CHAN KAM TOI v. MANHATTAN GARMENTS LIMITED

IN THE COURT OF APPEAL

BETWEEN

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JUDGMENT

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Fuad, J.A.:

1. The controversy which brought the parties before Garcia J., and which still divides them, concerns two air-conditioners used at various times in shop premises let by the Plaintiff to the Defendant.

2. The Plaintiff, Mr. Chan Kam Toi, granted a tenancy of four shops (as a single unit) in Jordan Road, Kowloon, to the Defendant, Manhattan Garments Limited ("Manhattan") for a term of five years from 1 June 1979, at a monthly rental of $66,000. The tenancy agreement was dated 17 April 1979.

3. When the original term expired, the lease was extended; by mutual agreement for a further 9 months to 28 February 1985 on the same terms and conditions, save that the rent was increased to $75,000 per month. Manhattan duly delivered up vacant possession of the premises on 1 March 1985.

4. Upon execution of the agreement, under Clause 2, Manhattan were required to pay, and did pay, a deposit of .. $165,000 "as security for the due payment of the .... rent and the due observance and performance of the terms and conditions herein contained..... ".

5. When Manhattan moved in to the shops in 1979, the premises were served by a Carrier air-conditioning unit ("the old a/c unit"), and the agreement, which otherwise contained terms which one would expect to find in a lease of this kind, made special provision for the unit. Clause 5(f) was in these terms:

"The Landlord has already installed an air-conditioner in the said premises and IT IS HEREBY EXPRESSLY AGREED that the Tenant shall be entitled to remove the said air-conditioner and to replace and install therefor another new air-conditioner and that all such replacement and installation as aforesaid shall be done and installed at the Tenant's own expense. The said replacement and installation shall remain the property of the Landlord and the Tenant shall on the expiration or sooner determination of the said term deliver same to the Landlord in tenantable repair and conditions without any claim or compensation whatsoever.

6. In about August 1981, Manhattan disconnected (I use a neutral word) the old a/c unit, moved it 10" inwards and left it there. They installed a Mitsubishi air-conditioning unit ("the new a/c unit'') which they took away with them when they gave up the tenancy:

7. When they gave up possession, Manhattan had not paid the last two months' rent ($150, 000), nor had they paid their share of the rates ($3,726) and water charges ($705) for the same period.

8. By his Statement of Claim, Mr. Chan averred that the old a/c unit was a fixture and that Manhattan had been in breach of Clause 3(d) of the lease, and particulars are given. This is what Clause 3(d) provides:

"To repair and keep the interior of the said premises and the appurtenances thereto including all doors windows and the Landlord's fixtures and additions thereto and the drains sewers pipes and sanitary and water apparatus in good and substantial repair and condition through the said term (fair wear and tear excepted)."

9. He also pleads, in the alternative, (a) that the new a/c unit belonged to him by virtue of Clause 5(f) or (b) that it had become a fixture, so that by removing that unit, Manhattan had been in breach of Clause 5(f), or they were guilty of conversion of his property.

10. Mr. Chan therefore claimed the arrears of rent; reimbursement of the rates and water charges; damages for breach of contract; damages for the conversion of the two air-conditioning units; and a declaration that he was entitled to forfeit the deposit of $165,000.

11. I interpolate here that the judge notes in his judgment that it was conceded on behalf of Mr. Chan that he was not entitled to forfeit the deposit, and that Manhattan could set off against it any amount found to be due by them.

12. In their Defence, Manhattan do not admit that either air-conditioning unit was a fixture, and they deny " that they were in breach of Clause 3(d) or 5(f) of the agreement. They accept that they had not paid rent, rates or water charges for the final two months of their tenancy, and say that Mr. Chan had agreed that the sum due in respect of these items should be deducted from the deposit. They deny that Mr. Chan was entitled to forfeit the deposit and, as we have seen, this is no longer an issue.

13. Manhattan counterclaim $11,274, less the amount proved to be their share of the water charges. This figure is arrived at in this way: $165,000, less $150,000 (rent) and $3,726 (rates).

14. The judge held that both air-conditioners were landlord's fixtures within the meaning of Clause 3(d) and of Clause 3(s) [which obliges the tenant "to yield up the said premises with the fixtures and fittings and additions thereto (Tenant's fixtures only excepted) .... in good and substantial repair and condition .... "].

15. However, the went on to say that his decision did not turn on the resolution of that issue but on the meaning of Clause 5(f).  He held that the new a/c unit was a replacement of the old, and that from the date of the replacement, Manhattan's obligations under Clauses 3(d) and 3(s) would have ceased.

16. The judge reached the conclusion that Clause 5(f) was wide enough to cover the moving of the old a/c unit from its original position to provide accommodation for the new unit and once the new unit had been installed to replace the old, the former became Mr. Chan's property, so that by taking it away from the premises at the end of the lease, Manhattan had become liable in damages for conversion, the measure of which should be the cost of replacing the new a/c unit. He assessed the damages at $32,000.

17. He therefore gave judgment in Mr. Chan's favour for $21,431, with interest, and dismissed Manhattan's Counterclaim. This is how he reached that sum: the amounts due to Mr. Chan were $.150,000 (rent) + $3,726 (rates) + $705 (water charges) +$32,000 (damages).   Giving credit to Manhattan for the $165,000 deposit, they were liable to pay only $21,431.

18. The judge dismissed the Counterclaim with no order as to costs, and gave Mr. Chan the costs of the action to be taxed in accordance with the District Court upper scale.

19. Manhattan now appeal to this Court, and the Notice of Appeal contains, in summary, the following grounds:

20. At the opening of the appeal, Counsel were able to agree that if what the tenant did in relation to the old and the new air-conditioners fell within Clause 5(f), it would tot be necessary to go into the vexed question as to whether either or both of the air-conditioners were fixtures.

21. In the event, as will be seen, my Lords and I did not consider it necessary to address the latter question.

22. It seems to me that a fair reading of Clause 5(f) of the lease makes it perfectly plain that if the tenant in fact replaces the old machine and installs a new one in its place, he cannot escape the effect of the clause by saying that he did not remove it from the premises. Anyone reading that clause, and looking at what happened, would surely conclude that the new machine had, indeed, been installed and had replaced the old. With due respect to Mr. Yu's arguments, I do not see how it matters whether or not the old air-conditioner was removed from the shops. In those circumstances, Clause 5(f) makes it clear that the new machine became the property of the landlord, and the tenant was required at the expiration of the term of his tenancy to deliver it up to the landlord in tenantable repair and condition. This he failed to do.

23. It is not clear from the judgment how the learned judge reached the figure of $32,000 as damages due to the landlord. It seems that he arrived at this figure by noting that the new machine had cost that sum, together with installation expenses, when it had been installed in 1981. Mr. Yu complains on behalf of the Appellant that there was no justification for the amount awarded by the judge on the evidence before him.

24. There is no doubt that the tenant was liable to pay damages for the conversion of the new machine. The normal measure of damages for conversion is the market value of the article at the time that it was converted.

25. As we have seen, the new machine was installed in 1981, therefore, by 1985,  its value would have depreciated very considerably. The only evidence about its value at the relevant date was given by a Mr. Fung Wing, who runs an air-conditioning company, and who has been in the business for some 15 years. He told the Court that the new machine at the time of its removal was worth something between $2,000 and $3,000 and his company would charge about $6,000 for reinstallation. He also said that the working life of a machine of that kind was not much more than four or five years. It is, therefore, evident that at the time of the conversion (and it is the only, and unchallenged, evidence the judge had on the matter) the new machine had little life left in it. It is common knowledge that second-hand machines are available in Hong Kong and, in my judgment, the landlord was only entitled to the market value of the machine in the state that it was, plus the cost of installation, and, therefore, that $9,000 is a reasonable assessment of the damages suffered by the landlord.

26. I would, therefore, allow the appeal and set aside the learned judges judgment on both the claim and the counterclaim. I would order that the claim be dismissed, and that judgment be entered for the Defendant on the Counterclaim in the sum of $1,569 which, I think, is the correct figure when one takes from the deposit of $165,000, the total amount admitted to be due for the arrears of rent, rates and water charges, and the $9,000 which I consider to be the appropriate sum for damages.

Mayo, J.:

27. I am in entire agreement with my Lord, the President and there is nothing that I can usefully add.

Clough, J.:

28. I also agree and have nothing to add.