MOK WAI MAN KENT v. CHOW KAM WAH BRENDA

DCCJ 5408/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.5408 OF 2001

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ASSESSMENT OF DAMAGES

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Background:

[1] The Defendant started her tenancy in the premises on 25/1/1979 for a two-year term. The Defendant got along with the former owners and the tenancy was renewed every two years. On 6/3/1991, the premises was transferred to the Plaintiff by a deed of gift.

[2] Irrespective of the change of ownership, the Defendant continued to renew her tenancy. The last tenancy renewal was the period between 1/9/1997 and 31/8/1999. The Defendant alleged that the premises has not been redecorated for the entire period she lived there and was in a dilapidated state. Specifically the windows were leaking very badly. As a condition of renewing her tenancy on 1/9/1997, the Defendant asked the Plaintiff to repair the windows and the Plaintiff agreed.

[3] Although the Defendant had renewed the tenancy, the Plaintiff failed to repair the leaking windows. After several unsuccessful attempts to have the Plaintiff repair the windows, the Defendant decided to move out of the premises. On or about 8/9/1998, the Defendant caused her solicitors to inform the Plaintiff that she would be terminating her tenancy as of 31/12/1998.

[4] Possession of the premises was returned to the Plaintiff on 31/12/1998. The Plaintiff attempted to lease the premises out without much success. On 15/1/1999, the Plaintiff carried out basic repairs on the premises. In or about March 1999 and June 1999, the Plaintiff carried out further decorations on the premises. However, the repairs and decorations failed to attract any tenant.

[5] The Plaintiff is now claiming the following damages:

(1)	Rent for the period 1/1/1999 to 31/8/1999	HK$224,000.00
(2)	Repair expenses	14,050.00
(3)	Rates and government rents for the period 1/1/1999 to 31/8/1999	20,232.00

[6] Prior to trial, liability was consented by the Defendant. The only issue left is the quantum of damages.

[7] The present action came to the District Court with a checkered pass. It appears that on 18/1/1999, the Plaintiff caused his solicitors to issue a letter to the Defendant stating that the rental deposit would be used to cover damages suffered by the Plaintiff and enclosed a quotation for the repairs from Artake Design & Associates Ltd. for HK$14,050.00. On or about 28/3/1999, the Plaintiff commenced an action against the Defendant for damages in the sum of HK$78,282.00 (being HK$134,282.00 - $56,000.00). On or about 16/8/1999, the Defendant paid the sum of HK$45,080.00 in court. This action was later struck out for want of prosecution.

[8] On 29/3/2000, the Plaintiff commenced the present action in the High Court for the sum of HK$202,282.00. A Statement of Defence was filed on 15/5/2000. The premises was sold by the Plaintiff on 16/5/2000 for HK$3,920,000.00. On 7/3/01, this action was ordered be transferred to the District Court.

[9] Just prior to commencement of the hearing, Mr. Sher, counsel for the Plaintiff, applied to add management fees in the sum of HK$9,300.00 and outstanding towngas charges in the sum of HK29.50 to the claim. Ms. Lan, counsel for the Defendant, made no objections and the amendment was allowed. Ms. Lan agreed that the outstanding towngas charges should be paid by the Defendant and Mr. Sher agreed that the Defendant's rental deposit in the sum of HK$56,000.00 should be used to set-off against the total damages.

[10] The Plaintiff's claim can be separated into two parts, the claim for the repair costs and the claim for rental, rates, government rents and management fees for the balance of the lease term. I will deal with the claim for repair first.

Repair Costs:

[11] All of the Plaintiff's claims in this action were grounded in contract. My review of the tenancy agreement dated 25/1/1979 (the "Original Tenancy Agreement") revealed that the Defendant had an obligation to maintain the premises. Clause 2(c) of the tenancy agreement stated as follows:

"To maintain and up keep from time to time the whole of the interior of the premises including the decorations and all the furniture and fittings in good and substantial repair and to replace all broken or damaged windows, if any."

[12] Clause 2(c) of the Original Tenancy Agreement was never pleaded and cannot be relied on by the Plaintiff. However, even without clause 2(c), the Defendant may be under an implied contractual obligation to maintain the premises under common law. In Chan Tung Man v. Kamshan Holdings Ltd. [1999] 4 HKC 303, Godfrey JA. stated at page 308:

"It was suggested below and before us that in addition to the expressed contractual obligations imposed on the tenant by cll 4 and 7 of the tenancy agreements, the tenants was under an implied contractual obligation to use the premises 'in a tenant-like manner'. It is true that a tenant under a yearly or other periodic tenancy comes under such an obligation; see Marsden v. Edward Heyes Ltd. [1927] 2 KB 1 (where the tenancy was a yearly tenancy) and Warren v. Keen [1954] 1 QB 15 (where the tenancy was a weekly tenancy)...."

[13] In Chan Tung Man, Keith JA, in page 315, however stated:

"I would not go so far as to say that only a tenant under a yearly or other periodic tenancy is subject to such an obligation. In my opinion, it is possible that a tenant under a fixed-term tenancy comes under such an obligation as well."

[14] Here we are dealing with a fixed term tenancy and assuming that the implied covenant to use 'in a tenant-like manner' was applicable, this implied covenant is however much more limited than the term contented in clause 2 (c). Keith JA, continued, in Chan Tung Man (at page 316) as follows:

"However, if a tenant is under an obligation to use the premises in a tenant-like manner, the extent of any obligation to restore the premises to their former condition on the termination of the tenancy is an obligation to restore them, not to their condition when the tenant first 'took' the premises, but to their condition at the commencement of the relevant tenancy...."

[15] The relevant tenancy for this matter is the tenancy dated 1/9/1997. It was not disputed that the premises had not been redecorated since 1979. It was reasonable to infer that the dilapidation of the premises happened gradually. From the photographs exhibited, it was cleared that the condition of the premises when possession was turned over to the Plaintiff on 31/12/1998 was virtually the same as it was at the beginning of the 1/9/1997 tenancy. Since there was no change to the condition of the premises, there was no obligation for the Defendant to restore. Accordingly, the Plaintiff cannot recover the costs of repair from the Defendant.

Rents, rates, government rents and management fees

[16] The Plaintiff's claim was simple. The Defendant breached the tenancy agreement and despite reasonable efforts the Plaintiff was unable to rent the premises to another tenant for the balance of the lease term. The Plaintiff is claiming the full amount of rents, rates, government rents and managements for the balance of the lease term against the Defendant.

[17] The Defence was one of failure to mitigate. During the hearing, a lot of time was spent on the fact that the Plaintiff had, on 18/1/1999, through his solicitors demanded HK$134,282.00, a considerably smaller sum, as damages from the Defendant. I am however of the view that this fact did not assist the Defendant. The 18/1/1999 demand letter was clearly the Plaintiff's attempt to estimate future losses at a time when that loss was yet to be ascertained. The 18/1/1999 letter could be viewed as nothing more than an offer-to-settle. As this offer-to-settle was never accepted by the Defendant, she can hardly say that the Plaintiff is now bounded by this estimate, now that the ascertained damages turned out to be higher than the earlier estimate.

[18] Much was also made of the exact day that Plaintiff received notice from the Defendant of her intention to terminate the tenancy. Again nothing could turn from this point. As the Defendant continued to occupy the premises, it would have been extremely inconvenient if not impossible for the premises to be viewed by potential tenants. In any event, as the condition of the premises was the main reason why the Defendant decided to terminate the tenancy, it would be reasonable to infer that it was difficult to re-lease the premises without doing some basic repair work. Repairs were of course impossible while the Defendant was still occupying the premises.

[19] The law on mitigation is succinctly described in Chitty on Contract, 28th ed. paragraph 27-085, as follows:

"There are three rules often referred to under the comprehensive heading of "mitigation": they will be considered in turn. First, the claimant cannot recover damages for any part of his loss consequent upon the defendant's breach of contract which the claimant could have avoided by taking reasonable steps. Secondly, if the claimant in fact avoids or mitigates his loss consequent upon the defendant's breach, he cannot recover for such avoided loss, even though the steps he took were more than could be reasonably required of him under the first rule. Thirdly, were the claimant incurs loss or expense in the course of taking reasonable steps to mitigate the loss resulting from the defendant's breach, the claimant may recover this further loss or expense from the defendant."

[20] Here we are only concerned with the first of these rules. The Defendant's allegation was that if Plaintiff had exercised reasonable efforts, the premises could have been leased out shortly after the Plaintiff obtained possession. In her final submission, Ms. Lan offered several scenarios, the highest was that the Plaintiff should have been able to lease out the premises at the rateable value (being HK$26,625 from 1/2/1999 to 31/3/1999 and HK$20,950 from 1/4/1999 to 31/8/1999), one month after the premises was turned over to the Plaintiff.

[21] The Plaintiff's case was that in or about early January 1999, he received a verbal valuation report from Lawson David & Sung Surveyors Limited (the "January Report") and offered the premises for rent through local estate agents at HK$15,500.00 per month, the same as the rental value stated in the January Report. There were few interests for the premises and on 15/1/1999, the Plaintiff carried out basic repair works to the premises. There was still very little interest and in or about March 1999, the Plaintiff alleged that he spent another HK$100,000.00 to redecorate the premises and he then increased the asking rent from HK$18,000.00 to HK$19,000.00. Again there was little interest. On or about June 1999, the Plaintiff again carried out extensive redecoration on the premises, this time spending approximately HK$110,000.00 to replace the ceiling and aluminum windows. Again there was no interest on the premises. The Plaintiff's testimony was that during the eight months, although there were some viewings, there was no offer to rent the premises.

[22] The Plaintiff commissioned another valuation report from Francis Lau & Co., (Surveyors) Ltd. (the "August Report"). The August Report was completed by Tse Wai Leung ("Mr. Tse"). Mr. Tse testified that at around the same period, Hong Kong property was undergoing a period of adjustment. Although home prices were on a general decline, Mr. Tse testified that this did not affect the rental market as badly. However, due to the fact that there were more flats available for rent, it generally took longer for owners to lease out their premises.

[23] Ms. Lan suggested that the rateable value of the premises was an accurate reflection of the true market rent at the relevant time. Having considered the fact the property market was undergoing its first downward adjustment in decades, I do not agree that the rateable value of the premises reflected the market rent of the premises at the time. The rateable value reflects the average rents being received in similar premises at a fixed point in time. In a fast declining market, it is difficult for the rateable value to truly reflect the actual market rent of one particular premises at a given time. The fact that the rateable value of the premises declined by HK$5,675.00 (a 21.31% decline) between 31/3/1999 and 1/4/1999, spoke volumes on the accuracy of the rateable value as compared to the actual market rent. I therefore rejected rateable value as a basis for calculating the market rent.

[24] The other evidence on market rent was the August Report. Ms. Lan criticized Mr. Tse's choice of comparable properties and the market rent derived there from. Valuation is an art as well as a science. A valuation report is no more than an estimate based on the opinion of the surveyor completing the report. There can be wide differences between these opinions. The August Report valued the market rent for the premises in January 1999 at HK$18,000.00 to HK$19,000.00, where the January Report valued the market rent for the same period at HK$15,500.00. I have to decide which report was a more accurate reflection of the market rent.

[25] In my view, if the August Report's estimate of HK$18,000.00 to HK$19,000.00 was correct, the then offered rate of HK$15,500.00, at close to 14% discount from market rent, should have easily attracted a tenant. The fact that not even an offer was received at the offered rent of HK$15,500.00, indicates that the August Report's valuation was much too high. I am of the view that the January Report did truly reflect the market rent for the premises at the time.

[26] I now turn to the issue on whether the Plaintiff had exercised reasonable effort to rent out the premises. At the time possession of the premises was turned over to the Plaintiff, it was agreed that the premises was in very poor condition. It was also common ground that basic repairs were carried out on the premises in the middle of January 1999. The fact that the Plaintiff was unable to rent out the premises at the asking rent of HK$15,500.00 indicate to me that even after the January repair, the condition of the premises was still very poor. This is supported by the fact that in the middle of March 1999, the Plaintiff decided to put in a new floor at the costs of HK$100,000.00. The problem is that after putting in the new floor, the Plaintiff decided to increase the asking rent to HK$18,000.00 per month.

[27] If the new floor had corrected the deficiencies in the premises, a small increase in the asking rent may have been justified; however, from the photographs exhibited and the evidence of the Defendant, we knew that the windows and the ceilings were the worst part of the premises. The fact that the Plaintiff had to spend another HK$110,000.00 to put in new ceilings and windows in June 1999, proofs that they were in poor condition at the time. When the condition of the premises was in such disrepair, I found that the Plaintiff did not act reasonably when he increased the asking rent for the premises in March 1999.

[28] The next step is perhaps the most difficult, but I accept Mr. Tse's testimony that although the property sale market was poor, the rental market was not affected in the same manner. Although there were more units available for rent, there were plenty of potential tenants. I am of the view that a potential tenant would be willing to rent the premises, if the Plaintiff did not increase the asking rent from HK$15,500.00 to HK$18,000.00 in March 1999. I will also hold that after the March redecoration, it would take no more than one month to find a tenant for the premises, if the asking rent remained at HK$15,500.00.

[29] Accordingly, the proper damages due to the Defendant's early termination of the lease are as follows:

(1)	Loss of rental from 1/1/1999 to 30/4/1999 (HK$28,000.00 x 4)	HK$112,000.00
(2)	Loss of rental from 1/5/1999 to 31/8/1999 (HK$28,000.00 - HK$15,500.00) x 4	50,000.00
(3)	Rates and Government rents from 1/1/1999 to 30/4/1999	10,116.00
(4)	Management fees from 1/1/1999 to 30/4/1999	4,650.00
(5)	Towngas charges	29.50
(6)	Less: Rental deposit	(56,000.00)
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	Total:	HK$120,795.50

Order:

(1) Damages is assessed at HK$120,795.50.

(2) Costs order nisi to the Plaintiff, to be taxed on party/party basis, if not agreed. This costs order shall becomes final unless written application is received from either party within 14 days from the day judgment was handed down.