FORTUNE HUGO (HK) LTD v. HOLLYWOOD PALACE CO LTD

HCA 1610/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1610 OF 2005

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J U D G M E N T

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1.  Fortune Hugo is the tenant of premises in the Chinachem Golden Plaza at 77 Mody Road, Tsim Sha Tsui.  Hollywood Palace is the landlord.  The tenancy agreement is for a term of three years commencing on 1 August 2002, and expiring on 30 July 2005.  The monthly rental was $270,000 per month. 

2.  The tenancy agreement contains an option to renew in the following terms:

“If the Tenant shall give three months’ prior written notice to the Landlord of the Tenant’s desire to renew the term hereby granted for a further period of three years, such notice to be given not later than three months before expiration of the Term, then this Agreement shall be renewed for such further period on the terms hereof (save for this provision for renewal and save that no rent-free period will be given to the Tenant), and save as to the rent payable during the renewed term which shall be at the then Fair Market Rent as shall be mutually agreed between the parties hereto not less than one month nor more than three months prior to the day following the date of expiration of the term hereby granted (hereinafter called “the review date”).”

The tenancy agreement then proceeds to set out a formula for the determination of the rent in the event that no agreement can be reached between the tenant and landlord as to the fair market rent.

3.  On 13 April 2005, (a date that was not later than three months before the expiration of the term), Fortune Hugo wrote to Hollywood Palace in the following terms:

“Now, we humbly ask your company to renew the tenancy for a further term under the same terms and conditions of the existing tenancy, that is, at the monthly rent of $270,000, for the further term commencing from 1 August 2005 to 31 July 2008.”

4.  Hollywood Palace refused to grant a renewal of the lease.  Instead, by their solicitors, notice was served on Fortune Hugo demanding interest on arrears of rent, (for which there was provision in the Tenancy Agreement), in the sum of $1,180,722 70.  Hollywood Palace demanded that Fortune Hugo should deliver up vacant possession of the premises on or before 31 July 2005.  Fortune Hugo thereupon issued a writ seeking, inter alia, an order that the option to renew the Tenancy Agreement had been exercised.

5.  In its Defence Hollywood Palace contends that the exercise of renewal was not effective because the fair market rental premises at that time was in excess of the sum of $270,000.  By Counterclaim Hollywood Palace sues for the interest on arrears of rent, rent for the period 1 June 2005 to 31 July 2005, and mesne profits from 1 August 2005.  It is not in dispute that since 1 June 2005, Fortune Hugo has paid no rent, and continues to occupy the premises.

6.  Hollywood Palace has issued a summons under Order 14 and Order 14A, for judgement on the counterclaim, contending that the exercise the option to renew was not effective and that accordingly they are entitled to judgement for possession, the term of the Tenancy Agreement having expired.

7.  The law is clear, and accepted by both counsel, that the test for determining whether a lessee has exercised an option for the renewal of a lease is whether the purported exercise clearly and unequivocally manifests an election to enter into the lease in accordance with the terms of the option.  Where the lessee purports to exercise the option by letter, proof of the election depends on whether a reasonable person who received the letter and reading it against the background of the dealings between the parties, would fairly understand the option to have been exercised.  These propositions are found in Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 CA.  That a tenant must take care in precisely adhering to the terms of the option is illustrated by the decision in Reporoa Stores Ltd v Treloar [1958] NZLR 177 CA.

8.  Mr Chain sensibly accepts that whether or not the letter constitutes a proper exercise of the option is largely a matter of first impression.  The terms of the letter are plain; the tenant seeks to renew the tenancy.  The tenancy agreement provides that rent for the renewed term will be the fair market rent, and that in the event of the parties failing to agree on that fair market rent a formula is provided to determine the rent.  I am satisfied that it is arguable that the letter constitutes a clear expression to renew the tenancy and suggests that the fair market rent at that time was the sum of $270,000 per month.  If the landlord does not accept that sum, there is a formula he is obliged to follow to determine the fair market rent.  On a fair reading of the letter I am satisfied that it is arguable that the statement as to rental at $270,000 per month is the tenant’s opening gambit in the procedure whereby agreement is sought as to the fair market rent.

9.  That being the case it is arguable that, subject only to the determination of rent pursuant to the procedure contained in the tenancy agreement, the option has been properly exercised.  While then it is clearly arguable that Fortune Hugo are entitled to occupy the premises, pending the resolution of the rent issue, it cannot be argued that they are entitled to be there rent free.  At the very least they must pay the rent they themselves considered amounted to the fair market rent, namely the sum of $270,000 per month.

10.  Hollywood Palace’s summons was brought in the alternative under Order 14 and Order 14A.  It is, I think, preferable not to determine the matter finally under Order 14A, as Mr Chain sought.  By determining the matter under Order 14 and giving Fortune Hugo leave to defend, it is open to me to impose conditions upon the leave.

11.  It has been argued for Fortune Hugo that this is a case of an unscrupulous landlord trying to force out a tenant in order that it may charge higher rent.  There is nothing in the papers whatsoever to support such a submission.  The evidence establishes that throughout the duration of the tenancy agreement Fortune Hugo has been consistently late in payment of its rent.  That is not in dispute.  The only matter in dispute is the validity of the provision for interest on late payment of rent.

12.  The evidence establishes that since 1 June 2005, Fortune Hugo has paid no rent at all, not even at the rate at which it offered to renew the tenancy agreement, yet it continues to occupy the premises.  On 7 October 2005, I granted Fortune Hugo an injunction requiring Hollywood Palace to maintain air-conditioning in the premises, conditional upon rent being paid and the interest outstanding being paid into Court.  Counsel for Fortune Hugo assured me then that payment would be made.  It has not been made.

13.  Rather than this being a case of an unscrupulous landlord seeking to force out an honest and worthy tenant, the case bears all the hallmarks of a tenant who is consistently late in his rent, and who then seeks to use the fine terms of the lease and the inherent delays in pursuing the matter through the courts, to avoid making any payment at all, while at the same time occupying the premises.

14.  I am satisfied that this is a clear case where leave should be granted to Fortune Hugo to defend the counterclaim upon terms.  Leave to defend is granted.  Fortune Hugo must pay to Hollywood Palace sum of $1,620,000, being six months rent outstanding at the rate of $270,000 per month for the period from 1 June 2005 to 31 November 2005, within seven days of the date of this judgement.  Fortune Hugo must pay into Court the sum of $1,180,722.74 being interest on arrears of rent for the period 11 November 2003 to 31 May 2005.  That sum must be paid into Court within seven days of the date of this judgement.

15.  The grant of leave to defend is conditional upon Fortune Hugo paying, on account of mesne profits, to Hollywood Palace, the sum of $270,000, by 5 p.m. on the first day of each calendar month until judgement in this matter.  In the event that the first day of a calendar month should fall on a Saturday or a Sunday, payment must be made by 5 p.m. on the first Monday thereafter.  In the event that that sum shall not be paid, Hollywood Palace shall be at liberty to enter judgement by default for possession of the premises, and to execute that judgement.

16.  All questions of costs are reserved.  In the circumstances it is not necessary for me to consider the alternative application for interim payment.