MTR CORPORATION LTD v. KA MONG MANAGEMENT LTD AND OTHERS

  HCA904/2009 & HCA905/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 904 AND 905 OF 2009

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J U D G M E N T

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1. This is an appeal from the orders of the Master in these two actions granting summary judgment to the plaintiff for an order for possession of certain shop premises at Luk Yeung Galleria in Tsuen Wan against the 1^st defendant, and ordering that the 1^st, 2^nd and 3^rd defendants pay arrears of rent and mesne profits assessed in the sums of $441,877.97 and $2,167,860.95 and interest thereon, that damages be assessed, and that the costs of the two actions be paid by the 1^st, 2^nd and 3^rd defendants, to be taxed on a full indemnity basis, if not agreed.

2. The defendants have appealed against these orders.

3. The plaintiff is the landlord of all the shops on the 2^nd Floor of Luk Yeung Galleria and by a tenancy agreement dated 10 July 2007, the plaintiff let Shop No.S35 to the 1^st defendant for two years from 1 September 2008 to 31 August 2010, and by another tenancy agreement dated 1 August 2007, the plaintiff further let Shop Nos.S25-26 to the 1^st defendant for three years from 1 October 2007 to 30 September 2010.  The 2^nd and 3^rd defendants are directors of the 1^st defendant and executed surety deeds to guarantee the due performance of the two tenancy agreements by the 1^st defendant. 

4. The relationship between the parties has not been a happy one.  The 1^st defendant operated a restaurant business in the shop premises and complained that, on 4 May 2008, the plaintiff’s staff sprayed pesticides in the building resulting in a large number of cockroaches rushing into the 1^st defendant’s shops and adversely affecting their business.  The 1^st defendant also complained that their business was adversely affected when remedial works were carried out by the plaintiff in the first half of May 2008.  The 1^st defendant also complained that, despite promotion fees having been paid by the 1^st defendant, the plaintiff failed to put up signboards indicating the location of the 1^st defendant’s restaurants.

5. It is not in dispute that on 10 March 2009, the 1^st defendant was in arrears of rent and other charges for the months of February and March in respect of Shop Nos.S25-26 and in arrears of rent and other charges for the month of March in respect of Shop No.S35.  On that day, Messrs Deacons wrote on behalf of the plaintiff to the 1^st defendant, and separately to the 2^nd and 3^rd defendants, complaining of the 1^st defendant’s failure to settle the arrears of rent and other charges.  The letter to the 1^st defendant ended with a statement that, in the event that payment of the claimed amounts was not received by close of business on 16 March 2009, “our client will institute legal proceedings against you as tenant for payment of the above amount (together with interest and costs) without further notice to you”.

6. There was no statement to the effect that failure to pay the arrears of rental would be regarded by the landlord as conduct amounting to a repudiation of the tenancy agreements.

7. On 31 March 2009, the plaintiff issued writs in the two actions, complaining of the 1^st defendant’s failure to pay arrears of rent and related charges.  In paras.14 and 15 of the Statement of Claim in the first action and paras.17 and 18 of the Statement of Claim in the second action, the plaintiff pleaded that, despite demand by the plaintiff through its solicitors, the 1^st, 2^nd and 3^rd defendants had failed, refused or neglected to pay the arrears or any part thereof and that the arrears had remained unpaid.  It was further pleaded that, by reason of the matters aforesaid, the 1^st defendant had evinced an intention no longer to be bound by the tenancy agreements and had repudiated the same and that the plaintiff, as it was entitled to do, had accepted the 1^st defendant’s repudiation by the issue of the proceedings herein and was entitled to possession of the premises.

8. In the prayers for relief in the two Statements of Claim, the plaintiff claimed possession of the premises, arrears of rental and other charges, interest, mesne profits, damages to be assessed, and costs on a full indemnity basis pursuant to the terms of the tenancy agreements.

9. Although the tenancy agreements in question contained forfeiture clauses, entitling the plaintiff to re-enter the premises in the event that the rent shall be unpaid for 21 days after becoming due (a remedy that has been referred to as “the forfeiture remedy” by Yuen JA in Well Century Holdings Ltd v Leung Kam Yu [2003] 2 HKLRD 653 at p.659E), the plaintiff did not avail itself of this remedy but chose instead to make the claims pleaded in the Statements of Claim (which have been referred to as “the common law remedy” by Yuen JA in the Well Century Holdings case at p.659H).

10. A Defence and Counterclaim was filed in both actions on 18 May 2009 and a Reply and Defence to Counterclaim filed on 26 June 2009.  The Order 14 Summons was only taken out on 10 August 2009.  The plaintiff’s averment of repudiatory conduct on the part of the 1^st defendant was denied in the Defence and Counterclaim. 

11. Although the defendants’ former solicitors did not, in correspondence, expressly challenge the plaintiff’s case that the tenancy agreements had been terminated by the acceptance of the defendants’ repudiatory conduct, the 2^nd defendant, in his affirmation of 28 August 2009, denied that the 1^st defendant had evinced any intention not to be bound by the tenancy agreements or had repudiated the same and he pointed out that the 1^st defendant’s fittings including valuable cooking installations and furniture remained in the premises.

12. At the hearing before the Master, and before me, Mr Benjamin Chain for the defendants submitted that there was a triable issue whether or not, by its failure to pay outstanding rent which, in the case of one shop, was one month in arrears, and, in the case of the other shops, was two months in arrears, the 1^st defendant had evinced an intention was not to be bound by the terms of the tenancy agreements.  He submitted that that failure had to be viewed in the context of the tenancy agreements which had an unexpired term of about 1½ years and in the context of the landlord holding three months’ rental deposits in respect of each of the two shops.  It appeared that by the time the matter came before the Master, the plaintiff had re-entered the shop premises, and that, in the case of one shop, had re-let the shop.  However, the undisputed facts were that the 1^st defendant had not abandoned the premises, the non-payment of rent did not occur towards the end of the tenancies, there had been only one demand before the plaintiff issued proceedings, and that demand did not assert that the failure to pay rent was a repudiation of the tenancy agreements. 

13. Mr Chain submitted further that the critical time was the date of the issue of the Writ and that the conduct of the defendants and of the parties thereafter had to be viewed with caution.  It was true that the 1^st defendant had not tendered rent after the issue of the proceedings, but the 1^st defendant’s failure to do so should not be regarded as conduct confirming the repudiation of the agreements prior to the issue of the Writs, particularly when viewed in the context of the undeniable fact that the plaintiff never retracted from its position that the tenancies had been brought to an end and did not intimate that it was willing to accept rent from the 1^st defendant, at least not until much later when, in its solicitors’ letter of 2 October 2009, the plaintiff offered to accept the outstanding sums if paid on or before 14 October 2009, with the threat that the plaintiff would re-enter and take possession of the shop premises on 15 October 2009 and dispose of the goods and chattels of the 1^st defendant if it did not pay up by then. 

14. Mr Chain also made the point that the landlord had cut off the supply of electricity to the shop premises on 31 March 2009 in respect of Shop Nos.S25-26 and on 17 April 2009 in respect of Shop No.S35.  The plaintiff had asserted that it was authorised to do so by Clause (2) under Section VI of the tenancy agreements.  However, Mr Chain submitted that it was arguable, upon a proper construction of the sub-clause, that, read as a whole, that clause could only be invoked by the landlord in the event that the tenancy agreement was validly terminated and in a case where the tenant was wrongfully holding over.  The 1^st defendant had challenged the termination of the tenancy.  If the 1^st defendant was correct, the cutting off of electricity was tantamount to wrongful eviction of the tenant and therefore relieved the tenant of its obligation to pay rent under the tenancy agreements.

15. For these reasons, Mr Chain argued that the failure of the tenant to tender rent after 31 March 2009 ought not to be regarded as conduct confirming the tenant’s alleged repudiation of the tenancy agreements before the issue of the Writ.

16. Mr Richard Khaw, on behalf of the plaintiff, countered these submissions by relying on the failure of the defendants to pay rent or to offer to pay rent and other charges as confirming the 1^st defendant’s repudiation of the tenancy agreements prior to the issue of the Writ.  He referred me to the correspondence and pointed out to me that there was no complaint of, indeed, no reference at all to the suspension of electricity by the plaintiff and he made the further point that one would have expected a reference to it in the correspondence if the suspension of electricity had had any impact on the tenant.  The Defence and Counterclaim contained a mere denial of the repudiation and did not make the points that Mr Chain was now making in court.  The demands for payment was simply met with silence from the defendants.  Mr Khaw submitted that the plaintiff’s case, based on the silence of the defendants, was stronger than the facts of the Well Century Holdings Ltd case in which the court had held that the failure to pay rent amounted to conduct which was repudiatory of the tenancy agreement.

17. In Well Century Holdings Ltd v Leung Kam Yu, on 1 January 2001, the defendant tenant had failed to pay rates and management charges which were due to the plaintiff landlord and, on 1 February 2001, he failed to pay rent which was due.  On 15 February 2001, the defendant wrote to the plaintiff through its solicitors to the effect that, since he started the business, he had been suffering a loss and that he could no longer pay the rent.  He asked the plaintiff to permit an assignment of the tenancy.  This was followed, on 19 February 2001, by another letter from the defendant to the plaintiff through its solicitors proposing an assignment of the tenancy and if that was not successful, asking the plaintiff to permit him to rescind the tenancy on 31 March 2001.  These proposals were not accepted by the plaintiff, who issued a letter of demand on 28 February 2001, demanding payment of rent and other charges in arrears.  On 1 March 2001, more rent and other charges became payable.  No payment had been made and on 26 March 2001, the plaintiff issued the writ relying on the forfeiture clause in its tenancy agreement to re-enter the premises (the forfeiture remedy) and also relying on the tenant’s failure to pay rent as conduct evincing an intention no longer to be bound by the tenancy agreement (the common law remedy).  The plaintiff succeeded on the common law claim for the reasons expressed by Yuen JA in para.47 of her judgment at p.664F-H:

“Here, the non-payment of rent had reached a substantial amount, there was no offer on the part of the defendant to make even part payment of outgoings such as rates and air-conditioning charges, let alone rent, and of course there were the two letters on 15 February 2001 and 19 February 2001 which showed that the defendant could no longer continue with the tenancy agreement and wished to withdraw from it.  Although the defendant has now said that when he wrote those letters, he was merely trying to negotiate for a lower rent and he did not really wish to terminate the tenancy, the letters have to be read objectively.  Read objectively, there can be no doubt but that they evinced his intention no longer to be bound by the existing tenancy agreement.”

18. I agree with the submissions of Mr Chain that the silence in this case cannot be regarded as stronger evidence of repudiation than the repudiatory letters referred to by Yuen JA in the Well Century case. 

19. The question, ultimately, is one of fact.  In a case where many months rent has been outstanding and where there has been no explanation by the tenant why there was a failure to pay rent, the court would have little difficulty concluding that such non-payment amounted to conduct evincing an intention not to be bound by the terms of the tenancy agreement.  In this case, however, only one month’s rent was outstanding in respect of one shop and two months’ rent outstanding in respect of the other shop.  If the landlord had sought to re-enter by reliance on the forfeiture clause and if the tenant had failed to apply for relief against forfeiture, the matter would have been resolved quickly.  Alternatively, if the plaintiff had waited a little longer before relying on the common law remedy and had followed up with a second demand letter stating that non-payment would be regarded as repudiatory conduct, its case would have been stronger.  Here, the landlord has pinned its colours on a very narrow mast, relying on non-payment of rent for a very short period of time as repudiatory conduct on the part of the tenant.

20. Whilst Mr Khaw has been eloquent in his submissions, I do not lose sight of the fact that I am not listening to final submissions at the end of a trial and that I am not here to determine a question of fact: I am here to determine whether or not a triable issue has been raised.

21. For the reasons advanced by Mr Chain, I am persuaded that the defendants have raised a triable issue in this case.

22. The judgment for arrears of rent and other charges must stand as it is accepted that the arrears of rent and other charges, for the months of February and March 2009 in respect of one shop and for the month of March 2009 in respect of the other, were due and payable.  Save as aforesaid, I set aside the orders of the Master and grant unconditional leave to defend with costs here and below to be in the cause with Certificate for Counsel.

23. The award of interest on the arrears of rent and other charges will depend on the date the rental deposit was applied to set off these claims.  I grant the parties liberty to apply to me to determine the issue of interest, if any, accruing on the arrears of rent and other charges, if they fail to reach agreement on this matter.  Mr Chain, very fairly, did not press for a stay on the judgment for arrears of rental and other charges on account of the counterclaim of the defendants.  In this case, it is not manifestly unjust to allow the judgment for arrears of rent and other charges to be enforced without regard to the defendants’ counterclaim.  Having regard to the terms of the tenancy agreements, I uphold the Master’s order that the plaintiff’s costs of pursuing its claims for arrears of rent and other charges be taxed on an indemnity basis. 

24. There is no longer any issue regarding recovery of possession.  The implications of what occurred after the issue of proceedings will only impact on the assessment of quantum after the determination of the issue of liability.

25. Had I found that there was no triable issue on the question of liability, I would still have set aside the Master’s liquidated award for mesne profits and ordered that the plaintiff’s claim for mesne profits be assessed.  The assessment of mesne profits turns on the question whether or not the plaintiff could reasonably have re-entered and re-let the premises earlier.  The failure by the defendant to make any positive averment in its pleadings on the issue of mitigation of damages and the omission by the defendants to file affidavit evidence on this issue cannot, in my view, convert the plaintiff’s claim, for unliquidated mesne profits to be assessed, into a liquidated sum in respect of which the Master can give final judgment on an Order 14 application.