KING HONOR INVESTMENT LTD v. A & A TRAVEL LTD

DCCJ 468/2021

[2023] HKDC 1190

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 468 OF 2021

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JUDGMENT

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Background

1.  This case is concerned with a tenancy dispute where the plaintiff is claiming against the defendant for damages for breach of a tenancy agreement by unilaterally terminating the agreement by vacating the premises without the plaintiff’s consent during the tenancy.

2.  By a tenancy agreement dated 12 February 2019 made between the plaintiff as the landlord and the defendant as the tenant (“the Tenancy Agreement”), the property known as Suite 1403 on 14^th Floor of Chinachem Tower, Nos.34-37 Connaught Road Central, Hong Kong (“the Premises”) was let to the defendant to be used as an office for a term of three years from 14 February 2019, at a monthly rent of HK$36,982.00, which was exclusive of management fees and air-conditioning charges (at HK$3,608.00 per month), as well as government rates and other outgoings. The rent, management fees and air-conditioning charges were payable monthly in advance on the 1^st day of each of every month without deduction, and the government rates were payable in advance as provided in the Tenancy Agreement. The Tenancy Agreement was duly stamped on 26 February 2019.

3.  The plaintiff is a member of the Chinachem Group. It is (and was at the material times) the registered owner of the whole of Chinachem Tower, the building in which the Premises is situated.

4.  It was provided in the Tenancy Agreement that if the defendant failed to pay the rent or other sums due within 14 days, interest would be payable on the sum due at the rate of 3.5% per month until payment.

5.  Upon signing the Tenancy Agreement, the defendant had also deposited with the plaintiff a sum of HK$121,770.00 as security deposit to ensure the due performance of the Tenancy Agreement.

6.  Further, it was provided in the Tenancy Agreement that if the defendant shall have performed, observed and complied with all the terms in the Tenancy Agreement, it shall not be required to pay the rent for the period from 14 February 2019 to 13 March 2019 (both days included), and from 30 January 2022 to 13 February 2022 (both days included). However, should the defendant fail to pay the rent or other charges as aforesaid, the defendant shall with retrospective effect cease to be entitled to the rent-free period aforesaid, and shall be liable to repay to the plaintiff the rent chargeable for such period or part thereof.

7.  It was also provided in the Tenancy Agreement that upon expiry of the Tenancy Agreement, the defendant shall deliver up vacant possession of the Premises in good clean and tenantable repair and condition and to reinstate the Premises in accordance with the last approved building plans and to a “bare shell” condition to the reasonable satisfaction of the plaintiff, and having made good any damage resulting from the removal of any of the tenant’s fixtures, fittings, fascia or signs.

8.  The Tenancy Agreement further provided that the plaintiff would be entitled to re-enter upon the Premises and forfeit the security deposit paid as aforesaid, if the defendant failed to pay the rent or other sums due for 14 days, or if there shall be any other breaches or non-performance of the terms, upon which the Tenancy Agreement shall cease and determine, without prejudice to the plaintiff’s right to claim other remedies.

Liability

9.  In the Defence dated 19 March 2021, the defendant pleaded that it had been forced to terminate the Tenancy Agreement early because of the adverse impact of the Covid-19 pandemic, especially on the defendant which operated as a travel agency. There is no dispute that the parties had in around August 2020 initially attempted to arrange for an early surrender of the Tenancy Agreement by securing a new tenant of the Premises, but to no avail.

10.  It was contended by the defendant that by the last quarter of 2020, the resources of the company had drained, and the defendant considered that it would be inappropriate for them to continue to occupy the Premises without the ability to pay rent.

11.  The defendant then issued a letter on 23 November 2020 to Chinachem Agencies Limited, the plaintiff’s agent, informing the plaintiff that they were unable to continue to pay the rent in view of the pandemic situation, and requested the plaintiff to consider terminating the Tenancy Agreement on 1 December 2020. The defendant also informed the plaintiff that the keys of the Premises would be returned to the management office of the building by the end of November 2020. There is no dispute that this it did on 30 November 2020, thus vacating the Premises before the expiry of the term of the tenancy. The defendant stresses that this was done in good faith. In fact, the defendant says that ever since 2000 when it first moved into the Premises, it had punctually paid all rent and fulfilled all obligations and had been a good tenant.

12.  By a letter dated 4 December 2020 issued to the defendant, the plaintiff through their solicitors informed the defendant that their unilateral termination of the Tenancy Agreement had amounted to a wrongful repudiation of the same, resulting in loss and damage caused to the plaintiff. It was also stated by the plaintiff that the defendant had failed to reinstate the Premises to a “bare shell” condition as required under the Tenancy Agreement. The plaintiff accepted the defendant’s repudiation of the Tenancy Agreement, and demanded the defendant to make good the rent due under the rent-free period, and to pay to the plaintiff loss and damage suffered as a result of the termination.

13.  There is no dispute by the defendant that the Tenancy Agreement had been terminated, and that it had vacated the Premises without the consent of the plaintiff in breach of the Tenancy Agreement. As the plaintiff has submitted, the return of the keys by the defendant had amounted to a repudiation of the Tenancy Agreement – see, e.g. Sano Screen Manufacturers v J & R Bossini Trading Limited, HCA 12351 of 1998 & HCA 12352 of 1998, 16 June 2000, Sakhrani J at page 7.

14.  In view of the stance taken by the defendant, liability is not disputed at the trial. The real area of contention rests on the amount of damages recoverable by the plaintiff. In this regard, the defendant contends that the plaintiff had not taken reasonable steps to mitigate its loss.

Damages

Applicable principles

15.  There can be little dispute, as the plaintiff submits, that compensatory damages to which the plaintiff is entitled to are calculated on the basis that the injured party should be put in the position he would have been in had the contract had been performed. In Wing Siu Co Ltd v Goldquest International Ltd, HCA 4145 of 2001 & HCA 3183 of 2001 (Consolidated), 18 August 2006, Master de Souza stated in paragraph 7:

“An aggrieved landlord’s entitlement to damages for wrongful repudiation of a tenancy agreement following general contractual principles is well established…He can legitimately anticipate in the measure of damages to be awarded, such damages as reflecting the rental, service charges, rates and reinstatement cost stipulated in the tenancy and therefore payable were the agreement to be permitted to run its full course, subject always to a duty to minimize his loss…He is, accordingly, expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at a market rent: Merry “The Hong Kong Tenancy Law”, 4^th ed. at page[s] 167-168. However, it falls upon the errant party to establish that mitigation has not taken place: Chan Annie v Lau Wai Kwong [1984] 1 HKC 231, 235G-H; Lai Hon Ming v Fong Wai Ching, HCPI 994/2001, 21 Oct 2002, unreported.”

16.  In Wing Siu Co Ltd, the plaintiff marketed the subject unit for a higher headline rent in a falling market, and the unit was only successfully rented out to a substitute tenant some 31 months after the early termination of the lease by the tenant. In relation to the effect of lowering the rental of a single unit to below the market rent, the court also stated at paragraph 15 of the judgment:

“15. … As a whole-building landlord, such an approach would impact on rent reviews, renewals and new lettings of other premises. The plaintiff was duty bound to do no more than was reasonably necessary to market the premises. Taking any steps that may have an adverse consequence on the rental tone of the building is not to be expected of the plaintiff in my considered view.”

17.  Further, in relation to the extent of the duty to mitigate, Master Simon Ho has in Kin Tong Land Investment Co Ltd v Capella Ltd, DCCJ 3495 of 2017, 25 January 2019 referred to Park Avenue Toys Ltd v Candy Novelty Works Ltd, HCA 11135 of 1997, 23 August 2004 at paragraphs 44-46 where Saunders J had summarised the applicable principles[1]:

“44. In taking steps to mitigate, a claimant is not under any obligation to do anything other than in the ordinary course of business. He is not required to go to extreme steps and is not bound to nurse the interests of the defendant: Harlow & Jones v Panex (International) [1967] Lloyds Rep 509. In mitigating his loss the claimant victim of a wrong is only required to act reasonably, and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer: see Banco de Portugal v Waterlow [1932] AC 452 per Lord Macmillan at 506. The criterion for reasonableness is stated in Dunkirk Colliery Co v Lever (1878) 9 Ch D 20 CA, and was approved in British Westinghouse (above). Whether the claimant has acted reasonably is in every case a question of fact, not of law: Payzu v Saunders [1919] 2 KB 581 CA.

45. At the time when the contract is broken it is not always clear what to do next. A plaintiff will not be treated as behaving unreasonably when he chooses one of the possible reasonable alternatives only to find out later that the other one would have been cheaper: Gebruder Metalmann GmbH & Co KG v NBR (London ) Ltd [1984] 1 Lloyds Rep 614.

46. The onus of proof on the issue of mitigation is on the defendant. If he fails to show that the claimant ought reasonably to have taken certain mitigating steps, then the normal measure of damages will apply: McGregor on Damages 17^th Ed, para 7-019.” [underline added]

18.  The plaintiff submits that in the present case, they had accepted the defendant’s wrongful repudiation of the Tenancy Agreement, and it should be entitled to recover the sums claimed as aforesaid, subject to the deduction of any loss it could avoid by taking reasonable steps to mitigate its loss.

19.  In particular, the plaintiff further submits that it is entitled to claim its loss of rent during the rent-free period granted to substitute tenants, as was in the case of Chinese Estates (Harcourt House) Limited v Surex Consultants Limited & Another, DCCJ 3378 of 2003, 20 July 2005, Deputy District Judge W.K. Kwok at paragraph 30.

20.  Bearing in mind the above applicable principles, I would consider the steps taken by the plaintiff in mitigating its loss in this case.

Steps taken by the plaintiff to mitigate its loss

(i) The plaintiff’s contentions

21.  The plaintiff’s witness, Wong Hoi Yi Vicky, who is the Assistant Manager – Leasing of the Chinachem Group, has described the steps taken by the plaintiff to mitigate its loss.

22.  First of all, it is the plaintiff’s case that since the defendant had failed to deliver up the Premises in good clean and tenantable repair and condition, and to reinstate the Premises to its “bare shell” condition to the reasonable satisfaction of the plaintiff, the plaintiff had to engage one Willing Decoration & Engineering Co Ltd (“Willing”) to carry out the necessary demolition and reinstatement works before putting the Premises in the market for a substitute tenant, thus incurring a sum of HK$42,700.00. The works done by Willing, as evidenced by photographs taken, were set out in its quotation dated 3 March 2021 to the plaintiff:

(1)  To remove all the sockets and telephone circuit (HK$1,300.00);

(2)  To remove all the wallpaper and carpets (HK$4,100.00);

(3)  To fill wall cracks and holes and repaint the wall in white (HK$15,000.00);

(4)  To repair the flooring (HK$2,500.00);

(5)  To supply and install rubber flooring and carpets (HK$6,200.00);

(6)  To supply and install painted skirting boards (HK$6,300.00);

(7)  To remove debris and rubbish after completion of the reinstatement works (HK$2,500.00);

(8)  To provide environmental and occupational safety measures during the works (HK$1,500.00);

(9)  To provide employees’ compensation and third-party insurance (HK$3,300.00).

23.  As for the plaintiff’s marketing efforts made in securing a substitute tenant, Ms Wong testified that the plaintiff had since December 2020 prepared a vacancy list of Chinachem Tower every month and sent the same to various estate agents, with asking rent for not only the Premises but other vacant units in the building. The vacancy lists issued from 8 December 2020 to 1 September 2021 had been produced. The lists show that the asking rent for all vacant units in the building, including the Premises, had been set at HK$43 (i.e. per square foot) from August 2020 to November 2020. The rent set for the Premises remained at HK$43 from December 2020 and January 2021 whilst it was raised to HK$45 in the month of February 2021. Thereafter, from March 2021 to September 2021, the asking rent set for the Premises was set at HK$40, whilst those for other vacant units varied from HK$34 to HK$43.

24.  According to Ms Wong, an estate agent had indicated to the plaintiff that a potential tenant was interested in renting the Premises in around mid-June 2021, and the plaintiff offered a monthly rental sum of HK$34,276.00 to the potential tenant (i.e. at a rate of HK$38 per square foot). However, no response had been received. Thereafter, another potential tenant also approached the plaintiff on 15 July 2021 and after some negotiation, had offered to rent the Premises at HK$33 per square foot, but the plaintiff did not accept that offer as it was said to be far below its expectation.

25.  Apart from issuing the vacancy lists to estate agents and liaising with them, Ms Wong said the plaintiff had also made phone calls to existing tenants who may be interested in the Premises. One existing tenant who was then occupying Suite 1402 (which was adjoining the Premises) had expressed an interest in additionally taking up the Premises. However, negotiations failed once again although the plaintiff had eventually made an offer of HK$38 per square foot, over the offer of HK$33 initially made by that potential tenant.

26.  Eventually, the plaintiff was able to secure a new tenancy agreement with a capital asset management company. The new agreement was signed on or about 6 October 2021 in respect of the Premises for a term of three years commencing from 23 September 2021, at a monthly rental of HK$36,982.00 (which is the same as the monthly rent payable under the Tenancy Agreement, i.e. at HK$41 per square foot) for the first two years, and HK$37,884.00 for the third year, exclusive of rates, management fees and air-conditioning charges and other outgoings, but with a rent-free period during the first month.

(ii) The defendant’s contentions

27.  On the other hand, the defendant’s witness, Mr Andy Wong Yuk Choi, being the director of the defendant, testified to the effect that the plaintiff had failed to reasonably mitigate its loss by adopting erroneous and contradicting pricing strategies, and putting forward unfavourable asking prices for re-letting the Premises, which affected its competitiveness with similar units.

28.  For example, Mr Wong complained that the original rent under the Tenancy Agreement was HK$41 per square foot, whereas the asking rent put up in respect of the Premises from August 2020 (when the parties agreed that a substitute tenant could be sought) was HK$43 per square foot, which was even higher than the original rent by almost 5 per cent. It is contended by the defendant that in light of the pandemic situation, such an act was unreasonable in terms of mitigation of loss. In fact, it is submitted by the defendant that as the asking rent was set too high, no potential tenant had come forward for a number of months until mid-June 2021.

29.  Whilst I understand that the pandemic would have had a certain degree of impact on the rental market, I can at the same time appreciate that the plaintiff would have to take into account various factors, including the overall effect of lowering the asking rent for a particular unit on the rest of the vacant units in the building. Further, the effect of the pandemic at that time might well have been that there was a scant number of persons or companies seeking to enter into new tenancies in any event, even if asking prices had been lowered. Also, the original rental of HK$41 per square foot under the Tenancy Agreement might not be a useful yardstick for determining the market rental at the end of 2020, as the Tenancy Agreement was signed back in February 2019. There had been a lapse of almost two years before the end of 2020. In any event, the defendant has only produced limited evidence of the market rent of units in the building at the material time (taken from websites of two real estate agents[2]) for reference, showing that the rental prices for units in the building ranged from HK$40 to HK$42 per square foot in 2020, and from HK$34 to HK$43 per square foot in 2021. Given all the circumstances, it would have been difficult to ascertain whether the asking rent of HK$43 per square foot was significantly above the market rent by the end of 2020.

30.  Also, although there has been some suggestion from Ms Wong during her cross-examination that the asking price of HK$43 per square foot might have been slightly higher than the market rent, she did mention that this was simply an asking price, which was subject to negotiation.

31.  Further, Mr Wong complained that the plaintiff had adopted contradicting pricing strategies. Initially, the plaintiff had offered the same asking price (i.e. HK$43 per square foot) for all vacant units in the building from August to November 2020, but thereafter changed its strategy by asking for different prices, and eventually reducing the asking rent for a number of units to sums below HK$40 per square foot. The stated sums were apparently also randomly set, sometimes with no difference between different floors, and sometimes with inexplicable differences between floors. As I see it, however, it seems that differences between floors can be discerned in the prices set. It can also be seen generally that there was a difference between prices for units with a city view and those with a sea view. The setting of prices could not have been a mechanical calculation, so that some slight differences which the defendant may have described as “random” might be possible. Common sense tells us that the floor levels, views, and interior condition of the various units would play different parts in determining the reasonable asking rent for such units. Besides, the differences referred to by the defendant were not huge in any event. Given all these reasons, I find it difficult to accept the defendant’s contentions.

32.  Mr Wong also contended that the process of dealing with the potential tenants had not been reasonable. For example, it is said that the negotiation with the potential tenant that approached the plaintiff in July 2021 had taken a total of 47 days, which was too long. Also, it is contended by the defendant that the rate eventually offered to that potential tenant for the Premises (HK$38 per square foot), who was already an occupant of the adjoining Suite 1402, was different from the rate offered to them for Suite 1402 (HK$42 per square foot). It is said that such an approach was unreasonable, and it was even suggested that this was done with a view to eventually claiming the difference against the defendant. With respect, I cannot agree with such contention based on pure conjecture. In fact, it is the defendant’s own contention that the initial asking rent of HK$43 had been set too high. It is also self-contradictory for the defendant to now claim that the lowering of the asking rent for the Premises was made with a view to claiming against the defendant for the difference. Further, as for the number of days taken for the negotiations, this cannot be tested against any set rules. The fact that the negotiations had taken one and a half months with this potential tenant is neither here nor there.

33.  Having considered the evidence and arguments put forward on both sides (including the comprehensible written submissions by the defendant, despite it not being legally represented), I accept the evidence and case put forward by the plaintiff. I agree that as a landlord having ownership of the entire building, they had to reasonably take into account the impact of asking prices for individual units on the market for the rest of the units in the same building. There is nothing in the evidence to show that the methodology and prices adopted in putting the Premises in the market, in my view, was flawed or in any way unreasonable or in particular was way below the prevailing market rent. In my view, the plaintiff had already taken reasonable steps to attempt to mitigate its loss.

The cost of reinstatement

34.  In relation to the cost of reinstatement claimed by the plaintiff, the defendant does not dispute liability for this item, except for the amount claimed. In this regard, the defendant contends that the quotation issued by Willing for the reinstatement works had only been supplied to it after the works had been completed, and it had not been given the opportunity to consider and discuss the items with the plaintiff beforehand. In any event, the defendant says that only items (1) and (2) listed on the quotation were related to reinstatement works, whilst items (3) to (6) were not reinstatement works but were rather works for “upgrading” the unit, and that items (7) to (9) should be appropriately apportioned between the plaintiff and the defendant[3]. Having considered the various items, I am of the view that:

(i)  Mr Wong had in cross-examination agreed with items (1) and (2). As for item (3), that was related to filling wall cracks and holes and repainting the wall. The evidence shows that the plaintiff had to remove the wallpaper left on the walls by the defendant. I find that this item was reasonably incurred. Item (4) is related to repairing the flooring and I would also allow that;

(ii)  As for items (5) to (6) which are works related to the flooring and skirting, there is insufficient evidence to show that such works are related to reinstatement rather than refurbishment. As such, I would disallow these items;

(iii)  As for items (7) to (9) (totalling HK$7,300), given my findings on the other items above, I agree that the amounts claimed should be apportioned between the plaintiff and the defendant. I would similarly adopt a common-sense approach, and find that there should be a reduction of HK$2,300.00;

(iv)  In light of my findings in sub-paragraphs (i) to (iii) above, the amount of reinstatement cost for which the defendant should be responsible would be: HK$42,700.00 – HK$6,200.00 – HK$6,300.00 – HK$2,300.00 = HK$27,900.00.

35.  The defendant also does not dispute its liability to repay the plaintiff for the one-month rent-free period as claimed.

Conclusion

36.  In the premises, I find that by reason of the breach of the Tenancy Agreement by the defendant as aforesaid, the plaintiff has suffered loss and damage as follows:

Nature	Period	Amount
Rent	Repayment of the rent for the rent-free period from 14/2/2019 to 13/3/2019 (HK$36,982.00 × (15/28 + 13/31) months)	HK$35,320.37
Loss of rent	From 1/12/2020 to 22/10/2021 (HK$36,982.00 × (10 + 22/31) months)	HK$396,065.29
Loss of management fee and air‑conditioning charges	From 1/12/2020 to 31/12/2020 (HK$3,968.80 × 1 month)	HK$3,968.80
	From 1/1/2021 to 22/9/2021 (HK$4,365.68 × (8 + 22/30) months)	HK$38,126.94
Loss of rates	From 1/1/2021 to 31/3 2021 (HK$5,175.00 per quarter - HK$5,000.00 [rates concession for 1 quarter])	HK$175.00
	From 1/4/2021 to 22/9/2021 (HK$4,650.00 per quarter - HK$4,650.00 [rates concession for (1 + 84/92) quarters	Nil
LESS: Security deposit		(HK$122,852.40)
ADD: Reinstatement costs incurred   Agency fee   Landlord’s half share of the stamp duty paid in respect of the new tenancy agreement		HK$27,900.00   HK$55,919.50   HK$1,124.00
	TOTAL:	HK$435,747.50

 

Judgment

37.  In light of the above, I give judgment in favour of the plaintiff for loss and damage against the defendant for the sum of HK$435,747.50, with interest assessed at the rate of 1% per annum above the prime rate from the date of the Writ of Summons herein (i.e. from 28 January 2021) to the date of judgment, and thereafter at judgment rate until payment.

38.  I also make an order nisi that the defendant shall pay the plaintiff the costs of this action. This costs order nisi shall become absolute in the absence of any application to vary the same within 14 days from the date of this judgment.

39.  Lastly, I would like to thank the parties for their assistance at the trial.