HOME FOOD AND DRINK HOLDINGS LTD v. DRAGON TRADE (HONG KONG) LTD

HCA 1337/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1337 OF 2012

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DECISION

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BACKGROUND

1.  The plaintiff, by original action, was the tenant which was renting the defendant’s premises for operating a Japanese restaurant for a term of 3 years starting from 1 October 2010. There were several prior agreements but, in the end, a formal Tenancy Agreement dated 11 April 2011 was signed.

2.  The tenant took out a writ on 30 July 2012 claiming for loss and damages arising out of the landlord’s various alleged fraudulent misrepresentation and breach of the Tenancy Agreement.

3.  The landlord filed its Defence and Counterclaim on 12 October 2012 naming 5 defendants including the tenant and the 4 guarantors in the Tenancy Agreement, namely Kwok Yik (“Kwok”), Pang Ka Lun (“Pang”), Lau Yau Shing and Cheuk Chi Man.

4.  In the Defence and Counterclaim, the landlord alleged that the tenant had failed to pay rent and other charges since 25 June 2012.  The landlord exercised the right to forfeit the tenancy and made the following counterclaims :-

i. Against the tenant: an Order for delivery up of vacant possession;

ii. Against the tenant and the 4 guarantors:-

a.  the sum of HK$504,277.39 (being arrears of rent and management fee) up to 11 October 2012

b.  the sum of HK$20,311.04 (being interest) up to 11 October 2012;

c.   Rent and /or mesne profits from 25 October 2012 until the date of delivery of vacant possession of the Premises;

d.  Management fees from 25 October 2012 until the date of delivery of vacant possession of the Premises;

e.   Government Rates and Government Rents from 12 October 2012 until the date of delivery of vacant possession of the Premises;

f.  Interests on the sum of HK$504,277.39 at the rate of 8% per annum from the date of the Defence and Counterclaim to date of judgment and at judgment rate until payment in full;

g.  Further and/or other relief; and

h.  Costs.

5.  According to the landlord, and as supported by an affirmation by Hon Shu Min dated 7 November 2012, the Defence and Counterclaim was served to the 4 guarantors on 15 and/ or 16 October 2012.

6.  No Acknowledgement of Service of the Defence and Counterclaim was filed and served by the 4 guarantors.

7.  Default judgment was granted by the court on 16 November 2012 against the 4 guarantors to pay the Plaintiff by counterclaim :-

a.  the sum of HK$504,277.39;

b.  the sum of HK$20,311.04;

c.   Rent and /or mesne profits from 25 October 2012 until the date of delivery of vacant possession of the Premises;

d.  Management fees from 25 October 2012 until the date of delivery of vacant possession of the Premises;

e.   Government Rates and Government Rents from 12 October 2012 until the date of delivery of vacant possession of the Premises;

f.  Interests on the sum of HK$504,277.39 at the rate of 8% per annum from the date of the Defence and Counterclaim to date of judgment and at judgment rate until payment in full; and

g.  Costs of the counterclaim.

8.  It was not until 21 November 2012 that Messrs Tang, Lee & Co (“TLC”) filed a Notice to Act on behalf of two of the guarantors, namely Kwok and Pang (“the Two Guarantors”).

9.  Interestingly, the Notice to Act was dated 5 November 2012 which was before the default judgment was granted.

10.  On 21 November 2012, TLC took out the present summons on behalf of the Two Guarantors for an application to set aside the default judgment.

THE CASE FOR THE PARTIES

11.  The legal principles on setting aside a default judgment is trite and need not be repeated here.

IRREGULAR SERVICE

12.  Mr Cheung, for the Two Guarantors, firstly alleged that there were irregular services for the Writs of Counterclaim for various reasons.

13.  I will dismiss this allegation right away: notwithstanding the evidence of the said affirmation by Hon Shu Min, the Notice to Act of TLC for the Two Guarantors was dated 5 November 2012, some 11 days before the default judgment was granted.  The only plausible explanation of this must be that the Two Guarantors had indeed received the service of the Writ of Counterclaim.

PREMATURE DEFAULT JUDGMENT

14.  The second allegation advanced by Mr Cheung was that the landlord has failed to serve any demand on the guarantors in accordance with Clause 4(aa) of the Tenancy Agreement.  As the landlord has failed to fulfill the condition which would otherwise hold the Two Guarantors liable, the Writ of Counterclaim, and thus the default judgment, was entered prematurely.

15.  Clause 4(aa) reads :-

“The guarantors in consideration of this tenancy hereinbefore contained being granted by the landlord to the tenant at his instance and request hereby agree with and jointly and severally guarantees to the landlord that at all times so long as the term hereby granted is vested in the tenant the tenant will pay the rent hereby reserved and all other sums and payments herein which the tenant is liable at the respective times and in manner hereinbefore appointed for payment thereof and will also duly perform and observe and keep the several stipulations herein on the tenant’s part contained and that the guarantors will jointly and severally pay and make good to the landlord on demand all losses costs and expenses sustained by the landlord through the default of the tenant in respect of any of the before mentioned matters….”

16.  Mr Hui, for the landlord, interpreted this clause differently.  He argued that the said Clause 4(aa) stipulated two types of obligations that the guarantors agreed to guarantee, namely:-

i) The tenant’s obligation to pay rent and other sums liable; and

ii) On demand, all losses and costs and expenses sustained by the landlord as a result of the tenant’s default

17.  Mr Hui argued that under the first obligation, the guarantors’ obligations should not depend on any prior demand made by the landlord but arose immediately once the tenant failed to pay rent or other sums due.

18.  On my reading of the clause, it is clear that Mr Hui’s interpretation of the clause must be correct.  It makes perfect sense and must be the parties’ intention that the guarantors should be immediately liable for any default in payment of rent etc by the tenant. On the other hand, for any claim in damages and loss which, by its nature, would likely be a non-liquidated sum, the landlord would need to issue a demand to the guarantors first.

19.  In this counterclaim, the guarantors’ liability arose out of the tenant’s default in rent and other payments. No demand was needed. Therefore, the default judgment was not entered prematurely.

DEFAULT JUDGMENT ENTERED TOO MUCH

20.  However, it is also abundantly clear from clause 4 (aa) that the guarantors’ first obligation goes as far as the rents and other payments that the tenant is liable to pay “so long as the term hereby granted is vested in the tenant”.

21.  As such, the liability of the guarantors should not extend beyond the date the landlord exercised his right to forfeit the tenancy, ie on 12 October 2012.

22.  Mr Hui claimed that there was an “implied” tenancy agreement which went beyond this date when the tenant continued to occupy the premises.

23.  I do not accept that.  The landlord’s loss after the termination was caused by trespassing of the tenant and not caused by a breach of any “implied” tenancy agreement.  Even if there was an “implied” tenancy agreement, there was no indication in the said clause that the liability of the guarantors, as far as the first obligation was concerned, would extend beyond the termination of the original Tenancy Agreement.

24.  As such, I agree with Mr Cheung’s submission that the default judgment was entered too much.  The guarantors’ liability should not extend to cover claims for rent and/ or mesne profits, management fees, Government Rates and Government Rents after 12 October 2012.

SET-OFF

25.  Mr Cheung argued that there was merit to the Defence of an equitable set-off against the claim of the tenant in the original action.

26.  I do not accept that argument.  Clause 2(a) of the Tenancy Agreement stipulated that the tenant should pay rent “without set-off and without any deduction” and Part IV of the First Schedule also stipulated that the rent should be “without any set-off or deductions whatsoever”.

27.  It is trite law that where there are clear contructual terms, the right of set-off can be excluded: see Unchained Growth III Plc. and Others v. Granby Village (Manchester) Management Co. Ltd [2000] 1 WLR 739 and Chong Lap Fu George v Hydra Shipping Services Ltd and others [2009] 4 HKC 445.

28.  Mr Cheung submitted that the word “set-off” did not specify whether this would be a legal or equitable set-off, and since the Tenancy Agreement was a legal document, the clause must only mean “without legal set-off”.

29.  I see no basis in this argument: Mr Cheung was suggesting that a “legal” document could never deal with “equitable” rights.

30.  In any case, judgment has been entered against the tenant in the original action on 12 April 2013 (for breach of an Unless Order for an interim payment).  I am not in a position to assess any evidence in the original action but suffice to say, this certainly does not lend support that the tenant has a meritorious claim in the first place.

CREDIT FOR RENTAL DEPOSIT

31.  Mr Cheung also argued that credit should be given for the rental deposit which had been forfeited.

32.  I do not accept this.  It is again trite law that where the tenancy agreement provides that the rental deposit shall be forfeited absolutely, the landlord is entitled to do so upon the tenant’s breach of covenants without the need to give credit to the tenant: see Orient Bright International Ltd v. Hiang Kie Hong Kong Ltd [2005] 2 HKC 663.

CONCLUSION

33.  Accordingly, I will vary the default judgment dated 16 November 2012 to read as follows :-

No Notice of intention to defend having been given by the 2^nd, 3^rd, 4^th and 5^th defendants by counterclaim herein, IT IS THIS DAY ADJUGED that the 2^nd, 3^rd, 4^th and 5^th defendants by counterclaim do pay the plaintiff by counterclaim :-

(i)  The sum of HK$504,277.39;

(ii)  The sum of HK$20,311.04;

(iii)  Interests on the sum of HK$504,277.39 at the rate of 8% per annum from 12^th October2012 to the date of judgment and thereafter at judgment rate until payment in full; and

(iv)  Costs of the counterclaim except for the costs of and occasioned by the summons by the 2^nd and 3^rd defendants (by counterclaim) dated 27 November 2012.

34.  There be an Order Nisi for the costs of and occasioned by the summons by the 2^nd and 3^rd defendants dated 27 November 2012 be to the 2^nd and 3^rd defendants (by counterclaim) with counsel’s certificate.