POWER PLUS LTD v. FRUIT DESIGN & BUILD LTD

LDPD 173/2016

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPD 173 OF 2016

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R E A S O N S   F O R

D E C I S I O N

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1.  This is a hearing of the applicant’s garnishee order to show cause dated 27 July 2016 attaching fund of the respondent now sitting at its account with the garnishee bank and the respondent’s summons dated 12 August 2016 to set aside the said garnishee order nisi.

2.  After hearing, the Tribunal discharged the said garnishee order nisi with costs against the applicant together with certificate for counsel. The costs in favour of the respondent were summarily assessed at $37,472.5 and those for the garnishee were $100. This Tribunal indicated brief reasons would be handed down, and they are set out below.

Brief Facts

3.  The facts are simple and not controversial.

4.  The parties were landlord and tenant pursuant to a tenancy agreement dated 15 June 2014 for a term of 2 years expiring on 25^th June 2016. The subject premises were a residential unit and a car parking space at the real estate development of Bel-air. Monthly rent was $75,000. A security deposit of $150,000 was paid to the applicant landlord by the respondent tenant pursuant to the tenancy agreement.

5.  It is not in dispute that:

i) the respondent failed and/or refused to pay rent as from 25 December 2015;

ii) the applicant issued a Form 22 in the Tribunal asking for arrears of rentals/mesne profits and possession of the premises; and

iii) the Form 22 was sent by post on 21 January 2016, thus forfeiting the tenancy upon its service.

6.  Before the applicant’s Rule 15 application was concluded, the respondent issued a summons asking for, inter alia, an order be made against it for rental/mesne profits due and owing and for return of the balance of security deposit after deduction of the said outstanding sum.

7.  The parties came before Member Pang on 12 February 2016. Both were represented by solicitors. After hearing, the following orders, after confirming that vacant possession had already been delivered to the applicant on 4 February 2016, were made:

i) by consent, the respondent do pay to the applicant a sum of $102,280.30 being rent/mesne profits in arrears for the period from 25 December 2015 to 4 February 2016; and

ii) the respondent do pay applicant’s costs of Application, assessed  at $2,500.

8.  No order for return of any balance of the security deposit was made. Both counsel do not know what exactly had happened on 12 February 2016, and whether submission in respect of set-off or otherwise of the security deposit had ever been made before Member Pang. It was submitted to me that Member Pang anticipated dispute would arise on setting off against the deposit.

9.  However, in late-July the applicant applied for a garnishee order against the respondent by attaching its account with the garnishee. In its affirmation filed in support, it was deposed to the fact that the respondent has since the date of the consent judgment, made no payment to satisfy the aforesaid judgment. A sum of $108,431.82 comprising principal sums and interest was said to remain outstanding.

10.  A garnishee order nisi was made against the garnishee on 27 July 2016. It is not in dispute that money sufficient to satisfy the judgment sum has been attached. The garnishee did not show up. The respondent vigorously contests the garnishee order nisi and asks to set aside the same. The garnishee order nisi was extended until final disposal of the dispute.   

11.  It is counsel’s common ground that this case hinges on whether the applicant is entitled to forfeit the security deposit of HK$150,000 absolutely pursuant to the terms of the tenancy without giving credit for it before enforcing the consent judgment. It boils down to a matter of construction of the relevant provisions of the tenancy agreement concerning forfeiture.

Discussion

12.  The applicant relies on the Court of Appeal (“CA”) decision in Orient Bright International Limited v Hiang Kie Hong Kong Limited[1] to support its proposition that the landlord should be entitled to forfeit the deposit absolutely without giving any credit for it when claiming damages or monetary loss. In Orient Bright, it was considered by Le Pichon JA that at common law, there was no bar to a landlord forfeiting the deposit if there is a stipulation as to the deposit and the forfeiture of it absolutely in the agreement. In that case the deposit was considered not recoverable and could not be used as a set-off against claims for arrears of rent unless certain equitable principle was applicable.

13.  The respondent disagrees and relies on 2 District Court decisions, namely, Hang Lung Real Estate Agency Limited and another v Du Win Garments Company Limited & Another[2] and Hsieh Ming Yin v Au Sin Yee[3]. In these 2 cases, HHJ Leung and HHJ Li respectively considered that credit should be given to the deposit already forfeited.

14.  In the present case, the forfeiture clause provides:

“[6]  ... If the Tenant shall commit a breach of any of the terms and conditions herein contained, this Agreement shall immediately be terminated and the Security Deposit paid under this clause shall be absolutely forfeited to the Landlord as and for liquidated damages (but not as penalty) and the rights and remedies given to the Landlord by this clause shall not prejudice any other right of action or any remedy of the Landlord in respect of such breach by the Tenant.” (Emphasis added)

15.  This Tribunal does not disagree with the CA’s decision in Orient Bright that in appropriate cases, rental deposit can be forfeited absolutely with no credit given for it when the landlord sues for other damages/losses. However, in the Tribunal’s judgment, whether or not a deposit can be forfeited absolutely without giving any credit for it when it comes to damages or other losses is entirely a matter of construction of the terms of the tenancy and, in particular, the forfeiture clause.

16.  It is noted that in Orient Bright the relevant part of the forfeiture clause is as follows:

“... the Landlord shall be entitled to ... forfeit the said deposit absolutely but without prejudice to the Landlord’s right to claim from the Tenant damages or monetary loss which the Landlord may incur as a result of such non-observance or non-performance by the Tenant...”[4]

17.  In Hang Lung, the relevant clause is as follows:

“... the deposit ... shall be forfeited to the Landlord as and for liquidated damages and not as penalty but without prejudice to the Landlord’s right to claim any further damages which the Landlord shall have sustained or may sustain.”[5]

18.  It will be immediately apparent that in Orient Bright, the relevant clause provided for absolute forfeiture whereas in Hang Lung, it did not. HH Judge Leung considered that the provision for claiming of “further damages” suggested that credit should be given for the deposit forfeited. The Tribunal respectfully shares His Honour’s view.

19.  Although in the present case the word “further” is missing as in Hang Lung, in the Tribunal’s judgment, it does not really matter. It has been stipulated here (as well as in Hang Lung) that the deposit is forfeited “as and for liquidated damages” (emphasis added). Although the word “absolutely” is also used in the present case, the purpose for which the forfeited deposit is put to has nevertheless been qualified by the phrase “as and for liquidated damages” which is absent in Orient Bright.

20.  As a matter of construction, it is obvious that the deposit, though forfeited absolutely, is intended to be a genuine pre-estimate of the landlord’s likely losses and damages in the event of the tenant’s breach of any provisions and/or stipulations of the tenancy. The word “absolutely” in the context of the present case, simply means, in the Tribunal’s judgment, “entirely”, “completely” or “unquestionably”. The insertion of these words “but not as a penalty” is an added precaution of the drafter to avoid this clause from being struck down because the forfeiture may be argued unenforceable on the ground it amounts to a penalty. Accordingly, the manifested intention is clear – it is meant to be an enforceable term to represent the parties’ genuine pre-estimate of the damages likely to be suffered by the landlord in case the tenant commits a breach of the tenancy.

21.  It is noted that the deposit is not merely a security for due payment of rents. It is a deposit to secure the due performance of all terms and provisions of the tenancy. Accordingly, in case of breach by the respondent, the forfeited deposit serves to cover unpaid rent/mesne profits until delivery of vacant possession, loss of rent if the premises have been left vacant for some time, and the diminution in rent if the new tenancy attracts a lower rental. It represents the parties’ pre-estimate of the applicant’s damages in case of the respondent’s breach. The judgment sum, being part and parcel of the applicant’s damages arising out of the respondent’s present breach, is obviously covered by the forfeited deposit. On a proper construction of the forfeiture clause, it simply does not entitle the applicant to forfeit the deposit absolutely without giving credit to any loss it may have suffered.

22.  Although it is controversial as to whether, by agreeing to the deposit forfeited as and for liquidated damages, the applicant has lost its right to sue for further damages, it is not the question to be decided in the present case. It is not in dispute that the deposit forfeited exceeds the judgment sum. The applicant puts in no evidence at all that its losses or damages exceed the security deposit forfeited. Even if the applicant does really suffer further loss and its right to such has not been lost, the quantum has yet been quantified. It is trite that any loss or damage not yet quantified is not attachable.

23.  By reasons aforesaid, the garnishee order nisi must be dismissed with costs against the applicant.