WINSWORLD PROPERTIES LTD. v. CHANCE FULL INTERNATIONAL DEVELOPMENT LTD. AND ANOTHER

HCA 4161/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4161 OF 2002

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J U D G M E N T

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1. In this action, the Plaintiff as owner claimed against the Defendants for possession and arrears of rent and other charges and/or mesne profit for the latter's use or occupation of the premises known as Unit 201 on the Second Floor of the Podium, Elizabeth House ("the Premises). The 1st Defendant was the tenant of the Plaintiff under a Lease dated 15 May 1999 at a rent of $438,000. That lease expired on 30 April 2002. Initially, the 1st Defendant operated a disco bar and restaurant business there. In the middle of the lease, the 1st Defendant transferred possession of the Premises to the 2nd Defendant and the Premises was used to operate a private club. The 1st Defendant alleged that this was done with the consent of the Plaintiff. The Defendants further alleged that there was a collateral agreement between the parties in mid 2001. The terms of the collateral agreement, as pleaded in Paragraph 8 of the Defence and deposed to by the Defendants' witnesses, are as follows,

(a) the lease shall be varied to permit the 1st Defendant to hand over possession of the Premises to the 2nd Defendant for the remainder of the term with a change of use as mentioned;

(b) upon expiry of the lease, the Plaintiff shall grant a new lease to the 2nd Defendant at the rent of $200,000 per month for a term of three years.

The Plaintiff denied the existence of such collateral agreement. The Plaintiff said it had only agreed to a change of user by the 1st Defendant as evidenced by a Supplemental Deed dated 13 July 2001.

2. After the original lease had expired, parties did not execute any new lease. The Defendants said that the Plaintiff failed to honour the collateral agreement. On the other hand, the Plaintiff said the 1st Defendant merely held over as a monthly tenant. The Plaintiff said it only discovered about the use of the Premises by the 2nd Defendant in October 2002 when a Warrant of Distress was executed by a bailiff.

3. The Plaintiff claimed in Paragraph 22 of the Statement of Claim that the 1st Defendant had wrongfully sublet the Premises to the 2nd Defendant on or about 1 May 2002. On the other hand, the Defendants' case is that all along the Plaintiff acquiesced in the use of the Premises by the 2nd Defendant since July 2001.

4. Since May 2002, neither the 1st nor the 2nd Defendants made any payment to the Plaintiff on account of rents or service charges in respect of the Premises. It is common ground that the 2nd Defendant has been using and is still using the Premises.

5. The Plaintiff commenced the present action on 1 November 2002. In Paragraph 24 of the Statement of Claim, the Plaintiff pleaded that the lease of the 1st Defendant has become liable to be forfeited and "is forfeited".

6. By a summons taken out on 13 December 2002, the Plaintiff applied for summary judgment against the Defendants. Included in the summons is a prayer for interim payment. The summons came before the Master on 6 January 2003. The application for summary judgment was adjourned for argument. The Master ordered the 2nd Defendant to make the following interim payments to the Plaintiff,

(a) a sum of $1,600,000 for the period from 1 May 2002 to 31 December 2002, to be paid within 7 days;

(b) a monthly sum of $200,000 on first day of each calendar month starting from 1 January 2003.

7. The Defendants filed a Notice of Appeal on 17 January 2003 against the decision of the Master on interim payments. The appeal was heard by me on 28 January 2003.

8. In dealing with the appeal, in the light of the arguments of the Defendants, it would be convenient to consider the interim payments ordered by the Master under two categories,

(a) Interim payment in respect of the period from 1 May 2002 to 30 October 2002;

(b) Interim payment in respect of occupation starting from 1 November 2002.

9. I shall first deal with the second category. The Plaintiff relied on O. 29 r. 12(b) to support its application for interim payment. The preconditions for ordering interim payment under that paragraph are,

(a) the plaintiff's claim includes a claim for possession of land;

(b) the court is satisfied that if the action proceeded to trial, the defendant would be held liable to pay to the plaintiff a sum of money in respect of the defendant's use and occupation of the land during the pendency of the action, even if a final judgment were given in favour of the defendant.

It is only when these preconditions are satisfied the court will have the discretion to order interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim.

10. There is no doubt that the Plaintiff's claims in this action included a claim for possession of land. As regards the second precondition, Mr Fung submitted on behalf of the Plaintiff that even if the Defendants succeeded on their claim based on the alleged collateral agreement at the trial, the 2nd Defendant would still be obliged to pay rent for the occupation and use of the premises since 1 May 2002. Hence, the second precondition is also satisfied.

11. Mr Au, solicitor for the Defendants, argued that apart from the defence of collateral agreement, the Defendants also pleaded a case of set-off and counterclaim. That was based on the alleged wrongful repudiation of the collateral agreement on the part of the Plaintiff. However, the primary claim in that regard was for specific performance of the collateral agreement (see Paragraph 15 of the Defence and Counterclaim). As an alternative to that primary claim, the Defendants pleaded a claim for damages. Particulars of such damages are pleaded as follows,

"Total costs of construction and decoration works to convert the said Premises for the operation of the Club	$ 8 million
Loss suffered for operating the Club for the period from September 2001 to July 2002	$2.4 million"

12. Bearing in mind that the 2nd Defendant has been using the premises up to this moment, I fail to see how the 2nd Defendant could allege that it has suffered loss in terms of the whole of the costs of converting the premises for the operation of the club. In fact, the Defendants have not produce a single piece of evidence to substantiate this alleged conversion costs of $8 million. Mr Au agreed that no such evidence has been filed. He however submitted that the 2nd Defendant was not obliged to file any evidence at this stage since the court could not adjudicate on the counterclaim in this application. I am not impressed by such submission. Although the court cannot resolve dispute of facts on affidavit evidence, the court still need to make a provisional assessment as to the strength of the defence in the exercise of its discretion in an application for interim payment. A defendant who relies on a counterclaim to resist an application for interim payment but chooses not to file any evidence to substantiate such counterclaim could not complain if the court entertains doubt about the bona fide of such counterclaim.

13. As regards the so called loss of $2.4 million, Mr Au has completely failed to explain to me how the Plaintiff could have said to cause such damages to the 2nd Defendant in respect of the period between September 2001 and July 2002. It is common ground that the 2nd Defendant had the use of the premises for this period and there is no suggestion that the 2nd Defendant had paid any sums during this period in excess of the amount that it was obliged to pay under the collateral agreement in any event.

14. As I said, the Defendants only claimed these damages as an alternative. Their primary claim is for specific performance of the collateral agreement. Hence, as far as the second precondition is concerned, I have to examine the situation on the assumption that the Defendants were successful in their primary claim, viz. specific performance is granted in respect of the collateral agreement. On that scenario, the 2nd Defendant would be obliged to pay rent to the Plaintiff in the sum of $200,000 per month starting from 1 May 2002. The second precondition is therefore satisfied.

15. I accept that in the exercise of my discretion, I should have regard to the fact that a counterclaim has been pleaded. However, as observed above, the 2nd Defendant has not adduced any credible evidence to support its counterclaim. It also seems to me that quite obviously the counterclaim of $2.4 million is unsustainable for the reason set out in Paragraph 13 above. It is equally clear that the counterclaim for $8 million cannot be wholly justified since the 2nd Defendant, on its own case, has enjoyed the benefit of the conversion from September 2001. Coupled with the fact that no evidence has been produced to prove the conversion costs of $8 million, I do not feel able to give any credit to the 2nd Defendant in the present appeal concerning this counterclaim.

16. I therefore see no reason to disagree with the Master in respect of interim payment for occupation after 1 November 2002.

17. A separate point was raised by Mr Au regarding interim payment prior to that date. He submitted that according to the Plaintiff's case, the 1st Defendant held over as a tenant after April 2002 and that tenancy was only forfeited upon the service of the Writ. Hence, there was no privity of contract nor privity of estate between the Plaintiff and the 2nd Defendant. He relied on the case of Zenuna Ltd v Jingdou Trading Co. [2002] 1 HKC 63 to argue that in these circumstances, the 2nd Defendant could not be regarded as a trespasser prior to 1 November 2002 and the Plaintiff is not entitled to claim mesne profit against it. It follows that interim payment could not have been ordered against the 2nd Defendant in respect of its occupation from 1 May to 30 October 2002.

18. Mr Fung argued that O. 29 r. 12(b) directed the court to have regard to the scenario where the Defendants succeed in their defence. In the present case, this means that the court should consider the matter on the basis that effects are to be given to the collateral agreement. There is no doubt that in that event, the 2nd Defendant would be obliged to pay rent at $200,000 from 1 May 2002.

19. In my judgment, that only satisfies the precondition laid down in r. 12(b). However, when the court exercises its discretion, it has to consider the position taken by both parties in order to arrive at a just decision. On the pleadings filed by the parties, Mr Fung quite properly accepted that it was open to the court to find at the end of the day that the 1st Defendant held over after 30 April 2002 and such tenancy was not terminated until there was a forfeiture by the Plaintiff. In that case, the Plaintiff would not be entitled to claim mesne profit against the 2nd Defendant until the forfeiture of the tenancy of the 1st Defendant and to that extent Zenuna could be relied upon by the 2nd Defendant.

20. The Plaintiff is applying for summary judgment and if it is successful in that application, judgment would be granted to the Plaintiff on the pleaded case of the Plaintiff. In respect of the occupation and use of the Premises up to the forfeiture of the tenancy of the 1st Defendant, the Plaintiff would get monetary judgment against the 1st Defendant by way of arrears of rent. But the Plaintiff could not at the same time get mesne profit against the 2nd Defendant for this period. This highlights why it would not be right to order interim payment against the 2nd Defendant in respect of the occupation from 1st May to 30 October 2002.

21. Mr Fung submitted that a date earlier than 1 November 2002 should be adopted as the date of forfeiture. He referred me to a letter dated 13 September 2002 from the solicitors for the Plaintiff to the then solicitors for the 1st Defendant. By that letter, the Plaintiff accepted the repudiation of an agreement between the Plaintiff and the 1st Defendant to enter into a new tenancy agreement as embodied in a letter dated 6 June 2002. However, the letter of 13 September 2002 did not refer to forfeiture of the tenancy of the 1st Defendant arising from holding over and it did not demand possession of the Premises. As stated in Paragraph 5 above, the Plaintiff's pleaded case is that that tenancy was forfeited by the Writ, presumably meaning by the service of the Writ. In these circumstances, I cannot accept the submission that there was a forfeiture of the tenancy of the 1st Defendant by the letter of 13 September 2002.

22. Lastly, Mr Fung argued bearing in mind that the Plaintiff is asking for mesne profit in the sum of $438,000 per month, it would not be unfair if the 2nd Defendant were required to make interim payment in the sum of $200,000 starting from 1 May 2002. Although there is nothing to prevent this court from looking at the matter globally in the exercise of its discretion to arrive at a figure that is just, this is not the approach adopted by the Master. The Master quite specifically ordered $200,000 a month starting from 1 May 2002. Further, the figure of $438,000 was based on the rent payable by the 1st Defendant under the original lease which was concluded in 1999. It is common knowledge that market rent has been reduced since then and it is doubtful whether the Plaintiff could get a mesne profit at that rate for occupation after 1st November 2002. I therefore do not accept this argument.

23. Hence, I have to allow the appeal in respect of interim payments on account of occupation of the Premises prior to 1 November 2002. I will set aside the order of the Master and order in its stead that the 2nd Defendant do make the following interim payments to the Plaintiff,

(a) a sum of $800,000 for the period from 1 November 2002 to 28 February 2003, to be paid within 7 days;

(b) a monthly sum of $200,000 on the first day of each calendar month starting from 1 March 2003.

24. Mr Fung invited me to make an unless order based on the summons taken out by the Plaintiff on 17 January 2003. That matter has come before a Master who adjourned the same pending the outcome of this appeal. Mr Au submitted that it would be too stringent to make an unless order at this stage. I am mindful of the fact that the summons is not before me and it was at the end of the hearing of the appeal that Mr Fung brought this matter up. I do not think it appropriate to deal with that matter in the context of the appeal given the objection of Mr Au. The Plaintiff could restore the matter before the Master or arrange for that to be heard immediately after the O. 14 application.

25. The 2nd Defendant is partly successful in the appeal. I make an order nisi that each party bears its own costs in respect of this appeal.