission has now been acknowledged to be incorrect50.

21.3.    In the circumstances, this court cannot interfere with the Tribunal’s determination that the multiplier is fair.     

Order

22.  I would allow the appeal, set aside the Tribunal’s order and make an order nisi that the Landlord pay the Tenant’s costs of the appeal and below.  

Hon Au JA:

23.  I agree with the judgments of Cheung JA and Yuen JA.

Annex