CHENG WING SUN v. LAM WING CHEUNG AND ANOTHER

DCCJ 5346/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINSTRATIVE REGION

CIVIL ACTION NO. 5346 OF 2001

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JUDGMENT

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1. In this action the Plaintiff seeks to recover the deposit paid to the Defendants for the occupancy of a shop premises at No38-40 Chuen Lung Street, Tsuen Wan. The amount of the deposit is $135,000.

2. The parties have elected to have only the evidential part of the hearing to be conducted in Chinese and to use English for submissions and legal argument. Accordingly this Judgment is delivered in English.

3. There were two applications by the Defendants at the commencement of this hearing. The first was an application to exclude a taped telephone conversation between the Plaintiff and the 1st Defendant from being admitted as evidence on the basis that it was without prejudice. Having listened to the tape and having heard evidence on how that conversation came about, I ruled that the conversation was privileged and excluded its admission. Following my ruling, Mr. Wong for the Defendants applied to delete paragraphs 9 and 10 of the 1st Defendant's witness statement (p39-40 of the bundle) and paragraph 8 of the Plaintiff's statement (p36 of the trial bundle). The application was granted unopposed. Lest the parties should have any doubt, this judgment is given without any regard to the content of that conversation or its transcript, which appears in the trial bundle. Likewise no consideration is given to the deleted paragraphs in the respective witness statements of the Plaintiff and the 1st Defendant or their respective evidence in court concerning that telephone conversation. The second application by the Defendants was an application to re-amend their Defence. The application was unopposed by the Plaintiff who sought, and was given, leave to reply to the Re-Amended Defence.

4. The Plaintiff and the 1st Defendant were the only witnesses to give evidence.

Undisputed Facts

5. I shall set out the non-controversial facts of this case. The Defendants were the tenants of the premises in question, having entered into a tenancy agreement with a Mrs. Cheung. Under this agreement, the Defendants would lease the premises at a monthly rental of $45,000 for a period of 2 years starting from an unspecified date in March 2000. There was an option to renew the lease for another year. The Defendants were required to pay Mrs. Cheung a deposit of $135,000, representing 3 months rental. In the event that the lease is terminated prematurely, the deposit would be forfeited.

6. The Defendants are operator of restaurant. They decided to rent the premises in order to venture into something new namely, running a bakery. However, this new venture proved unprofitable and by June 2000 the Defendants formed the view that the business was not viable. Mrs. Cheung was informed of the Defendants' difficulties and the possibility of an early termination of the lease. The Defendants were told their deposit would be forfeited but in view of her friendship with the 1st Defendant, Mrs. Cheung said she would not pursue the rental income of the outstanding term under lease.

7. The Plaintiff has been in the bakery business for over 10 years. Through the nephew of the 1st Defendant, the Plaintiff learned of the availability of the premises sometime in June 2000. Since the Plaintiff was interested in expanding his bakery which is also located in the Tsuen Wan area, he contacted the 1st Defendant. The parties had their first meeting on an unspecified date in June 2000. Following this first meeting, at a second meeting on 28th June 2000 the Plaintiff gave a cheque to the 1st Defendant for $30,000. A copy of the cheque appears at p46 of the bundle. Given that the cheque was dated 28th June 2000 the natural inference is that the first meeting took place before 28th June 2000. There was a second cheque dated 19th July 2000 from the Plaintiff made payable to the Defendants for $128,000. It is common ground that the total amount of these two cheques represent the deposit, pro-rata rental for the month of July and charges for useful materials left by the Defendants for the Plaintiff at the premises. The non-controversial evidence ends here.

Plaintiff's case

8. The Plaintiff says that only he and the 1st Defendant were present at the first meeting during which the 1st Defendant asked if he was interested to try and run a bakery at the premises. According to the Plaintiff, the 1st Defendant told him the Defendants' bakery at the Premises was not profitable and since the Plaintiff was in this line of business he could have a go and try it out for a week or two and that if it did not work the Plaintiff could always return the premises to the Defendants. The 1st Defendant asked $45,000 per month for the Plaintiff's trial occupation of the premises and a deposit of 3 months rental. No agreement was reached in this meeting as the Plaintiff had to discuss the matter with his two partners.

9. At the second meeting on 28th June 2000 the Plaintiff, 1st Defendant and Mrs. Cheung were present. It was in this second meeting that the parties reached an oral agreement. The Plaintiff says the 1st Defendant repeated the offer for the Plaintiff to occupy the premises on a trial basis terminable at the Plaintiff's discretion. The monthly rental of $45,000 was inclusive of rates and water but exclusive of electricity. The Plaintiff concedes neither he nor the 1st Defendant mentioned the purpose of the deposit. On his part he considered the deposit was a security for the Defendants against future rental payments and the equipment and fittings in the premises. The Plaintiff says he was told by the 1st Defendant at this second meeting that the Plaintiff could occupy the premises for 2 years should his bakery business proves profitable as there were 2 years remaining from his lease with Mrs. Cheung. It was at this second meeting that the Plaintiff said the parties concluded an agreement and he paid the 1st Defendant $30,000 as part of the deposit. After the second meeting the Plaintiff proceeded to hire staff and purchased ingredients in preparation for the opening of his bakery at the premises. He also installed a cupboard and repaired a refrigerator at the premises. The Plaintiff began occupation of the premises on 16th July 2000. The second cheque representing the balance of the deposit, pro-rata rental for the month of July and miscellaneous charges was given to the 1st Defendant on 19th July 2000, after the Plaintiff had taken possession of the premises.

10. However, after only ten odd days the Plaintiff decided against continuing the bakery at the premises. He informed the 1st Defendant, giving one-week verbal notice, of his intention to vacate the premises at the end of July 2000. According to the Plaintiff the 1st Defendant's reaction was one of acceptance and had said "fine" at the time.

11. On 29th July 2000, the Plaintiff asked the 1st Defendant for the return of the deposit. The 1st Defendant lamented that he had omitted to tell the Plaintiff that should his trial use of the premises proved unsuccessful, the deposit was non refundable. The Plaintiff says this was the first time he learnt that the deposit was not refundable and it had never crossed his mind that he would not be able to get the deposit back.

Defendants' Case

12. The 1st Defendant disagrees with the Plaintiff's evidence as to what was said or agreed at the meetings. According to the 1st Defendant, Mrs. Cheung was present at the first meeting he had with the Plaintiff. In that meeting the Plaintiff was informed of the terms of agreement between Mrs. Cheung and the Defendants and was aware that he was taking over the terms of that agreement. The 1st Defendant says he had informed the Plaintiff of the size of the premises, the monthly rental of $45,000, the tenancy term of 2 years and a deposit of $135,000 which will be forfeited in the event of a premature termination of the lease. According to the 1st Defendant, the parties reached agreement during that meeting.

13. During the second meeting the 1st Defendant says he repeated the conditions specified in the first meeting, in particular the 1st Defendant says he told the Plaintiff the deposit would be forfeited if the agreement was terminated prematurely.

Issues

14. The issue for this court is factual namely, whether there was an agreement for a two-year fixed term lease; and if not, whether the Defendants were entitled to forfeit the deposit.

Findings

15. I am satisfied on the evidence that the 1st Defendant had told the Plaintiff he could have a go and try running his bakery at the premises without specifying the trial period. I am also satisfied that the 1st Defendant did not mention the fate of the deposit in the event the Plaintiff decides to end this trial period.

16. By June 2000, if not earlier, the Defendants knew and, were prepared, for the loss of their deposit unless a suitable person was found to take over the remaining term of their lease. It is significant to note that the fittings of the premises meant that its used was limited for bakery business only. The Defendants' chance of finding a suitable replacement tenant was, to that extent, limited. Therefore when a person of the Plaintiff's background and experience came into the picture the Defendants must have been very keen for him to agree to take over the premises. I accept the Plaintiff's evidence that the 1st Defendant had told him to have a go and try out the premises without specifying that it was for a fixed term of two years and that the Plaintiff could return the premises to the Defendants at his discretion. Such attractive terms were undoubtedly prompted by the Defendants' eagerness to have the Plaintiff take on the premises. I do not agree with the Defendants' submissions that the exercise of having the Plaintiff take over the premises is futile if there was no stipulation of a two-year term or forfeiture of deposit. On the contrary, I consider the Defendants had nothing to lose when they allowed the Plaintiff to occupy the premises on a trial basis. If the Plaintiff decides to remain on the premises, so much the better for the Defendants as they will not lose their deposit. On the other hand if the Plaintiff decides to leave the premises, the Defendants will merely be put back to square one so to speak, they will be in the same position as they were in June 2000 before the Plaintiff came into the picture.

17. It is clear that neither the Plaintiff nor the 1st Defendant cast their mind into the future beyond the time of the agreement, nor did they contemplate the possibility of what will happen to the deposit if things did not work out. The Defendants were glad and relieved to have found someone willing to take over the premises at $45,000 a month so that their deposit, at least for the time being, was saved. Clearly it did not occur to them that, despite the Plaintiff's experience, the bakery business might not work at the premises. Likewise it did not cross the Plaintiff's mind that his venture at the premises would be so short lived. On the part of the Plaintiff, the offer by the 1st Defendant represented a good deal because it allowed him to start a second bakery shop with all the necessary equipment and fittings pre-installed so that his costs was a fraction of the capital normally involved in starting a new outlet from scratch.

18. I do not find the 1st Defendant to be a truthful witness. His evidence in court came across as rehearsed. On more than one occasion, he gave the answer that that he had informed the Plaintiff that the deposit would be forfeited in the event of an early termination of the lease when being asked questions totally unrelated to the forfeiture of deposit. His repeated emphasis and, his unprompted evidence, in this respect suggest this was a significant matter in his mind. Yet, his witness statement of 8th April 2002 (at p37 of the bundle) made no reference to such notification. In that witness statement the 1st Defendant merely said the agreement with the Plaintiff was for a period of 2 years and that the basis and understanding of the agreement was that the deposit will be forfeited in the event that the Plaintiff leave the premises before the expiry of the 2 years term. Nowhere in that statement does the 1st Defendant say he had expressly told the Plaintiff that the deposit would be forfeited if the latter vacate the premises before the expiry of 2 years. On 17th October 2002 the 1st Defendant made a supplemental witness statement but did not consider it necessary to include this assertion which he took pains to emphasize in court. I find it unlikely that the Plaintiff would have decided to leave the premises after less than two weeks if he knew that the deposit would be forfeited. It would have made more commercial sense for him to remain at the premises and default payment of rental for 3 months.

19. Moreover, if there had in fact been an agreement for a fixed term of two years and provision for forfeiture of deposit, it is unlikely that the 1st Defendant would not have recorded this in writing bearing in mind the Plaintiff was practically a stranger to him. This is in contrast with the agreement between him and Mrs. Cheung. Notwithstanding Mrs. Cheung was a friend, the 1st Defendant nevertheless thought it necessary to record the main terms of their agreement in writing.

20. I also reject the 1st Defendant's assertion that the parties reached agreement during the first meeting. The Plaintiff has two partners and it is unlikely that the Plaintiff would have agreed to the conditions put forward by the 1st Defendant there and then in the first meeting without consulting his other two partners. The fact that only partial deposit was paid at the second meeting reinforces my view that no agreement was reached during the first meeting.

21. Mr. Wong for the Defendants submitted that the Plaintiff's credibility has been called into question by his original statement of claim. The cause of action in the Plaintiff's original pleaded case was breach of warranty and agreement on the 1st Defendant's part. The breach was said to be the 1st Defendant's failure to enter into a formal agreement with the Plaintiff on or before 31st July 2000. Whilst I agree that the facts pleaded in the Plaintiff's original Statement of Claim is very different from that in the amended version, the differences do not necessarily reflect on the Plaintiff's lack of credibility. It is not disputed that there was a change in handling-solicitor between the filing of the original Statement of Claim and the Amended Statement of Claim. The Plaintiff says he has always given the same instructions to his solicitors. It is not unusual for misunderstanding to occur between a solicitor and his client although I am not suggesting that this was what happened. In the absence of evidence suggesting that the Plaintiff has changed his instructions, I will not speculate the reasons for the differences between the Statement of Claim and the Amended Statement of Claim, nor will I draw any adverse inference against the Plaintiff.

22. It follows from my findings that the Plaintiff is entitled to have his deposit refunded by the Defendants. However I consider it reasonable that the Defendants should have had 7 days from the date of the Plaintiff's vacation of the Premises to return the said deposit.

23. There will be an order that the Defendants return the deposit of $135,000 to the Plaintiff with interest thereon at the rate of 1% over prime interest rate from 8th August 2000 to judgment date and thereafter at judgment rate until payment. The Defendants to pay the costs of this action to be taxed if not agreed.