HANG LUNG REAL ESTATE AGENCY LTD AND ANOTHER v. DU WIN GARMENTS CO LTD AND ANOTHER

DCCJ 3212/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL JURISDICTION 3212 OF 2006

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J U D G M E N T

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1.  Parties to this action entered into a tenancy agreement dated 17 June 2005.  Hang Lung (the 1^st Plaintiff) is the authorised agent of Glory View (the 2^nd Plaintiff), the landlord.  Du Win (the 1^st Defendant) was the tenant.  Becky Tang (the 2^nd Defendant) was the surety.  Hang Lung commenced the present action, claiming that upon Du Win’s repudiation, Hang Lung terminated the tenancy agreement in the beginning of March 2006.  Hang Lung claimed, among other things, rent, management fee and rates in arrears as well as damages for the early termination of the tenancy agreement.

2.  The trial began on 10 July 2007 but was adjourned.  It was during the adjournment when Glory View was joined as a plaintiff; pleadings were further revised; and further evidence was filed.

BACKGROUND

3.  In 2001, Tina Ku, a lady from Taiwan, intended to establish a branch office of her garment business in Hong Kong.  Du Win was formed.  Becky Tang became the Branch Manager while her younger sister, Iris Tang, became the Administrative and Account Officer of Du Win.  Du Win rented an office in Park Building at Cheung Sha Wan, Kowloon (the PB property).  Hang Lung entered into that tenancy agreement as agent of the landlord.  In 2003, the tenancy in respect of the PB property was renewed until May 2006.

4.  But in May 2005, Du Win became interested in moving to another property, also in Hang Lung’s group.  The property was in CNT Tower Group Building, also at Cheung Sha Wan (the CNT property).  Glory View is the registered owner of the CNT property.  The CNT property was then subject to an existing tenancy.  Du Win proposed to take over the CNT property with effect from June 2005 and to rent it till May 2007.

5.  Letter of offer of tenancy and other documentations followed.  On 19 May 2005, Crystal Chan, then leasing officer of Hang Lung, brought the formal tenancy agreement to the office of Du Win.  Becky Tang signed this agreement on behalf of her company.  She also signed as the surety.  The tenancy agreement was dated on 17 June 2005.

6.  Towards the end of October 2005, Du Win experienced internal and financial difficulties.  The rent for November 2005 was let in arrears.  While Du Win informed Hang Lung of its desire to surrender the tenancy, it settled the rent for November 2005 eventually.  But in January 2006, Du Win defaulted in paying rent again.  Hang Lung attempted distress for rent (Distraint Action DCDT 379/2006).  Du Win again raised with Hang Lung the subject of surrender of the tenancy.

7.  Eventually parties failed to enter into a cancellation agreement.  Hang Lung, through its solicitors, sent an ultimatum on 27 February 2006 to Du Win and Becky Tang to settle the rent in arrears.  Upon expiry of the ultimatum, Hang Lung terminated the tenancy agreement and repossessed the CNT property in the beginning of March 2006.  The CNT property was successfully let some 6 months afterwards.

8.  The above is largely common ground or in any event evidenced by contemporaneous documents.  Hang Lung/Glory View now claims the rent, management fee and rates in arrears prior to termination and damages for the early termination of the tenancy agreement.  Interlocutory judgment was entered against Du Win on 16 August 2006 for the amounts in arrears, leaving damages to be assessed.  Du Win has since been liquidated.

ISSUES

9.  Becky Tang disputes both liability as the surety and quantum.  She raises the following major issues in dispute:

(1) whether Hang Lung’s right to sue;

(2) whether the contract of surety between Hang Lung and her is enforceable;

(3) when and how the tenancy agreement was terminated; and

(4) the loss and damage, including the issues of mitigation and the forfeiture of the rental deposit.

HANG LUNG’S RIGHT TO SUE

10.  From the outset, Hang Lung has pleaded that Glory View is the registered owner of the CNT property and Hang Lung is its authorised agent.  By her pleading before the trial was last adjourned, Becky Tang admitted this, subject to the production of the agency agreement between Glory View and Hang Lung.  When the trial began, Miss Koo for Becky Tang asked that the question of Hang Lung’s capacity to sue be tried as a preliminary issue.  Mr Lam for Hang Lung complained about the surprise.  I was not minded to proceed as requested by Miss Koo.  Nevertheless, the case was adjourned upon Mr Lam’s suggestion that his client intended to consider its position fully.  I allowed the adjournment.

11.  During the adjournment, Hang Lung added Glory View as the second plaintiff.  Becky Tang further amended her defence.  The original qualified admission of Hang Lung’s authorised agent capacity was amended to become simple non-admission.  In addition, Becky Tang pleaded positive challenge against Hang Lung’s capacity to sue.  She argued that Hang Lung entered into the tenancy agreement solely on behalf of Glory View.  Merely an agent, Hang Lung is neither liable nor entitled to sue on the agreement.

12.  Miss Koo for Becky Tang referred to Boustead & Reynolds on Agency (18^th ed) at paras. 9-001 to 9-002.  However, para.9-002 of Boustead also says that the mere fact that a person acts as agent and is known to do so does not necessarily negate his involvement in the transaction.  The true principle of law is that a person is liable for his engagements even though he acts for another, unless he can show that by the law of agency he is to be held to have expressly or impliedly negatived his personal liability.  An agent can conclude a contract on behalf of his principal by creating privity of contract between the third party and his principal, whilst also himself becoming a party to the contract.

13.  The question whether an agent who has made a contract on behalf of his principal is to be deemed to have contracted personally, and, if so the extent of his liability, depends on the intention of the parties, to be deduced from the nature and terms of the particular contract and the surrounding circumstances.  The test is objective: see Boustead at 9-004 & 9-005.

14.  The same is true in respect of written contract: see Boustead at 9-036.  The mere fact that the agent is described as an agent, whether by words connected with or forming part of the signature, or in the body of the contract, and whether the principal is named or not, raises no presumption that the agent did not intend to contract personally: see Boustead at 9-037.

15.  In the schedule to the tenancy agreement in question, Hang Lung was described as the agent for and on behalf of the landlord, Glory View.  There is no real dispute that Glory View and Hang Lung belong to the same group and share similar composition and management.  The documents evidence that Glory View has since 1995 authorised Hang Lung to enter into and to execute agreements on its behalf, including doing so in Hang Lung’s own name.  There was also authorisation to Hang Lung to conduct proceedings in respect of the tenancy agreement.  In the tenancy agreement, details of Hang Lung’s registered office were stated but not those of Glory View.  When it came to execute the tenancy agreement, Hang Lung executed as the contracting party.  In fact, Hang Lung entered into the previous tenancy agreement with Du Win in respect of the PB property in essentially the same way.  Miss Koo referred to the case of Wing Lung Insurance Co Ltd and Equity Underwriters Limited v Victor Insurance Management Company Limited, DCCJ 4726/2003, 3 January 2007 at paras.7 and 45.  But in that case, the general agent, that had no right to sue, never signed the contract in its own name.

16.  The objective circumstances evidenced by the documents were that at all times since 2001, Du Win or Becky Tang always looked to Hang Lung as the contracting party.  In my judgment, while Glory View no doubt has the right to sue, Hang Lung also has the right to do the same in its own name.

17.  Mr Lam for Hang Lung/Glory View submitted that even if Hang Lung has no right to sue, there would only be costs implication.  In my view, even that would have been insignificant, in view of the identical position and contentions of Hang Lung and Glory View.

THE CONTRACT OF SURETY

18.  Clause 8 of the tenancy agreement contained the surety provision.  It reads:

“The Surety in consideration of the tenancy hereinbefore contained having been granted at his request hereby agrees with the Landlord that the Tenant will pay the rent hereby reserved on the days and in the manner aforesaid and will perform and observe all the Tenant’s terms and conditions hereinbefore contained and that in case of default in such payment of rent or in the performance or observance of such terms and conditions as aforesaid the Surety will pay and make good to the Landlord on demand all losses damages costs and expenses thereby arising or incurred by the Landlord……”

19.  Becky Tang signed the tenancy agreement on behalf of Du Win as the tenant and herself as the surety.  This signifies her apparent assent and adherence to what the document states.  She is bound by such act unless there is shown to be recognised legal basis for concluding that her apparent consent has been in some way vitiated or that reliance on that document by Hang Lung/Glory View falls into some category of unconscionable conduct justifying relief in equity: see Ming Shiu Chung & Ors v Ming Siu Sum & Ors [2006] 9 HKCFAR 334 at 361J-362C, per Ribeiro PJ.  To disavow a signed legal document, facts constituting the particular vitiating factor relied on must be pleaded and established by evidence: see Bank of China (Hong Kong) Ltd v Fung Chin Kan [2002] 5 HKCFAR 515 at 533, per Litton NPJ.

20.  Becky Tang pleaded that the contract of surety was vitiated for the following reasons:

(1)  misrepresentation;

(2)  undue influence; and

(3)  mistake.

Alternatively, she contends that the contract of surety was unsupported by consideration and is therefore unenforceable.

21.  Two things should be noted.  First, in her solicitors’ first letter to Hang Lung’s solicitors in May 2006, it was alleged that the contract of surety is not enforceable because she executed the tenancy agreement allegedly under economic duress when the management of the board was not in Hong Kong.  She was an employee of Du Win and should not be responsible for its liability as tenant.  In the letter, no mention was made of the other allegations now pleaded.  In fact, the allegation of undue influence was explicitly pleaded only by way of the most recent amendment of the defence after the last adjournment in July 2007.

22.  Secondly, the background of Becky Tang and her actual position in Du Win are relevant. According to Becky Tang, she received education up to Form 5.  She had nearly 20 years of experience as coordinator and merchandiser for companies including the “Polo” brand before joining Du Win.  As the Hong Kong Branch Manager of Du Win, she was effectively put in charge of Du Win’s daily operation.  According to Ku, she came only once or twice a year or when very important meeting had to be held here.  According to her employment contract with Du Win, Becky Tang was given a wide range of power including that to make change or decision on company procedures and to sign documents including official and bank documents for Du Win.  These documents also included those naming her as Du Win’s representative or agent for tenancy related matters.  She was also one of the authorised signatories of Du Win’s cheques.  Though Becky Tang was not a director or shareholder, her name and signature was seen appearing side by side with the other directors in Du Win’s board minutes.  Most, if not all, of the documents signed or approved by Becky Tang for Du Win were in English.  Her remuneration, according to her employment contract, included a salary and a commission on the net profit of Du Win in Hong Kong, the Mainland and the Philippines.

Misrepresentation

23.  It is alleged that Chan, the then leasing officer of Hang Lung, misrepresented to Iris Tang the meaning of the word “surety”.  Chan also allegedly refused to explain the terms of the tenancy agreement to Becky Tang.  Prior to Becky Tang’s signing of the tenancy agreement in question, Chan again misrepresented the meaning of the word “surety”.

24.  The Tang sisters were adamant that Becky Tang could not have possibly agreed to become a surety, had she known that the word “surety” in fact means guarantor.  They referred to their father’s previous experience and claimed that under no circumstance would either of them agree to act as a guarantor.  It would seem that their complaint is not really that they did not know the nature of a guarantee generally but they simply did not know that the word “surety” effectively means guarantor.  Chan is said to have misrepresented the meaning of this word.

25.  Chan gave evidence.  In fact, Chan has already left Hang Lung since the end of 2006.  She is now a leasing officer of another property management company.  According to her, no surety was required for the tenancy agreement in respect of the PB property when it was first signed in 2001 and renewed in 2003.  By proposing to move from the PB property to the CNT property, Du Win was expecting a much larger area at double the rent for the PB property.  Hang Lung decided to require a surety from Du Win for the new tenancy.  In fact, the tenancy agreement with the existing tenant of the CNT property was secured by a surety.

26.  Chan said that for preparing Hang Lung’s letter of offer in May 2005, she had consulted Iris Tang on the telephone about the surety offered by Du Win.  When asked, Chan said to Iris Tang that “surety” means “個人擔保“ (or in English, personal guarantor).  Iris Tang gave the particulars of Ku.  Subsequently, Iris Tang telephoned Chan, informing her that Ku would not be coming to Hong Kong in time to execute the tenancy agreement and asked if the signatory and the surety could be changed to Becky Tang.  Chan consulted her superior and subsequently confirmed to Iris Tang that the proposed change was acceptable to Hang Lung.  With the particulars of Becky Tang, Chan finalised the letter of offer (dated 10 May 2005) and had Du Win’s estate agent take it to Du Win.

27.  The letter of offer provided that the tenancy agreement should be signed within 10 days and Du Win offered Becky Tang as the surety.  Becky Tang signed the letter both on behalf of Du Win and as the named surety.  Meanwhile, Becky Tang also signed the other documents relating to the taking over of the existing fixtures and fittings of the CNT property on behalf of Du Win from the outgoing tenant.  The documents together with part payment of the deposit were sent to Hang Lung.

28.  Chan also stated that on 19 May 2006, She met Becky Tang for the first time at the latter’s office.  Chan brought the tenancy agreement.  Iris Tang after greeting her took the agreement to Becky Tang’s room.  After a while, Iris Tang escorted her to Becky Tang’s office.  In the presence of Chan and Iris Tang, Becky Tang signed the agreement both on behalf of Du Win as tenant and herself as surety.

29.  The Tang sisters gave evidence of their version of what happened.  According to Becky Tang, she received the letter of offer and noticed the word “surety” for the first time.  She associated this word with “sure” and thought surety meant someone to ensure or to make sure about something.  She asked Iris Tang about this.  Iris Tang told her that she had previously asked Chan about this.  Such evidence actually differs from their statements whereby Iris Tang stated that she asked Chan about the meaning of the word only after Becky Tang asked her to do so, upon reading the letter of offer.

30.  According to Iris Tang, Chan explained that “surety” means representative of the company or contact person.  Such explanation apparently differs from what Becky Tang said she had in mind, namely, surety is someone to make sure about something.  Nevertheless, it appeared that Becky Tang was satisfied with what her sister told her.

31.  As to what happened on 19 May 2006, Iris Tang said she asked Chan if they should go through the terms of the agreement.  Chan represented that the agreement contained usual terms.  When they were inside Becky Tang’s office, Becky Tang asked if any terms needed explanation, to which Chan replied in the negative.  When signing, Becky Tang specifically asked Chan to confirm whether the word “surety” means “contact person”.  Chan answered in the affirmative.  This was the only occasion on which Chan allegedly made the misrepresentation directly to Becky Tang.  Becky Tang signed the agreement allegedly as a result of such representation by Chan.

32.  So according to the allegation of the Tang sisters, they were apparently satisfied with the notion that contact person of Du Win somehow needed to sign as such separately in the tenancy agreement.  If that were true, I first wonder why Iris Tang originally provided Ku as the surety, since Ku was normally out of Hong Kong and was hardly ever the contact person in relation to the company’s tenancy.  Secondly, when Du Win was the tenant of the PB property in 2001, Becky Tang signed a contact list for Hang Lung, naming herself and her sister as precisely the contact persons of Du Win.  Clearly none of them needed to sign the tenancy agreement then in 2001 or when that tenancy was renewed in 2003.  Thirdly, if contact persons somehow needed to do so in respect of the tenancy over the CNT property, the Tang sisters did not seem to wonder why both of them were not named as the sureties and required to sign as such in the tenancy agreement.  Lastly, if only one contact person was required to sign as surety, I wonder why it should not be Iris Tang instead.  After all, Iris Tang accepted in court that she, rather than Becky Tang, was always the one Hang Lung contacted in relation to the tenancy.

33.  Further, if Becky Tang signed the 10 May 2006 letter of offer as surety because she accepted what her sister allegedly told her about what surety means, I wonder what caused Becky Tang to specifically ask Chan to confirm nothing but whether surety means contact person before she signed the tenancy agreement on 19 May 2006.  If she really had doubt, seeking to read the tenancy agreement or even reference to a dictionary beforehand would have cleared it. The fact was that nothing prevented the Tang sisters from demanding to read the document, if any of them had doubt.

34.  I also wonder why Chan would want to misrepresent the meaning of the word “surety” to the Tang sisters? Miss Koo for Becky Tang put to Chan that Chan tried to cover up her mistake in explaining the meaning of surety to the sisters.  I wonder what sort of mistake Miss Koo was referring to.  There is no suggestion that Chan did not in fact know the meaning of the word at the time.  Quite on the contrary, Chan had about 3 years of experience in property management before becoming a leasing officer then.  Her superior had explained to her the meaning of surety.  As mentioned above, she knew why Hang Lung required a surety for Du Win to take up the tenancy over the CNT property.

35.  Miss Koo for Becky Tang suggested that Chan wanted to avoid the risk that Becky Tang would refuse to sign the tenancy agreement, if she was told her liability as the surety.  Chan therefore kept on lying to the Tang sisters.  This suggestion was not really put to Chan in court.  In the absence of actual pleading that Chan knowingly misrepresented the meaning of the word, Miss Koo would not have been entitled to put that in any event.  Misrepresentation like that would not have succeeded, as the sisters could have demanded to read the tenancy agreement before signing it and Chan could not have refused that.

36.  Becky Tang’s evidence is that she came to know the real meaning of the word “surety” in about October 2005.  By then, Du Win’s financial situation was problematic so that the company also proposed to surrender the tenancy.  The exposure to potential liability of Becky Tang as the surety should be reasonably apparent then.  She said in court that she had complained to Hang Lung verbally.  But this was not mentioned in her statement.

37.  In both Du Win’s resolution at the end of October 2005 and its letter to Hang Lung in January 2006 regarding surrender of the tenancy, Becky Tang was still referred to as the surety.  Iris Tang, who drafted the letter, explained that this simply followed the description in the tenancy agreement.  Ku even explained that in Taiwan and the Philippines, “surety” means contract person or company representative.  There is no other meaning for the word.  She said she had not told Becky Tang about her understanding of the word.  In my view, such evidence must be viewed with scepticism.  As mentioned above, even in her solicitors’ letter in May 2006, no such complaint was made.

38.  All the evidence, including those analysed above, do not really add up to a credible case of the alleged misrepresentation.  On balance, I prefer the evidence of Chan.  I find that Chan did not misrepresent to either of the Tang sisters the meaning of surety.

Undue influence

39.  It is alleged that Becky Tang signed the agreement under the undue influence of her employer.  Hang Lung was put on inquiry and should have taken reasonable steps to satisfy itself that Becky Tang understood the agreement.  Yet, Hang Lung has neither explained the terms of the agreement to her nor advised her to seek independent legal advice.

40.  There is no dispute that Hang Lung has not explained the terms of the agreement to Becky Tang or advised her to seek independent legal advice.  The starting point is whether there was in fact undue influence which caused Becky Tang to agree to act as surety.

41.  The relationship between Becky Tang and her employer was not one of the well-established categories where undue influence is presumed (or Class 2A case as commonly known).  Miss Koo for Becky Tang accepted this.  But she submitted that there was nevertheless a trust and confidence relationship between Du Win and Becky Tang.  She submitted that undue influence could still be inferred from that relationship.

42.  The sort of abuse of trust and confidence relationship that one looks for is that by the dominant party of the trust and confidence reposed in him by the subservient party: see Li Sau Ying v Bank of China (Hong Kong) Ltd (2004) 7 HKCFAR 579 at 596C-D.

43.  For the purpose of her case, Becky Tang would have to be the subservient party while Du Win would have to be the dominant party.  However, it was rather Du Win that reposed trust and confidence in Becky Tang.  Becky Tang was effectively the person put by Ku in charge of the Hong Kong branch office and entering into tenancy agreements.  The situation differed from the case where an employer exerted influence on a junior employee, who reposed trust and confidence in his employer: see for instance Credit Lyonnais Bank Netherland NV v Burch [1997] 1 All ER 144.  Miss Koo for Becky Tang argued that Becky Tang certainly reposed trust and confidence in her sister who acted on behalf of the employer.  Such argument is in my view an artificial formulation for the sole purpose of fitting into relevant principle.

44.  There is no evidence of impropriety exercised by Du Win or Ku on Becky Tang that caused her to agree with Hang Lung.  There was no evidence for inferring such kind of influence by Du Win or Ku on her.  As Becky Tang’s witness, Ku even said that she was surprised to learn that Becky Tang should become personally liable for the tenancy.

45.  Miss Koo for Becky Tang submitted that a party should be put on inquiry where the relationship between the debtor and the surety was non-commercial, relying on Royal Bank of Scotland Plc v Etridge (No 2) [2001] 2 All ER 448.  However, it must be borne in mind that this must be looked at with the eyes of the creditor.  The concept of a non-commercial relationship is inherently imprecise: see Li Sau Ying (above) at 598H-J.  In view of the role of Becky Tang in Du Win, as Hang Lung had understood since the tenancy over the PB property, I find no relevant circumstance to put Lung on inquiry so as to cast on it the duty to explain or to advise Becky Tang on the implication of the agreement.

Mistake

46.  It is alleged that the tenancy agreement was not what Becky Tang purported to execute.  She purported to execute the tenancy agreement on behalf of Du Win only in the capacity as a contact person for Du Win only.  In the absence of the alleged misrepresentation or undue influence, the defence of mistake is not available to her for the fact that she might not be wholly familiar with English or for her own failure to appreciate or to read the content of the tenancy agreement: see Chekiang First Bank Ltd v Ng Chun Hing Benjamin, HCA 3473/2000, 12 December 2001; Wing Hang Bank Ltd v Liu Kam Ying [2002] 2 HKC 57; Bank of China (Hong Kong) Ltd (above).

Consideration for the surety

47.  Failing to establish the grounds vitiating the surety agreement, Becky Tang’s remaining argument is that her agreement to act as surety still failed for lack of consideration.  Hang Lung’s agreement to grant the tenancy to Du Win provided the necessary valuable consideration for the contract of surety.  This is the law and the effect of clause 8 of the tenancy agreement.  There is no merit in this argument.

Conclusion

48.  I do not find any basis for Becky Tang to escape from her liability as surety in accordance with clause 8 of the tenancy agreement.

TERMINATION OF THE TENANCY AGREEMENT

49.  It is alleged that Hang Lung accepted Du Win’s surrender of the tenancy in about October 2005 and the tenancy terminated at the end of January 2006.  Du Win and therefore Becky Tang should not be liable for what arose out of the tenancy agreement since then.

50.  According to Iris Tang, Yvonne Leung, another leasing officer of Hang Lung, verbally agreed in October 2005 that the tenancy would come to an end in January 2006; and the 3 months’ rental deposit would be applied to settle the rents for the remaining 3 months, i.e., from November 2005 to January 2006.

51.  There is no real dispute that in October 2005, Du Win did suggest to Hang Lung to surrender the tenancy agreement.  However the contemporaneous documents and the parties’ conduct did not reflect the existence of the alleged verbal surrender agreement.

52.  The internal e-mail correspondence in November 2005 of Hang Lung show that Hang Lung was considering accepting the early surrender of tenancy.  But this could at most be one in principle and on terms including the finding a replacement tenant.

53.  The Tang sisters gave evidence that Du Win’s neighbour was an interested replacement tenant then.  However, nothing materialised because Hang Lung asked for too high a rent.  In her evidence, Leung did not agree with that.  But to begin with, there was no duty on the part of Hang Lung to act reasonably in deciding whether to accept early termination of the agreement, as opposed the duty to act reasonably in mitigating loss and damage upon any actual termination.  Hang Lung could simply decide to hold Du Win onto the agreement.

54.  Leung gave evidence that the issue of early termination was not pursued since then until Du Win raised it again in January 2006.  The conduct of the parties also reflected this.  Du Win still paid the rent in arrears in November 2005.  Du Win even paid overdue interest.  The Tang sisters explained that this was Ku’s instruction.  This was said to avoid incurring overdue interest.  I see no logic in their explanation.  If it were really agreed that the rental deposit would be applied by Hang Lung to settle the rent for the coming months since November 2005, such rent would have been settled once becoming due.  No overdue interest would have accrued.

55.  The Tang sisters suggested that Du Win in fact moved out of the CNT property in January 2006 of which Hang Lung was informed.  They were referring to the entry/exit permits issued by Hang Lung in January 2006.  According to their terms, these permits were apparently issued for management purpose.  The removal of furniture from the property perhaps evidenced Du Win’s intention to vacate from the property.  But this does not therefore evidence Hang Lung’s agreement to the early termination of the tenancy.  The fact was that even after such removal, Du Win still sent to Hang Lung a letter stating that Du Win decided to terminate the tenancy and authorised Becky Tang to sign a surrender agreement.  No mention was made about the alleged verbal termination agreement between Leung of Hang Lung and Iris Tang.  In court, Ku also expressed her understanding that there was yet to be final resolution of the issue by then.

56.  Even in February 2006, Hang Lung was demanding for rent in arrears for the first 2 months of 2006.  In the meantime, Hang Lung sought to enter into a written cancellation agreement with Du Win.  Not surprisingly, the draft cancellation agreement bore no trace at all of the terms of the alleged verbal agreement.  The Tang sisters were not seen to have further corresponded with Hang Lung regarding the tenancy.  They explained that the matter was left to an accountant whom Ku asked to assist the company.  The fact was that no cancellation agreement was entered into; and neither Du Win nor Becky Tang responded to the ultimatum of Hang Lung on 27 February 2006.  This led to Hang Lung’s acceptance of Du Win’s repudiation in the beginning of March 2006.  This was how the tenancy agreement was terminated.

57.  I have no difficulty in finding that the allegation about verbal surrender agreement fails.

LOSS AND DAMAGE

58.  Hang Lung/Glory View claims (1) rent, management fee and rates in arrears by the time when the tenancy agreement was terminated; and (2) damages for the loss as a result of the termination of the tenancy agreement.

Rent, management fee and rates in arrears

59.  Mr Lam submitted that since Hang Lung/Glory View’s ultimatum dated 27 February 2006 gave Du Win and Becky Tang 3 days to respond.  Therefore, the earliest time when the CNT property could be re-possessed was 3 March 2006.  Since the rent was payable on the first day of each month in advance, the rent for March 2006 should have become due by the time when the tenancy agreement was terminated.  This somehow differs from what Hang Lung’s witnesses said in their statements.  According to them, the CNT property was re-possessed on 1 March 2006.

60.  While his analysis is in line with the strict legal position, Mr Lam accepted that whether the amount for March 2006 is treated as in arrears or loss (attracting damages in like amount) makes no material difference in practice in the circumstances of this case.  I note that the interlocutory judgment against Du Win for the amounts in arrears covers those up to the end of February 2006 only.  In the circumstances of this case, I would treat the claim for the amount since March 2006 essentially loss suffered as a result of termination of the tenancy agreement and assess the damages accordingly.

Mitigation

61.  The loss suffered by Hang Lung was primarily the amount that it would have received from the remainder of the tenancy, had it not been prematurely terminated, subject to mitigation.

62.  The CNT property was successfully let to a new tenant on 11 September 2006, 6 months after Hang Lung/Glory View recovered possession of the property.  Becky Tang argues that Hang Lung/Glory View has failed to mitigate its loss by failing to let the CNT property sooner by letting it either on the same terms as before or at the current market rent.

63.  The steps that the innocent party to the breach is compelled to take to extricate himself from the situation ought not to be weighed in nice scales at the instance of the party in breach.  Criticism of the steps taken does not come well from the party in breach that created the situation.  The law is satisfied if the innocent party has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken: see Banco de Portugal v Waterlow [1932] AC 452 at 506.  It is Becky Tang’s burden to prove that the steps taken by Hang Lung were unreasonable.

64.  By the time when it was terminated, the tenancy agreement still had about 15 months to go.  The CNT property is office premises.  Any new tenancy would normally be expected to last beyond 15 months.  There is no suggestion or evidence that the market rental has gone down by then.  In my judgment, there was no reason to expect Hang Lung/Glory View to bind itself to the old rent for a new tenancy exceeding the original term of tenancy.  Seeking to let the property other than in accordance with the terms of the original tenancy agreement was not unreasonable.

65.  Miss Koo for Becky Tang criticised Hang Lung’s asking rental of HK$16 per sq. ft. as being too high.  This allegedly prevented the property from being successfully let sooner.  According to K L Sung, assistant manager of the leasing department of Hang Lung, this was the asking rental of Hang Lung for other properties within the building during that period of time.  Comparables were referred to during trial.  They showed a rent per sq. ft. in the region of HK$10-13 at the time.  However, these were the rates for renewal of tenancy, where there were no rent-free period (normally for 2 to 3 months) and agency fee (normally equivalent to 1 month’s rent) as in the case of a new tenancy.  In view of that, the effective rent for a new tenancy being asked by Hang Lung should be less than HK$16 per sq. ft.

66.  Hang Lung was entitled to a reasonable period of time to secure a new tenant of the CNT property.  The record showed that the CNT property had been viewed by potential tenants over 30 times.  Eventually, at the end of August to September 2006, there was the offer to rent the property at about HK$11 per sq. ft. subject to Hang Lung’s agreement to refurbish the property at its own cost.  The new tenancy agreement was concluded on 8 September 2006, commencing on 9 October 2006.  There was a 3-month rent-free period.  One rent-free month fell on the beginning of the term.

67.  Bearing in mind the principles of mitigation, I do not find that Hang Lung should be criticised for being unreasonable in the steps it took to let the property with a view to mitigating its loss.

Damages

68.  As pleaded, Hang Lung/Glory View has suffered the following loss since the termination of the tenancy agreement in March 2006.  There are documentary evidence in support of the claim and I allow the same as follows:

(1)	Loss of rent from 1 March to 8 November 2006
	HK$31,520 x 8 months and 8 days =	HK$260,565.33
(2)	Loss of management fee from 1 March to 8 October 2006
	HK$3,309.60 x 7 months and 8 days =	HK$  24,021.29
(3)	Loss of rates from 1 March to 8 October 2006
	HK$(3,525-2,148.66 + 4,650 + 5,050) =	HK$  11,076.34
(4)	Reinstatement and refurbishment
	HK$(16,000 + 19,200 + 24,750 + 31,980) =	HK$  91,930.00
(5)	Estate agency fee	HK$  34,672.00
(6)	Bailiff fee and court fee for distraint action	HK$    9,411.00
		HK$431,675.96

69.  From the new tenancy, Hang Lung obtained a monthly rent of HK$34,672, which was higher than the original rent of HK$31,520.  Upon my pointing this out, Mr Lam in his supplemental written submissions conceded that credit should be given to the difference between the two for the period between 9 November 2006 and 31 May 2007 (i.e., the end of the original term).  He calculated the amount to be HK$(34,672-31,520) x 6 months and 22 days or HK$21,223.47.  The damages would be HK$(431,675.96 – 21,223.47) = HK$410,452.49.

The rental deposit

70.  Hang Lung claims to have forfeited the rental deposit in the sum of HK$104,488.80.

71.  Clause 4(a)(i) of the tenancy agreement contained the forfeiture clause and provided that:

“…… and the deposit paid hereunder 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.  All costs and expenses incurred by the Landlord in demanding payment of the rent and other charges arising out of this clause shall be paid by the Tenant and shall be recoverable from it as a debt or be deductible by the Landlord from any deposit held by the Landlord hereunder.”

72.  Upon breach of the tenancy agreement on the part of Du Win, that Hang Lung/Glory View was entitled to forfeit the rental deposit pursuant to the above clause is beyond dispute.  Mr Lam for Hang Lung/Glory View went further and submitted that no credit needs to be given to this amount when assessing the damage suffered by Hang Lung.

73.  Mr Lam relied on Orient Bright International Ltd v Hiang Kie Hong Kong Ltd, CACV 220/2004, 11 May 2005.  In Orient Bright International Ltd, the forfeiture clause provided that the landlord should be entitled to forfeit the deposit absolutely but without prejudice to the landlord’s right to claim from the tenant damages or monetary loss.  The court of appeal (at para.17 of the judgment) considered that the clause did not require the landlord to give credit for the deposit in respect of damages otherwise recoverable.  This was to be contrasted with the standard clause in the sale and purchase of land which limits the amount of the damages recoverable by a party forfeiting the deposit to the deficiency between the deposit forfeited and loss suffered on the sale of the property (i.e., credit would have to be given for the forfeited deposit): see Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 at 262-3.

74.  I follow what were said in Orient Bright International Ltd and Polyset Ltd.  But this does mean parties could not agree with the effect that credit should be given for the forfeited deposit.  This is ultimately a question of construction of the terms of the tenancy agreement.  In my view, the reference in clause 4(a)(i) to Hang Lung/Glory View’s right to forfeit the rental deposit without prejudice to its right to claim “any further damages”, properly construed, suggests that credit should be given for the deposit forfeited.  This clause is different in terms from that in Oriental Bright International Ltd.

75.  I find that upon forfeiture of the deposit, Hang Lung/Glory View is only entitled to claim any further damages.  Becky Tang argues that the forfeiture clause amounts to a penalty.  I do not agree.  In view of above finding, whether the forfeiture clause amounts to a penalty is academic in any event.

Conclusion

76.  Giving credit to the deposit forfeited, I find that Hang Lung is entitled to damages in the amount of HK$(410,452.49 – 104,488.80) = HK$305,963.69.

77.  Interest on the sum of HK$71,807.86 (i.e., amount in arrears) at the contractual rate of 2% per month (clause 4(h) of the tenancy agreement) up to the date of the interlocutory judgment has been ordered.  Interest on the sum of HK$305,963.69 (being damages for breach) shall in the circumstances of this case carry interest at the judgment rate from the date of writ until payment.

COSTS

78.  When the trial was last adjourned in July 2007, I reserved the question of costs of the adjournment.  As mentioned above, I was not minded to conduct a trial of the preliminary issue as suggested by Miss Koo for Becky Tang.  The request for adjournment was made at the request of Mr Lam for Hang Lung then so as to enable his client to consider the position regarding its capacity to sue.  I take the view that Hang Lung should bear the costs of the adjournment of the trial.  Subject to that, Hang Lung/Glory View shall have the costs of this action.

ORDER

79.  By the interlocutory judgment dated 16 August 2006, Du Win was ordered to pay to Hang Lung:

(1)    The sum of HK$71,807.86 being arrears of rent, management fee and rates for the period from 1 January 2006 to 28 February 2006;

(2)    Interest on the sum of HK$34,829.60 at the rate of 2% per month from 1 January 2006 to 16 August 2006 and thereafter at the judgment rate until payment;

(3)    Interest on the sum of HK$34,829.60 at the rate of 2% per month from 1 February 2006 to 16 August 2006 and thereafter at the judgment rate until payment;

(4)    Interest on the sum of HK$2,148.66 at the rate of 2% per month from 31 March 2006 to 16 August 2006 and thereafter at the judgment rate until payment.

80.  I make the same order in favour of Glory View and against Becky Tang as well.

81.  I also order that Du Win and Becky Tang shall pay to Hang Lung/Glory View damages in the sum of HK$305,963.69 together with interest thereon at the judgment rate from the date of writ until payment.

82.  As to costs:

(1)    Hang Lung shall pay Du Win and Becky Tang costs of the adjournment of the trial on 10 July 2007;

(2)    Subject to (1), Du Win and Becky Tang shall pay Hang Lung/Glory View costs of this action, including any costs reserved;

(3)    Costs shall be taxed, if not agreed.  For clarity, I certify the engagement of counsel;

(4)    This costs order is nisi and shall become absolute in the absence of appointment for argument within 14 days.