MULTI-PROGRESS LTD v. OLYMPUS HONG KONG AND CHINA LTD

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 10686 OF 2000

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JUDGMENT

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1. This case involves a dispute between a landlord and a tenant. By a tenancy agreement dated 11^th February 1999 ("the Agreement"), the Plaintiff agreed to let the premises known as Flat 1716, 17^th Floor, Block B, Kornhill, Quarry Bay, Hong Kong ("the Premises") to the Defendant for a term of 2 years commencing from 15^th March 1999 to 14^th March 2001 at a monthly rent of $25,200 exclusive of rates and other outgoings. It is stipulated in the Agreement that the Defendant has an option to terminate the Agreement by giving the Plaintiff 2 months' written notice in advance after the first 12 months of occupation.

2. The Plaintiff had not obtained the consent of its mortgagee bank for the granting of such tenancy to the Defendant.

3. Shortly after the making of the Agreement, the Plaintiff defaulted in the repayment of its mortgage loan to its bank. The default commenced in March 1999, and as a result the mortgagee bank commenced an action in the High Court in September 1999 to claim for, inter alia, possession of the Premises. Possession order and monetary judgment were granted by the High Court on 16^th December 1999. The Defendant was obviously very concerned with the legal proceedings, and through its agent one Ms. Tong Kwai Lin, the Defendant repeatedly approached one Ms. Chua Chin Miu of the Plaintiff to make enquiry about the progress of the legal proceedings. Ms. Chua gave an assurance to Ms. Tong that the Plaintiff would settle the claim with the bank in February 2000. However in the end of that month, Ms. Tong made enquiry with the bank and found out that the Plaintiff had not repaid the mortgage loan, Ms. Tong therefore contacted Ms. Chua and informed her that the Defendant would vacate the Premises on or before 30^th April 2000. The giving of such notification was disputed by Ms. Chua of the Plaintiff.

4. In March 2000, Ms. Tong learnt that the bailiff would make an attempt to recover possession of the Premises on 15^th April 2000. She therefore contacted Ms. Chua and confirmed that the Defendant would vacate the Premises in April 2000. She also offered assistance to the Defendant to find an alternative accommodation, and consequentially the Defendant signed a provisional tenancy agreement with another landlord on 11^th or 12^th of April 2000. The Plaintiff apparently settled the mortgage loan with the bank on 12^th April 2000, but it did not make any immediate attempt to notify the Defendant of the same. As the Defendant had not paid any rent since January 2000, the Plaintiff, through its solicitors, sent a letter to the Defendant to demand for the payment of the rent in arrears. In reply, the Defendant said it would vacate the premises on 30^th April 2000, and it also paid the rent to the Plaintiff for the months of March and April 2000. The Defendant alleges that Ms Chua had at one stage promised to Ms. Tong that the Defendant could use the 2 months' rental deposit to set-off the payment of the rent for the months of January and February, and so it is the Defendant's case that it has discharged all its obligation relating to the payment of rent.

5. On the other hand, it is the Plaintiff's case that the Defendant has not given 2 months' notice in advance to terminate the tenancy pursuant to the terms of the Agreement, and so the Defendant should pay for the rent and management fee for the period from 1^st May to 19^th June 2000, the latter date being the end of the 2 months' period counting from the Defendant's reply letter dated 19^th April 2000.

6. There is also a related claim for the loss resulting from the damage to the properties in the Premises, but such claim has been settled by the parties prior to the trial.

Was the Plaintiff in breach of the covenant for quiet enjoyment and not to derogate from his grant?

7. As I see it, the first issue is whether, by making default in the repayment of the mortgage loan and consequentially with the bank taking legal proceedings to claim for the possession of the Premises, the Plaintiff was in breach of the express or implied covenant for quiet enjoyment and not to derogate from his grant. Because if the Plaintiff was in breach of such covenant, the Defendant would have the right to accept such repudiation on the part of the Plaintiff and to terminate the Agreement, the Defendant does not even have to reply on the contractual right in the Agreement for the termination of the tenancy.

8. In this regard, both parties have referred me to the case of Yeung Lam Wilson v. Law Po Chong Priscilla [2000] 1 HKC 758. That case relates to an appeal from an order made by a judge in respect of an Order 14 application, and the facts are very similar to those in the present case. The landlord defaulted in the repayment of its mortgage loan to its bank, and as a result legal proceedings were commenced by the mortgagee bank to recover possession of the subject premises. The tenant refused to pay rent and so the landlord made an application for summary judgment against the tenant. The Court of Appeal set aside the order of the judge in the court below, and granted the tenant unconditional leave to defend the landlord's claim for rent. Godfrey JA said the following in page 781 at C:

"A tenant, as it is said, is 'estopped' from denying the landlord's title. But from the moment that a claim for possession of the premises is made by a person, such as the mortgagee here, with a paramount title that 'estoppel' becomes irrelevant. What is relevant is that, from that moment, the landlord is in breach of his obligation to the tenant to secure that the tenant will be able quietly to enjoy his or her possession of the premises in right of the tenancy the landlord has granted; and accordingly the landlord cannot thereafter claim to be entitled to rent."

9. Godfrey JA has emphasized that the landlord was in breach of the covenant for quiet enjoyment when the mortgagee bank made a claim for the possession of the subject premises, and so it follows that the tenant would have a right to terminate the tenancy agreement when he has to face with such a claim by the landlord's mortgagee bank. In my judgment, the said observation is directly applicable in the present case, and so the Plaintiff was in breach of the covenant for quiet enjoyment and not to derogate from its grant, and this entitled the Defendant to accept such repudiation on the part of the Plaintiff and to terminate the tenancy irrespective of the terms in the Agreement.

10. Mr. Ko, in his able submission, tries to argue that the Yeung Lam case is not directly applicable in the present case. He submits that the issue decided in that case is different from the present one, and Godfrey JA's view is only obita. However in my judgment, what Godfrey JA said must be good law. When the landlord's mortgagee bank makes a claim for possession of the property by reason of the default in the repayment of the mortgage loan, the landlord is in breach of the covenant for quiet enjoyment, and as a result the tenant has the right to terminate the agreement. To hold the contrary would mean that the tenant is bound to stay in the premises up to the time when he is actually evicted by the bailiff, and I do not accept that this reflects the law.

11. Mr. Ko's argument does not rest here. Relying on the case of Miller v. Emcer Products Ltd. [1956] Ch 304, Mr. Ko submits that, by reason of the principle of expressio unius est exclusio alterius, there is no room for the implication of the implied covenant for quiet enjoyment, as the parties has entered into an express covenant in Clause 6(a) of the Agreement. As the Plaintiff was not in breach of that express covenant, the Plaintiff was not in breach of any covenant to provide quiet enjoyment for the use of the Premises.

12. Clause 6(a) of the Agreement reads as follows:

          "The Landlord hereby agrees with the Tenant as follows:

13. However in my judgment, the Plaintiff was clearly in breach of such express covenant. By defaulting in the repayment of mortgage loan which would result in the bank taking legal action to recover possession of the Premises, the Plaintiff had certainly interrupted the quiet possession and enjoyment of the Premises on the part of the Defendant. Mr. Ko argues that failure to make repayment of the mortgage loan is only an omission, and for such omission to amount to a breach of covenant against quiet enjoyment, the omission in question must be a breach of some duty owed to a tenant. However as I see it, the Plaintiff certainly owed a duty to the Defendant to make mortgage repayment. Under a tenancy agreement, it is essential that the tenant is able to use and to occupy the premises. In such circumstances, this is a fundamental obligation on the part of the landlord to make mortgage repayment to his bank, otherwise the tenant may be precluded to use and occupy the premises. In such circumstances, the Plaintiff has certainly interrupted the quiet possession and enjoyment of the Premises by not making mortgage repayment to its bank.

14. Furthermore, the mortgagee bank was claiming for the possession of the Premises "through" the Plaintiff, and so the Plaintiff was clearly in breach of the express covenant. The word "through" should be given its ordinary meaning. As the mortgagee bank was relying on the mortgage that it had made with the Plaintiff to recover possession of the Premises, the mortgagee bank was making a lawful claim to the Premises "through" the Plaintiff. Hence I cannot accept Mr. Ko's submission that the Plaintiff was not in breach of the express covenant under Clause 6(a).

15. Indeed, Mr. Ko in his submission has asked the court to focus on the wordings of Clause 6(a). As the implied covenant for quiet enjoyment has no room for operation in the present case by reason of the principle of expressio unius est exclusio alterius, the only issue here is whether the Plaintiff was in breach of the express covenant under Clause 6(a). However in my judgment, Clause 6(a) does not exclude the operation of the implied covenant on the part of the Plaintiff not to derogate from its grant, and based on facts of the present case, it is clear that the Plaintiff was in breach of such implied covenant. Hence in addition to the breach of the express covenant under Clause 6(a), the Plaintiff was also in breach of the implied covenant not to derogate from its grant.

16. Finally, in his last desperate attempt, Mr. Ko seeks to argue that the Plaintiff was not in breach of the covenant for quiet enjoyment as the interruption to the Defendant's possession of the Premises was not a "substantial" one. He relies on the case of Howard v. Maitland (1883) 11 QBD 695 and tries to argue that, even if a judgment has been obtained against a particular property, it may not amount to a breach of the covenant for quiet enjoyment. However as laid down in the case of Southwark London Borough Council v. Tanner [1999] 3WLR 939, it is always a question of fact and degree whether the tenant's ordinary use of the premises has been substantially interfered with. In the present case, the Plaintiff's mortgagee bank had commenced legal action and obtained an order of possession against the Premises. The mortgagee bank even proceeded to execute the judgment by instructing the bailiff to recover possession of the Premises. Under such circumstances, the right of the Defendant to use and to occupy the Premises was seriously threatened by the action of the Plaintiff and its mortgagee bank, and so it is not open to the Plaintiff to say that there was no substantial interruption to the Defendant's quiet possession or enjoyment of the Premises. Indeed if what Mr. Ko submits is correct, perhaps only the actual eviction by the bailiff would amount to an interruption to quiet possession and enjoyment, and in my judgment, this cannot be right.

Did the Defendant accept the repudiation?

17. The second issue I have to consider is whether the Defendant has accepted the repudiation of the Agreement on the part of the Plaintiff. In this regard, I would prefer to accept the evidence of Ms. Tong that she had expressly notified Ms. Chua of the Plaintiff in February and March 2000 that the Defendant would terminate the Agreement and vacate the Premises on or before 30^th April 2000. My reasons are as follows. Firstly, although the Defendant used to be one of the clients of the estate agent company she worked in, Mr. Tong has no direct interest in the outcome of the proceedings. In such circumstances, she can be regarded as an independent witness.

18. Secondly, if what Ms. Chua said were indeed the truth, the Defendant did not inform her of any plan to vacate the Premises even as late as March 2000. By that time, the Defendant had already known that the bailiff would make an attempt to recover possession of the Premises on 15^th April 2000. As one can imagine, the Defendant was very anxious by that time, and so it should have made some plan to vacate the Premises and to inform the Defendant of the same. To say that the Defendant did not have any plan to vacate the Premises as late as March 2000 simply does not make sense.

19. Thirdly, the Plaintiff settled the mortgage repayment with the bank on 12^th April 2000. Having known that the bailiff would make an attempt to recover possession of the Premises on 15^th April 2000, there was a real risk that the Defendant could justifiably move out of the Premises on or before that date. However, the Plaintiff did not make any attempt to notify the Defendant of the settlement arrangement before 15^th April 2000. In my judgement, this certainly supports that the Defendant's case that the Plaintiff did have prior knowledge that the Defendant did plan to vacate the Premises in the end of April 2000. In such circumstances, there was no urgent need, or indeed any need, to inform the Defendant of the settlement arrangement.

20. In his submission, Mr. Ko asks the court not to accept the evidence of Ms. Tong. If what Ms. Tong said were indeed the truth and that she had informed Ms. Chua that the Defendant would vacate the Premises on or before 30^th April 2000, there was no need for Ms. Tong to approach the Plaintiff in March 2000. However according to my observation, Ms. Tong was all along a very responsible estate agent. By approaching the Plaintiff in March 2000, she only wanted to find out if there was any latest news about the legal proceedings. In such circumstances, I do not accept that this fact would in any way affect the creditability of Ms. Tong's evidence.

21. Based on the aforesaid, I find that the Plaintiff was in breach of the covenant to provide quiet enjoyment of the Premises and not to derogate from his grant, and that the Defendant has accepted such repudiation on the part of Plaintiff in February 2000. In such circumstances, the Defendant could lawfully vacate the Premises on 30^th April 2000, and the Plaintiff claim for unpaid rent and management fee should therefore fail.

Counterclaim

22. Based on the said findings, the Defendant is entitled to counterclaim the Plaintiff for the loss caused by the early termination of the Agreement. As there is no direct evidence to show that the Defendant has gained any benefit by the early termination of the Agreement, it should be entitled to recover the loss relating to the moving charges. The claim for wasted stamp duty has not been included in the Defence and Counterclaim and I therefore disallow the same.

23. For the claim for moving charges, the Defendant would still have to incur such expenses upon the expiry of the term of tenancy on 14^th March 2001. On the other hand, the Defendant did suffer some loss by reason of the early termination. In such circumstances, I apportion the loss and reduce the amount of the claim as follows:

24. I therefore assess the quantum of the counterclaim accordingly.

25. Based on the aforesaid, I make the following order:

26. I now listen to the parties' submission on costs and interest. But before I do so, I would like to express my gratitude to both counsel for their research work and able submission.