Chau Kin Keung v. Connections Unlimited Ltd.

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

DISTRAINT NO. 648 OF 2001

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J U D G M E N T

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1. This is an application by the defendant company, the tenant, to set aside a warrant of distress for arrears of rent or, in the alternative, for relief from forfeiture in respect of premises at 5th floor at main roof, 6 Lan Kwai Fong, Central, Hong Kong. The warrant, which is dated 14 February this year, is for arrears of rent in the sum of $51,019.20. Related to the issue of the warrant and the taking of possession of the premises by the bailiff, I have already heard an interpleader summons wherein two occupants of the premises as licensees of the tenant made a claim as to the majority of the items in the premises which the bailiff had taken possession of. Having heard the evidence relating to that matter, I have already ruled in an earlier judgment that these items belong to the occupants and not to the tenant and I have directed the bailiff to release those items to the two occupants.

2. I must now rule on the more substantial issue between the plaintiff as the owner of the premises and the tenant as to the warrant of distress where the tenant says that I should set it aside for reasons which I must now set out. In order to do that I must relate the history and background to the ownership of the premises which I can do shortly.

3. The plaintiff purchased the premises on 17 October 2000 for $860,000 from the previous owner, Mr Chan Kim-fai. He took the purchase, subject to the tenant's tenancy of the 5th floor and the main roof above it which had been created by the previous owner by a lease in writing dated 24 May 1999 for a rent of $11,000 a month. The main roof part of the premises comprises an illegal structure which forms part of the living accommodation. In respect of that structure the Building Department have issued a demolition order which is dated 15 March 2001. The tenant has created separate licences in favour of a Mr Burell and Mr Ruffy, dated 3 November 1999 and 1 October 2000 respectively, allowing them to separately occupy the main roof and the 5th floor. These have been divided into two separate flatlets, measuring about 350 square feet each. There is an issue as to whether the tenant was entitled to create these licences, having regard to the terms of the lease which has the usual covenant against sub-letting, but this does not fall to be considered by me in this judgment.

4. The plaintiff made his purchase knowing of and subject to the tenant's tenancy and knowing of, but to put it neutrally, without prejudice to any rights that he may have to remove them, the occupation of the premises by Mr Burell and Mr Ruffy, and also knowing of the pending demolition order by the Buildings Department in relation to the structure on the main roof.

5. Prior to the conveyance of the premises to the plaintiff, the tenant and the previous owner had been in dispute over the effect of the demolition order in respect of the main roof structure and its impact on the rent that should therefore be payable for the premises. That dispute has now crystallised into a separate action in this court, Case No. DCCJ 14260 of 2000, the pleadings of which are before me, having been exhibited to the affirmation of Chan Ka-wai dated 7 April 2001. The plaintiff is not a party to that action. Before the issuing of these separate proceedings, the tenant had offered to purchase the premises from the previous owner. The asking price was $2 million, later reduced to $1.5 million. The tenant offered $1 million which was rejected. These negotiations were conducted in the knowledge that the demolition order was about to be made, which would mean that the owner would need to spend money on those works and once completed that the area which was available for residential letting would become smaller and which would almost inevitably result in a reduced rental for the owner.

6. Whilst these disputes were in full flow, the previous owner completed the sale of the premises to the plaintiff on 17 October 2000 for, as I already said, $860,000, some $140,000 less than the tenant had offered and which offer had been rejected by the previous owner. In the light of this price differential and for other reasons which I will draw attention to presently, Mr Shane Weir, who appears for the tenant, submits that the conveyance of the premises between the previous owner and the plaintiff was a sham. It was not bona fide and it was designed to get the previous owner out of the inconvenience of the ownership of the premises during the dispute with the tenant over the demolition order and its consequences concerning the rent of the premises.

7. Mr Weir submits that on a true analysis of the evidence the plaintiff is no more than the previous owner's nominee, designed to avoid for the previous owner the relief sought by the tenant by counterclaim in Action No. DCCJ 14260 of 2000, where the tenant has counterclaimed against the previous owner of the premises qua owner and as his landlord.

8. By appearing to divest himself of the premises, much of the relief sought by the tenant in that action is now not appropriate as the previous owner no longer has any interest in the premises.

9. The tenancy itself continues to subsist as a statutory tenancy, the contractual term having expired on 1 November 2000. Mr Weir says that the proper forum for this dispute should not be this court, where the plaintiff claims for arrears of rent based on the contractual rent of $11,000 a month but the Lands Tribunal, which should fix the rent at a considerably lower figure, having regard to the pending demolition of the unlawful structure on the main roof. What Mr Weir apprehends is that once this current dispute is eventually ironed out, presumably before the Lands Tribunal, the previous owner will then reappear and have the premises conveyed back to him by the plaintiff. In such circumstances, says Mr Weir, where there is mala fides and collusion between the previous owner and the plaintiff, it would be unjust to allow the plaintiff, who is not the bona fide owner, to distrain against the tenant whilst the tenant's action with the previous owner remains pending and unresolved. Accordingly, I should set the warrant aside.

10. Apart from the price paid, which I have already referred to, the other features relied upon by Mr Weir are these:

11. The plaintiff has said that the premises were introduced to him by a friend of his who is a cousin of the previous owner, which Mr Weir says is an indication, although not conclusive by itself, that the previous owner and the plaintiff are not at arms length. The previous owner's solicitors in the conveyance are the same solicitors who are used by a Miss Lau and her company, Project Marketing Limited, who act as the plaintiff's agents for the collection of rent on the premises. The solicitors, Messrs Raymond Woo & Company, also have adjoining offices to those of Project Marketing Limited in Jardine House.

12. All this, according to Mr Weir, points to a cosy relationship between the previous owner and the plaintiff. Against that the plaintiff has told me that this was a perfectly conventional purchase by him. He saw it as a good investment where there was already in possession a sitting tenant at a rent of $11,000 a month, which he considered a good rent. He and the previous owner had brief negotiations over the purchase price and his counter-offer of $860,000 was accepted. He says the price took into account the current state of the market, the fact that the building is old with no lift up to the flats and the size of the flats. Added to which there is the demolition order which will result in expense to him to comply with it.

13. It seems to me that Mr Weir's best point relates to the price. Why did the owner let this go for $140,000 less than the tenant was offering a matter of weeks beforehand? It is right to observe that the previous owner was already in dispute with the tenant, and one can well understand that he did not wish to sell to the tenant with the prospect of having the tenant profit from the sale over the course of the next few years. He would rather sell to somebody else, albeit at a lower price. I appreciate that this sort of view is speculative, but equally the totality of the features relied upon by Mr Weir are not sufficiently persuasive or compelling to enable me to infer that this was not a bona fide sale to the plaintiff. Mr Weir bears a heavy burden to show this sale to be a sham. The totality of the evidence would need to be sufficiently persuasive that I could say that this is the only proper inference that I could draw. It simply does not amount to that. And, in any event, I am bound to say that I found the plaintiff to be an impressive witness, whose evidence I am disposed to accept.

14. I hold, therefore, that the sale to the plaintiff was bona fide and at arms length. Accordingly, he was fully entitled to apply for and obtain a warrant for distress in respect of these arrears of rent. Accordingly, the warrant must stand but subject to any relief that I may be prepared to give to the tenant.

15. This then brings me to Mr Weir's alternative submission, which is to give his client relief upon terms that he pays a proportion of the arrears and of the present and future rent until the Lands Tribunal fixes a new rent to reflect the demolition of the main roof structure.

16. I asked the plaintiff in the course of his evidence whether he was seeking possession or merely the payment of the arrears and the current rent. He was unclear about that in the sense that on separate occasions he said he wanted the rent and later that he wished to have possession. He also accepted that the current rent of $11,000 could not survive once the demolition work was completed. He considered that the appropriate rent would be in the region of $8,000 a month.

17. I take the view that it would be proper to give the tenant relief from forfeiture. Clearly there is a genuine dispute, having regard to the unlawful structure on the roof which will require demolition. The history of how this structure came to be built and whether the tenant was aware of the illegality and so forth, will all need to be gone into. But notwithstanding all this, the tenant has brought much of this upon himself by not paying any rent since last October and allowing this situation to have developed.

18. I will suspend this warrant on terms and upon the tenant's undertaking to apply to the Lands Tribunal, within 28 days to fix a new rent and to prosecute that application with due diligence and to bring the application on for hearing as soon as is reasonably practicable.

19. And further, that the tenant will pay off all the arrears under the warrant within 21 days and that as from 1 November pay $7,500 per month on account of the rent, pending the decision of the Lands Tribunal. Once that court's decision is known, credit will have to be given in respect of the payments under this order.

20. I have ordered payment in this way because it seems to me that as to the arrears, the premises still enjoy the benefit of the roof structure and so I have allowed no reduction of rent up to the present.

21. As to future rent, I have done my best to arrive at a figure that allows for the loss of the structure but also has regard to the benefit of the roof itself, albeit free of any building. So clearly more than half the current rent is justified. This has been entirely a question of my doing my best on the available evidence as a temporary solution until the issue of the rent is resolved in the Lands Tribunal. This figure of $7,500 is not to be taken as the last word on the correct rent. It is temporary and highly provisional. I have not had the benefit of hearing of comparable rents, as the Lands Tribunal undoubtedly will.

22. That, therefore, is my order and I will now hear the parties as to the costs and as to the remaining costs between these parties on the interpleader which I had adjourned to today.