XCHRX LUEN YICK KNITTING FACTORY LIMITED v. ETERNAL GROWTH COMPANY LIMITED

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Action No. A9204/1995

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J U D G M E N T

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Findlay, J.:

1. I have before me an application by the defendant to amend a summons before a Master to the effect that the prayer should be that default judgment entered against the defendant in favour of the plaintiff on 6 October 1995 be set aside on the merits rather than on the ground that the writ was not properly served. I am told that this ground of irregular service was the only ground relied upon before the Master, and that the defendant withdrew this. Following this withdrawal, the Master made an order that "there be no order as to the Defendant's application to set aside the Default Judgment". I also have before me an application for leave to appeal against this order out of time, that leave be granted to appeal against the Master's order mentioned above, and that the default judgment be set aside.

2. I am not entirely sure that this was the right way to go about this matter, but counsel have, very sensibly, agreed that I should treat the question before me as whether or not the defendant has put up a case entitling it to leave to defend.

3. Madam Wan Shek Hung, a director of the defendant, has made an affirmation in support of the defendant's applications. In this, she says that the defendant was the tenant of a property owned by the plaintiff. Notice was given to terminate this tenancy with effect from 31 July 1994. Before the issue of this notice to quit, there were negotiations between the parties regarding the sale of the property and the purchase of the plaintiff's shares in the defendant. When she received the notice to quit, Madam Wan spoke to Mr Chan Hon Kee, a director of the plaintiff, who assured her that the notice was only a formality and would not interfere with their negotiations. Subsequently, it was agreed that the defendant would purchase the property and Madam Wan would purchase the plaintiff's shares in the defendant. Later, she was persuaded to purchase the property through another company formed by her. So the sale of the property was to a company called Main Lion Development Limited. The agreement referred to the tenancy and provided that the sale was subject to this and to the notice to quit. The completion date for the sale was 31 August 1994. On 23 September 1994, by an agreement between the plaintiff and Madam Wan, the completion date was postponed to 30 September 1994. This agreement was said to be collateral to the sale agreement. On 28 November 1994, by an agreement to which the plaintiff, Main Lion and Madam Wan were parties, the completion date was further extended to 14 October 1994. This agreement provided that Main Lion and Madam Wan would be responsible for all arrears of rent in respect of the property.

4. The transactions were not completed.

5. Madam Wan says that it was clear to both the plaintiff and herself that the defendant should remain in occupation pending completion, and that the assignment would supersede the notice to quit. Madam Wan says that the defendant paid rent for August 1994. The plaintiff denies that rent was paid for August 1994. The plaintiff says that last payment by the defendant was on 5 May 1995 and this was for the month of July 1994.

6. Madam wan does not give any particulars as to why it was clear that the defendant should remain in occupation pending completion, but this is probably the case. In a situation in which Madam Wan was to acquire the plaintiff's shares in the defendant and was to acquire the property through Main Lion, it would be contemplated by all concerned that the defendant would continue to occupy the property until completion, and then Madam Wan would make her own arrangements as to whether or not she would continue to occupy the property through the defendant, or what other arrangements she would make. It would make no sense at all for the defendant to vacant the property before completion. Mr Ip concedes that the plaintiff knew that the defendant would continue to occupy the property after 31 July 1994, and allowed this. In these circumstances, Mr Ip agreed with me that the defendant was not a trespasser after 31 July 1994. So, I wanted to know, on what basis did the plaintiff argue that the defendant continued to occupy the property. Mr Ip said that the defendant did not have a lease or a licence, but the plaintiff must be taken to have agreed only that the operation of the notice to quit would be suspended pending completion of the transactions.

7. The essential question that I have to answer is: Does the defendant have a real prospect of success of establishing that the conduct of the plaintiff amounted to a waiver of the notice to quit, rather than merely an attitude dictated by the circumstances that the notice to quit would not be enforced pending completion of the transactions? Naturally, it must have been in the plaintiff's mind that, if the transactions were completed, it would no longer have any interest in enforcing the notice to quit. But is it to be said that it was implied in what the plaintiff did, in allowing the defendant to remain in occupation, was that, if the transactions were not completed, the plaintiff had waived the notice to quit, and must start again. I think not. The truth of the matter, of course, is that the parties probably did not apply their minds to what was to happen regarding the defendant's occupation if the transactions were not completed, but if someone had, at the relevant time, asked the plaintiff, in the hearing of the defendant, if it was the intention that, if the transactions were not completed, the plaintiff was to be taken to have agreed to an extension of the old tenancy, or the grant of a new tenancy, so that it would be obliged to give a new notice to quit and wait 6 months before obtaining vacant possession, the answer is not hard to imagine. The plaintiff would have said - "Of course not. We go back to the notice to quit, and the defendant is bound to vacate in accordance with it. The operation of the notice to quit was only suspended, not waived altogether.", and the defendant could not reasonably have dissented from this. The fact that the plaintiff had not consigned the notice to quit to oblivion is clearly demonstrated by the fact that the sale of the property was made subject to it. This says - "I have a notice to quit in my favour. Once the property is yours, you have it. Do with it what you wish." If it was the intention of the plaintiff to waive the notice to quit, it would have ceased to operate, and there would have been no need to mention it. I do not think the provision in the later of the extension agreements that Main Lion and Madam Wan would be responsible for the arrears of rental militates against this. It must have been contemplated by all those involved that that the defendant would not occupy the property without payment between 31 July and the completion. Whether one calls what should be paid by the defendant "rent" or "mesne profits" or something else does not, to me, make any difference to the proposition that it was not contemplated by the parties that, if the transactions failed, that the plaintiff would be obliged to give a new notice to quit and wait a further 6 months.

8. In the result, in my judgment, the defendant does not have any reasonable prospect of success of establishing that it has a good arguable defence to the plaintiff's claim for possession. The judgment must stand, and the defendant's applications are refused. There seems no reason why costs should not follow the event. Accordingly, I make an order nisi that the defendant pay the plaintiff's costs.

(J.K. Findlay)

Judge of the High Court