TIME RICH 08 LTD v. DBE (HK) LTD AND OTHERS

CACV 282/2017

[2018] HKCA 404

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 282 OF 2017

(ON APPEAL FROM HCA NO. 566 OF 2017)

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Hon Cheung JA (giving Reasons for Judgment and Decision on Costs of the Court) :

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REASONS FOR JUDGMENT 

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I.   The appeal

1.  Chu J gave summary judgment to the plaintiff for $2,329,459.59 being arrears of rent, management fees, government rent and rates together with interest at judgment rate from 10 March 2017 until payment.  She further ordered the defendants to pay the plaintiff damages to be assessed for repudiation of the Tenancy Agreement dated 13 October 2015 (‘the Tenancy Agreement’).  The defendants appealed against the judgment.  We dismissed the appeal at the conclusion of the hearing.  We now give reasons for our decision.

II. Background

2.1  By the Tenancy Agreement the plaintiff as landlord let a shop premises on the ground floor of a building in Sai Yeung Choi Street South and Soy Street, Kowloon (‘the premises’) to the 1^st defendant for business purpose for three years commencing from 15 October 2015 until 14 October 2018 at a monthly rent of $680,000 (exclusive of rates, government rent and management fees) and payable in advance on the first day of each calendar month.

2.2  Prior to entering into the Tenancy Agreement, the 2^nd defendant and 3^rd defendant who are husband and wife, jointly executed a deed of guarantee on 9 October 2015 in favour of the plaintiff that they will jointly and severally guarantee the due performance of the Tenancy Agreement throughout the term of the tenancy (‘the guarantee’).

2.3  It is the plaintiff’s case that there was a rent free period from 15 October to 13 November 2016, and apart from two part payments, one paid on 17 January 2017 for $685,800 and the other paid on 9 February 2017 for $73,100, the 1^st defendant had failed to pay rent, management fees and government rent, and rates from 1 July 2016 to 31 March 2017, and the amount outstanding as of 31 March 2017 was $4,965,030.10.  In its writ issued on 10 March 2017, the plaintiff claimed this amount together with mesne profits at the rate of $680,000 per month from 1 April 2017 until delivery of vacant possession.  It also claimed damages together with interest and costs.  The 1^st defendant had made a further part payment of $200,000 after the writ was issued.

2.4  On 17 March 2017, the 1^st defendant delivered vacant possession of the premises to the plaintiff. 

2.5  After taking into account the further payment of $200,000, the rental deposit and other adjustments, the plaintiff sought summary judgment for the sums as awarded by the Judge.

III.  Defence

3.1  The defendants opposed the application for summary judgment.  They pleaded clause 3.1 of the Tenancy Agreement which conferred a right on the 1^st defendant to peacefully hold and enjoy the premises.  They further pleaded that the Tenancy Agreement contained the following implied terms, namely,

1)  the premises should be fit for business purposes;

2)  the whole of the premises should be in tenantable condition at all times;

3)  the 1^st defendant should have quiet enjoyment of the premises at all times.

3.2  The defendants pleaded that in breach of the express and implied terms, the ceiling of the premises began to leak from around 17 May 2016 to 4 July 2016 and the leakage then recurred periodically between 18 August 2016 and 19 October 2016.  The leakage led to the flooding at the back of the premises which was used for storage of stock.  As a result the 1^st defendant suffered loss and damages :-

Particulars of loss and damage
		HK$
(1)	the 1st defendant had to place its stock at the front part of the 1st defendant’s shop in the said premises which affected its general aesthetics;	(To be assessed)
(2)	the stock placed at the front part of the shop also restricted the area for customer movement inside the shop;	(To be assessed)
(3)	disruption and decline in the 1st defendant’s business.	$3,300,000.00

3.3  The defendants further pleaded that under Clause 8 of the Tenancy Agreement the 1^st defendant had the right to suspend rent, or alternatively, if rent was not suspended, then the plaintiff had failed to take reasonable steps to mitigate its loss.  Further or alternatively, if the 1^st defendant is found liable to the plaintiff, the 1^st defendant is entitled to set off the damages suffered by it as a result of the water leakage.

IV. The Judge’s decision

4.1  The Judge rejected the defendants’ argument on the implied terms.  She referred to the express term for quiet enjoyment under clause 3.1 of the Tenancy Agreement.  Clause 3.1 states that the landlord agrees with the tenant as follows:

‘ that the Tenant paying the Rent, rates, Government rent, management fees and maintenance and/or air-conditioning charges and all other payments and outgoings … and observing and performing the terms and conditions herein contained and on the Tenant’s part to be observed and performed shall peacefully hold and enjoy the Premises during the Term without any interruption by the Landlord or any person lawfully claiming under or in trust for the Landlord.’

4.2  The Judge held that with this express term, there are no other implied terms nor is it necessary to imply terms.  The Judge further held that :

‘ Even if there were the 3 Implied Terms, the water leakage was not caused by P or any other person “lawfully claiming under or in trust for P”. There was no breach on the part of P and P cannot be held responsible for the leakage cause by an unrelated third party, the landlord or owner above the Premises. Further, D1 also failed to meet the condition for the quiet enjoyment of the Premises in that it failed to pay rent and performed the obligations of a tenant, as said in the Cheong Nin case, even prior to the 1^st period of water leakage. Further, as pointed out by Ms Lee, D1’s claim of HK$3,300,000 being disruption and decline in business was a bare assertion with no particulars and/or any evidence to support.’

4.3  The Judge referred to clause 8 of the Tenancy Agreement which provids that :

‘ 8.1 If the Premises shall at any time during the Term be:

8.1.1  destroyed or damaged or become inaccessible or become subject to a Closure Order or Demolition Order due or owing to fire, water, storm, wind, typhoon, defective construction … or any calamity beyond the control of the Landlord and not attributable to any failure of the Tenant to observe and carry out any of the terms or conditions of this Agreement so as to render the Premises unfit for occupation and use, or

8.1.2  condemned as a dangerous structure or part thereof …

Then the Rent hereby reserved or a fair proportion of the Rent according to the nature and extent of the damage sustained or order made shall …. Be suspended …’

4.4  The Judge held that clause 8 would not assist the defendants.  She held that :

‘ 67.  As stated in Hong Kong Tenancy Law under “Suspension of rent”, it is not unusual to find a clause in the lease suspending or abating payment of rent in the case of destruction of or damage to the premises by a variety of calamities including, fire, landslide, flood and typhoon, but if the premises are damaged rather than destroyed, they must be so severely damaged as to be rendered unfit for use, not merely dilapidated and in need of repair.

68.  As seen earlier, the water leakage which led to the alleged flooding was in the back part of the Premises used for storage of the goods.  The photographs did not show that the Premises being severely damaged or unusable or inaccessible.  In fact, D1 had been using and occupying the Premises until it delivered up vacant possession and returned the keys to P on 17 March 2017.  The water leakage was from 17 May 2016 to 4 July 2016 and then recurring periodically between 18 August 2016 to 19 October 2016.  Thus Ds stayed on the Premises for some 5 months even after the 2^nd period.’

4.5  The Judge further rejected the defendants’ claim on water leakage.  She held that there was no other supporting evidence produced by the 1^st defendant for its alleged claim of $3,300,000 such as management accounts showing fall of business during those 3.5 months of water leakage.  She held that what was clear was that notwithstanding the water leakage, the 1^st defendant stayed on occupying the premises until March 2017.  She held that having considered the evidence, what the defendants alleged about the serious effect of the water leakage, whether on the premises or on the 1^st defendant’s business was not supported and not believable.

V.  Consideration of the grounds of appeal

5.1  In essence, the defendants’ grounds of appeal are twofold.  First, the Judge was wrong in law to reject the defendants’ case on the three implied terms.  Second, the Judge was wrong on the facts to find there was no triableissue in respect of the water leakage problem.  

5.2  In my view, the defendants’ arguments on the implied terms, although academically interesting, missed the point because it is important to determine in the first place whether the defendants have on the facts raised a credible defence on the alleged damage it suffered by reason of water leakage because if there is no triable issue on this issue, the presence or otherwise of the implied terms will not assist them.  As this Court had said in summary judgment applications, in deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues.  If there are, the matter should go to trial.  If not, judgment should be entered against the defendants.  In considering whether there are triable issues, the Court will not take the defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier.  The Court will also consider the inherent probability of the defence but what the Court should not do is to conduct a mini-trial on complicated factual issues : Paul Y Management Ltd v Eternal Unity Development Ltd (CACV 16/2008). 

5.3  Hence it is important to see how the issue of water leakage was dealt with by the defendants in this case.  The Judge observed that the water leakage took place during two periods, (1) some 1.5 months from May to July 2016 (the 1^st period), and (2) recurring periodically over two months between August 2016 and October 2016 (the 2^nd period), totalling only about 3.5 months.

5.4  The evidence showed that since February 2016 the 1^st defendant had not paid any rent.  On 22 April 2016, it wrote to the plaintiff admitting that it was in financial difficulties due to the drop in business.  It was unable to pay the rent on time and made two proposals.  First, starting from 1 May 2016 to 31 December 2016, the plaintiff would give the 1^st defendant a rent free period on alternative months.  The second proposal was that starting from 1 May 2016 to 31 December 2016, the rent payable to the plaintiff would be based on 35% of the total business turnover of the 1^st defendant. In respect of the arrears of rent for February, March and April 2016 in the sum of $2,130,500, the 1^st defendant offered to repay them by ten instalments.  This letter was sent prior to the alleged water leakage over the 1^st period. The plaintiff rejected the proposals and by a letter dated 4 May 2016, the plaintiff’s solicitors demanded the defendants to pay up the sums due under the Tenancy Agreement in the sum of $2,810,750 (the first letter of demand).

5.5  What happened afterwards is summarised by the Judge as follows.  On 18 May 2016, the 1^st defendant sent a letter to the plaintiff complaining about the water leakage which allegedly seriously affected the sales of the shop and further notifying the plaintiff that the 1^st defendant had arranged for a contractor to check and who opined the leakage was from the unit above the premises.  In this letter, there were three photographs attached.  One showed a bucket in the middle which appeared to be catching dripping water, and two appeared to show the ceiling and/or shelves.  There were no goods or stock seen in the photographs.

5.6  It was not clear what happened afterwards, but according to the 2^nd defendant’s first affirmation, in around mid 2016, the 1^st defendant had moved out of the premises and verbally informed the plaintiff and that the plaintiff did not object and proceeded to seek new potential tenants for the premises.  Further, according to the 2^nd defendant, the plaintiff then informed the 1^st defendant a new potential tenant had been found at a lower rent, and the 1^st defendant agreed to bear the deficiency in rent throughout the remainder of the tenancy term.

5.7  The Judge said that this was not contradicted by the plaintiff, and it appeared that there were oral discussions between the parties at that time.

5.8  It would also appear that the rent, management fees, government rent and rates for February and March 2016 were paid after the plaintiff’s solicitors’ first demand letter.  

5.9  Then, on 1 September 2016, the plaintiff’s solicitors sent their second letter of demand, demanding the 1^st defendant to pay the arrears of rent, management fees, government rent and rates from 1 April to 31 August 2016 which by then had accrued to about $3.575 million.

5.10  Again, it was not clear what happened thereafter, save that it would appear that there were further discussions between the parties.  It would appear that there had been payment of arrears for April, May and June, and the 1^st defendant was given a rent free period from about mid October to mid November 2016.  The rent free period appeared to follow from the 2^nd period of water leakage.

5.11  The plaintiff had produced some emails which the 1^st defendant’s staff sent to the plaintiff on 4 November 2016, and also on 6 and 7 December 2016.  There were photographs attached to the emails showing the water leakage.  In the email of 4 November 2016, there were five photographs showing what appeared to be the floor of the premises.  In the December emails, there were three photographs, one with goods seemingly inside the premises, one appeared to be taken from the flat roof above the premises, and it was not clear from where the other one was taken.

5.12  On 17 January 2017, the plaintiff’s solicitors sent a third letter of demand, demanding arrears of rent and unpaid management fees, government rent and rates from 1 July 2016 to 31 January 2017, and after allowing a rent free period from 15 October 2016 to 13 November 2016 and further part payment from the 1^st defendant, the net balance outstanding in January 2017 was $3.67 million.

5.13  The 1^st defendant then sent a letter dated 20 January 2017.  The letter was signed by the 3^rd defendant on behalf of the 1^st defendant.  There was no mention of any damage suffered by the 1^st defendant due to the water leakage, and all it did was to say, among other things, that due to the falling retail market, the 1^st defendant was not able to continue running the business at the premises and offered to deliver up vacant possession on 31 January 2017 and to pay the arrears by ten post dated cheques.  Further, the 1^st defendant stated that it understood that what was proposed would result in loss and damage to the plaintiff, and that the 1^st defendant was willing to pay compensation in the sum of $680,000 being one month of the rental deposit.

5.14  The 1^st defendant’s proposal was rejected by the plaintiff through their solicitors’ letter dated 20 February 2017.

5.15  The plaintiff then issued the writ.  Thereafter, the plaintiff received a cheque for $200,000 dated 8 March 2017 from the 1^st defendant, and on 17 March 2017, a letter from the 1^st defendant signed by the 2^nd defendant together with the keys to the premises.  In this letter, the 1^st defendant stated that due to the external circumstances and also the interior problems of the premises, which were different from those at the time of signing of the Tenancy Agreement, the 1^st defendant was not able to conduct business normally, and had to vacate the premises.

5.16  In respect of the matters contained in paragraphs 5.8 and 5.9 above of the Judge’s summary of facts, it should be pointed out that according to the defendants’ evidence, the plaintiff subsequently informed the 1^st defendant that it would not lease the premises to the new potential tenant and the 1^st defendant had to continue paying full rent for the remainder of the term.

5.17  It is clear that the defendants had indeed raised with the plaintiff the problem of water leakage but the real issue here is whether the defendants can show that it had indeed suffered damages as a result of the water leakage in the premises and rely on it in defence of the plaintiff’s claim for non payment of rent.  The Judge was clearly entitled to test the credibility of defence by reference to the contemporaneous correspondence.  In respect of the 1^st defendant’s letter dated 20 January 2017, the 1^st defendant did not mention again the water leakage problem and the damages it had suffered as a result of the water damage.  On the contrary, the 1^st defendant offered to pay the arrears of rent by installments without deduction.  Most surprisingly it said that it understood its proposal would cause the plaintiff damage and offered to use the rental deposit of $680,000 to compensate the plaintiff.  This was said in the context of the plaintiff giving the 1^st defendant an additional rent free period from 15 October to 13 November 2016 following the defendants’ complain of water leakage in November 2016.  The statement by the 1^st defendant that it would compensate the plaintiff is clearly inconsistent with its case that the water leakage caused it substantial damage which entitled it to set off the arrears of rent which it had admitted was owing to the plaintiff. Likewise, the 1^st defendant’s letter of 17 March 2017 was equally telling.  It raised no complaint whatsoever about the damages that it had allegedly suffered as a result of the water leakage problem.  That, however, was not the end of the matter, because on 18 July 2017, the 1^st defendant again wrote to the plaintiff admitting that it owed rent in the sum of $2,329,459.59.  It proposed to pay 60% of this sum at $1,397,676 by 18 instalments of $77,648.67 each, commencing from 15 August 2017.  In the letter the 1^st defendant stated that it made the proposal without choice and it hoped the plaintiff would understand its financial difficulties and accepted its proposal.  Again, there was no reference to the damages that it had suffered as a result of the water leakage problem.  All this was inconsistent with someone who had suffered damages by reason of the alleged breach of the terms of the tenancy agreement caused by the water leakage.  Further it is for the defendants to condescend to give particulars of their defence.  The alleged damages were not quantified and the claim of $3.3 million was not supported by evidence.

5.18  We are of the view that the Judge was clearly entitled to find that there was no triable issue regarding the water leakage and gave summary judgment to the plaintiff.  Accordingly, the appeal was dismissed.

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DECISION ON COSTS

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6.  The plaintiff is entitled to the costs of this appeal.  It also asked for indemnity costs against the defendants.  The appeal is totally without merits and we will order indemnity costs which is summarily assessed at $132,350.