CITY SUCCESS LTD v. H&M HENNES & MAURITZ LTD

HCA 1369/2018

[2019] HKCFI 2444

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1369 OF 2018

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J U D G M E N T

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Introduction

1.  This is an appeal from the Master’s grant of summary judgment.  The judgment has been stayed pending this appeal, brought by the defendant on the basis that it has a good defence to the claim.

2.  The claim arises out of a Tenancy Agreement dated 26 March 2015, under which certain shop premises in a Yuen Long shopping mall were let by the plaintiff to the defendant for a three-year term commencing 1 June 2015 and ending 31 May 2018.

3.  Clause 26 of the Special Conditions of the Third Schedule of the Tenancy Agreement (“Clause 26”) provided an option to renew on pre-agreed terms for a further term of three years.  The central issue between the parties is whether the defendant served an effective notice of non-renewal on the plaintiff, so that the tenancy came to an end after the initial three-year term.  The plaintiff says the defendant did serve such a notice, but the defendant says that it did not.

4.  The relevant document which either gave the effective notice of intention of non-renewal or did not is an email from the defendant to the plaintiff dated 31 October 2017, which itself enclosed a letter dated 30 October 2017, which further referred back to an email of 29 September 2017.

5.  The issue falls to be determined on the proper construction of the Tenancy Agreement and the 31 October 2017 email.

6.  The Master apparently refused to provide a recording or transcript of his ex tempore reasoning for granting summary judgment.  However, that does not seem to me to matter where the appeal to this Court is by way of a de novo hearing.

Background

7.  Various affidavit evidence has been filed by the parties.  Much of it is irrelevant or inadmissible on the material question of construction, containing (as it does) various statements of subjective intention or even submission.  Nevertheless, the evidence usefully identifies the context against which the question of construction is to be answered.

8.  The plaintiff is a wholly owned subsidiary of the sole owner of the shopping mall in which the shop premises were located.  The shop premises are of a sizeable area approaching 18,000 sq ft and located on two levels of the shopping mall (“Level 1” and “Level 2” respectively).  The defendant is a multi-national retailer, whose retail outlets are frequently accommodated in similar large shop premises.

9.  Clause 26 is in the following terms:

“Subject to the Tenant not having committed any material breach and has not rectified the same [sic] after notice from the Landlord the Tenant shall be automatically extended for a new tenancy of the said premises for ONE (1) further term of THREE (3) years commencing immediately after the expiration of the Initial Term (“the 1^st Renewal Term”) at the revised rent to be calculated by reference to the revised basic rental as hereinafter provided in sub- clause (b) hereof (hereinafter called “the 1^st Renewal Basic Rental”) and, if any, the additional turnover rental calculated in the same manner of Year 3 of the Initial Term as aforesaid Subject to the Tenant serving on the Landlord a written notice of its desire to take up the 1^st Renewal Term, unless the Tenant serves a notice to the Landlord not less than seven (7) months prior to the expiration of the Initial Term of its intention not to renew for a further term. Upon its exercise of this option, the Tenant shall enter into a new tenancy agreement with the Landlord containing the same terms and conditions herein save and except the amount of rent (including the definition of the Total Gross Receipts) and/or other payments, this Clause for renewal, rent-free benefit (if any) and any other terms and things that the Landlord and wants [sic] to exclude for the renewal term …”

10.  The latter part of Clause 26 provided for a further but final option to renew for a further but final term of three years, called the 2^nd Renewal Term.  It also provided that if the tenant did not exercise the first of the two options, the Tenancy Agreement would terminate upon the expiration of the Initial Term, at which point the tenant should forthwith yield up vacant possession.

11.  Hence, the Initial Term was to expire on 31 May 2018, and the seven-month period referred to (for a notice of intention not to renew for a further term) expired on 31 October 2017.

12.  Negotiations as to possible new tenancy arrangements, not necessarily in accordance with the option to renew contained in Clause 26, began from around May 2017.

13.  The 29 September 2017 email was headed “Subject to contract and H&M board final approval” and materially provided as follows:

“Following up on your offer and as communicated in my previous email. Although your offer to repossess our whole Level 1 portion is foreseen as an option, your proposed rental per square feet is not be acceptable as-is. We have reviewed our 2015 lease tracking tools with our previous lease managers and since H&M would give up prime premises on ground floor, facing the main atrium, we will propose you the following deal …”

14.  The detail of the alternative proposal which is then set out essentially related only to Level 2 of the premises with an area of around 11,900 sq ft at a monthly rental on a sliding scale depending on turnover.  It cannot be in dispute that this proposal put forward different terms than would have applied on an exercised option to take up the 1^st Renewal Term.

15.  The 31 October 2017 email was also headed “Subject to contract and H&M board final approval” and the material part of it read as follows (emphasis in original):

“We refer to the tenancy agreement dated from 26^th of March 2015, and all other related licences and agreements …, at Shop Nos 1112-1113 on Level 1 and Shop No. 2043 on Level 2 of the [shopping mall].

Kindly receive enclosed H&M’s Notice Letter for our tenancy agreement renewal under special condition.

Please contact me … at your earliest convenience.

Look forward to receiving your reply and have a great day …”

16.  The enclosed 30 October 2017 letter is headed by reference to the shop premises, and does not say it is subject to contract and board approval.  It materially read as follows (emphasis in original):

“We refer to the tenancy agreement dated from 26^th of March 2015, and all other related licences and agreements (ref: 1112-1113 & 2043 H&M –TA)

In accordance with the terms and schedule of the Tenancy Agreements, we confirm you that we would like to renew the premises for a 1^st renewal option, as per THE THIRD SCHEDULE / SPECIAL CONDITIONS, 26, of the Lease agreement, and the email/proposal submitted to you and your team last month on Friday, September 29, 2017 - 3:14 PM (also here enclosed)

Alternatively, and since your team needs more time to review our offer, you could kindly confirm the postponing of the option notice limit date, by three months, until the 31^th [sic] January 2018.

In this connection, we look forward to your answer and to concluding the terms with your office as soon as practical.

Should you need any additional information regarding this matter, please feel free to contact us at any time.”

17.  On 8 November 2017, the agent acting for the plaintiff wrote to the defendant to “put on record your intention that the [30 October 2017 letter] which serve as a notice to us of your abandonment of your right to the automatic renewal … at the rental and on the terms and conditions as set out in the Special Condition No. 26”.

18.  There was no immediate response to that letter, and the suggestion is that the letter was never received.  But, on 6 February 2018, the defendant’s new leasing manager wrote by email to the agent seeking to renew for a further three years at the end of the current lease, but proposing different rental terms.  The email also asked the plaintiff to ignore the “previous correspondence regarding the surrender of the Level 1”.

19.  On 3 May 2018, the defendant sought formally to confirm renewal of the tenancy and exercise of the option under Clause 26, and did so again on 30 May 2018.  The parties are agreed that the 3 May 2018 document was an effective notice of renewal if the 31 October 2017 email was not a valid notice of non-renewal.

20.  The defendant did not deliver up vacant possession of the premises after 31 May 2018, and has continued to use the premises, upon payment of what it regards as the appropriate rental amounts.

Applicable Principles – Summary Judgment

21.  There can be no real argument about the principles applicable on applications for summary judgment under RHC Order 14, which are well-known.  The burden is on the defendant to show that there are triable issues, that he has a real or bone fide defence.  What the defendant has to assert does not have to be believed, but must be believable in the light of the evidence before the court.

22.  Order 14 is suitable for clear cases, including cases where there is a crisp legal question as well decided summarily as otherwise.

23.  Indeed, though the summons does not make reference to Order 14A, a legal issue which can be determined summarily in the absence of factual sensitivity will lead to a final conclusion on that issue.

Applicable Principles – Construction of Option Notices

24.  Mr Wong Yan-lung SC, for the plaintiff, and Mr Charles Hollander QC (E&W), for the defendant, are broadly in agreement as to the relevant applicable principles.

25.  A contractual notice involving the exercise of an option to renew, or an option not to renew, falls to be construed objectively.  The subjective belief or intention of the notice-giving party is irrelevant.  The test is how a reasonable recipient would have understood the notice, taking into account the relevant objective contextual scene including the terms of the lease.  The standard of reference is that of the reasonable man exercising his common sense in the context and in the circumstances of the particular case, and there is no requirement for absolute clarity or an absolute absence of any possible ambiguity: see, Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749, at 767-768, 782 as approved in Hong Kong in Best Fashion Management Co Ltd v. Star Play Development Limited [2002] 1 HKC 708 at §22.

26.  In a case such as the present, the relevant question is: does the notice which was given, properly construed, comply with the agreed specification?  If it does, it is effective for its purpose.  If it does not, it is not so effective.  As it was graphically described in the Mannai Investments case (and approved in the Best Fashion case), if the notice, properly construed, did not comply with the agreement between the parties, then the key does not fit the lock and so the door will not open.

27.  An option to terminate is to be construed in the same manner as any other option.  Hence, any condition must be strictly complied with, and any condition precedent to its exercise must be strictly fulfilled: see, for example, Lewison, The Interpretation of Contracts 6^th Ed at §17.15.

28.  But it is to be remembered that an option of the sort that is relevant in this case is one exercised unilaterally, and is not a consensual document.  If it is in compliance with the specification in the clause, it has a force of its own.  It is either effective or it is not, and no act of the recipient can, or is needed to, change its character.

Submissions and Analysis

29.  I might start by pointing out that I do not think that the proper construction of the relevant documents turns on who bears any burden.  The relevant documents have one construction, when properly construed, and that is so irrespective of who put forward any particular argument.  Whilst it may be necessary to construe the document as to what it reasonably, that is objectively, meant to the landlord, that does not create any particular burden for the landlord.

30.  As Mr Hollander submits, Clause 26 is perhaps unhappily drafted.  Whilst initially it appears to contemplate automatic renewal, the clause also requires written notice of renewal for the renewal to be effective.  Nevertheless, the key aspects for present purposes seem clear:

(a)  The tenancy will be automatically renewed, unless the tenant serves a notice to the landlord of his intention not to renew for a further term.

(b)  To avoid automatic renewal, the tenant must serve that notice not less than seven (7) months prior to the expiration of the Initial Term.

(c)  The automatic renewal would be on the same terms and conditions as the Tenancy Agreement save and except the amount of rent and/or other payments, the Clause for renewal, rent-free benefit (if any) and any other terms and things that the Landlord wants to exclude for the renewal term.

(d)  If a notice of intention not to renew for a further term is served by the tenant within time, the tenancy will expire at the end of the Initial Term.

(e)  A notice of intention not to renew does not have to be in a particular form, or to use any particular words.  However, the intention must be clear from the words actually used.

(f)   If no notice of intention not to renew is given in time, the tenant should still give a notice of intention to renew, albeit that there is no time within which it must do so (except, logically, before the expiry of the Initial Term).

31.  Hence, Mr Hollander submits that the question before the court is simply whether the notice given on 31 October 2017 constituted valid notice of non-renewal.  By that, and by reference to the terms of Clause 26, I consider that must mean whether the notice given on 31 October 2017 constituted valid notice of the intention not to renew for a further term on the terms as would apply upon an automatic renewal.

32.  Mr Hollander submits that it is quite impossible to treat the defendant’s email of 31 October 2017 as having the effect of making clear the defendant’s wish not to renew the term.  He points to the heading of the letter, which itself identifies what is put forward is tentative and subject to approval, being inconsistent with an unequivocal notice.  He points to the words “we would like to renew the premises for a 1^st renewal option, as per THE THIRD SCHEDULE/SPECIAL CONDITIONS, 26”, which he says is obviously not a notice of non-renewal.

33.  At its highest, says Mr Hollander, it might be said that the 31 October 2017 email and its accompanying 30 October 2017 letter are somewhat equivocal, but that cannot assist the plaintiff who must show an unequivocal exercise by the defendant of the right of non-renewal.

34.  For his part, Mr Wong submits that the 31 October 2017 email and its accompanying documents would have unequivocally conveyed to a reasonable recipient, with knowledge of the relevant context and terms of the lease, the defendant’s intention not to renew the tenancy for further term on the terms and conditions set out in Clause 26.

35.  Mr Wong relies on the date of the 31 October 2017 email itself, and the reference to Clause 26 in the accompanying 30 October 2017 letter.  Both on their face indicate a formal notice specifically timed to pre-date what would otherwise be the expiration of the time within which a notice of intention not to renew could be served.  Indeed, the 30 October 2017 email specifically invites postponing the expiration date for a further three months.

36.  Mr Wong also relies upon the fact that the 1^st Renewal Term and the Clause 26 would relate to all of the previously rented premises on both Level 1 and Level 2, and at a revised basic rental specifically provided for and pre-agreed.  On the other hand, the 30 October 2017 letter confirmed an intention only to enter into a new tenancy for the shop premises on Level 2, and at a differently calculated rent.

37.  Indeed, the proposals referred to in the 29 September 2017 email, referenced in the 30 October 2017 letter, proposed terms which are very different from those which would be the terms of the tenancy on the pre-agreed terms of the 1^st Renewal Term under Clause 26.

38.  As Mr Wong says, the relevant notice cannot possibly be construed as a notice of renewal on the terms as would apply under Clause 26, and so he says it can only be construed objectively as the only other possible type of notice under Clause 26, namely a notice of intention not to renew on the relevant terms.

39.  I do not think it is necessarily a wholly binary choice.  Properly construed, the 31 October 2017 email and its accompanying documents might not be either form of notice under Clause 26.  However, I agree that it would be relevant in considering the proper construction to take into account that the documents clearly are not a notice of renewal on the terms as would apply under Clause 26, yet Clause 26 has been specifically referenced.

40.  In this context, the commercial purpose of the giving of the relevant notices under Clause 26 might be identified.  If the Initial Term is to be extended by the 1^st Renewal Term, it may not matter much to the landlord how late he learns of the intended renewal by the notice of renewal.  That might logically, and in a commercially sensible way, identify why there is no time limit for giving notice of renewal.  On the other hand, if the tenant does not intend to renew on the pre-agreed terms, it makes commercial sense for the landlord to be given sufficient advance notice of that fact.  In those circumstances, the landlord can seek to agree acceptable renewal terms with the existing tenant, or he is given a proper opportunity to enter into a lease of the premises with a new tenant on better terms.

41.  I agree with Mr Hollander that this appeal does not concern the validity of offers and counter-offers.  The terms of the Tenancy Agreement are already in place.  The question is whether the defendant gave a notice of non-renewal in accordance with those terms.

42.  In that context, I am not sure it is helpful to talk about rights of termination.  It is correct that one of the rights given to the defendant under the Tenancy Agreement was the right to avoid an automatic renewal on pre-agreed terms.  That might be termed a right of termination.  But the defendant also had the right to that automatic renewal on those pre-agreed terms.  That was a right of renewal.  The question in this appeal simply requires identification of whether the defendant gave notice of its intention not to renew, so as to avoid what would otherwise have been automatically triggered had he not given such a notice.  What would have been automatically triggered was a further tenancy agreement under which the defendant would have been bound to rent all of the premises already rented, on materially identical terms as, and at a rental level pre-determined within the terms of, the (first) Tenancy Agreement.

43.  I accept Mr Hollander’s submission that there is a degree of equivocation in the 31 October 2017 email and its accompanying documents.  However, I disagree with him as to what is equivocal.  It may be right that the defendant was proposing certain terms on which it still reserved the right to change its mind, where it might not get sufficient high-level board approval, or where it envisaged the possibility of further negotiation and discussion.  There is, therefore, some equivocation.  In that context, the use of the phrase “subject to contract” or “subject to H&M board final approval” makes sense.

44.  Nevertheless, the documents seem to me to be unequivocal in stating that the defendant did not intend to renew the lease on the terms which would otherwise automatically apply under Clause 26.  Because the notice is a unilateral document, it does not seem to make sense that such a notice is said to be “subject to contract”.  I also agree that the phrase used in the letter is “subject to contract and H&M board final approval”, and that phrase is not somehow to be parsed into two separate requirements.  Obviously, H&M would not enter into any contract unless its board had finally approved it.  But there is no contract that flows from a notice of intention of non-renewal.

45.  As Mr Wong in my view correctly submits, the only requirement for a valid notice of the intention of non-renewal was the defendant’s notification of its intention not to renew the tenancy for a further three-year term on the pre-agreed terms.  This the defendant did in clear terms.  Whilst the defendant suggested that it wished to confirm renewal of the premises for the 1^st Renewal Term under Clause 26, it did so on proposed terms which were actually fundamentally different from those which would have applied upon the creation of the 1^st Renewal Terms under Clause 26.

46.  The fact that the defendant suggested extending the expiration period for the giving of the notice of non-renewal also makes the intention of the 31 October 2017 email objectively unequivocal.  The defendant was saying that it intended not to renew on the pre-agreed terms, but that it was content to continue negotiating for potentially different terms (including as to limited premises in a reduced square footage than under the Tenancy Agreement).  The request for the extension beyond 31 October 2017 is, objectively construed, a clear recognition by the defendant that time would otherwise expire on 31 October 2017.

47.  The context identifies that as at that date the defendant clearly did not intend to effect the renewal – that is, it intended not to effect the renewal – which would automatically apply under Clause 26 on the terms as would then automatically apply.  Unless time for giving such a notice were to be extended, which would require the agreement of the landlord (and which was never forthcoming), time for giving notice of the intention not to renew would by any later date than 31 October 2017 have already expired.  Hence, that intention required expression at that point in time.

48.  It seems to me that the 31 October 2017 email, and its accompanying documents, unequivocally conveyed that intention.  The suggestion of negotiating different terms is the antithesis of agreeing a renewal on pre-agreed terms.  If all that was intended, objectively construed, was to keep open negotiations, there was no need to have been concerned with any 31 October 2017 deadline, and no need to have referenced Clause 26.

49.  It also makes commercial sense.  The giving of notice of intention not to renew on the pre-agreed terms by the agreed deadline for doing so permitted the existing tenant and the landlord to negotiate on potential different terms for renewal of the tenancy.  Those different terms might relate to the extent of the premises to be rented, and the amount of the rent to be paid.  The landlord would also have been able, with the knowledge that it was now in the context of negotiating for terms yet to be agreed, to seek other potential tenants.

50.  I do not agree with Mr Hollander’s submission that if one strips out from the 31 October 2017 email and its accompanying documents those parts relating to proposed new terms which might be agreed, there is nothing left, so that there is nothing which can be understood to amount to the suggestion that if the landlord does not agree to those proposed new terms, then the tenant will leave.  The process of construing the words used seems to me to require looking at the totality of the words used in their context.  The process is not to exclude some words for some reason, and then to seek to construe only what words are left (if any).

51.  Stepping back, and looking at the actual words used in the 31 October 2017 email and its accompanying documents, it seems to me to be clear that a recipient would reasonably – that is, objectively – have understood the tenant to have been giving its notice of intention not to renew on the previously agreed terms, albeit that it was content to enter into negotiations for potentially different terms for a potentially different lease.

Result

52.  Accordingly, I dismiss the appeal.

Costs

53.  The costs will follow the event, so will be payable by the defendant to the plaintiff, to be taxed if not agreed.