EVER SCORE DEVELOPMENT LTD v. HANG HEUNG FOODS (GROUP) LTD

LDPE 1146/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 1146 OF 2014

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J U D G M E N T

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Undisputed or Indisputable Background

1. The property involved in the tenancy agreement in this case consisted of the followings at the On Lok Industrial Building (“the Building”) :

(a)   all that factory unit on the Ground Floor;

(b)   all those car parking spaces No. 6 and 7 on the Ground Floor;

(c)   all those factory units “A” and “B” on the First Floor; and

(d)   all that car parking space No. 5 on the Ground Floor

(collectively referred to as the “Suit Premises”).

2. Back in 2011, the Suit Premises was owned by a Mr Cai Yong Bao (“Cai”).  By a tenancy agreement dated 20 January 2011 between Cai and the respondent in this case (“the T/A”), Cai agreed to let and the respondent agreed to rent the Suit Premises for a term of 8 years commencing from 20 January 2011 to 19 January 2019 at a monthly rent of HK$85,000 payable on the 20th day of each and every calendar month during the said term (page 8-23 of Bundle).  Mr Cheng Hung Kit (“Cheng”), who is the sole director and shareholder of the respondent, signed the T/A for and on behalf of the respondent.

3. Under Clause 2(p) of the T/A, the respondent agreed :

“Not without the previous written consent of the Landlord (such consent shall not be unreasonably withheld or delayed) to assign underlet or otherwise part with the possession of the said premises or any part thereof to any person or persons or firm or body corporate in any way whether by way of sub-letting lending sharing or other means whereby any person or persons not a party to this Lease obtains the use or possession of the said premises or any part thereof irrespective of whether any rental or other consideration is given for such use or possession and in the event of such transfer sharing assignment or parting with the possession of the said premises (whether for monetary consideration or not) this Lease shall absolutely determine and the Tenant shall forthwith vacate the said premises on notice to that effect from the Landlord....” (page 10 of Bundle).

4. By a tenancy agreement dated 2 May 2012 between the respondent and a Mr Wong Long Wai, the respondent subletted Unit B on Ground Floor of the Building to Mr Wong Long Wai (“Sub-T/A”) (page 24-25 of Bundle).  Cheng signed on the Sub-T/A for and on behalf of the respondent.

5. By a sale and purchase agreement dated 6 September 2013 (“SPA”) (page 198-246 of Bundle), Cai sold and assigned the Suit Premises to Cheng who became the landlord of the Suit Premises ever since the purchase. The Suit Premises was mortgaged to Lei Shing Hong Credit Limited (“LSH”) by Cheng on 9 September 2013 (page 248-285 of Bundle).

6. On 30 September 2014, LSH, in exercise of its power of sale as the mortgagee, sold the Suit Premises to the applicant in this case (page 287-315 of Bundle).  Mr Wong (“Wong”), director of the applicant, had visited the Suit Premises and served a letter prepared by its solicitors dated 30 September 2014 on all the occupiers of the Suit Premises informing them of the change of ownership (page 362 of Bundle).  On this occasion, Wong discovered that the occupiers of the factory units are not the respondent and there may be situations of subletting by the respondent.

7. The respondent had failed to pay the rent to the applicant since 30 September 2014 and the applicant had sent an undated demand note to the respondent (page 48 of Bundle) on or about 14 October 2014. 

8. In or about October or early November, through one of its estate agents, Wong was being provided with a copy of the Sub-T/A and the facts of subletting was confirmed.  Through its solicitors, the applicant sent a letter dated 10 November 2014 to the respondent asking for delivery up of vacant possession on the ground of subletting (page 316-317 of Bundle).

9. On 19 November 2014, the applicant filed the Notice of Application in this case against the respondent seeking for a possession order and arrears of rent and mesne profits on the ground of non-payment of rent and breach of Clause 2(p) of the T/A.

10. By end of December 2014 or early January 2015, Wong was given to understand that other than the Sub-T/A, the respondent had also subletted other parts of the Suit Premises to 3 others parties, namely:

(a)   Hong Kong Sheng Shi Gold Crafts Co Ltd (photo at page 62 of Bundle);

(b)   Cheung Kee Cycle Co (photo at page 63 of Bundle);

(c)   Revival Christian Church, Global Outreach (photo at page 64 of Bundle); and

(d)   RiderHome Shop (the Sub-T/A, photo at page 65 of Bundle).

11. A cheque in the sum of HK$139,930, being arrears of rent for the period from 30 September 2014 to 19 November 2014, was being sent by the solicitors acting for the respondent to the applicant’s then solicitor on 27 November 2014 (page 322-323 of Bundle).  However, the applicant refused to accept the same.

12. The respondent filed a Notice of Opposition on 1 December 2014.

13. By 2 letters dated 10 December 2014, solicitors acting for the applicant indicated that they have instructions to accept payment of the arrears of rent from 30 September 2014 to 19 November 2014 (page 324 of Bundle) and demanded payment of rent for 20 November 2014 to 19 December 2014 (page 326 of Bundle).

14. On 12 December 2014, the respondent had through its solicitors delivered, inter alia, a cheque of HK$85,000 to settle the rent for 20 November 2014 to 19 December 2014 (page 331 of Bundle).

This Trial

15. It is admitted at trial that rent for 30 September 2014 to 19 November 2014 as well as rent ever since 20 December 2014 are still outstanding.  The respondent also agreed that for rent running in arrears, the applicant is entitled to a possession order.  But the respondent is asking for relief under Section 21F of the High Court Ordinance, which is as of right given the fact that this is the first application against the respondent.  The respondent is asking for the relief date to be fixed on 2 March 2015.  The applicant contended that only 7 days should be allowed.

16. As for the breach of Clause 2(p), it is admitted by the respondent that there was a breach in the sense that there was no consent in written form.  However, it is the case of the respondent that even though there was a breach, Cai had waived the right to forfeit the T/A based on this breach.  And since the breach is a once-and-for-all breach instead of a continuing breach, when the right to forfeit is lost by waiver, it is lost for the remainder of the existence of the lease (Hill and Redman’s Law of Landlord and Tenant at §4846).  So Cai’s waiver will be applicable to all successor in title and binding on all subsequent owners including Cheng and the applicant.

17. And even if this Tribunal found that it is a continuing breach, Cheng and the applicant had also waived the breach upon notice of the same.

18. So the issues to be determined in this case are :

(a)   Whether subletting is a once and for all breach or a continuing breach;

(b)   Whether Cai had waived the forfeiture;

(c)   Whether Cheng had waived the forfeiture;

(d)   Whether the applicant had waived the forfeiture; and

(e)   What should be the period of relief to be granted on the ground of rent running in arrears (if applicable).

A Once and For All Breach?

19. Ms Yu for the respondent relied on the authority of Scala House & District Property Ltd v Forbes and Others [1974] QB 575 and Hill and Redman’s Law of Landlord and Tenant to support the contention that subletting is a once and for all breach. 

20. The case of Scala House involved a breach of covenant where the premises had been sublet.  The landlord gave a section 146 notice (which is same as a notice under section 58 Conveyancing and Property Ordinance) calling upon the tenant to remedy the breach and 14 days later issued the writ.  Russell LJ found that it was a once and for all breach and that a breach of a negative covenant not to assign underlet or part with possession is never capable of remedy. 

21. Examples of continuing and once-and-for-all breaches are named in Hill and Redman and “assigning, underletting or permitting a third person to occupy the demised premises in breach of covenant is once-and-for-all breach” (at §4847).

22. Mr Leung for the applicant relied on the case of Donald W Shields v Many Chan (unreported) HCA 1259 of 1970, 4 June 1971 which says “(I)n any event, the case of Laurie v Lees, although the question is broached from a somewhat different angle, is authority for the proposition that breach of a covenant as to user is a continuing breach which will entitle a landlord to insist on forfeiture notwithstanding that he has received rent with knowledge of the breach” (at page 10) to support his contention that breach of subletting is a continuing breach.

23. I found the case of Donald W Shields does not assist the applicant.  In answer to the plaintiff tenant’s application for specific performance of the option to renew the tenancy agreement, the defendant landlord alleged that the plaintiff was in breach of the tenancy agreement which disentitled the plaintiff for enjoying the benefits of the option.  The breach alleged included subletting in breach of the tenancy agreement as well as use of the premises for business purpose in breach of the Crown Grant.  McMullin J found that there was no subletting of the premises so there is in fact no finding as to whether a breach of the covenant of subletting is a once-and-for-all or continuing breach.  The paragraph relied upon by Mr Leung is in fact a finding on the breach of user and had nothing to do with subletting.

24. I agree with Ms Yu and accept the authorities she relied upon and found that subletting is a once-and-for-all breach.  And given the nature of the breach, if this Tribunal found that Cai had waived the forfeiture, both Cheng and the applicant will be bound since the right of forfeiture cannot be resurrected.

Waiver on the part of Cai

25. It is Cheng’s evidence that upon learning that Cai was minded to acquire the Suit Premises, he approached a Mr Chung (“Chung”) who was the agent of Cai and indicated the interest in renting the Suit Premises.  Cheng said that he had made it clear to Chung that it is his intention to sublet part of the Suit Premises to others for rental income.  Chung told him that Cai was agreeable to this so within 3 days after Cai became the owner, the T/A was being signed.  Cheng also said that since he was not conversant with English, he trusted Cai and Chung in the preparation of the T/A and had not read the content before he signed, hence he was not aware of the terms of Clause 2(p) therein.  And Chung had once approached him for subletting part of the Suit Premises but eventually Chung had introduced a friend of his to rent Unit A on Ground Floor.

26. Under cross-examination, Cheng agreed that he did not know if Cai had agreed to the subletting but it’s just Chung who had told him that Cai did.  And Chung is a friend of Cai who is dealing with the purchase and mortgage of the Suit Premises for and on behalf of Cai.  Having said so, Cheng also said that Cai had visited the Suit Premises after the purchase and he had met Cai twice after the T/A, once at a restaurant in Yuen Long and once in Zhongshan China when Chung brought him to Cai’s factory, and on all these occasions, Cai had never raised the issue of subletting.

27. The law on waiver of the right of forfeiture is not in dispute.  The essential elements of waiver, according to Hill & Redman (at §4822) are :

(a)   actual knowledge by the landlord (or knowledge to be imputed to him from knowledge of his agent) of the relevant breach;

(b)   unequivocal acts by the landlord (or his agents) which are consistent only with the continued existence of the lease; and

(c)   communication of the implicit recognition of the continued existence of the lease to the tenant.

28. Having considered the evidence of Cheng, I do not accept that Cai had actual knowledge of the breach or knowledge by Chung can be imputed to Cai since there is nothing to show that Chung was the agent of Cai.

29. I agree with Mr Leung that there are documentary evidence showing, on a balance of probabilities, that Cai did not have knowledge of the breach.

30. The T/A contained Clause 2(p) which specifically prohibits subletting unless with prior written consent of Cai.  If Cai were aware of the fact that Cheng was minded to sublet part of the Suit Premises, he should not have allowed Clause 2(p) to exist in the first place or should have given Cheng a written consent to put things right.  The T/A was being entered into with both parties being represented by their respective solicitors.  It is recorded on the T/A that contents of the T/A had been interpreted to Cai by a clerk of the solicitor firm (page 21 of Bundle). It would be beyond belief that Cai would allow Clause 2(p) to stand without a written consent provided to Cheng if Cai knew and did give his consent to the subletting.

31. In the SPA between Cai and Cheng, it is stated that the Suit Premises will be sold subject to and with the benefit of the lease, ie the T/A and Cai as vendor had specifically warrants and undertakes at Clause 30(b) that :

“(i) the vendor has not granted or agreed to grant any licence lease or tenancy of the said premises or any part thereof other than the Lease.

(ii) there is no breach or potential breach of the terms of the Lease on the part of the Tenant or the Vendor in his capacity of the landlord.” (“Clause 30(b)”)(page 210 of Bundle).

32. The effect of Clause 30(b) quoted above is that Cai had confirmed that the T/A was the only tenancy concerning the Suit Premises and there was no breach of the terms of the Lease on the part of the tenant, ie the respondent.  If Cai was aware of the subletting, what stated in the SPA must be false and one wonders why Cai should make such representation upon sale.  The only reasonable inference to be drawn from the existence of such a term in the SPA must be that Cai was not aware of the subletting and the breach. 

33. Ms Yu submitted that Clause 30(b)(ii) showed that Cai agreed to such term because there was the waiver. This cannot be right.  The breach was always there but it is just the landlord waived the right of forfeiture arising from the breach.  Even if there was a waiver, Cai could not say that there was no breach.  The reason Cai confirmed there was no breach must be that he was not aware of any.

34. Cheng also relied on the fact that Cai had visited the Suit Premises himself.  But it was Cheng’s evidence that the issue of subletting was not raised during Cai’s visit.  Cheng is relying on this to show that Cai knew of the subletting.  I found this to be a farfetched contention.  There is no evidence as to when Cai made the visit.  Apart from the Sub-T/A, there is no evidence as to when the other sub-tenancies were in existence.  Such evidence was not forthcoming from Cheng.  The Sub-T/A was only signed on 2 May 2012.  There is nothing to show that during Cai’s visit after purchase of the Suit Premises, anything should have raised his suspicion.  The mere fact that the issue of subletting was not raised tends to show that there is nothing to raise such suspicion instead of Cai knew of it.

35. I found it is more likely than not that Cai was not aware, and never gave his consent to the subletting and the breach on the part of the respondent.  Without such actual knowledge, the first essential element of waiver is not established and the respondent’s defence of waiver on the part of Cai must fail.

36. As for the knowledge on the part of Chung, Cheng claimed that Chung was the agent of Cai but there was no evidence in support of the same except for the bare assertion of Cheng.  I found the respondent had failed to prove that Chung had the actual or apparent or ostensible authority to act for Cai.

37. Cheng confirmed under cross-examination that Chung was just a friend of Cai and there was no authorization document from Cai appointing Chung as his agent.  Cheng just relied on the fact that Chung assisted Cai in the purchase as well as mortgage application to conclude that Chung was Cai’s agent.  There is nothing to show that Cai has given Chung the authority by words or writing.  Nor was there any special relationship and dealings between Cai and Chung to infer there may be implied authority.  And there was no evidence to suggest that Cai had expressly or impliedly represented to Cheng that Chung had authority to act on his behalf.

38. I found on a balance of probabilities that Cai had never consented to subletting and had no knowledge of the breach and had never waived the right of forfeiture.

Waiver by Cheng

39. It is the evidence of Cheng that he was not aware of the existence of Clause 2(p) in the T/A nor was he aware of the fact that written consent is required for subletting.  He frankly admitted under cross-examination that he was not aware of the breach by subletting and hence, had not even considered the waiver of the forfeiture.

40. Under such circumstances, Cheng cannot be said to have actual knowledge of the breach and least to say waiving the right of forfeiture.  He failed to satisfy the first essential element of waiver.  The respondent’s defence that Cheng had waived the forfeiture must also fail.

Waiver by the applicant

41. Wong of the applicant had testified that he had personally visited the Suit Premises before the purchase.  When he was there on this occasion, all the shops were closed so he just took a look from outside and had not paid particular attention to the signboards erected at each unit.  He then went to the lobby to look at the main directory of the Building hang up there and saw the name of the respondent on Ground Floor and First Floor (photo of the main directory marked as Exhibit A1 produced).  Wong said that there was nothing to raise his suspicion of any subletting.

42. After the purchase of the Suit Premises, Wong visited the Suit Premises again to deliver the letter prepared by its solicitors.  On this occasion, he did go into the bicycle shop on First Floor and came to know that the person at the shop is also surnamed Cheng.  Wong thought this person is related to Cheng of the respondent but was told not so and in fact the bicycle shop had nothing to do with the respondent. Wong further asked if it was a subletting and this person said it’s none of his business and refused to show Wong any document.

43. Wong felt that there might be subletting involved so he asked the estate agent to find out for him.  By late October or early November, the agent had provided Wong with a copy of the Sub-T/A and since he got concrete evidence in hand, Wong instructed solicitors to issue the letter dated 10 November 2014 to demand for delivery up of vacant possession within 7 days on the ground of subletting as well as arrears of rent.

44. The respondent contended that Wong should have noticed the fact of subletting when he visited the Suit Premises before the purchase since it is apparent from the signboards erected for each unit as shown on the photographs produced by Wong.  In any event, the applicant should have notice by 30 September 2014 latest.  And even though Wong had notice of the fact of subletting, the applicant still demanded for payment (page 48 of Bundle) and did accept payment of rent, such conduct had unequivocally affirmed the existence of the lease and waived the right of forfeiture.

45. I accept the evidence of Wong that he had no notice of the signboard on his first visit before the purchase.  In any event, the mere fact that there are signboards of different entities erected at the units cannot be conclusive evidence that there was subletting.  As Wong said in his evidence, when he noticed the different nature of business on his second visit, he thought the respondent was involved in different nature of business.  Being the landlord, it cannot restrict the kind of business run by the tenant at the Suit Premises as long as the rented premises was occupied by the tenant.  I do not agree that the signboards erected at the different units of the Suit Premises would necessarily raise the suspicion or actual knowledge of subletting.

46. On the second occasion when Wong visited the Suit Premises and after talking to the person inside the bicycle shop, Wong agreed that he had the feeling that there was subletting but there was no evidence in support.  I found this may only amount to suspicion and cannot be said to be actual knowledge since there is nothing in support of such suspicion.  Wong then engaged estate agent to conduct investigation to confirm the same.  I found the conduct of Wong on behalf of the applicant clearly rebutted the conclusion that the applicant had waived the breach he was on notice of (Hill & Redman at §4823).

47. And upon confirmation with the Sub-T/A at hand, the applicant immediately instructed its solicitors to demand for vacant possession on the ground of a breach of Clause 2(p).  All these points to the fact that the applicant had not waived the right of forfeiture but instead had exercised its right of forfeiture upon actual notice of the subletting.

Conclusion

48. I found there was no waiver of the right of forfeiture on Cai, Cheng or the applicant.  Since the respondent admitted its breach of Clause 2(p) of the T/A, the applicant is entitled to have the possession order on this basis.

Relief

49. In view of my findings on waiver, it is not necessary for me to deal with the issue about the relief date.  But in case I am wrong on my findings above, I shall deal with the relief date briefly.

50. I see no justification for the respondent to ask for a longer relief date than the “not less than 7 days” stipulated in Section 21F.  Rent had been running in arrears for a long period of time.  To allow the respondent a longer period for the arrears to be paid will be unfair to the applicant.

Order

51. It is ordered that :

(a) The respondent do deliver vacant possession of the Suit Premises to the applicant;

(b) The respondent do pay the applicant arrears of rent from 30 September 2014 to 19 November 2014 in the sum of $139,930;

(c) The respondent do pay the applicant mesne profits at the rate of $85,000 per month from 20 December 2014 until delivery up of vacant possession; and

(d) The respondent do pay the applicant costs of this application to be taxed if not agreed at District Court scale.