VINCENTONE LIMITED v. PROFIT LOCK LIMITED

DCCJ 258/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 258 OF 2012

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REASONS FOR JUDGMENT AND JUDGMENT ON COSTS

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INTRODUCTION

1. On 7 May 2013, I gave judgment for the plaintiff’s claim for damages in the sum of $187,650 and dismissed the defendant’s counterclaim.  I said that the reasons were to be handed down and that the judgment on the plaintiff’s claims for interest and costs be reserved.  I now give the reasons and the judgment on outstanding matters. 

2. This is about a dispute between the plaintiff as landlord and the defendant as tenant.  The subject property is House 27, 16^th Street, Hong Lok Yuen, Tai Po, New Territories, Hong Kong (“the Premises”). 

3. There is no dispute that on 18 November 2010, the plaintiff entered into a tenancy agreement (“the Lease”) with the defendant for a period of two years commencing on 1 December 2010 at a monthly rental of $56,000 in advance payable on the first day of each calendar month.  There is also no dispute that the defendant rented the Premises for the use of its director Madam Lau.  A security deposit of $112,000, which was equivalent to two months’ rent, was paid by the defendant pursuant to the Lease.  It was a term of the Lease that either party had the right of termination anytime after the first twelve months by giving the other party two months’ written notice and that the minimum lease term was 14 months.

THE DISPUTE

4. The defendant continued to pay the rent until June 2011 when the payment stopped.  Then, by a letter dated 7 July 2011, the plaintiff, through its solicitors, demanded the rent for the months of June and July 2011.  Eventually, the defendant’s solicitors, under the cover of a letter dated 29 July 2011, returned the keys and one remote control of the Premises to the plaintiff and purported to terminate the Lease.  On the same day, the plaintiff’s solicitors wrote back to the defendant’s solicitors expressly accepted the defendant’s repudiation and terminated the Lease. 

5. After that, the plaintiff deducted from the security deposit the rent in arrears for June and July 2011 and looked for a new tenant.  Despite various efforts made by the plaintiff, the Premises remained vacate until 7 November 2011 when it was re-let to a new tenant at a monthly rental of $64,500.  For that purpose, the plaintiff incurred an estate agent commission of $32,250. 

6. By the present action, the plaintiff seeks to recover from the defendant:-

(i)  damages in the amount of $187,650, being the difference between the rent payable under the Lease for the period between 1 August 2011 and 6 November 2011 and the rent payable under the new tenancy agreement (after the deduction of the commission payment) in excess of that under the Lease for the period between 7 November 2011 and 31 January 2012 (the earliest date on which the defendant was entitled to terminate the Lease);

(ii)  interest at 8% per annum; and

(iii)  costs on indemnity basis.

7. On the other hand, by way of defence the defendant alleges that the plaintiff had breached its expressed and implied covenant to keep the structural parts of the Premises in a reasonable state of repair.  The defendant also alleges in particular that the plaintiff’s failure to repair the pipes/drains serving the Premises resulted in flooding occurred to the Premises on or about 22 May 2011 and caused property damages.  The defendant therefore counterclaims against the plaintiff for:-

(i)  the costs of repair of electrical appliances and other expenses in the amount of $18,000;

(ii)  compensation for damaged clothing and furniture and the costs of alternative accommodation for the defendant’s director in the amount of $303,581.99;

(iii)  interests; and

(iv)  costs.

THE PROCEEDINGS

8. The defendant was absent from the trial and was not represented.  The Notice of Trial, dated 4 February 2013, had been sent by the Registrar of the District Court to the parties through their respective solicitors.  I was satisfied that the defendant had adequate notice of the trial.  However, on 2 May 2013, which was only a few days before trial, the defendant’s solicitors applied to court to cease acting and the application was granted.  In all the circumstances, I was satisfied that the defendant was voluntarily absent and I ordered that the trial should proceed in its absence. 

9. The plaintiff called only one witness, namely Mr Law who was a director of the plaintiff.  Mr Law adopted his witness statement as his evidence in chief which covered the facts as stated in paragraphs 2 to 5 above. 

10. There was no evidence from the defence.

CONSIDERATION

The plaintiff’s claim for damages

11. I have read Mr Law’s statement and I accept his evidence.  I find that the plaintiff has proved its case on balance of probabilities, both in relation to liability and quantum, as regards the claimed damages for loss of rental income:-

(i)  there was no dispute that the defendant had failed to pay the rent since June 2011;

(ii)  the plaintiff was entitled to deduct the security deposit as it did.  Clause 13 of the Lease provided:-

“ … if the Tenant shall commit a breach of any of the terms and condition herein contained, it shall be lawful for the Landlord at any time thereafter to re-enter the Premises whereupon this Agreement shall absolutely determine and the Landlord may deduct any loss or damage suffered by the Landlord as a result of the Tenant’s breach from the Security Deposit without prejudice to any other right of action or any remedy of the Landlord in respect of such breach of the Tenant.”

(iii)  the plaintiff has adduced satisfactory documentary proof that it engaged several estate agents between August and November 2011 with a view to look for a new tenant to mitigate its loss; and

(iv)  the plaintiff’s has provided satisfactory documentary proof of the new tenancy agreement made and the estate agent commission incurred.

The defendant’s counterclaim

12. There being no evidence adduced by the defendant, its counterclaim against the plaintiff is bound to fail.

The plaintiff’s sanctioned offer

13. After I had given judgment for the plaintiff on its claim of damages, I was informed by Mr Poon, counsel for the plaintiff, that the plaintiff had made a sanctioned offer to the defendant before trial by a letter dated 2 April 2013.  The terms of the offer were follows:-

(1)  the defendant paid the plaintiff the amount of the damages claimed;

(2)  the defendant paid the plaintiff’s costs, to be taxed if not agreed; and

(3)  the defendant discontinued its counterclaim against the plaintiff.

It is noted that the offer did not include any interest on the damages.

14. The defendant’s solicitors replied by a letter dated 10 April 2013 not accepting the offer and made a counter-offer.  It is not necessary to go into the details of the reply letter. It suffices to say that the major disagreement between the parties was about costs.

15. The plaintiff’s solicitor then replied by a letter dated 16 April 2013 reiterating the terms already offered in its first letter and added that, to save time and costs, the plaintiff was prepared to accept by a given sum as full and final settlement of the plaintiff’s costs and disbursement.  However, the defendant’s solicitor did not reply to this second letter of the plaintiff.

16. Now that judgment has been given for the plaintiff for its main claim on damages, in the normal course of event the plaintiff will be awarded interest on damages and costs. Therefore, the plaintiff has done better than its sanctioned offer given on 2 April 2013. 

17. The question then is whether the plaintiff’s second letter should be taken as an amendment to the sanctioned offer made on 2 April 2013.  If so, the amended sanctioned offer would only take effect from 16 April 2013.  This is because Order 22 Rule 12(3) of the Rules of the District Court says,

“An amendment to a sanctioned offer is effective when its details are served on the offeree.”

The date is relevant to the consideration of the consequences of the defendant’s non-acceptance.

18. In this regard, I accept the submission of Mr Poon that the letter dated 16 April 2013 was not an amendment to the offer made on 2 April 2013.  Insofar as costs is concerned, the offer remained the same throughout, namely, the defendant pay the plaintiff’s costs in the action, to be taxed if not agreed.  The effect of the letter dated 16 April 2013 was for the plaintiff to propose a figure for the purpose of agreement and there was no agreement on quantum, then there remained the other option of taxation.  In my judgment, the date of the sanctioned offer remained 2 April 2013 which was more than 28 days before trial.  Therefore, the latest date on which the defendant could have accepted the offer without leave of the court would be 30 April 2013 which was 28 days after the offer was made: see Order 22, Rule 16(1) and Order 3, Rule 2(2).

19. In the present case, there are two possible consequences flowing from the defendant’s non-acceptance of the sanctioned offer:-

(i)  the court may order interest on the whole or part of any sum of money (excluding interest) awarded to the plaintiff at a rate not exceeding 10% above judgment rate for some or all of the period after 30 April 2013: Order 22, Rule 24(2); and

(ii)  the court may also order that the plaintiff is entitled to (a) his costs on the indemnity basis after 30 April 2013; and (b) interest on those costs at a rate not exceeding 10% above judgment rate: Order 22, Rule 24(3).

Furthermore, the court shall make the above orders unless it considers it unjust to do so: Order 22, Rule 24(4) & (5).

The plaintiff’s claim for interest

20. In the prayer of the Amended Statement of Claim, the plaintiff seeks pre-judgment interest on the damages of $187,650 at the rate of 8% per annum.  At the trial, however, Mr Poon agreed that, but for the sanctioned offer, the applicable pre-judgment interest rate should be the commercial rate: Hong Kong Civil Procedure 2013, Volume 1, §6/L/10 & 11.

21. In the present case, bearing in mind that the damages are unliquidated damages and that the actual amount claimed was not quantified for the defendant’s consideration until the statement of claim was amended on 13 April 2012, my view is that the interest should start to accrue on the date of the amendment which was 13 April 2012.  See Claymore Services Ltd v Nautilus Properties Ltd [2007] BLR 452.

22. In my judgment the applicable pre-judgment interest rate, but for the sanction offer, should be at 2% above the best lending rate of the Hongkong and Shanghai Bank Corporation.  I do not see any reason why the plaintiff should not be awarded an enhanced interest rate starting on 1 May 2013.  I order that the interest on the damages of $187,650 be calculated at the enhanced rate of (10% + 2%) 12% above the best lending rate of the Hongkong and Shanghai Bank Corporation from 1 May 2013 until the date of judgment and thereafter at the enhanced rate of 10% above the judgment rate until the date of payment.

The plaintiff’s claim for costs

23. As a general rule, costs should follow the event.  In the present case, there is no reason to depart from the general rule and the plaintiff is entitled to its costs on the claim and counterclaim.

24. As to the basis of assessment, the plaintiff seeks costs on the indemnity basis in the Amended Statement of Claim.  The ground for that is said to be Clause 3 of the Lease as follows:-

“The Tenant shall pay to the Landlord the Rent in advance on the 1^st day each and every calendar month during the Term. If the Tenant shall fail to pay the Rent within 10 days from the due date, the Landlord shall have right to institute appropriate action to recover the Rent and all costs, expenses and other outgoings so incurred by the Landlord in relation to such action shall be a debt owed by the Tenant to the Landlord and shall be recoverable in full by the Landlord.” (Emphasis supplied)

25. It is a matter of construction of the Lease as to whether the plaintiff is entitled to recover his costs in the present action on the indemnity basis.  The first thing to note that is Clause 3 is talking only about the costs and expenses in recovering “the Rent”, such term being defined in the Lease as “HK$56,000 per month inclusive of Management Fee, Government Rates & Government Rent”.  The liability to pay “The Rent” presupposes the continual existence of the Lease. However, the Lease was terminated by the plaintiff on 29 July 2011 upon its acceptance of the repudiation by the defendant.  Had the defendant continued to remain in possession of the Premises, what the plaintiff would have been entitled to receive would have been “mesne profits”: Canas Property Co Ltd v K L Television Services Ltd [1970] 2 QB 433.  “Mesne profits” are not rent but damages due to the trespass of the lessee after following termination of the lease.  There is a significant difference between the two.  In fact, Clause 13 of the Lease provided that “any loss or damage suffered by the landlord as a result of the Tenant’s breach”.  Therefore, the parties appreciated the difference between “the Rent” and damages.  In the present case, the defendant was not in possession of the Premises and what the plaintiff is seeking is not even “mesne profits” but damages for loss of rental income for the unexpired lease term. In my judgment, as a matter of construction of the Lease, the plaintiff’s costs for its claim are not intended by the parties to be covered by Clause 3 of the Lease. 

26. Then, there are also the plaintiff’s costs regarding the defendant’s counterclaim.  This part of the plaintiff’s costs relates to a separate cause of action by the defendant which is distinct from the plaintiff’s action.  The defendant could have pursued its counterclaim in a separate action.  It is obvious that it could not have been the objective intention of the parties that the plaintiff’s costs in this regard should be covered by Clause 3 of the Lease. 

27. In my judgment, but for the sanctioned payment, the costs which the plaintiff is entitled to recover from the defendant should be assessed on the party and party basis.  Similar to the case of interest, I cannot see any reason why, as a consequence of the defendant’s non-acceptance of the sanctioned offer, the plaintiff should not be awarded costs on the indemnity basis from 1 May 2013 onwards.  Furthermore, there shall also be interest on the plaintiff’s costs from 1 May 2013 onwards at the rate of 10% above the judgment rate from that date until the date of payment.

Interest accrued on the defendant’s payment into court

28. There was an application by the plaintiff for summary judgment against the defendant heard on 12 July 2012 and as a result of which the defendant was granted leave to defend on the condition that it paid into court the full amount of the claimed sum of $187,650 within 21 days.  The sum was paid into court within time on 2 August 2012 and is accruing interest.  Now that judgment has been given for the plaintiff on damages, the amount of $187,650 previously paid into court by the defendant should be paid out to the plaintiff forthwith in satisfaction of the judgment.  The question arises, however, as to how the interest accrued should be dealt with.

29. As a general rule, money paid into court is not treated as belonging to the person claiming damages.  As a result, when the award to the person claiming damages equals but does not exceed the amount of the payment in, the accrued interest will be ordered to be paid out to the party who made the payment in: see Polish Steam Ship Co v Atlantic Maritime Co & Others; The Garden City [1985] QB 41; see also Hong Kong Civil Procedure 2013, Volume 1, §22/13/1.

30. However, in the present case, since the judgment in favour of the plaintiff includes the interest on damages, it will be appropriate for the interest accrued on the amount kept by the court be paid out to the plaintiff in satisfaction of the judgment on the interest on damages and for any surplus thereof to be paid out to the defendant: see Woonsing Limited v Wong Yi Ming, HCA 6744/1998 (unreported, dated 26 February 2001, at pp 8 & 9).

Conclusion

31. The plaintiff is awarded the following:-

(i)  Damages in the amount of $187,650;

(ii)  Interest on Damages:-

•  From 13 April 2012 to 30 April 2013:		at the rate of 2% above the best lending rate of Hongkong and Shanghai Bank Corporation
•  1 May 2013 to date   of Judgment:		at the rate of 12% above the best lending rate of the Hongkong and Shanghai Bank Corporation
•  thereafter:		at the rate of 10% above the judgment rate

(iii)  Costs:-

•  up to and including 30 April 2013 (on party and party basis)

•  From 1 May 2013 onwards (on indemnity basis) which carries interest at 10% above the judgment rate from that date until the date of payment.

  Counsel certificate is granted to the plaintiff for the claim and the counterclaim.

32. I also order that the payment by the defendant into court in the sum of $187,650 together with the interest accrued thereon be paid out to the plaintiff in satisfaction of the judgment on (i) and (ii) above and any surplus thereof to be paid out to the defendant.