WINDSOR HOUSE LTD (formerly known as Chinese Estates (Windsor House) Ltd) v. LEGEND GLORY CORPORATION LTD AND ANOTHER

HCA 940/2017

[2019] HKCFI 194

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 940 OF 2012

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J U D G M E N T

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Undisputed Background

1. By a tenancy agreement dated 11 February 2016 (“Tenancy Agreement”) (“T/A”) (B/41-95) entered into between the plaintiff (“P”) as the landlord, the 1st Defendant (“D1”) as the tenant and the 2nd Defendant (“D2”) as the guarantor, the P let to the D1 Shop No. 125, 1/F Windsor House, No. 311 Gloucester Road, Causeway Bay, Hong Kong (“the Premises”) for a fixed term tenancy of 1 year commencing from 22 October 2015 to 21 October 2016.

2. Terms of the T/A includes: -

 (1) the minimum monthly rent of HK$132,000 (Clause 5(a) & 3rd Schedule Part I) (B/43-44 & 84);

 (2) a monthly percentage rent which shall be 18% of D1’s monthly gross revenue less the minimum monthly rent (Clause 5(a)) (B/43-44);

 (3) a monthly service charges of HK$10,232 (Clause 2 and 3rd Schedule Part II) (B/43 & 85);

 (4) a monthly promotion levy of HK$1,279 (Clause 5(b) & 3rd Schedule Part III) (B/45-46 & 86);

 (5) to pay government rates charged by the Government at HK$25,850 per quarter (Clause 5(c)) (B/46-47 & 197-199);

 (6) interest on unpaid rent and other monies due from the due date until payment at the rate of 3% per annum above the rate from time to time quoted by the Hong Kong and Shanghai Banking Corporation Limited as its prime rate (“HSBC Prime Lending Rate”) (Clause 1) (B/43);

 (7) All costs and expenses of and incidental to any demand for rent or any other sum payable under these presents or actions or distraint for recovery of the same shall by paid by the Tenant on a full indemnity basis and shall be recoverable from the Tenant as a debt (Clause 7(a)(i)) (B/69-70);

 (8) D1 shall “yield up the Premises quietly at the expiration or sooner determination of the term in good clean substantial and proper repair and condition … and in bare-shell condition … in the event of the Tenant failing so to do to the satisfaction of the Landlord then the Tenant shall on demand forthwith pay to the Landlord all the cost and expenses of such re-instatement restoration or making good” (Clause 5(i)(i)) (B/55);

 (9) D2 gives the guarantee and indemnity to unconditionally and irrevocably guarantees to the P the due and punctual performance and observance by D1 of its obligations under the T/A and indemnifies the P against all liability or loss arising from, incurred in connection with the breach of the T/A by D1 (Clause 10) (B/77-80); and

 (10)  D2 agrees to pay interest on any amount payable under the guarantee from when the amount becomes due for payment until it is paid in full at the rate of 3% above the HSBC prime rate (Clause 10) (B/77-80).

3. The D1 had failed to pay the Monthly Rent, service charges, promotion levy and rates since 1 November 2015 and the P instituted distraint action (Action No. DCDT 384/2016) with seizure of goods and chattels at the Premises took place on 9 March 2016 by the bailiff.  Auction took place on 16 March 2016 and the proceeds of sale realized from the auction was HK$50,000.  After deducting the expenses of the distraint action incurred (details at B/24 with receipts and invoices at B/97-109), the net proceeds realized from the distraint action is HK$27,476.30.

4. In or about mid-March 2016, D1 unilaterally parted with and deserted and abandoned the Premises and the P re-entered the Premises on 22 March 2016 and recovered possession of the Premises.

5. Upon repossession, the P found that the D1 had failed to yield up the Premises in a good clean substantial and proper repair and bare-shell condition (photos taken on date of re-entry at B/112-119).  The P had arranged for the reinstatement of the Premises to be done which consisted of reinstatement work and the installation of the sprinkler system/fire services and incurred a total sum of HK$102,965 (HK$98,500 + HK$4,465) (receipts at B/152 and photos of Premises after reinstatement at B/135-140).

6. A letter was sent to the D1 and D2 on 17 June 2016 demanding for the settlement of the outstanding arrears and damages in respect of the Premises and interest.  The defendants failed to settle the same.  Therefore, the P commenced this action against the defendants by Writ of Summons dated 19 April 2017 for: -

 (1) Arrears of the Monthly Rent, service charges, promotion levy and Government rates from 1 November 2015 to 22 March 2016 in the total sum of HK$645,509.98 with interest as at 30 November 2016 at HK$47,228.60;

 (2) Damages for early termination of the T/A with interest;

 (3) Costs for the distraint action and the reinstatement work; and

 (4) Costs incurred on a full indemnity basis.

7. On 18 August 2017, the P obtained final and interlocutory judgment (“the Judgment”) (B/17) by reason that no notice of intention to defend having been given by the defendants.  In the Judgment, it is ordered that: -

 (1) The 1^st and 2^nd defendants do pay the P the sum of HK$692,738.58 (§6(1) above) and interest on the sum of HK$645,509.98 at the rate of 3% pa over the HSBC Prime Lending Rate from 1 December 2016 to the date hereof and thereafter at judgment rate until payment;

 (2) Damages for breach of T/A to be assessed; and

 (3) Damages representing costs to be assessed on indemnity basis.

8. This is the hearing for assessment of damages.

9. The Defendants are unrepresented and absent at this hearing.  Having read the affirmation of service filed by the P on 16 January 2019, I am satisfied that all the relevant court documents and notice of assessment hearing had been duly served on the Defendants and that the P had not received any return post.  Hence, I am satisfied that the Defendants had been given sufficient notice of this assessment hearing and it is appropriate to proceed with the hearing notwithstanding the Defendants’ absence.

Loss of Rent, Service Charges, Promotion Levy & Rates

10. The P contended that, but for the breach on the part of the D1, the P would have been entitled to receive rent and other charges since repossession (ie 23 March 2016) to the date when the T/A would have expired (ie 21 October 2016), hence claiming such loss as damages.

11. Ms Cheng, the Leasing Manager of the P, testified that: -

 (1) To mitigate the loss, the P had spent extensive efforts in the search for a replacement tenant including: -

 i. Publicizing and marketing the premises to target tenants through more than 20 real estate agencies;

 ii. Distributing promotional flyers and vacancy lists by email to target tenants; and

 iii. Making cold calls to retail tenants of other shopping malls or retail complexes;

 (2) Asking price at HK$210,000 (or $164 per square foot) from 22 March 2016 to 20 May 2016 and reduced to HK$138,000 (or $107.80 per square foot) starting from 31 May 2016 due to an overall downward trend in market rent.  In setting the asking rent, the P had taken into consideration the quality and location of the Premises, the prevalent rent of similar properties and the impact on rent reviews, renewals and new lettings of other premises in the entire building of Windsor House.  The asking price was in line with the prevalent rent of similar properties and the overall portfolio of the shopping mall.  Neighbouring Shop No. 120 had been successfully let out at HK$194,000 on 26 May 2016.  Tenancy agreements for 4 other shops (including Shop 120) made in 2016 were produced in support.  The P would indicate to a prospective tenant that the asking rent was negotiable if anyone indicated interest.  Such a practice is to minimize the deleterious effect that rental reduction on one property may have on other properties in the P’s portfolio;

 (3) On 17 May 2016, in order to minimize loss, the P entered into a licence agreement with a third party (“the Licence Agreement”) (B/161-172) for a 6-month duration at a base rental of HK$45,000 per month or 15% of the monthly gross revenue, whichever is higher (“Licence Fee”) with no provision for service charges, promotion levy or government rates.  The Licence Agreement was terminable at any time on or after 30 September 2016 by serving 28 days’ notice.  During the entire Licence period, the P continued to make effort to lease out the Premises and the Licence Agreement did not affect the P’s effort in finding a replacement; and

 (4) The P suffered loss of rent, service charges, promotion levy and rates from 23 March 2016 to 21 October 2016 in the total sum of HK$800,339.17 as follows: -

 i. Loss of rent (after deducting the Licence Fee received) = $662,532.96 (B/33 at §39)

 ii. Loss of service charges = $71,293.93 (B/33 at §39);

 iii. Loss of promotion levy = $8,911.74 (B/33 at §39); and

 iv. Loss of government rates = $57,600.54 (B/33 at §39).

12. It is trite law that an aggrieved landlord is entitled to damages for wrongful repudiation of a tenancy agreement, such damages as reflecting the rental, service charges, rates and reinstatement cost stipulated in the tenancy and therefore payable if the agreement is permitted to run its full course, subject always to a duty to minimize his loss.  The landlord is expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at market rent.  However, it falls upon the errant party to establish that mitigation has not taken place (Wong Siu Co Ltd v Goldquest International Ltd (HCA 3183 & 4145/2001, unreported, 18 August 2006 at §7-8).

13. And I also accept the submissions by Ms Li for the P that “the duty to mitigate is not onerous as the landlord is not required to do anything other than in the ordinary course of business (McGregor on Damages, 18^th ed. at §7-019).

14. Having heard from Ms Cheng, I accept her evidence in full and agree that the P suffered loss of rent, service charges, promotion levy and rates since repossession on 23 March 2016 to the date when the T/A would have expired on 21 October 2016 if not for the repudiatory breach of the D1 in the early termination of the T/A.  And it is also my finding that the P had taken all reasonable steps and extensive efforts to promptly and duly mitigate the loss caused by the D1’s repudiation of the T/A in the search for a replacement tenant. Being the landlord of the entire office building of Windsor House, I accept that the P is entitled to consider the prevalent rent of similar properties in the same building in setting the market rent of the Premises and not to set the asking rent below the market rent to minimize the deleterious effect on the P’s portfolio of properties in the same building.

15. I therefore allow the P’s claim in full for loss of rent (after setting off of the Licence Fee), services charges, promotion levy and government rates as claimed from 23 March 2016 to 21 October 2016, ie HK$800,339.17 ($662,532.96 + $71,293.93 + $8,911.74 + $57,600.54).

Loss of Reinstatement Cost

16. Ms Cheng testified that upon repossession of the Premises, it was discovered that the D1 had failed to yield up the Premises in a bare shell condition (ie same condition when D1 took possession) as required under the T/A, the P therefore incurred expenses to reinstate the unit to “good clean substantial and bare-shell condition”.  Photos of the Premises before and after the reinstatement work is at B/112-119 and 135-140. For the general reinstatement work including taking down of all existing fittings, floor finishes, wall finishes and re-surface the same, reinstating the light switch and socket as well as cleaning of existing fan coil unit and reinstating 2 sets of return air aluminum filter etc, tender was being called for and eventually selected the lowest tender at HK$98,500.  And the installation of sprinkler system (fire services) was required in order to reinstate the same to its original location after alteration being made by D1. The existing maintenance contractor of the fire services installation of the whole building was engaged since the cost of the installation was fairly low at HK$4,465.

17. I accept the evidence of Ms Cheng that the D1 failed to reinstate the Premises to bare-shell condition which is supported by the photographs and I also find that the P has to incur costs in the performance of the reinstatement works which are reasonable and necessary to reinstate the Premises to a condition as required under the T/A.

18. I therefore allow the claim for loss of reinstatement costs in full, ie HK$102,965.

Costs of Distraint Action 

19. As the D1 had failed to pay the Monthly rent, service charges and promotion levy since 1 November 2015, the P instituted distraint action (DCDT 384/2016 refers) to arrange for the seizure and auction of goods and chattels of D1 in the Premises.  Seizure of goods at the Premises took place on 9 March 2016 by the bailiff and auction took place on 16 March 2016.  The proceeds of sale realized from the auction was HK$50,000 and after deducting the expenses of HK$22,523.70, there was a net proceeds of HK$27,476.30.  Ms Cheng confirmed in her evidence that the expenses for locksmith (B/110) had been wrongly included in this case and should be deleted from the list of expenses.

20. I accept and find that costs of the distraint action is recoverable from the defendants under Clause 7(a)(i) of the T/A (B/69-70) and the amount claimed are reasonable.  I therefore allow the claim in full.

Quantum of Loss and Damages

21. Based on the findings above, the total amount of loss and damages is set out as follows:

Head of Loss	Period Covered	Total Amount (HK$)
(1)  Loss of Monthly Rent	23/3/2016 - 21/10/2016 at $132,000/month less Licence Fee received	$662,532.96
(2)  Loss of Services Charges	23/3/2016 - 21/10/2016 at $10,232 per month	$71,293.93
(3)  Loss of Promotion Levy	23/3/2016 - 21/10/2016 at $1,279 per month	$8,911.74
(4)  Loss of Government Rates	1/4/2016 - 30/6/2016 1/7/2016 - 30/9/2016 1/10/2016 - 21/10/2016 at 25,850 per quarter	$57,600.54
(5)  Loss of Reinstatement Costs	N.A.	$102,965
Total		$903,304.17

22. The P agreed that the net proceeds from the distraint action at HK$27,476.30, the security deposit of HK$456,033 and reinstatement deposit of HK$20,000 paid by D1 should be set off against the award.

23. Therefore, the total amount of loss and damages awarded to the P should be HK$399,794.87 ($903,304.17 - $27,476.30 - $456,033 - $20,000).  I so ordered.

Interest

24. The P asks for pre-judgment interest on the damages awarded at prime rate plus 1% from the date of writ to the date of judgment.

25. I agree that prime rate plus 1% has been well-established by authorities to be the applicable pre-judgment rate from the date when the loss has accrued to the date of judgment (Tadjudin Sunny v Bank of America, CACV 12/2015, unreported, 20 May 2016 at §179).  I order that there be pre-judgment interest rate at prime rate plus 1% on the sums awarded (ie HK$399,794.87) from the date of the Writ to the date of Judgment and thereafter at judgment rate till payment.

Costs

26. Costs should follow the event.  A Statement of Costs for summary assessment is submitted at the end of this hearing.  In the Statement of Costs, the P claims the sum of HK$69,045 as costs in this action against the defendants.

27. Having reviewed the Statement of Costs, I find the overall costs claimed appeared proportionate and each item is reasonably incurred and its costs is reasonable.

28. I therefore summarily assessed the amount of costs payable by the defendants to the P in the sum of HK$69,045.  This is a costs order nisi. Unless any of the parties applies by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days from today.