WILSON COMMUNICATIONS LTD v. FORDEASE LTD

DCCJ315/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 315 OF 2002

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JUDGMENT

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1. The Plaintiff is a company trading in mobile phones and phone accessories, it has a chain of mobile phone shops in different parts of Hong Kong. The Defendant is a registered owner of a shop known as A136 Nan Fung Centre, 264-298 Castle Peak Road, Tsuen Wan, New Territories (hereinafter called "the said shop").

2. The Plaintiff entered into a tenancy agreement with the Defendant on 23rd July 1999 for a term of two years of the said shop commencing on 1st August 1999 to 31st July 2001 at a monthly rental of $43,000 (hereinafter called the "said agreement"). A deposit of $86,000 was paid under the said tenancy agreement by the Plaintiff to the Defendant.

3. The Plaintiff delivered vacant possession of the said shop to the Defendant on 31st July 2001 and demanded the return of the deposit from the Defendant under Clause 7 of the said agreement. The Defendant failed to do so, and the Plaintiff now claims against the Defendant for the return of the deposit after deduction of outstanding rates and government rent, leaving a balance of $81,780.

4. The Defendant in its defence alleged that the Plaintiff had been in breach Clauses 2 and 6 of the said tenancy agreement by failing to obtain the written consent of the Defendant and made alterations to the said shop and further had failed to deliver vacant possession of the said shop to the Defendant in the same repair and condition on the expiration of the tenancy. The Defendant relies on Clause 7 of the said tenancy agreement and deducted from the deposit the loss it suffered by re-instating the fixtures and furniture at the said shop and the loss of rental during the period of re-instatement.

Plaintiff's case

5. It is the Plaintiff's Mr. So Kam Lun's evidence (PW2) that the Defendant's Madam Yip had agreed to the Plaintiff's replacement of all fixtures, fittings and furniture at the said shop because the Plaintiff has a chain of mobile phone shops using similar shop designs and logo unique to its shops.

6. Mr. So (PW2) admitted to have removed the false ceiling, replaced the light sign box, demolished the three build-in-display cabinets, replaced the switch box, stripped the carpet and installed floor tiles, removed the lighting panel and removed the wall paper at the said shop.

7. According to PW2, a few days before expiry of the lease and delivery of vacant possession, Madam Yip called him and requested him to leave behind the fixtures, fittings and furniture. PW2 refused her request and informed her that the Plaintiff's shop design was unique to the Plaintiff and it cannot be left behind for her new tenant's use. Madam Yip was not happy with the refusal and told Mr. So (PW2) that she would deduct the re-instatement costs from the deposit. PW2 then told her the shop was let on vacant possession basis, the Plaintiff would handover the said shop in a vacant possession basis.

8. PW2 claimed that there was an oral agreement between the Plaintiff and the Defendant that the said shop would be delivered to them on a 'bare-shell' basis and the Plaintiff would handover the said shop also on a 'bare-shell' basis. He claimed this oral agreement was made between himself and the Defendant's Madam Yip (DW1).

9. The Plaintiff further claims that as the Defendant had leased out to a previous tenant and in the previous tenancy agreement, the Defendant had agreed to the tenant's request to replace the old fixtures, fittings and cabinets with new ones, it would follow that the Defendant would not have taken objections to the succeeding tenant's demolition of the existing fixtures and fittings. The director of the previous tenant Precision Technologies Co. Ltd. (PW1) Mr. Lam Hung Tak gave evidence and confirmed the terms of the two year tenancy agreement his company signed with Defendant on 1st September 1998. It is his evidence that he did not replace the exiting fixtures and fittings left from the previous tenant, Union Link Technology, because his business had not been good and he terminated the tenancy after only 10 months, leaving behind the same fixtures and fittings as he found them.

Defence case

10. According to DW1 Madam Yip Siu Ying's evidence, she had requested Mr. So not to demolish the cabinets and fittings when she handed over the keys to the cabinets to Mr. So at the handover after the tenancy agreement was signed. She claimed that PW2 had agreed to her request. It is her evidence that the Plaintiff did make use of the fixtures and furniture when it started business on 24th July 1999, the first day of the tenancy.

11. It is Madam Yip's evidence that she reminded PW2 of his promise not to remove the fixtures, fittings and cabinets on 27 July 2002, a few days before delivery of possession to the Defendant and she claimed Mr. So (PW2) had agreed.

12. However, on 31st July 2001, she found workmen were demolishing the fixtures at said shop and she telephoned Mr. So (PW2) asking for an explanation. PW2 told her, he told her it was too late to notify them.

13. At an inspection of premises upon repossession, Madam Yip found the following items of fixtures, fittings and furniture demolished and stripped:

a. false ceiling;

b. air-condition duct and outlet with wiring;

c. one light box;

d. three cabinets;

e. one switch box;

f. floor carpet;

g. one overhead lighting panel;

h. wall paper.

14. As Madam Yip had already successfully found a new tenant on 1st July 2001 trading in the same business as the Plaintiff, due to the poor condition of the suit property which was delivered without lighting and fixtures, the Plaintiff had to re-instate the said shop and lost 13 days of rental caused by the delay of delivery to the new tenant. The Defendant claims a set-off for the loss of $74,537.10 in total.

15. Madam Yip denied that she met PW2 Mr. So before or at the time of signing of the tenancy agreement, she claimed that all the negotiation was conducted through the estate agent Miss Liu. Madam Yip further denied there was any oral agreement with PW2 Mr. So Kam Lun prior to or after the signing of the formal tenancy agreement that the premises would be let on a 'bare-shell' basis without fixtures, fittings and furniture or that upon expiry of tenancy the Plaintiff would deliver back vacant possession in a 'bare-shell' basis to the Defendant. The Defendant relies on Clause 6 of the tenancy agreement which required the tenant to deliver up vacant possession of the premises in the same repair and condition on the expiration of the lease and Clause 7 of the said agreement that the landlord may deduct any loss or damage suffered as a result of the tenant's breach of the agreement.

16. The Defendant claimed 13 days loss of rental and the costs of re-instating the fixture, fittings and cabinets for its incoming tenant to whom it had agreed to let with the fixtures and fittings intact.

Findings

17. Clause 2 of the said tenancy agreement provides that:-

"2. The tenant shall not make any alteration and/or additions to the Premises without the prior written consent of the Landlord, which consent shall not be unreasonably withheld."

Clause 6 states that:-

"6. The tenant shall during the Term keep the interior of the Premises in good and tenantable repair and condition (fair wear and tear and damage caused by inherent defects excepted) and shall deliver up vacant possession of the Premises in the same repair and condition on the expiration or sooner determination of this Agreement."

Clause 7 further states that:-

"7. The Tenant shall pay to the Landlord the Security Deposit set out in Schedule I for the due observance and performance of the terms and conditions herein contained and on his part to be observed and performed. Provided that there is no antecedent breach of any of the terms and conditions herein contained, the Landlord shall refund the Security Deposit to the Tenant without interest within 30 days from the date of delivery of vacant possession of the Premises to the Landlord or settlement of any outstanding payment owed by the Tenant to the Landlord, whichever is later. If the Rent and/or any charges payable by the Tenant hereunder or any part thereof shall be unpaid for seven (7) days after the same shall become payable (whether legally demanded or not) or if the Tenant shall commit a breach of any of the terms and conditions 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."

Further, Clause 9 of the said agreement provides that:

"9. The Landlord shall keep and maintain the structural parts of the Premises including the main drains, pipes and cables in proper state of repair Provided that the Landlord's liability shall not be incurred unless and until written notice of any defect or want of repair has been given by the Tenant to the Landlord and the Landlord shall have failed to take reasonable steps to repair and remedy the same after the lapse of a reasonable time from the date of service of such notice."

18. From the evidence adduced before me, it is undisputed that the Plaintiff had replaced the floor and wall covering, the cabinets, light box, light panel, switch (fuse) box and air conditioning outlet at the said shop a few days after the commencement of the tenancy. It removed all it had fitted in the said shop except for partial floor covering, the switch (fuse) box and a light panel at the expiry of the tenancy.

19. The issue in dispute is whether the Defendant had agreed to waive the reinstatement of the said shop.

20. The Plaintiff's counsel referred a number of cases to me, in the case of Shing Yip Co. Ltd. v. Fung Kwok Wai [1982] HKC 478 Deputy Judge Rogers (as he then was) held clause 2(e) of the tenancy agreement was so broad that a literal construction would produce repugnant and absurd result, that each and every item alleged to fall within the clause had to be considered (clause 2(e) in that case is similar to Clause 2 of the said agreement in the present case). The learned judge went on to examine the nature of the complaint which involved the replacement and installation of two air-conditioners. The facts revealed in the judgment showed that at an earlier date air-conditioner had been installed with the instructions of the representative of the landlord. The court further found the landlord had acquiesced to the installations for over 13 years. Clearly, the Shing Yip case is factually very different from the present case.

21. In the case of Cheuk Kin Trading Ltd. v Prudential Mall Ltd. [1996] 4 HKC 758, Yam J. commented that he took judicial notice that in shop-premises new tenants have their own ideas of fittings and decor and would immediately be concerned to put the shop into an appropriate state for the selling of their particular retail goods.

22. From the evidence adduced in the present case, the Plaintiff fitted this description. On the other hand, the Plaintiff is also bound by the terms of the written tenancy agreement. Clearly, the Plaintiff could have requested the Defendant to amend the tenancy agreement supplied by the estate agent in accordance with its requirements if it intended the shop should be let on a "bare-shell" basis.

23. In all cases where the agreement entered between the parties had been reduced in writing, the written agreement should have included all the terms agreed by the parties. It is a rule of law that in such cases, verbal evidence is not allowed to be given, so as to add to or subtract from, or in any manner to vary or qualify the written contract (see paragraph 12-094 Chitty on Contracts Vol. 1 28th edition).

24. The parol evidence rule has no application until it is first determined that the terms of the parties' agreement are wholly contained in the written document (paragraph 12-096 Chitty on Contracts Vol. 1 page 625). In seeking to introduce the evidence of an oral term that the Defendant had agreed to the Plaintiff to deliver a 'bare-shell' back to the Defendant prior to the signing of the written tenancy agreement, the burden is on the Plaintiff to rebut the presumption. Or the Plaintiff should be able to show that the Defendant had agreed to waive the reinstatement of the fixture and fittings at the said shop.

25. In the case referred to me by the Defendant Sime Darby Motor Group Ltd. v Sky Champion Investment Ltd. HCA 5934 of 1998 (date of judgment 29 September 2000) Chung J. held that :

"The burden is on the Plaintiff to establish its case of waiver, variation and/or estoppel. This is because in the absence of such waiver, variation and/or estoppel, the Plaintiff would have been under the terms of the tenancy agreements to reinstate the shops failing which it would have been in breach of them and thus the rent deposits would have been liable to be forfeited."

26. As to ownership of fixtures, I have been referred to Halsbury's Laws of England Vol. 27(1) 4th edition paragraph 143 on page 140 :

"In accordance with the general rule of law that anything fixed to the freehold becomes part of the freehold, chattels affixed to premises at the date of a lease by a landlord, or some prior owner or tenant, pass under the demise unless expressly or impliedly excluded. Chattels so affixed, and chattels affixed subsequent to the commencement of the lease, must be delivered up to the landlord on the determination of the tenancy, unless the tenant is entitled to remove them by virtue of some special rule of law, statute or agreement, ......"

27. The right of a tenant to remove fixtures stated in Mr. Malcolm Merry's Hong Kong Tenancy Law 3rd edition referred to me by Mr. Law, counsel for the Plaintiff, has this to say on page 161 :-

"Even though an object is a fixture, the tenant may be entitled to remove it at the end of the lease. This is because the law has evolved exception to the general rule that fixtures may not be removed. The rule worked harshly, for instance, on a tenant who had invested heavily in plant and machinery for the improvement of his business or in decoration of the premises and found he could not take with him, at the end of the lease, those items which had become fixtures.

Accordingly, it became accepted that the tenant could remove trade, ornamental and domestic fixtures despite the general rule - at least so long as their removal did not irreparably damage the premises and the parties had not agreed otherwise. These exceptions, which are collectively, yet rather confusingly, known as "tenant's fixtures",....."

28. Page 163 of the Hong Kong Tenancy Law further says that :-

"Removal by agreement

The tenant may also take fixtures which he has added to the premises if the landlord agrees to this in the lease or in some collateral contract......

It may of course be agreed in the lease that the tenant may not remove fixtures or that he will deliver up the premises with fixtures. Such a stipulation overrides the rules concerning removal of trade and ornamental and domestic fixtures."

29. In the present case, the Defendant's Madam Yip may have owned a number of small shops between herself, her husband and their companies. However, they cannot be described in any way as a major property owner. Madam Yip operated a small shop in a nearby shopping centre at the time the Plaintiff rented the said shop from the Defendant. On the other hand, it is undisputed that Madam Yip passed by the said shop on many occasions during the tenancy period and was aware of the changes made in the said shop by the Plaintiff.

30. This goes to show that Madam Yip had accepted and acquiesed to the replacement of the original fixtures and fittings. I, nevertheless, accept that she had made it a point to remind the Plaintiff's manager PW2 Mr. So that the fixtures, fittings and cabinets should not be removed soon after the tenancy agreement was sign and repeated it a few days before the expiry of the tenancy. I further accept that she had on 1st July 2001 signed an agreement (page 75 of the bundle) and agreed to let the said shop to a new tenant and that she had informed the incoming tenant that he would have the benefit of the use of the existing fixtures and fittings.

31. The Plaintiff accepted that when the Defendant handed over possession of the shop to the Plaintiff, Madam Yip had also handed over all the fixtures, fittings and cabinets to the Plaintiff along with the keys to the cabinets to the Plaintiff's manager Mr. So (PW2). This had enabled the Plaintiff to trade at the said shop immediately which it did for a few days before renovation work took place.

32. I find Madam Yip's evidence on her insisting the Plaintiff not to demolish the fixtures, fittings and cabinets at the said shop to be credible and consistent with the Defendant's past practice in letting out the said shop with existing fittings, fixtures and cabinets. It would, no doubt, be to the Defendant's benefit to rent out the premises with fixtures, fittings and cabinets to tenants who are in the same mobile phone business as the Plaintiff because the new tenant would have been able to do business almost immediately, just as the Plaintiff and his predecessor Mr. Lam (PW1) had done.

33. Consequently, it is illogical for Madam Yip to have agreed with Mr. So that the said shop would be let on a 'bare-shell' basis because it would have been detrimental to the Defendant's interests.

34. I find Madam Hui to be a truthful witness. Further, on a balance of probability, I reject the evidence of PW2 Mr. So that the Defendant's Madam Yip had agreed orally with him to lease the said shop on a 'bare-shell' basis, it is completely inconsistent with the Defendant's past history of leasing of the said shop. Further, if there had been such an agreement, she would not have called up Mr. So (PW2) repeatedly reminding him not to remove the fixtures, fittings and cabinets and informed him that if they were removed she would forfeit the deposit. Furthermore, from the photographs produced of the Plaintiff's chain of shops, except from the Plaintiff's logo, I find there were not much in common in their lay-out for shoppers to distinguish the Plaintiff's shop from other mobile phone shops. The Plaintiff's shop designs I find are by no means unique to the Plaintiff.

35. I find Madam Yip an honest witness and accept that she had not met Mr. So until after the tenancy agreement was signed. That there could not have been an oral agreement either prior to or after the signing of the tenancy agreement that the said shop was let on a 'bare-shell' basis.

36. For the aforesaid reasons, I find the Plaintiff had failed to discharge the burden of proof of the presumption that Clauses 2 and 6 should not apply and that the Defendant is not entitled to forfeit that part of the deposit applied to pay for the reinstatement of the fixtures, fittings and cabinets in the same condition as they were handed over to the Plaintiff at the commencement of the tenancy.

37. I further find the Defendant is entitled to recover lost rent for 13 days due to the delay in the handing over of the said shop to its new tenant. I find the Defendant's deduction of the costs incurred of $73,139.00 from the deposit to be reasonable and justified. The Plaintiff is entitled to the return of the balance of $12,861.00. The Defendant had attempted to pay to Plaintiff this sum by cheque on 30th August 2001 which was rejected and the Defendant again offered to pay the Plaintiff an amount of $19,343.00 soon after the issue of the writ on 9 February 2002, it was also rejected by the Plaintiff.

38. Costs nisi : - As the Defendant has successfully set off $73,139.00 of the claim of $81,760.00 and had offered to pay this sum to the Plaintiff months before the writ was issued, I do not think the Defendant should be liable to pay the Plaintiff's costs. Further, as the Defendant is successful in its defence of set off and had offered to pay to the Plaintiff $19,343.00 on 9th February 2002, it is entitled to recover its costs to defend this action from 10th February 2002 to the date of judgment.