MUTUALBEST LTD v. NGAI WAH KIT

LDPD 1548/2013

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPD 1548 OF 2013

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J U D G M E N T

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Undisputed Facts

1.  The applicant is the owner of Flat A, 9^th Floor, Hoi To Court, No. 275 Gloucester Road, Hong Kong (“the Suit Premises”).

2.  By the tenancy agreement dated 23 September 2011 (Exhibit A1) (“the Tenancy Agreement”), the Suit Premises was leased to the respondent for the period from 1 October 2011 to 30 September 2014 at a rental of $29,800 per month.

3.  Clause 1 Schedule II of the Tenancy Agreement reads:

“The Tenant shall not use or permit to be used the Premises or any part thereof for any purpose other than for residential purposes only.” (page 18 of applicant’s bundle)

4.  Clause 3 printed on the Tenancy Agreement reads :

“The Tenant shall not assign transfer sublet with the possession of the Premises or any part thereof to any other person. This tenancy shall be personal to the Tenant named herein.” (page 16 of applicant’s bundle)

5.  However, Clause 3 was deleted and above it written in Chinese are the words “3之條款依然生效” (page 16 of applicant’s bundle) which means “Terms under Clause 3 is still effective”.

6.  Clause 1 Schedule II and Clause 3 of the Tenancy Agreement are referred to as the “Covenants” collectively in this judgment.

7.  The respondent is using the Suit Premises for the running of a youth hostel or a guesthouse called “Pandora After 80s” which involved a letting-out of the rooms or bed space inside the Suit Premises to travelers.

8.  Press coverage in late January 2012 revealed that the Suit Premises was being used as an unlicensed guesthouse.

9.  On 31 January 2012, the applicant, through its solicitors, had issued a letter to the respondent (Exhibit A6) asking the respondent to confirm whether he had acted in breach of the Covenants. No reply is forthcoming.

10.  On 13 November 2012, the applicant, through its solicitors sent another letter to the respondent (Exhibit A8), giving notice to the respondent that the Tenancy Agreement is being terminated due to the respondent’s breach of the Covenants.

11.  On 20 November 2012, the respondent replied by email (Exhibit A10) denying any breach of the Covenants and invited the applicant to conduct a premises check upon written notice in advance.

12.  Media coverage revealed the use of the Suit Premises as a guesthouse in April 2013 again.  The applicant through its solicitors issued another letter to the respondent dated 17 April 2013 (Exhibit A11) indicating the intention to take legal action unless the respondent delivered vacant possession on or before 30 April 2013.  The respondent replied with a solicitor’s letter denying the breach (Exhibit A12).

13.  On 26 June 2013, the applicant issued the proceedings in this case asking for a possession order on the ground of breach of the Covenants.

14.  The respondent’s defence at trial is that:

(a) He was never aware of the adding of the Chinese characters to Clause 3;

(b) the applicant knew and consented to the use of the Suit Premises as a guesthouse;

(c) the applicant had acknowledged or acquiesced in such use and should be estopped for denying such fact.

15.  Madam Peck (“Peck”), a director of the applicant is the witness for the applicant and the applicant also called Mr. Wincent Hung (“Hung”), a former director of Talent International Enterprises Limited, the company running Pandora After 80s, to testify.

16.  The respondent testified in this case and also called Mr. Alan Tsang (“Tsang”), the estate agent, to give evidence.

Chinese characters added to Clause 3

17.  When giving evidence, the respondent produced Exhibit R1 which is another version of the tenancy agreement between the applicant and the respondent where the initial of the respondent on Clause 3 is different from that in Exhibit A1. It is the respondent’s evidence that Exhibit R1 is the only tenancy agreement he had signed and denied any knowledge about the Chinese characters being added to Clause 3 or he had ever initialled to confirm the Chinese characters.

18.  The respondent only produced Exhibit R1 after all other witnesses in this case had finished with their evidence and the respondent had never raised the issue of a different version of the tenancy agreement with any of them.  It is the evidence of Peck, Hung and Tsang that Exhibit A1 is the tenancy agreement signed between parties. 

19.  Tsang in his evidence confirmed that the 3 signatures of the respondent on Clause 3 on Exhibit A1 are all signed by the respondent.   Tsang testified that he had told Peck about the intended use of the Suit Premises by the respondent as a European style youth hostel and Peck agreed so Clause 3 had been deleted on the draft tenancy agreement (Exhibit A2). But when the draft tenancy agreement was sent for Peck’s signature, Peck disagreed and asked for Clause 3 to be reinstated for the protection of her company. So Tsang wrote the Chinese characters above Clause 3 on Exhibit A1 and additional initial by the parties were put in place. Tsang had explained the situation to the respondent who had indicated that even with the use limited to domestic purpose on the Tenancy Agreement, he would still be able to obtain a license since this is the situation for 11/F at the same building.  

20.  At trial, the inconsistency between the evidence of Tsang and the respondent had been pointed out to the respondent and he had been allowed the opportunity to re-call Tsang to clarify.  Yet the respondent elected not to do so.  In view of the evidence of Tsang, the evidence of the respondent concerning Exhibit R1 must be rejected and I found the respondent is not truthful in this regard.  I found the tenancy agreement signed between the parties is the one now produced as Exhibit A1 by the applicant and confirmed by Tsang and the respondent is well aware of the fact that Clause 3 had been reinstated and had initialled on the Tenancy Agreement to acknowledge the same.

Consent to Use as Youth Hostel

21.  It is the respondent’s evidence that he was told by Tsang that the landlord, having informed of the fact that the Suit Premises will be used as a youth hostel, had agreed to such use.

22.  Tsang’s evidence on this point had been recited in paragraph 19 above.  Tsang further said that Peck was well aware of and agreed to the use as youth hostel but just insisted that it should be reflected on the Tenancy Agreement that the Suit Premises is only to be used for domestic purposes for the protection of her company.

23.  Peck said that she was never told that the Suit Premises will be used to run a youth hostel or guesthouse.  She had never met the respondent before the signing of the Tenancy Agreement and Tsang told her that the Suit Premises would be used as residence for the 3 directors of an international company running chains of youth hostels.  When she received the draft tenancy agreement (Exhibit A2) and found that Clause 3 was deleted, she indicated to Tsang that the Suit Premises will not be leased out if it is not for residential use.  So Tsang took away the draft and came back with the tenancy agreement now become Exhibit A1 for her to sign.

24.  Hung testified that he was in partnership with the respondent and 2 other persons to run the business of Pandora After 80s.  Since they had rented 11/F at the same building to run a guesthouse, they are eager to secure another tenancy at the Suit Premises as a common area for the guests and staff to relax and for recreation.  Though the tenancy was being taken out in the respondent’s name, he was also involved in the process.  They had told Tsang of the intended use as a common area which required Clause 3 to be deleted so as not to confine their use to residential purpose.  But the landlord had indicated their disagreement for Clause 3 to be deleted so the Chinese characters were being added which have the effect that Clause 3 was reinstated.  He was present witnessing all 3 signatures of the respondent on the Tenancy Agreement (Exhibit A1).  He is adamant that the real use intended was never disclosed to the landlord and in fact, he, Tsang and the respondent had discussed as to how to persuade the landlord to lease out the Suit Premises with the information withheld.

25.  Having considered the evidence and on a balance of probabilities, I accept the evidence of Peck and Hung and found the evidence of Tsang unreliable and not trustworthy.  

26.  Under cross-examination, Tsang said that the agreement of both parties is reflected in the Tenancy Agreement (Exhibit A1). This is inconsistent with his evidence about Peck had in fact agreed to a non-residential use which is not in line with the Covenants.  And he had initially agreed under cross-examination that Peck insisted on the reinstatement of Clause 3 because she did not agree with the use as guesthouse. Further into the cross-examination, he then changed his version by saying that Peck agreed to the guesthouse use but just insisted on Clause 3 being reinstated for the protection of her company.  These inconsistencies, which turn on a material factual issue in this case, rendered Tsang’s evidence unreliable.

27.  And the contention by the respondent that Peck did agree to the use of the Suit Premises as a youth hostel is also inconsistent with his response to such an allegation in November 2012.  It is not in dispute that upon receipt of the letter from the applicant dated 13 November 2012 (Exhibit A8), the respondent had sent a email in reply (Exhibit A10) denying the allegation of using the Suit Premises for hostel or related purposes.  What’s more, the respondent also indicated his “consent to a premises check upon a written notice in advance” and agreement to vacate the premises “provided that the landlord can give further valid evidence for such claim”.  Had Peck agreed to the use as a youth hostel, why would the respondent deny such a fact?  And why would the respondent not state such agreement by Peck in the reply to refute the allegation.  The reply email by the respondent is utterly inconsistent with the fact that he had obtained the consent of Peck to use the Suit Premises to run a youth hostel.  I found the respondent’s evidence is beyond belief and I reject his evidence.

28.  I found as a fact that Peck was never told of the use of the Suit Premises to run a youth hostel and she had never agreed to such a use.

Estoppel

29.  The respondent said that Peck had been to the Suit Premises on a number of occasions including the opening party held on 1 October 2011 and the name card given to her showed the use of the Suit Premises as a youth hostel.  Peck had also referred clients to the business as a guesthouse.  Since the applicant was well aware of the use of the Suit Premises as a youth hostel but had turned a blind eye and had done nothing all along till the media coverage, the applicant had knowingly failed to enforce a legal right at a proper time, hence the applicant should be estopped from denying the fact that it had no knowledge of the use.

30.  Peck admitted attending the Suit Premises on 1 October 2011 for a housewarming party only and had only stayed for a short period of time and saw nothing indicating the use as a youth hostel or guesthouse. And her second visit was on a day after the media coverage in January 2012 but again she saw nothing supporting the allegation. The 3^rd and last occasion she went was in early 2013 when she met a girl on the street, holding a paper asking the way to the Suit Premises.  And Peck denied ever introducing any client to the respondent or received the name card of the respondent. 

31.  Hung testified that Peck was invited to the housewarming party but had only stayed for 10 odd minutes and the business of running a hostel at the Suit Premises only commenced after 1 October 2011 by putting up advertisement on the internet.

32.  Given the ruling above that Peck had neither been told nor consented to the use of the Suit Premises as a youth hostel, the allegation by the respondent that by having knowledge, the applicant should be estopped to deny such a fact must fail.

33.  As for the allegation of Peck turning a blind eye to such fact, on a balance of probabilities, I accept the evidence of Peck.  Her evidence is supported by Hung as far as the party on 1 October 2011 is concerned.  And there is no evidence to support the fact that Peck, upon attending the party should know about the running of the youth hostel at the Suit Premises.  As revealed from the photos depicting the party on 1 October 2011 produced by the respondent, nothing showed that it was the opening of a youth hostel or anything indicated that the Suit Premises was used for a purpose other than residential purpose. The fact that there was the cutting of the roast pig at the party is neither here nor there.  The visit with the media in early 2012, as revealed from the newspaper reports produced, also showed nothing which raised any suspicion. 

34.  By the allegation that Peck had visited the Suit Premises time and again but had turned a blind eye to the use without taking any enforcement action, the respondent is alleging acquiescence and a waiver by the applicant in enforcing its legal right.

35.  In Wong Pun-man v. Incorporated Owners of Tung Fat Industrial Building [1996] 1 HKDCLR 32, Judge Cruden had said the followings in the judgment :-

“Acquiescence is a long established equitable doctrine. It amounts to a waiver of a party’s rights and raises an equitable species of estoppels, preventing him from later enforcing those rights. The modern approach of the courts is to determine whether it would be unconscionable for a party to deny that which, knowingly or unknowingly, he has allowed or encouraged the other party to assume, to his detriment.”

36.  In Chitty on Contracts (Vol. 1), it is said that waiver (or forbearance) means:

“Waiver (in the sense of waiver by estoppel …) may also be held to have occurred if, without any request, one party represents to the other that he will forbear to enforce or rely on a term of the contract to be performed or observed by the other party, and the other party acts in reliance on that representation.” (at para. 22-040)

37.  The burden is on the respondent to prove acquiescence or waiver which amounts to estoppel.  For the equitable doctrine to operate, the respondent has to show that :

(a) there must be a legal relationship giving rise to rights and duties between the parties;

(b) a promise or a representation by the applicant not to enforce against the respondent its legal rights arising out of the relationship;

(c) the respondent had acted in reliance on that representation; and

(d) the respondent had suffered detriment by acting in reliance on the representation.

38.  In this regard, the case of West Country Cleaners v. Saly [1966] 3 A.E.R. 210 is relevant with facts similar to this case.  The tenant in that case is alleged to have breached the covenant of failing to repair.  The tenant’s case is that the landlord, who lived next door, was frequently in and out of the premises and noticed the failure and had in fact raised about the garish aspect of the decoration which had been done. The tenant alleged that the landlord had waived any breach of the covenant.  It is held that even when a landlord has actual notice of a breach of a term of a lease and takes no action, his consent is not automatically presumed and he is not estopped from relying on that breach.  It is said that :

“Mere silence cannot amount to a representation, but when there is a duty to disclose, deliberate silence may become significant and amount to a representation. Of course, there was no duty to disclose anything on the part of the landlord in the present case, and it seems to me that the silence of the landlord here cannot amount to conduct which induced the tenants to change their position in any way.” (at page 212)

39.  Applying the principles found in West Country Cleaners, I found there is no evidence to show that the applicant had made any representation to the respondent in waiving its legal right.  Mere silence and inaction by the applicant cannot amount to a representation and the applicant has no duty to disclose anything to the respondent in this case.  Apart from this, the respondent has also failed to show that he had acted upon the representation to his detriment.  There is nothing to show that the respondent, because of the representation, had done something that he was not previously bound to do and as a result has suffered loss.

40.  The defence relied upon by the respondent on waiver or estoppel must also fail.

Breach of Clause 1 Schedule II

41.  It is also the contention of the respondent that the use is not in breach of Clause 1 Schedule II since the use as a guesthouse is part of domestic use according to A Layman’s Guide to License Application under the Hotel & Guesthouse Accommodation Ordinance issued by the Office of the Licensing Authority of the Home Affairs Department (“Layman’s Guide”). 

42.  The relevant provision relied upon by the respondent is the provision on Choice of Location under General Requirements in the Layman’s Guide.  The provision reads :

“In choosing premises, applicants are required to note the following –

-      The premises should be for domestic or hotel/guesthouse use approved by the Building Authority or situated in a domestic use village type house.”

43.  I found the respondent’s contention in this regard misconceived.  What the Layman’s Guide mean is that in picking the premises to run a guesthouse, the premises must be one which is for domestic/residential use and not the use of the premises to run a guesthouse amounts to a residential use.  The respondent had apparently misunderstood this provision. 

44.  Clause 1 Schedule II required the Suit Premises to be used for residential purposes.  This means use as the residence of the tenant.  The running of a guesthouse or youth hostel involved the leasing out of rooms or bed spaces for value and this is apparently for a commercial purpose and can hardly be qualified as a residential use.

45.  I found the use of running a youth hostel or guesthouse in the Suit Premises by the respondent is clearly in breach of Clause 1 Schedule II of the Tenancy Agreement.

Breach of Clause 3

46.  The re-instated Clause 3 of the Tenancy Agreement disallowed any assignment, transfer, sublet with the possession of the Suit Premises.  The act of running a youth hostel at the Suit Premises by leasing the rooms or bed spaces to travelers is apparently in breach of the said clause.

Validity of the Section 58 Notice

47.  Having said so, the applicant is still required to satisfy the requirement under Section 58(1) of Conveyancing and Property Ordinance (Cap. 219) (“CPO”) before the right to forfeiture accrued.

48.  Section 58(1) of Cap. 219 reads:

“(1) A right of re-entry or forfeiture under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice-

(a) specifying the particular breach complained of; and

(b) if the breach is capable of remedy, requiring the lessee to remedy the breach; and

(c) specifying the compensation, if any, which the lessor requires in respect of the breach,

and the lessee fails, within a reasonable time thereafter, to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach.”

49.  Exhibit A6 is the notice (“the Notice”) relied upon by the applicant in compliance with Section 58. The Notice, dated 31 January 2012, is being issued by the solicitor acting for the applicant.  In the Notice, the respondent’s attention was drawn to Clause 3 and Clause 1 Schedule II of the Tenancy Agreement and the relevant part of the Notice reads as follows :

“We are given to understand from the media that you have acted in breach of the above provisions. Please confirm in writing within the next 3 days whether you have sub-leased the Premises to other persons not a party to the Agreement or used the Premises or any part thereof for hostel or related purposes.

We are instructed to give you notice, which we hereby do, that unless you use the Premises or any part thereof strictly in accordance with the Tenancy Agreement, viz., for residential purposes only, our client will have no alternative but to institute legal proceedings for RE-POSSESSION and recovery of all outstanding sums without further warning and you shall forthwith vacate the Premises on notice to that effect from our client.”

50.  It is the contention of Mr. Tse for the applicant that the breach of subletting is a breach that is incapable of remedy so even though nothing had been mentioned in the Notice to require the respondent to remedy the breach, the Notice is still a valid one.  Mr. Tse relied upon the authority of Scala House & District Property Ltd v Forbes and Others [1974] 1QB 575 and Akici v LR Butlin Ltd [2006] 2 All ER 872 in support of his contention.

51.  The case of Scala House involved a breach of the covenant when the premises had been sublet.  The landlord gave a section 146 notice (which is same as a section 58 notice) calling upon the tenant to remedy the breach and 14 days later issued the writ.  Russell LJ found that it was a once and for all breach and that a breach of a negative covenant not to assign underlet or part with possession is never capable of remedy.  And it is the submission of Mr. Tse that the case of Akici found that Scala House is still good law.

52.  I have no argument as far as the finding of Scala House is concerned but it is the finding in Akici that Scala House should not be followed.  Akici is a case on a breach of the covenant by sharing occupation of the premises.  Lord Justice Neuberger had made the following findings :

“73. …the general principles laid down in two relatively recent decisions in this court, namely Expert Clothing and Savva, point strongly to the conclusion that, at least in the absence of special circumstances, a breach of covenant against parting with possession or sharing possession, falling short of creating or transferring of legal interest, are breaches of covenant which are capable of remedy with the meaning of section 146.

74. The only authority which could be cited to call that conclusion into question is Scala House itself, but that does not deter me from my conclusion. First, it was only concerned with underletting; secondly, the reasoning of the leading judgment in the case is, at least in part, demonstrably fallacious and inconsistent with common sense and many other authorities; thirdly, it has been overtaken and marginalized by Expert Clothing and Savva; fourthly, there is no reason of logic or principle why the reasoning or conclusion in Scala House should be extended to apply to a breach which falls short of creating a legal interest.

75.       It is true that Slade LJ said at 354G in Expert Clothing that the principle in Scala House extends to parting with possession, as well as assigning and underletting.  That was an obiter observation, which I do not regard as binding.  At 365C, Bristow J agreed with Slad LJ’s judgment, but he also agreed with the judgment of O’Connor LJ, who, at 365A-B, said that Scala House, while authority for the proposition that breach of a covenant against underletting was irremediable, was not authority for any wider proposition. … I think that principle and precedent probably require one to go along with Slade LJ and conclude that Scala House applies to assigning, but, in agreement with O’Conor LJ, I certainly do not see why it extends to parting with (let alone sharing) possession.”

53.  I agree with the observation quoted above.  The finding in Scala House is faulted and should not be followed.  The running of the youth hostel by the respondent in the present case involved the parting of possession of part of the Suit Premises without creating or transferring any legal interests in the Tenancy Agreement to the users.  Applying the findings in Akici, this should be a breach that is capable of remedy and the Notice issued should allow a reasonable time for the respondent to remedy the same.  Since the Notice issued by the applicant failed to provide the same, it is not a valid Notice and the applicant had failed to satisfy the requirement under Section 58 of the CPO.

54.  Even if the subletting of part of the Suit Premises is not remediable, the breach under Clause 1 Schedule II must be a breach that can be remedied.  Since the applicant is also relying on this breach as the basis for forfeiture, reasonable time should be allowed in the Notice for the respondent to remedy the same.

Conclusion

55.  Since the applicant had failed to serve a valid Notice on the respondent, no cause of action for forfeiture of the Tenancy Agreement had been accrued and this application must be dismissed.

Costs

56.  Costs order nisi that there be no order as to costs.  Unless any of the parties applies by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.