KAMSHAN HOLDINGS LTD. v. CHAN TUNG MAN

HCA 7959/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7959 OF 1997

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J U D G M E N T

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This is one of those unfortunate cases where due to some minor misunderstanding the parties ended up pitted against each other in court. At the end of trial, by consent judgment was reserved pending written final submissions. The last submission was in on 15th April 1999. Here is my judgment.

2. The Plaintiff company was the registered owner of the building situate and known as No. 922 Canton Road, Kowloon ("the Building"). It has sold its interests in the Building. The Plaintiff company is basically a company controlled by a CHAN family. The head of the family is an elderly gentleman called CHAN Shing-hee ("Mr. CHAN senior"). Mr. CHAN senior was the developer of the Building. He remained the owner of the Building until late 1995 when the Building was sold subject to existing tenancies to the Plaintiff company managed by his children.

3. On or soon after completion of the Building, the Ground floor together with the Mezzanine Floor as one unit of the Building ("the First Premises") were let by Mr. CHAN senior as landlord to the Defendant. That was about 35 years ago. Some time after that, the First Floor of the Building ("the Second Premises") was also let by Mr. CHAN senior to the Defendant. Evidence conflict as to whether the Second Premises were let in mint condition to the Defendant but it is not disputed that the Defendant had been a tenant of the Second Premises for at least 20 years before he moved out of the Building in March 1997.

4. The letting of the First Premises and the Second Premises were renewed periodically without interruption. After the Plaintiff became the registered owner of the Building and thus the landlord by assignment of the Defendant, in August 1996, the Plaintiff duly served notice to quit on the Defendant in respect of both the First Premises and the Second Premises. It is common ground that the Defendant moved out of the Building and surrendered the keys to the Plaintiff on 22 March 1997.

5. On 22 March 1997, Mr. CHAN senior and one of his sons Mr. CHAN Ka-cheong (Mr. CHAN junior) both on behalf of the Plaintiff went to inspect the First Premises and the Second Premises. Then they joined up with the Defendant for formal hand over of the keys as symbolic delivery of vacant possession back to the Plaintiff. A crude hand-over note in Chinese was signed. This noted has been admitted into evidence. There are two certified translations of this note. In my view, and I am supposed to be conversant with both the Chinese and the English language, the differences in translation are insignificant. One version reads:-

"Canton Road No.922, Ground Floor together with Cock Loft/Mezzanial Floor and Second Floor on 14-3-97 vacated, Landlord agrees to repossess

Chan Tung Man 3 Keys

Landlord's signature: Chan Ka Cheong

Tenant's signature: illegible"

6. Evidence from both sides confirm that neither Mr. CHAN made any complaint to or demand on the Defendant regarding the state or conditions of the First Premises and the Second Premises. In fact there is evidence, which is not contradicted, that Mr. CHAN senior asked the Defendant to help with showing prospective buyers or tenants to the premises.

7. Throughout the period when the Defendant was the tenant at the First Premises and the Second Premises, he conducted a business selling plumbing accessories using the Ground Floor as the shop front and storing his stock on all three levels he rented. To maximize or optimize use of space and to suit the operations of his business, the Defendant made a number of alterations and additions on all three levels. The Plaintiff has produced as evidence an expert report ("the Report") and called the author of that report, a chartered building surveyor called Mr. K.K. Lo. There is no serious challenge to the observations in the Report. Essentially, Mr. Lo noted in the Report that the Defendant had

(1) constructed a large number of standing and hanging metal racks for storing hoses and pipes; these racks were affixed to the floor, wall or ceiling for support;

(2) converted all but one toilet on all three levels to make them suitable for use as store rooms; the kitchen in the Second Premises was also converted for the same purpose;

(3) constructed a large metal cage balcony (cockloft) at the Mezzanine Floor above the shop front;

(4) the internal concrete staircase leading from the Ground Floor to the Mezzanine Floor completely removed to create space;

(5) a number of internal doors removed;

(6) the parapet wall along the outer edge of the Mezzanine Floor taken down;

(7) built an metal extension to the back of the Mezzanine Floor for extra storage space;

(8) created an opening and installed there a pair of metal doors in the external wall of the balcony of the Second Premises; in addition a steel hoisting beam was fixed to the ceiling beams in the Second Premises for lifting goods from street level into the Second Premises through the said opening; and

(9) left rubbish, junk and debris in the First Premises and the Second Premises.

There is no suggestion that any of the said conversions or alterations contravene any building regulation. But by all accounts the Second Premises is a residential unit and the conversion of those premises into a kind of store house cannot be right.

8. With the evidence as aforesaid, I turn to the bases of the claim and that of the defence. According to the Amended Statement of Claim, the Plaintiff avers:-

(1) Breach of Clause 4 of the respective tenancy agreement for the First Premises and the Second Premises in that the Defendant failed to remove all those furniture and fittings in the premises. (Paragraphs 4 and 5).

(2) Breach of implied obligation not to commit any waste of the First Premises and the Second Premises as particularized and summarized in Paragraph 7 above. (Paragraphs 6 and 7).

(3) Breach of implied obligation to use the First Premises and the Second Premises in a tenant-like manner and to deliver up possession of the premises at termination of tenancy in the same condition as when the Defendant took them. (Paragraphs 8 to 11 inclusive).

(4) For all the breaches, the Plaintiff claims the costs of re-instatement and loss of rent. (Paragraphs 12 and 13).

9. According to the Amended Defence, contractual obligation to remove all furniture and fittings under Clause 4 of the respective tenancy agreement is denied. Implied obligation not to commit any waste is not denied but the Defendant avers that the state of the premises complained of was the result of reasonable and proper use of the premises. The Defendant admits an obligation to use the premises in a tenant-like manner but denies the obligation to deliver up the premises in the conditions as he first took them. It is also contended on behalf of the Defendant that even if there is an obligation to deliver the premises in the conditions as the Defendant took them, since the Plaintiff purchased the First Premises and the Second Premises in late 1995 at which point in time the premises were already in the state as they were found in 1997, the obligation to deliver the premises in the same conditions has been complied with.

10. The relevant clauses in the identical tenancy agreements are:-

"Both parties agreed to make all the terms and conditions as follows and each is willing to observe (them):-

(4) When Party B moves out, he shall remove all the furniture during the term of tenancy in order to complete the procedure. In case Party B does not return the key to the door on any excuse, or leaves behind old and broken trunks and cabinets etc. Without taking them away in order to intentionally cause delay in time, then Party B will be regarded as having abandoned his rights if he fails to remove the items left three days after he has vacated the premises. Party A is entitled to sell these items in the presence of one or two witnesses without going through the police station or tenancy tribunal and to rent (the premises) to others. The proceeds from the sale will be used to pay up the rent in arrears. If there is still any deficiency, Party B shall make up for the same without dispute.

(7) The decorations and partitions inlaid to walls, window guards, electrical installation etc. put up by Party B on taking up possession may not be dismantled when Party B vacates the premises in order to maintain its original complete state. Party B may dismantle such inters only on the consent of Party A, but the premises shall nevertheless be restored to its complete state."

Breach of Clause 4

11. Although the Plaintiff claims that the Defendant should remove all furniture and fittings under Clause 4 of the tenancy agreements, the wording of that Clause covers furniture only. I do not think it is fair to read into the Clause things unprovided for.

12. The Report does not refer to any furniture. The only furniture left behind by the Defendant are several self-standing steel filing cabinets shown in one of the photographs in the Report. The numerous metal racks, being affixed to the wall, the floor or the ceiling, cannot properly be regarded as furniture. The racks are fixtures. It is trite law that a tenant may not remove fixtures. In short, the Defendant breached Clause 4 in not removing the steel filing cabinets.

Breach of Implied Obligation not to commit Waste

13. Both Mr. Chua for the Plaintiff and Mr. Sham for the Defendant refer me to Halsbury's Law of England (4th Edition Reissue 1994) Volume 27(1). There it is said that "waste consists of an act or omission which causes a lasting alteration to the nature of the land in question to the prejudice of the person who has the remainder or reversion of the land. The obligation not to commit waste is an obligation in tort, and is independent of contract or implied covenant.": Para.345 at page 326. It is also said there that,

"Although changing the nature of the demised premises is technically waste, this is not so if the change has been expressly sanctioned by the landlord. It seems that an act does not constitute waste unless it is in fact injurious to the inheritance, either by diminishing the value of the estate, or by increasing the burden upon it, or by impairing the evidence of title. At any rate, in the case of acts which may be technically waste but in fact improve the inheritance ('meliorating waste'), the court will not interfere to restrain them by injunction, nor will they be a ground of forfeiture under a proviso for re-entry on commission of waste. Apart, however, from acts done in exercise of statutory authority5, a substantial alteration in the character of the demised premises will be treated as waste and restrained by injunction, notwithstanding that the value may be thereby increased; and the tenant is not entitled to pull down a house and build another which the landlord dislikes7, or to convert a dwelling house into a shop." (Para. 346 at page 327)

14. The footnotes to Para. 346 cite a number of past cases in which English courts refused to intervene on complaints of waste:

"Doe D Grubb v Earl Burlington (1833) 5 B & Ad 507 at 517 (pulling down a barn); approved in Jones v Chappell (1875) LR 20 Eq 539 (erection of new buildings); Doherty v Allman (1878) 3 App Cas 709 at 722, HL (conversion of store buildings into dwelling houses under a lease for 999 years); Meux V Cobley [1892] 2 Ch 253 (conversion of arable and pasture land near London into a market garden and erection of glasshouses); and see Grand Canal Co v M'Namee (1891) 29 LR Ir 131, Ir CA (acts complained of were partly meliorative and partly trivial)."

It seems to the learned authors of Halsbury's that the question of whether waste has been committed is, in the end, a question of fact and degree: see Hyman v. Rose [1912] AC 623 at 632 per Earl Loreburn L.C.

15. Mr. Chua also refers me to the decision of Cons J. (as he then was) in Cheung Yeung Kan v. Liu Kwan [1973-1976] HKC 237. For present purposes, I would accept the headnote in the report as the correct summation of the judgment,

"(1) It was well settled that it was a duty imposed by the law rather than by any term of the lease upon a tenant not to commit waste. Regis Property Co Ltd v Dudley [1959] AC 370 applied.

(2) In determining whether the tenant had committed waste by virtue of the alterations, the question to be asked was whether there had been alteration in the nature or character of the place. West Ham Central Charity Board v East London Waterworks Co [1900] 1 Ch 624 and Hyman v Roce [1912] AC 623 applied. Marsden v Edward Heyes Ltd [1927] 2 KB 1 considered.

(3) Whether the alteration has that effect is often a question of fact and must depend on all the circumstances. What the tenant had done was to turn a small dwelling with a fairly spacious roofed courtyard attached into a larger dwelling with no courtyard. But, most importantly, the tenant had taken a large area of outside property and made it inside property and that was a substantial change and sufficient to find that the tenant had thereby changed the overall nature of his holding. Accordingly, judgment was entered for the plaintiff with costs whereby the defendant was ordered to reinstate the premises to the condition prior to the alterations."

16. Returning to Halsbury's, the remedies for waste are stated thus,

"An action for waste is an action in respect of a tort. The measure of damages is accordingly the injury to the reversioner, and it is measured by considering the depreciation of the selling value of the reversioner's interest." Para.349 at pages 329-330.

In Hill Redman's Law of Landlord and Tenant it is said that

"In an action for waste the measure of damages is not the sum which it would cost to restore the property to its original state, less a discount for immediate payment; this shows the utmost limit of damages, but the true measure is the injury done to the value of the reversion." (Para.1051 at page A448)

17. The definition of voluntary waste is clear enough from the authorities - any act or omission which causes a lasting alteration to the nature of the property or which impairs title. There is no doubt that the Plaintiff's complaint is about voluntary waste for all the alterations and additions noted in the Report were undoubtedly the design of the Defendant.

18. The corollary of voluntary waste is ameliorating waste. It is no good simply proving permanent alteration to the nature of the property. If the alteration results in enhancement of the value of the property, it is the policy of the law not to require the tenant to doubly enrich the landlord. In this case, items (2), (3), (4), (5), (6) and (7) listed in Paragraph 7 supra were done to increase storage space. The removal of the internal concrete staircase in (4) does not affect access to the Mezzanine Floor because there is still a common staircase from the street to that floor and above. In my view, items (2) to (7) inclusive listed in Paragraph 7 supra, with the exceptions I will mention, are ameliorating waste and unactionable wrong.

19. Item (8) listed in Paragraph 7 supra, that is the hoist for lifting goods to the Second Premises, is in one view also an ameliorating waste. However, since the Second Premises can be let to any other tenant for residential use, I think the hoist and connected conversion did change the nature of the Second Premises to an extent beyond reasonable and proper use even though those Premises were let to the Defendant for business use. By the same token, the conversion of the toilet and kitchen and other additions in the Second Premises are also voluntary waste which must be made good.

20. I suppose the Plaintiff would rely heavily on Cheung Yeung Kan v. Liu Kwan for the argument that alterations and additions in the First Premises must also be re-instated. But in that case Cons J. did not consider the beneficial effect of the conversion that increased the roofed-over living space. I think that case must be regarded as decided on its own peculiar facts.

Breach of Implied Obligation to use in a Tenant-like Manner

21. Mr. Chua for the Plaintiff refers to Hong Kong Tenancy Law (Second Edition) by Mr. Malcolm Merry where the learned author wrote,

"The only term that the law implies as to the condition of the premises on handover is that they must be in the same condition as they were when leased to the tenant, fair wear and tear excepted. This obligation ties in with the tenant's obligation to use the premises in a tenant-like manner during the term of the letting (covered in chapter 5), but is wider. Strictly, the obligation to return the premises in the same condition as when let involves the tenant in undoing any improvements and removing any additions or decorations which he has made to the premises and restoring any additions or decorations which were in place when he took over the premises. In the case of business premises this is usually unrealistic and unwanted by both landlord and tenant, who readily agree to a variation of the implied obligation. The landlord is often content to take back the premises with some or all of the changes carried out by the outgoing tenant, who is content to be relieved of the burden of reversing those changes and the incoming tenant is content to take the benefit of the changes, or some of them.

Handovers, particularly of business premises, are not always amiable, however. The landlord often takes the attitude that he is entitled to require that the tenant put the premises into a condition which is near perfect, or better than they were when let to him, or that he strip them bare. The implied term certainly does not require this and very few express terms do so either. If an express term calls for delivery "in tenantable condition" or some similar formula, the premises must be handed over in a state which is acceptable according to their age, location, use and so forth at the beginning of the lease: see the discussion of standards of repair in chapter 9. If a term calls for delivery in the state which the premises were when let, the tenant must put them back into their condition when the expiring (or expired) tenancy began, not their condition before the very first tenant went into them, nor necessarily their condition when the tenant first took possession, for he may have had several successive leases of the premises." (Page 158).

22. The law on a tenant's obligation to repair is notoriously obscure. Both counsel refer me to Halsbury's Law of England (Fourth Edition Re-issue). There it is stated:-

"341. Tenant's liability for repair. In the absence of an express stipulation, the tenant's liability for the maintenance of the premises depends partly on the doctrine of waste1, and partly on an implied obligation to use the premises in a tenantlike manner2. The liability for waste is not founded on contract and accordingly is not excluded on the ground that there is an express contract dealing with the same matter3. The implied obligation to use the premises in a tenantlike manner is, however, excluded where there is an express contract to repair4. It has been said that a tenant from year to year is bound to keep the premises wind and water tight5 and to make fair and tenantable repairs6, but it is doubtful whether this liability extends beyond the implied obligation to use the premises in a tenantlike manner7." (Volume 27(1) at page 324).

In relation to the obligation to use in a tenant-like manner, the footnote says:-

"²Horsfall v Mather (1815) Holt NP 7; Marsden v Edward Heyes Ltd [1927] 2 KB 1, CA. The extent of this obligation is not entirely clear, but the tenant is certainly under a continuing obligation to repair acts which would amount to voluntary waste: Marsden v Edward Heyes Ltd supra at 8 per Atkin LJ. In Warren v Keen [1954] 1 QB 15 at 20, [1953] 2 All ER 1118 at 1121, CA, Denning LJ said that the obligation to use the premises in a tenantlike manner meant that the tenant 'must take proper care of the place' and 'must do the little jobs about the place which a reasonable tenant would do'. It is not a breach of the obligation for a tenant to fail to lag water-pipes or to turn off the mains and drain the system when going away for two nights: Wycombe Health Authority v Barnett (1982) 47P & CR 394, CA."

Similar observations can be found in numerous reference works.

23. In my view, an implied obligation to use in a tenant-like manner largely, if not completely, overlaps the obligation imposed by law not to commit permissive waste. The obligation puts a burden on a tenant to carry out small repairs and to take precausions against the elements. There is no basis and it is confusing to latch on to this obligation a duty to undo improvements and to remove alterations or additions. The duty to undo improvements and to remove alterations or additions comes under the obligation not to commit voluntary waste and even that is subject to a number of exceptions.

24. There is no suggestion or evidence that the Defendant failed to use the First Premises or the Second Premises in a tenant-like manner in the sense I understand it. Obviously, the Defendant maintained and kept the premises under repair for he must be anxious to protect his stock-in-trade. Thus, the Plaintiff's claim under this head is misconceived.

The Plaintiff as Successor-in-title

25. It is argued that since the Plaintiff purchased the First Premises and the Second Premises on "as is" basis in 1995, the Defendant's duty to the Plaintiff should be determined by reference to the conditions of the premises in 1995. This is relevant to the issue of voluntary waste only. I think Mr. Chua must be right that the terms of sale and purchase between Mr. Chan senior and the Plaintiff are immaterial for the Defendant has no priority of contract. Moreover, I should think the duty not to commit voluntary waste should be treated like a covenant that runs with the land especially when the waste affects title. Here the conversion and alteration of the Second Premises into non-residential nature most probably contravenes the occupation permit. The policy of the law should enable a successor-in-title to take action against a sitting tenant for conversions or alterations in defiance of building or planning law.

Duty to mitigate

26. In fairness to the Defendant, he did say when giving evidence that he was prepared to re-instate the premises had the Plaintiff requested it. He did not do so before Mr. CHAN senior and Mr. CHAN junior came to inspect because he expected the two gentlemen to indicate to him what they want removed or re-instated. Had he been required to carry out restoration work, the work would generate more junk and rubbish and he would completely clean up the premises before final delivery of possession to the Plaintiff. But there was no indication. So he believed the Plaintiff wanted to take over the premises with the alterations and improvements. This pretty much accords with the customary practice in Hong Kong as noted by Mr. Merry in his work quoted above. The next thing he heard, it was three months later, by way of a solicitor's letter demanding on behalf of the Plaintiff payment of $117,500 without breakdown. Had he been required to do work, it would not cost so much. I believe the Defendant.

27. I can understand the Defendant was incensed. As I have observed at the beginning, the Plaintiff through Mr. Chan senior or Mr. Chan junior could have told the Defendant on 22 March 1997 that he must re-instate and clean up the premises. Even if the Plaintiff needed time to consider and take advice, it should not take more than a couple of weeks to come to a decision as to what the Defendant must do to render the premises acceptable. I am, therefore, not at all sympathetic to the Plaintiff's claim for loss of rent due to time taken to re-instate the premises. That head of claim should be disallowed.

Conclusion

28. For the reasons given, I hold that the Defendant is liable to the Plaintiff for the cost of re-instatement of the Second Premises and to clean up. The Report gives an estimate of the aggregate costs of reinstatement of the Second Premises at $58,100. The general overhead for work covering the First Premises and the Second Premises is $19,100 which should be halved to cover the Second Premises only. Of course, the Defendant may be able to do the same cheaper and the actual expenditure is slightly lower than the estimates. But I think the differences are not significant and the Plaintiff is entitled to recovery on a fair estimate. To this should be added $13,000 for professional charges relating to the Report as special damages. Accordingly, there is judgment for the Plaintiff for $58,100 + $9,550 + $13,000 = $80,650.

29. Costs should follow the event but the amount awarded is within the District Court civil jurisdiction. Hence I make an order nisi that the Defendant shall bear the Plaintiff's costs in this action, such costs to be taxed according to the District Court scale if not agreed. The order nisi becomes absolute within 28 days from today unless either party applies for an order otherwise.