THE HONG KONG HOUSING AUTHORITY v. HUNG PUI AND ANOTHER

1986, No. A403

IN THE HIGH COURT OF HONG KONG

HEADNOTE:

A lease contained a provision for a rent review at the end of the 3rd year of the tenancy. The parties agreed a reviewed rent in correspondence one letter in which was mistakenly headed "Subject to contract". The tenant subsequently paid rent in accordance with the agreement.

HELD

(Observations on the use of the words "Subject to contract" without thinking.)

1986, No. A403

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This is an action for arrears of rent, and mesne profits. The Plaintiff is the Hong Kong Housing Authority and the Defendants are Mr. HUNG Pui and Mr. LUK Shun-chung. The property concerned is Restaurant No.3, Commercial Complex, Upper Pak Tin Estate, Kowloon, Hong Kong.

2. The Defendants took the restaurant under an agreement of 18th December 1980. The tenancy was for a period of 5 years from 1st April 1981 but determinable on 3 months' notice. The rent was $68,800.00 per month. The tenancy agreement contained a provision (in Clause 1, at the end of the reddendum) for a review of the rent in these terms:-

"Provided the said rent is to be reviewed at the end of the 3rd year of the commencement of the tenancy."

3. Clause 2(a) contained a covenant to pay the rent in the following terms:

"To pay the said rent at the time aforesaid without any deduction and also to pay rates in respect of the said premises as assessed by Commissioner of Rating and Valuation. The rent is subject to a further review at the end of the 3rd year during the tenancy of the restaurant."

            (The last sentence appears simply to duplicate the proviso at the end of Clause 1.) By a second tenancy agreement dated 30th September 1981 the Defendants took an adjacent transformer house and meter room at a rent of $1,800.00 per month and otherwise on the same terms as the restaurant.

4. The issue which I have to consider is whether or not the parties came at the end of the 3rd year to an agreement as to a reviewed rent. If I come to the conclusion (as I have) that they did come to such an agreement, no further issue arises. The Defendant gave up possession of the premises on 6th March 1987.

5. The agreement relied on by the Plaintiff is contained, it alleges, in an exchange of correspondence between itself and the Defendants. After various meetings, and certain correspondence following these meetings, the Defendants wrote to the Plaintiff on 30th July 1984 in Chinese of which the following is an agreed translation:-

"Dear Sir,

                With reference to our exchange of correspondence in connection with the rent increase of Wah Fung Restaurant, we would like to give our final reply that we can only afford a monthly inclusive rent of $120,000.00 in respect of the period from 1.4.84. to 31.3.86. We hope that the Authority would give us another chance after taking into account the financial difficulties we face and the hardship we suffer in carrying on our business."

6. In my judgment, that letter falls in all the circumstances of the case to be construed as an offer to pay a monthly rent of $120,000.00 in respect of the period mentioned for the whole premises, inclusive of the transformer house and meter room.

7. The Plaintiff's response, dated 12th September 1984, was in the following terms:-

"        I refer to your letter of 30th July 1984 and am pleased to inform you that your offer of $120,000.00 (One Hundred and Twenty Thousand Dollars) per calendar month exclusive of rates for the remaining two years of your existing tenancy, effective from 1st April 1984, has been accepted. The Housing Manager, Pak Tin Estate, has been asked to contact you directly to arrange the formalities."

8. The last letter to which I need to refer is a letter of 20th November 1984 from the 2nd Defendant to the Plaintiff, the agreed translation of which reads as follows:-

"        This concerns the rent problem of our restaurant. Due to poor business potential in this estate, we have decided that, apart from paying the rent of $120,000.00x each month, the accumulated rent-in-arrears of $400,000.00x will be repaid by twelve monthly instalments of $40,000.00 each. As regards the overdue rent deposit of $150,000.00x we can pay it up by the fifteenth of next month."

9. This, in my judgment, recognises that a rent of $120,000.00 per month had been agreed. The. Defendants subsequently paid rent at first at the rate of $120,000.00 per month and later, when plainly stretched for money, at exactly half that rate down to October 1985. I have no doubt at all in these circumstances that the Defendants regarded themselves as having agreed to pay rent at the rate of $120,000.00 per month.

10. The only matter which creates any difficulty is that the letter of 12th September 1984 from the Plaintiff, in response to the Defendant's letter of 30th July 1984, was headed "Subject to contract" and (as has been seen) referred to the arrangement of "formalities."

11. The Plaintiff says that in fact there were no "formalities" to be arranged and, subject perhaps to the question of payment of an increased deposit, that does appear to be the case. It further says that the word "Subject to contract" are in the context meaningless, since there is nothing further to be done and no further instrument to be executed. The words "Subject to contract" are not lightly to be ignored; but where the court is satisfied on the evidence that they had no meaning it is entitled to ignore them. It is also entitled to ignore them where the parties by their words or conduct have unequivocally demonstrated that they have agreed that the words may be treated as expunged from the instrument which contains them. Authority for the first proposition is to be found in Michael Richards Properties Ltd. v. Wardens of St. Saviour's [1975] 3 All E.R. 416. Authority for the second proposition is to be found in Tevanan v. Norman Brett (Builders) Ltd. [1972] 223 E.G. 1945 approved in Sherbrooke v. Dipple [1980]255 E.G. 1203.

12. In Michael Richards Properties Ltd. v. Wardens of St. Saviour's (supra), Goff J. said (at p.424) of the case before him "Nothing remained to be negotiated, there was no need or scope for any further formal contract, and it is difficult to see how it would be drawn. Nobody ever thought there was .... It seems to me that the word "Subject to contract" in the acceptance are meaningless." In Tevanan v. Norman Brett (Builders) Ltd. (supra), Brightman J. said at (p.1947) "Parties can get rid of the qualification of subject to contract only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied."

13. The Defendants asserted, in evidence by Mr. HUNG Pui which I accept, that before 30th July 1984 there had been discussions as to the increased rent with Mrs. Kwok of the Plaintiff's office. They had been invited to the office and has been told that they would have to sign documents in relation to the increase; but Mr. HUNG Pui accepted that the signature of further documents was not mentioned again after June 1984, and the exchange of letters on which the Plaintiff relies is an exchange between July and September. The remarks of Mrs. Kwok are not pleaded in bar to the Plaintiff's claim and in any case they precede the relevant exchange of letters. In these circumstances I think I am bound to disregard the words "Subject to contract" at the top of the letter of 12th September 1984, more particularly because, when evidence was given by Mr. Newman (who put them there) for the Plaintiff, it became quite apparent that they had been inserted mindlessly and simply because it was the practice, in the case of new leases, to put them there so as to keep the parties' position open while negotiations continued. Here, however, everything, in my opinion, points to a concluded agreement for a reviewed rent of $120,000.00 per month. But if the words "Subject to contract" had any effect originally, the parties' subsequent conduct, in my opinion, is consistent only with an implied agreement to treat them as expunged.

14. The Defendants were not represented but I am satisfied that everything which could be said on their behalf has been put to me and I am grateful for the assistance I received from Mr. David Hinchen who presented the case on behalf of the Plaintiffs. In view of the conclusions to which I have come I am bound to give judgment for the Plaintiff for the arrears of rent and mesne profits claimed. I need only add that the Plaintiff's practice of using the words "Subject to contract" without thinking, a practice which adversely reflects on the administration of an important public body in Hong Kong, has now, Mr. Hinchen told me, been changed, and of course I welcome this.