HONG KONG HAI ZHOU TONG XIANG ASSOCIATION LTD v. NGAI SHUN WAH

[English Translation – 英譯本]
LDPD 2125/2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPD 2125 OF 2012

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JUDGMENT

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1.  The applicant, which is a clan association, is a company registered under the Companies Ordinance. It is the landlord of the subject premises (“the premises”).

2.  By a tenancy agreement dated 2 June 2008, the applicant rented the premises to the respondent for a period of four years from 20 July 2008 to 19 July 2012, at a monthly rent of $8,000 for the first two years and $9,000 from the third year onwards (“the original agreement”).

3.  One Chan Chi Shun [transliteration], who claimed that he was authorized to represent the applicant, brought these proceedings on 3 September 2012 seeking to recover possession of the premises on the bases of “expiry of the term of tenancy and  subdivision of the premises into units, [and the applicant] demands reinstatement of the premises”.

4.  The respondent filed a Notice of Objection, stating that he was a member of the clan association and was responsible for managing the premises, that he had rented the premises since 2008 and had not been in arrears of rent, that he had already entered into a new tenancy agreement with the applicant to continue to rent the premises until 2016, and that he did not understand why the applicant would seek to repossess the premises.

Evidence

5.  It is common ground that a dispute had arisen in the clan association, with the members thereof split into two camps.  Each camp convened its own general meetings of the applicant (which were called “Fellow Members Meetings” or “同人大會”in Chinese according to the applicant’s memorandum and articles of association), dismissed company directors (referred to as “committee members” or “理事” in Chinese in the applicant’s memorandum and articles of association) belonging to the other camp, and elected its own people as directors.  However, both camps had elected Yuen Fook Chiu [transliteration] and Yuen Moon Hung [transliteration] as their company directors.

6.  The respondent produced in court the new tenancy agreement dated 10 April 2012 as Exhibit R1 (“the new agreement”).  It was signed by Yuen Fook Chiu and Yuen Moon Hung on behalf of the applicant and was affixed with the applicant’s company seal.  The new agreement provided that it was a continuation of the original agreement and that the term was from 20 July 2012 to 19 July 2016, with the first year being “fixed tenancy” and the second year “open tenancy”, and the monthly rent was $10,500 for the first year and $11,800 for the second year.

7.  The applicant called Chan Chi Shun, Yuen Kin Cheung (also known as Yuen Cheung Yau) [transliterations] and Yuen Hin Lai [transliteration] to give evidence.  The gist of their evidence is:

(1)     The respondent failed to pay rent totalling $27,000 for the period between March and June 2012.

(2)     They denied that Yuen Fook Chiu and Yuen Moon Hung were authorized to sign the new agreement on behalf of the applicant and claimed that the company seal affixed to the new agreement was fake.  They pointed out that according to the applicant’s “usual practice”, the premises would only be rented to a member in need and the person who signed the tenancy agreement on behalf of the applicant must be    authorized by at least six directors of the company.  They produced the minutes of a meeting of the applicant’s Executive Committee dated 10 March 2005 to show that Chan Chi Shun had been authorized by seven directors to sign a tenancy agreement with a person surnamed Ng for two years from 1 March 2005 to 28 February 2007.

(3)     They denied having allowed the respondent to subdivide the premises into units or sublet the premises.

8.  The respondent testified in person and also called Yuen Yip Hung [transliteration], Yuen Choi Kuen [transliteration] and Yuen Fook Chiu to give evidence.  The gist of their evidence is:

(1)     It was Yuen Yip Hung who introduced the respondent to the applicant for the purpose of renting the premises.  At    that time the clan association had a dispute with the former tenant and was unable to receive rent of the premises on time.  Yuen Yip Hung therefore introduced the respondent to the applicant for renting the premises.  Yuen, however, did not know whether there was any agreement between the applicant and the respondent about the subdivision or subletting of the premises.

(2)     The respondent denied that he had defaulted on rent    payment.  He had directly deposited the rent into the   applicant’s bank account since July 2011, and before that      he had paid rent by cheque.  He was informed by the      bank that there was some problem with the applicant’s       management, which might have affected the operation of   the applicant’s account.

(3)     The original agreement was signed by Chan Chi Shun as director on behalf of the applicant   and was affixed with the applicant’s seal.  The new agreement was also signed by the directors of the applicant (namely Yuen Fook Chiu and Yuen Moon Hung) and affixed with the applicant’s seal.

(4)     Although Clause 2 and Clause 9 of the original agreement (and the new agreement) respectively stipulated that the tenant must not sublet the premises and that the tenant could not change the layout of the premises without the consent of the landlord, the landlord had long been aware of and acquiesced in the respondent’s subdividing and subletting of the premises.  According to the respondent, the original agreement was for a term of four years because       consideration had been given to the fact that the respondent would have to carry out the subdivision and sublet the premises.  After the signing of the original agreement, the respondent immediately started the subdivision work, during the course of which Chan Chi Shun and the then secretary of the applicant (Yuen Lai Ying [transliteration]) visited the premises to inspect the work.  When they learnt that the respondent intended to partition the premises into four rooms, they even requested that one of the rooms be   reserved for the applicant as a storeroom.

(5)     Yuen Choi Kuen and Yuen Fook Chiu confirmed that they had signed the new tenancy with the respondent on      behalf of the applicant.  Yuen Fook Chiu and Yuen Moon Hung signed the agreement as directors of the applicant and affixed the applicant’s company seal, while Yuen Choi Kuen, who was then secretary of the applicant, witnessed the signing of the new agreement.

9.  In reply, Chan Chi Shun said that:

(1)     before the signing of the original agreement, he did not      know that the respondent intended to subdivide and sublet      the premises.  He admitted having visited the premises with Yuen Lai Ying during the renovation period and requested that one of the subdivided rooms be reserved for the applicant as a storeroom.  In fact, the applicant did use one of the rooms in      the premises for that purpose.  At the time of his inspection, he was aware that each of the subdivided rooms had its own toilet and bathroom, but he thought that the respondent    intended to let his mother use them.  Therefore he insisted that he had never known that the respondent intended to sublet    the subdivided rooms.

(2)     he confirmed that the respondent had not defaulted on the payment of rent.  The applicant was not seeking to repossess the premises on the ground that the respondent had defaulted on or been late in rent payment.

(3)     as the applicant already terminated Yuen Choi Kuen’s      membership on 10 November 2011 and relieved her of all her duties, she had no authority to witness the signing of the new agreement on behalf of the applicant.

Discussion

10.  The issues in the present case are:

(1)     Has the term of tenancy expired?

(2)     Was the respondent in breach of the tenancy agreement by reason of the subdivision and/or subletting of the premises?  If he was in breach of the agreement, is the applicant entitled to forfeiture?

(1)   Has the term of tenancy expired?

11.  The applicant denies that there is a new agreement.  This part of the dispute hinges on the question of whether the new agreement is binding on the applicant; if it is, the term of tenancy has not come to an end under the new agreement.

12.  The new agreement was entered into on behalf of the applicant by two directors thereof.  There is no dispute about their capacity as directors.

13.  Generally speaking, as the board of directors should act collectively as a whole, an individual director (except a managing director) has no authority to enter into a contract on behalf of the company unless he is authorized by the board of directors to do so.  See Qualihold Investments Ltd v Bylax Investments Ltd [1991] 2 HKC 589 at 593H; Pennington, Company Law, 8^th ed. (2001), p. 148.

14.  In my view, the applicant’s allegation that the company had not authorized Yuen Fook Chiu and Yuen Moon Hung to sign the new agreement is open to question.  Yuen Fook Chiu confirmed that the two of them had been authorized.  With the company split into two camps, the camp represented by Chan Chi Shun could not deny that the other camp had given authorization. I accept that the two Mr Yuens had in fact been authorized.

15.  Even if Yuen Fook Chiu and Yuen Moon Hung did not have actual authority, in my view they did have apparent authority to sign the new agreement on behalf of the applicant.

16.  In law, where someone purporting to be the agent of a company enters into a contract on its behalf with a third party (“the contracting party”) but in fact does not have actual authority to do so, four conditions have to be satisfied before the contracting party is allowed to enforce the contract against the company:

(1)     a representation, namely that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced, was made to the contracting party;

(2)     such representation was made by a person or persons who had “actual” authority to manage the business of the       company either generally or in respect of matters to which the contract relates;

(3)     the contracting party was induced by such representation to enter into the contract, that is to say, he in fact relied on the representation; and

(4)     under its memorandum or articles of association the    company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into such a contract to the agent.

See Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, paras. 42 to 45.

17.  In the present case, by its conduct (through Chan Chi Shun) in the course of signing the original agreement, the applicant had clearly indicated to the respondent that individual directors had the authority to sign a tenancy agreement on behalf of the company.  Conditions (1), (2) and (4) set out above are therefore satisfied.  The respondent did in fact sign the new agreement, and condition (3) is obviously satisfied.  Accordingly, Yuen Fook Chiu and Yuen Moon Hung had apparent authority to sign the new agreement on behalf of the applicant.

18.  The applicant submits that:

(1)     Yuen Fook Chiu and Yuen Moon Hung had not been authorized by no fewer than six directors (as per the applicant’s “usual practice”) to sign the new agreement, and therefore had no authority to sign the agreement.

(2)     the seal on the new agreement was fake.

19.  The witnesses called by the applicant agreed that there was no evidence in writing to prove the existence of that “usual practice”. They indicated that they had deduced the “usual practice” from Clauses 41 and 49 of the articles of association.  Judging from their wordings, however, those provisions make no mention of what is required of the tenant or how the company should authorize people to sign agreements on its behalf.  The minutes of meeting of the Executive Committee dated 10 March 2005 simply recorded that seven directors had attended the meeting and resolved to authorize Chan Chi Shun to sign the agreement, without making any reference to “usual practice”. I reject the applicant’s argument.

20.  Each of the two camps of the clan association maintained its own stance on the authenticity or otherwise of the company seal.  The respondent benefits from the confirmation made by Yuen Moon Hung, a director of the applicant, that the seal affixed to the new agreement was indeed the applicant’s seal.  The applicant has failed to satisfy me on the evidence adduced that the seal affixed to the new agreement was fake.

21.  In any event, there is the following legal principle in company law:

“Under the rule in Royal British Bank v Turquand a third party acting in good faith is entitled to assume that the relevant procedures of “indoor management”, the details of which were not available to him, have been       complied with.”

See Bowstead & Reynolds on Agency, 19^th ed. (2010), para. 8-035.

22.  In the present case, no one has harboured doubt about the legal effect of the original agreement which was signed by Chan Chi Shun, a director of the applicant and affixed with the company seal.  Likewise, the new agreement was signed by the directors of the applicant (namely Yuen Fook Chiu and Yuen Moon Hung) and affixed with the company seal.  From the respondent’s perspective, the manner in which the applicant signed the new agreement was apparently the same as that with the original agreement, and there was no evidence to cause him to reasonably suspect that there was anything wrong with the authority of the two Mr Yuens to sign the agreement on behalf of the applicant or with the company seal.  In my view, the above legal principle does apply in the present case, and the respondent was entitled to assume that the acts of Yuen Fook Chiu and Yuen Moon Hung in signing the agreement and affixing the company seal were consistent with the relevant procedures of indoor management of the applicant.  The new agreement is legally valid and binding on the applicant.

23.  In any event, the applicant had all along received rent from the respondent, including the rent under the new agreement. Even if the two Mr Yuens had actually exceeded their authority in signing the agreement, the applicant had by its conduct ratified the new agreement (see Halsbury’s Laws of Hong Kong, Vol 6(1) (2010 reissue), para 95.165).  This being the case, it would be unreasonable to allow the applicant to deny the new agreement.

24.  As the new agreement is valid and the term of tenancy has not expired, the applicant is not entitled to repossess the premises before the expiry of the term.

(2)               Was the respondent in breach of the tenancy agreement by reason of the subdivision and/or subletting of the premises? Is the applicant entitled to forfeiture if the respondent breached the tenancy agreement?

25.  I accept the respondent’s case that the applicant was obviously aware of and had all along acquiesced in the subletting of the subdivided units by the respondent.  Chan Chi Shun’s evidence that he thought the respondent intended to let his mother use the subdivided units, each of which had its own toilet and bathroom, is clearly incredible.  All along the applicant had allowed the respondent to subdivide and sublet the premises, and it even obtained a benefit therefrom (namely, the right to use the storeroom). The applicant cannot renege after more than four years and seek to repossess the premises on the ground that the respondent has breached the relevant clauses in the original or the new agreement.

26.  Moreover, the applicant has not issued a notice to the respondent in accordance with section 58 of the Conveyancing and Property Ordinance, Cap. 219 complaining about the subdivision and subletting of the premises by the respondent and requiring the respondent to remedy the problem. In law, the applicant cannot exercise its right of forfeiture on those grounds.

Conclusion

27.  For the above reasons, I find that the new agreement is binding on the applicant, that the term of tenancy has not come to an end, and that the applicant is not entitled to recover possession of the premises before the expiry of the term.  Further, the applicant cannot exercise its right of forfeiture on the ground that the respondent has breached Clause 2 or 9 of the original or new agreement.

28.  This application fails and is dismissed accordingly.

29.  The respondent does not ask for costs, and I make no order as to the costs of these proceedings.