TIMELESS SOFTWARE LTD v. GLORIOUS LTD

HCA151/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 151 OF 2007

----------------------

----------------------

----------------------

JUDGMENT

----------------------

Introduction

1. The plaintiff Timeless Software Limited (“TSL”) is a Hong Kong company incorporated on 12 March 1996.  It is listed in the Growth Enterprise Market and is the holding company of Timeless Laboratories Limited (“TLL”), a Hong Kong company incorporated on 19 December 1997.

2. The defendant is a Hong Kong company incorporated on 22 February 2005.  It is a company solely owned and controlled by Francis Law Sau Fai (“Francis Law”).

3. This action concerns the premises known as 79^th Floor, The Center, 99 Queen’s Road Central, Hong Kong (“the premises”).

4. By a tenancy agreement dated 30 December 2005 (“the tenancy agreement”) the premises were let by the defendant as landlord to TSL as tenant for business purposes for a term of 12 months from 30 December 2005 to 29 December 2006 at a rent of HK$528,520 per month exclusive of rates, management fees and air-conditioning charges upon the terms and conditions of the tenancy agreement.

5. On signing of the tenancy agreement TSL deposited with the defendant the sum of HK$1,789,872, being 3 months’ rent, rates, management fees and air-conditioning charges, to secure the observance and performance by TSL of the agreements, stipulations and conditions in the tenancy agreement which were to be observed and performed by TSL.

6. The deposit was to be retained by the defendant throughout the term and in the event of any breach or non-observance or non-performance by TSL of any of the covenants, agreement, stipulations or conditions on its part contained in the tenancy agreement causing monetary loss to the defendant, the defendant was entitled to deduct from the deposit any such monetary loss.  Subject to any deduction, the deposit should be returned to TSL by the defendant without interest within 3 days after expiration of the tenancy agreement and the delivery of vacant possession of the premises to the defendant.

7. Clause 11 of the tenancy agreement contained a break clause.  By clause 11(1) TSL has the right to early termination of the tenancy agreement at any time after 3 months from the commencement of the term by serving not less than 3 months’ written notice of termination on the defendant.

8. By a notice dated 30 March 2006 from TSL to the defendant, TSL gave notice to the defendant to early terminate the tenancy agreement on 30 June 2006.

9. On 30 June 2006, on TSL’s case, vacant possession of the premises was handed over to the defendant.  The defendant accepts that physical possession of the premises was handed over on 30 June 2006 but disputes that vacant possession was handed over.

10. On TSL’s case the defendant was liable to return the deposit of HK$1,789,872 to TSL without deduction.

11. Despite demands the defendant failed or refused to return the deposit to TSL.

12. On 22 January 2007 TSL brought this action against the defendant to recover the deposit in the said sum of HK$1,789,872 with interest thereon.

13. The defendant’s case is that by a letter dated 18 May 2006 from the defendant’s solicitors Messrs Gallant Y. T. Ho & Co. (“GH”) to TSL, TSL was requested, inter alia, to reinstate the premises “to the original handover condition given by Cheung Kong Group to you (as per the attached photograph)”.  TSL was also requested to leave behind certain items.

14. The defendant’s case is that TSL failed to reinstate the premises as directed by GH.  The defendant carried out the reinstatement work which was completed on 13 November 2006.  The defendant’s case is that by  reason of TSL’s failure to reinstate the premises as directed, the defendant has suffered loss and damage.

15. After giving credit for the deposit paid by TSL in the sum of HK$1,789,872 the defendant claims that it suffered loss and damage being costs for the reinstatement work, loss of rental or mesne profits and payment of management fees and rates from 1 July 2006 to 13 November 2006 in the total sum of HK$2,171,972.30 which sum the defendant counterclaims against TSL.

The Agreed Issues

16. The agreed issues are:

(1)    What was TSL’s obligation with respect to the state and condition of the premises when TSL delivered up the same to the defendant upon termination of the tenancy on 30 June 2006?

(2)  In particular, what were the fittings, fixtures, alterations or additions to the premises which TSL should reinstate or remove from the premises on delivering up the premises to the defendant on 30 June 2006?

(3) (a)     On resolving issues (1) and (2), whether TSL was in breach of the tenancy agreement.

(b)  If the answer to sub-issue (a) is yes,

(i)  whether the breach caused monetary loss to the defendant and if so what was the amount of the loss;

(ii) whether the defendant was entitled to set off the deposit paid by TSL to it from the loss suffered;

(c)    If the answer to (a) is no, whether TSL is entitled to refund of the deposit.

17. The parties have agreed a statement of agreed facts. 

18. I heard evidence from Law Kwai Lam, a director of TSL and TLL and from Francis Law.  I found both Law Kwai Lam and Francis Law honest, credible and reliable witnesses.  There is little dispute between them on factual matters.

The Background

19. By an assignment dated 13 July 2000 Land Development Corporation as the vendor, The Center 79 (No. 2) Ltd as the confirmor, assigned the premises to TSL at a price of $178,375,000.

20. Ever since the premises were assigned to TSL, TSL used the premises until 30 June 2006.

21. When the premises were handed over to TSL by the vendor in 2000 the premises were similar in condition to the premises on the 42^nd floor as shown in the photographs in Bundle C2 Tab 46.  This was confirmed by Law Kwai Lam.  At that time there was already an air-conditioning system installed by the developer underneath the raised floor.  

22. When TSL moved into the premises in 2000 modifications were made by TSL to the air-conditioning system.  There were also fire services installations in the premises but TSL made some modifications to the same when they moved in.

23. There is no dispute that TSL fitted out the premises to suit its needs.  These included installing socket columns or power points for its software business, glass partitions, raised platforms, two large sofas and a large conference table as shown in the photographs.

24. By an assignment dated 25 November 2003 (“the 2003 assignment”) TSL assigned the premises to TLL at a price of $129,924,831.

25. After the 2003 assignment TSL continued to occupy the premises.  TLL as the owner and landlord let the premises to TSL as tenant for a term of 120 months under a tenancy agreement dated 1 December 2003.

26. By a provisional sale and purchase agreement dated 7 July 2005 (“the provisional agreement”) made amongst TLL as the vendor, the defendant as the purchaser and AGW Commercial Ltd trading as A. G. Wilkinson & Associates (“AGW”) as the agent, TLL agreed to sell and the defendant agreed to buy the premises at a price of $158,556,000 upon the terms and conditions contained therein.

27. Clause 7 of the provisional agreement provided for the letting of the premises to TSL.  

28. The provisional agreement was superseded by the formal agreement for sale and purchase of the premises dated 2 August 2005 (“the formal agreement”) made between TLL as vendor and the defendant as purchaser.  Law Kwai Lam signed the formal agreement on behalf of TLL and Francis Law signed the same on behalf of the defendant.

29. Clause 11 of the formal agreement provided for the tenancy to be entered into with TSL.  

30. The sale and purchase of the premises was completed by an assignment of the premises by TLL to the defendant dated 30 December 2005 (“the 2005 assignment”).

31. It was under the above circumstances that the tenancy agreement came to be made and entered into on the same day 30 December 2005.  Law Kwai Lam signed it on behalf of TSL and Francis Law signed it on behalf of the defendant.

32. The above facts are either agreed or undisputed.

33. The determination of the claim and the counterclaim turns on the proper construction of the tenancy agreement in particular clause 5.4 which provided:

“ Yielding Up

Upon the expiry or early termination of this Agreement, the Tenant shall deliver the Premises to the Landlord in good and tenantable repair and condition fair wear and tear excepted.  The Tenant shall if required by the Landlord leave behind such fittings fixtures alterations and additions of the Tenant as the Landlord shall direct in writing and the Tenant shall also demolish and/or reinstate such fittings fixtures alterations or additions of the Tenant as the Landlord shall direct in writing.”

The Applicable Legal Principles

34. The applicable legal principles on the construction of documents are not disputed.

35. The construction of documents is governed by well settled principles.

36. These were summarized by Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society and another [1998 ] 1 WLR 896 at pages 912 to 913 as follows:

“    (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)     The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.  They are admissible only in an action for rectification.  The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life.  The boundaries of this exception are in some respects unclear.  But this is not the occasion on which to explore them.

(4)     The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words.  The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.  The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749.

(5)     The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.  Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A. B. [1985] A.C. 191, 201:

‘ if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’  ”

37. And in Jumbo King Ltd v Faithful Properties Ltd & others (1999) 2 HKCFAR 279 Lord Hoffman NPJ said at page 296:

“ The construction of a document is not a game with words.  It is an attempt to discover what a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.  In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant.  Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession.  Or one of the parties may simply have made a bad bargain.  The only escape from the language is an action for rectification, in which the previous negotiations can be examined.  But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

38. The background facts which are admissible on the question of the construction of a document are limited to objective facts.  This was emphasized by Le Pichon JA in Ng Chun Kong v First Star Development Ltd [2007] 3 HKLRD 281 where she said at page 291:

“    27. It is well settled that the court must construe a writtenagreement in the light of the circumstances surrounding its making.  What this means was explained by Lord Wilberforce in his speech in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at pp.995H­-996A:

No contracts are made in a vacuum: there is always a setting in which they have to be placed.  The nature of what is legitimate to have regard to is usually described as “the surrounding circumstances” but this phrase is imprecise; it can be illustrated but hardly defined.  In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

His conclusion (at p.997C) was this:

… what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were.

   28. There is no conceptual limit to what can be regarded as background.  It includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man and which he would have regarded as relevant save that previous negotiations of the parties and their declarations of subjective intent are excluded.  See Investors Compensation Scheme Ltd v West Bromwich Building Society & Others (No 1) [1998] 1 WLR 896 at pp.912H-913A and Bank of Credit and Commerce International SA v Ali (No 1) [2002] 1 AC 251 at para. 39.  Evidence of background that is admissible is limited to objective facts.”

39. The objective facts are those facts which are relevant namely, those facts which the parties would have had in mind and known that the other party had in mind at the time when the contract was made.  In Scottish Power Plc v Britoil 141 SJ LB 246, The Times 2 December 1997 Staughton LJ said (at page 4 of the lexis copy):

“What then is comprised by the surrounding circumstances, or the factual matrix as the fashionable phrase is today?  To my mind it must mean the immediate context of the contract, facts which both parties would have had in mind and known that the other had in mind at the time when the contract was made.”

40. At the same page Staughton LJ made the plea that ‘surrounding circumstances’ should be confined to:

“what the parties had in mind, what was going on around them at the time when they were making the contract.”

Analysis and Findings

41. Mr Li, for the defendant, submitted, correctly in my view, that the genesis of the tenancy agreement is the provisional agreement.  It seems to me that the relevant background facts would include the provisional agreement and the formal agreement which led to the making of the tenancy agreement.

42. The vendor of the premises was TLL not TSL.  Although both companies were under the same management, they nevertheless are two separate legal entities.

43. TLL as the owner of the premises agreed to sell the same to the defendant under the provisional agreement made on 17 July 2005.  Completion was agreed to take place on 30 December 2005 over 5 months later.

44. It was not envisaged that vacant possession of the premises would be given at the time of completion.  Instead it was agreed that vacant possession would not be delivered up on completion but that TLL would procure TSL to enter into a tenancy agreement with the defendant.  This was the reason for clause 7 of the provisional agreement.

45. Clause 7 of the provisional agreement provided:

“ It is hereby agreed that upon completion of this transaction, vacant possession of the [premises] will not be delivered to the Purchaser and the Vendor shall procure [TSL] (as Tenant) to enter into a Tenancy Agreement with the Purchaser whereby the Purchaser (as Landlord) shall lease the [premises] to the Tenant on the following terms: ­-

(a)   Term : Twelve (12) months commencing from the Completion Date.

(b)  Rent : HK$528,520.00 per month exclusive of rates, management fees, air-conditioning charges and outgoings of a recurring nature.

(c)   ……………………………………………………………….

(d)  Rental Deposit : equivalent to 3 months’ rent, rates, management fees and air-conditioning charges.

(e)   ……………………………………………………………….

(f)    Stamp Duty : To be paid by the Landlord and the Tenant in equal shares.

(g)   Legal Costs: Each party shall bear its own legal costs.

(h)   Break Clause : At any time after 3 months from the Completion Date, the Tenant shall have the right to early terminate the Tenancy Agreement by serving not less than 3 months’ written notice of termination on the Landlord.  At any time after the Completion Date, the Landlord shall have the right to early terminate the Tenancy Agreement by serving not less than 3 months’ written notice of termination on the Tenant.

(i) The Landlord shall be responsible for the maintenance of the structure and main conduits pipes and wirings of the [premises].

(j)    Upon the expiry or early termination of the Tenancy Agreement, the Tenant shall deliver the [premises] to the Landlord in good and tenantable repair and condition with fair wear and tear excepted.  The Tenant shall if required by the Landlord leave behind such fittings fixtures alterations and additions of the Tenant as the Landlord shall direct in writing and the Tenant shall also demolish and/or reinstate such fittings fixtures alterations or additions of the Tenant as the Landlord shall direct in writing.

The Vendor shall on completion deliver to the Purchaser’s Solicitors the Tenancy Agreement in duplicate duly signed by the Tenant and 1 month’s advance payment of rent, rates, management fees and air-conditioning charges and the stamp duty payable by the Tenant.”

46. Clause 11 of the formal agreement provided:

“11. TENANCY OF THE PROPERTY

11.1  It is hereby agreed that upon completion of this transaction, vacant possession of the [premises] will not be delivered to the Purchaser and the Vendor shall procure [TSL] (the “Tenant”) to enter into a tenancy agreement with the Purchaser whereby the Purchaser (or its nominee(s) or sub-purchaser(s)) (the “Landlord”) shall lease the [premises] to the Tenant on the following terms :

(a)   Term    :    twelve (12) months commencing from the date of completion.

(b)   Rent :    HK$528,520.00 per calendar month (exclusive of rates, management fees, air-conditioning charges and outgoings of a recurring nature).

(c)  ....................................................................................

(d)   Rental Deposit  :    equivalent to 3 months’ rent, rates, management fees and air-conditioning charges.

(e)   ....................................................................................

(f)    Stamp Duty     :    to be paid by the Landlord and the Tenant in equal shares.

(g)   Legal Costs  :    each party shall bear its own legal costs.

(h)   Break Clause    :    at any time after 3 months from the date of completion, the Tenant shall have the right to early terminate the Tenancy Agreement by serving not 1ess than 3 months’ written notice of termination on the Landlord; and at any time after the date of completion, the Landlord shall have the right to early terminate the Tenancy Agreement by serving not less than 3 months’ written notice of termination on the Tenant.

(i)    The Landlord shall be responsible for the maintenance of the structure and main conduits pipes and wirings of the [premises].

(j)    Upon the expiry or early termination of the Tenancy Agreement, the Tenant shall deliver the [premises] to the Landlord in good and tenantable repair and condition with fair wear and tear excepted.  The Tenant shall if required by the Landlord leave behind such fittings fixtures alterations and additions of the Tenant as the Landlord shall direct in writing and the Tenant shall also demolish and/or reinstate such fittings fixtures alterations or additions of the Tenant as the Landlord shall direct in writing.

11.2  The Vendor shall on completion deliver to the Purchaser’s solicitors for execution by the Purchaser (or its nominee(s) or sub-purchaser(s)) the Tenancy Agreement (in the form set out in the Appendix hereto) in duplicate duly signed by the Tenant and the rental deposit and one month’s advance payment of rent, rates, management fee and air-conditioning charges and the stamp duty payable by the tenant.”

47. TSL’s case is that the words “such fittings fixtures alterations and additions of the Tenant” in the second sentence of clause 7(j) of the provisional agreement and clause 11.1(j) of the formal agreement means all fittings fixtures alterations and additions put in by TSL as tenant after the commencement of the tenancy granted by the defendant as landlord.

48. The defendant’s case is that those words mean all the existing fittings fixtures alterations and additions that were already in the premises at the time of the provisional agreement.

49. Although at the time of the provisional agreement TSL was a tenant of TLL under a long tenancy, Law Kwai Lam said that TSL was prepared to move out of the premises after it was sold by TLL.  The sale was not subject to TSL’s tenancy with TLL.  TSL, however, needed some time to move out of the premises.  This was to enable TSL to deal with compliance and disclosure requirements.

50. Francis Law said, and I accept, that he was informed by AGW that TSL would need some time to move out and deliver vacant possession and that TSL proposed a sale and lease back arrangement of a period of not more than 12 months and which could be as short as 6 months at market rent.  Francis Law also said, and I accept, that the tenancy agreement between TLL as landlord and TSL as tenant was never shown to the defendant or to Francis Law. 

51. It seems to me that the tenancy to be entered into was for the benefit of TSL as well as for the benefit of the defendant.  Francis Law, the beneficial owner of the defendant, was an experienced property investor.  He said that he had bought the premises as an investment with a view to reselling it or renting it.  By granting the tenancy to be entered into as provided for in clause 7 of the provisional agreement the defendant would be receiving market rent immediately after the completion of the sale and purchase of the premises as the tenancy was to commence on the same day as completion of the sale and purchase.  The defendant would be receiving the market rent while waiting to decide whether to resell or rent the premises.

52. It is clear to me on a plain reading of clause 7 of the provisional agreement that TSL was to be the future tenant of the defendant on the terms set out therein.  This is clear from the words “the Vendor shall procure [TSL] (as Tenant) to enter into a Tenancy Agreement with the Purchaser whereby the Purchaser (as Landlord) shall lease the said premises to the Tenant……..”. 

53. As regards the future tenancy to be entered into, the defendant was described “as Landlord”.  In my view the use of the words “as Tenant” and “as Landlord” was to describe the status of TSL as tenant and the status of the defendant as landlord in the future tenancy agreement to be entered into.  This is in contrast to the status of the defendant as purchaser.  It was clearly stated at the outset of the provisional agreement that the defendant was thereafter to be called “the purchaser”.  However, at clause 7 of the provisional agreement, the defendant is described “as Landlord”.  It seems to me to be plain that at clause 7 of the provisional agreement the words “as Landlord” were used to describe the status of the defendant as the landlord in the future tenancy.

54. I am unable to accept Mr Li’s submission that the use of the words “as Tenant” and “as Landlord” was simply to identify TSL and the defendant but not to describe the status of TSL as tenant and the defendant as Landlord. 

55. The same construction must be given to the same phrase in the formal agreement which superseded the provisional agreement and in the tenancy agreement.

56. It is important to consider clause 8 of the provisional agreement, the “ as-is” basis clause which provided:

“ The said premises is sold to the Purchaser on an “as-is” basis.  The Purchaser shall accept the existing physical state and condition of the said premises.  Before completion of the sale and purchase, the Vendor shall use it best endeavour to enforce the terms of the Deed of Mutual Covenant.”

57. Clauses 9 (1) and (2) of the formal agreement contains the same “as is” basis provision as in clause 8 of the provisional agreement.  Clause 9(1) of the formal agreement provided:

“ The Property is sold to the Purchaser on an “as-is” basis.  The Purchaser shall accept the existing physical state and condition of the Property.”

58. It has been held that where a vendor agrees to sell property on an “as is” basis this provision is for the benefit of the vendor in that the vendor will have no obligation to improve the property (Leung Wing Fat v Onlink Investments Ltd [2000] 1 HKLRD 725).

59. There can be no doubt that the premises were sold by TLL to the defendant in the existing physical state and condition at the time of the agreement.  The physical state and condition of the premises included all the previous changes to the interior of the premises.  I find that the fixtures fittings alterations and additions as existing at the time of the provisional agreement in July 2005 were also sold to the defendant.

60. There was no list of items in either the provisional agreement or the formal agreement listing out the items that were to be left on the premises or to be removed from the premises on termination of the future tenancy.  This was to be left to the defendant as landlord to decide which of the tenant’s fixtures (hence the words “of the Tenant”) the defendant as landlord would direct in writing should be left behind and which should be demolished and/or reinstated.

61. In my judgment what TLL and the defendant were intending to do by clause 7(j) of the provisional agreement was to agree what should happen to the “fittings fixtures alterations and additions” in the premises at the determination of the future tenancy.  The words “such fittings fixtures alterations and additions of the Tenant” at clause 7(j) of the provisional agreement and clause 11(1) of the formal agreement and subsequently at clause 5.4 of the tenancy agreement were, in my judgment, clearly intended to mean the fixtures, fittings, alterations and additions that TSL as tenant would put into the premises.  That is the ordinary meaning of the words.  In my judgment the parties could not reasonably have intended those words to mean the fixtures, fittings, alterations and additions put in by TSL as owner of the premises when it took over the premises from the developer in 2000.  That is made clear by the use of the words “of the Tenant” after the words “fittings fixtures alterations and additions” which, in my view, describes the status of TSL as the future tenant.

62. Mr Li submitted that assuming that there was an ambiguity caused by the phrase “such fittings fixtures alterations and additions of the Tenant” at clause 7(j) of the provisional agreement, clause 11.1(j) of the formal agreement and later on at clause 5.4 of the tenancy agreement it should be construed against TSL under the contra proferentem rule.

63. I am unable to accept Mr Li’s submission.  It seems to me, and I so find, that there is no ambiguity in the phrase “such fittings fixtures alterations and additions of the Tenant”.   In my view this meant the fittings fixtures alterations and additions of the future tenant when the phrase first appeared in the provisional agreement on 17 July 2005 to deal with the situation on completion some 5 months later when vacant possession would not be delivered up and a tenancy was to be granted by the future landlord, the defendant to the future tenant, TSL. 

64. It is also useful to bear in mind what is stated in Lewison’s The Interpretation of Contracts on the contra proferentem rule at page 267:

“ In The Olympic Brilliance129 Eveleigh L.J. said that the principle was: “usually a rule of, if not last, very late resort”.

And in Macey v Qzai130 the Court of Appeal went further, and declared that the presumption is to be used only as a last resort.  In McCann v Switzerland Insurance Australia Ltd131Kirby J. said:

‘ Courts now generally regard the contra proferentem rule (as it is called) as one of last resort because it is widely accepted that it is preferable that judges should struggle with the words actually used as applied to the unique circumstances of the case and reach their own conclusions by reference to the logic of the matter, rather than by using mechanical formulae.’  ”

65. In any event, I am not persuaded that the contra proferentem rule applies in this case.  Francis Law of the defendant was an experienced property investor in Hong Kong unlike TLL or TSL.  First TSL and then TLL only held one property in Hong Kong namely, the premises.  There is no evidence that either TSL or TLL were experienced property investors.  There is also no evidence that the phrase “such fitting, fixtures, alterations and additions of the Tenant” was put forward by TLL.

66. Mr Merry, for TSL, submitted that clause 5.4 of the tenancy agreement was the kind of provision found in commercial leases enabling the landlord to choose which of the additions made by the tenant during the term of the tenancy are to be kept in the premises and which are to be removed on termination of the tenancy.

67. I accept that fixtures which the tenant may not remove are usually referred to as “landlord’s fixtures” and includes fixtures attached to the premises at the date of the tenancy, those fixed by the landlord during the term and also those fixed by the tenant which he is not entitled to remove (paragraph 235.125 Vol 17(1) Halsbury’s Laws of Hong Kong). 

68. Mr Merry further submitted that the shortness of the tenancy with a provision for early termination indicated that the items contemplated to be removed or reinstated would be limited and could not have extended to all of the fixtures, fittings, alterations and additions or to reinstatement to the handover condition when the premises were delivered up by the developer in 2000.  It could not have meant all such fixtures, fittings, alterations and additions.  There would not have been enough time to remove them. 

69. On the undisputed evidence there was extensive fitting out of the premises when TSL moved into the premises in 2000.  Although by 30 December 2005 the parties would not have known precisely how long it would take to remove them it seems to me that they would have known the extent of the fitting-out of the premises.  Francis Law had inspected the premises before purchasing it and was able to see the extent of the fitting-out.

70. It seems to me that the parties would have known that it would take months rather than weeks to reinstate the premises to the handover condition in 2000.  The premises were in a modern high tech building.  Permission to carry out works would have to be obtained from the management of the building where the premises were situate and there would have been a requirement to use nominated contractors for some of the works such as air-conditioning, electrical installation and fire services installation.  Work could only commence after permission had been granted by the management. 

71. TSL also relied on Section 16 (1) of the Conveyancing and Property Ordinance (“the Ordinance”) Cap 219 which provides:

“ Unless the contrary intention is expressed in the assignment, an assignment shall operate to assign, with the land, all rights, interests, privileges, easements or appurtenances in, over, belonging or appertaining to that land or at the time of the assignment used, held, occupied or enjoyed with that land and things attached to the land or permanently fastened or anything attached to the land.”

72. It is clear that the 2005 assignment of the premises to the defendant did not mention the fixtures or fittings to be included with the sale.

73. Section 2 of the Ordinance defines “land” as including:

“………

(c) things attached to the land or permanently fastened or anything attached to land.”

74. Section 16(1) operates to assign with the land “things attached to the land or permanently fastened or anything attached to the land”.  In my view this would include fixtures on the premises and fittings which are permanently fastened or anything attached to the premises unless a contrary intention is shown in the assignment.

75. As to the words “things attached to the land or permanently fastened to anything attached to the land” in section 16(1), Sarah Nield in The Hong Kong Conveyancing and Property Ordinance states at page 67:

“This repeats the final element of the definition of ‘land’ found in section 2 so that buildings forming part of the land and other fixtures will automatically pass with the land without express mention, unless a contrary intention is shown.”

76. The contrary intention can be expressed in the assignment.  The contrary intention can also be expressed in the contract (Selby District Council v Samuel Smith Old Brewery (Tadcaster) (2000) 80 P & C R 466).  Thus one can look at the provisional agreement and the formal agreement to see if there is a contrary intention.  In my judgment no contrary intention is shown there.

77. The effect of section 16(1) of the Ordinance is that when the premises were assigned by TLL to TSL in 2003 the fixtures and fittings that were permanently fastened or attached to the premises passed with the assignment to TLL.  No contrary intention is shown in that assignment.

78. It seems to me, and I so find, that as the fixtures and fittings that were permanently fastened or attached to the premises passed with the premises to TLL by the 2003 assignment those fixtures and fittings were landlord’s fixtures and fittings belonging to TLL and not tenant’s fixtures and fittings belonging to TSL.  I also find that those fixtures and fittings passed to the defendant by the 2005 assignment.  They were landlord’s fixtures belonging to the defendant and not tenant’s fixtures belonging to TSL as tenant of the defendant.

79. Mr Li submitted that on the evidence, TSL and TLL regarded the fittings, fixtures, alterations and additions to the premises as belonging to TSL at all times.  He relied on the Annual Reports of TSL on which he cross-examined Law Kwai Lam. 

80. In the Annual report for the year ended 31 March 2001 under ‘Fixed assets’ it shows that additions to leasehold improvements were made in the year to the extent of $5,383,000.  This was regarded as an asset of TSL in the accounts.  In subsequent years the leasehold improvements were regarded as an asset of TSL even after the premises were assigned by TLL to TSL. 

81. Law Kwai Lam said that the accountants treated the payment for the leasehold improvements as expenses capitalized as fixed assets.  These were depreciated over a 5 year period.  He said that the leasehold improvements shown in the accounts were in fact the leasehold improvements done to the premises from 2000 to 2003 to the extent of $6,135,000 when the premises were sold and assigned to TLL (save for the small sum of $18,000 which was expended subsequently and shown in the accounts for the year ended 31 March 2004).  He also said that the accounts show that the leasehold improvements belonged to TSL. 

82. In re-examination, Law Kwai Lam said that in respect of the payments of leasehold improvements the accountants would depreciate a portion of the expenses each year for a period of 5 years.  As TSL was actually using the leasehold improvements it was an expense capitalized as assets and appears as assets in the balance sheet.  He said that the nature of the asset was the right to use the leasehold improvements rather than asset ownership.  He said that the accounting treatment dealt with the relationship about usage of the leasehold improvements.  He also said that in the accounts it would appear as belonging to TSL but the accounting treatment did not really say anything about ownership.

83. Law Kwai Lam is not an accounting expert and I attach no weight to his evidence of the accounting treatment in the accounts.  As Law Kwai Lam, however, said in evidence and as is apparent from reading the accounts, they show that the leasehold improvements was treated as an asset belonging to TSL even after 2003 when the premises were sold to TLL. 

84. Be that as it may, whether in law the leasehold improvements belonged to TSL rather than TLL is a different matter.  I am satisfied that the fixtures and fittings that were permanently fastened or attached to the premises did not belong to TSL after it assigned the premises to TLL by the 2003 assignment.

85. I would also observe that there is no evidence that the Annual reports and accounts of TSL were ever shown to Francis Law or the defendant at any time.  The defendant was only incorporated in 2005.  Whatever is shown in the accounts cannot, in my view, form part of the relevant factual matrix in the construction of clause 5.4 of the tenancy agreement.

86. Mr Li also relied on section 16(2) of the Ordinance which provides:

“This section shall not operate to give to any person a better title than that assigned or any better title than that enjoyed by the assignor.” 

87. He submitted that as the fixtures and fittings were owned by TSL and not TLL they could not pass with the land to the defendant under section 16(1) of the Ordinance.  I am unable to accept this submission as I have found that the fixtures and fittings were not owned by TSL but by TLL at the time of the assignment to the defendant.   Section 16(2) of the Ordinance does not assist the defendant.

Issue (1)

88. As regards issue (1), it is important to see what demands were made of TSL by the defendant at the termination of the tenancy.

89. By the notice dated 30 March 2006 TSL gave 3 months’ notice to the defendant to terminate the tenancy on 30 June 2006.

90. About 6 weeks later, by a letter dated 18 May 2006 from GH to TSL, GH on behalf of the defendant gave the following direction to TSL under clause 5.4 of the tenancy agreement:

“ Pursuant to Clause 5.4 of the Tenancy Agreement dated 30^th December 2005 (“the Tenancy Agreement”), we are instructed by our client to give you our client’s direction that upon termination of the tenancy on 30^th June 2006, you shall deliver vacant possession of the Premises to our client and that you are required to reinstate the Premises to the original handover condition given by Cheung Kong Group to you (as per the attached photograph).  You shall also leave behind the following:-

(a)   three (3) back-up air-conditioning system;

(b)  the electric window blinds installed at the glass ceiling of the Premises; and

(c)   the electricity and water meters at the Premises.

All our client’s rights under the Tenancy Agreement are hereby specifically reserved.”

91. As the tenancy was to terminate on 30 June 2006, TSL was given less than 6 weeks to comply with the direction.

92. Law Kwai Lam gave evidence, which I accept, that when TSL as owner moved into the premises in 2000 alterations were made to the original air-conditioning system, fire prevention system and electrical installations.  Further alterations were made by constructing additional raised platforms on top of the existing raised floor, erecting glass fencing and partitions and installing socket columns in the premises.  Law Kwai Lam said that the premises were fitted out to suit the TSL’s business needs as a software business. 

93. The Annual Report of TSL for the year ended 31 March 2001 shows that substantial leasehold improvements were made to the extent of $5,383,000.  This shows that after purchasing the premises in 2000 TSL expended the said sum to make improvements to the premises.  The photographs in evidence showing the premises at the time of the handover in June 2006 shows the extent of the substantial leasehold improvements which had been made to the premises way back in 2000 when TSL was the owner of the premises. 

94. It is clear that by the direction in that letter the defendant as landlord required TSL as tenant to reinstate the premises to the same condition as it was in 2000 when it was handed over by the developer when TSL had purchased the premises.  In my view the defendant was plainly not entitled to so demand. 

95. I am satisfied and find that the defendant was not entitled to demand as it did that the premises be reinstated by TSL to the “original handover condition given by Cheung Kong Group to you (as per attached photograph)”.  I also find that TSL was entitled to refuse to comply with that demand. 

96. Mr Merry also referred to Chan Tung Man v Kamshan Holdings Ltd [1999] 4 HKC 303.  In respect of one of the causes of action by the plaintiff landlord against the defendant tenant, the complaint by the plaintiff landlord was that the defendant had breached an implied obligation to use the premises in a tenant-like manner and to deliver up possession to the plaintiff at the termination of the tenancy in the same condition as when the defendant took the premises with fair, wear and tear excepted.  Rogers JA (as he then was) in dealing with this said at page 314:

“The obligation to use the premises in a tenant-like manner and to deliver up the possession to the plaintiff at the termination of the tenancy in the same condition as when the tenant took it

In respect of the final matter, it appears to me that this obligation is a contractual obligation arising out of the tenancy agreement.  It is an implied obligation.  As is stated in the footnote in Halsbury’s Laws if England (4th Ed, Reissue) Vol 27(1), the extent of the obligation to use the premises in a tenant-like manner is not entirely clear.  The tenant is clearly under a continuing obligation to make repairs which would amount to voluntary waste.  However, the obligation it appears to me must be founded upon the state of the premises at the commencement of tenancy.  There is no dispute in this case that when these tenancies commenced in 1995, the premises were in, for all material purposes, virtually the same condition as they were upon relinquishment.  Apart from the fact that the premises were filthy and messy, it appears to me that the learned judge correctly dismissed the claim in this regard since matters of complaint existed at the commencement of the tenancy and therefore as a matter of contract, the plaintiff is not in a position to make a complaint in that regard.”

97. In that case, however, there was an implied obligation in the tenancy agreement.  Although an implied obligation is not relied on in this case, that case illustrates that the natural expectation in the absence of an express contrary intention is that the tenant is obliged to reinstate premises to their state as at the beginning of the tenancy. 

98. As to issue (I), I find that the obligation of TSL with respect to the state and condition of the premises was to deliver up the premises in the same state as at the commencement of the tenancy on 30 December 2005, fair wear and tear excepted.

Issue (2)

99. As to issue (2), the fittings, fixtures, alterations or additions to the premises which TSL should remove from the premises on delivering up the premises on 30 June 2006 should be those that were put in by TSL as tenant of the defendant.  There was no evidence that it had put in any.

100. By the said letter dated 18 May 2006 from GH to TSL, TSL was also directed to leave behind the items (a) to (c) as set out therein.  On the evidence, this request was complied with.

101. There was also evidence that TSL had removed three items namely, sliding cabinets, the UPS system in the computer room and all the plasma televisions in the conference room. 

102. There is a dispute as to whether these were fixtures which went with the land or whether they were personal chattels which TSL was entitled to remove.  Although the sliding cabinets and UPS system were fixed onto the floor they could easily be removed.  I am of the view that these items were the tools and equipment of TSL for the operational needs of TSL and were personal chattels of TSL which they could remove at the end of the tenancy.  In my view these, as well as the plasma TVs, were personal chattels of TSL used in its software business and were never intended to be part of the landlord’s fixtures. 

103. I find that TSL should also have removed the large sofas and the conference table but it failed to do so.  However, there is no claim by the defendant in respect of this.  Nothing turns on this failure.

Issue (3)

104. Although I have found that TSL should have removed the large sofas and the conference table, no monetary loss to the defendant is shown.  there is no claim in respect of this.

105. In my judgment TSL is entitled to the refund of the deposit in the sum of $1,789,872.  The counterclaim should be dismissed.

The counterclaim

106. In the event that the matter goes further and it is held that TSL was obliged to reinstate the premises to the handover condition in 2000, I go on to deal with the counterclaim.

107. It is agreed that the defendant came to engage Kin’s Building Materials & Contracting Ltd (“Kins”) to do the reinstatement work.

108. On the evidence work commenced on 28 July 2006 and was completed on 13 November 2006.  The sum counterclaimed by the defendant after deduction of the deposit is the sum of $2,171,972.30.  The statement of final account as at 13 November 2006 submitted by the defendant to TSL gives the detailed calculations of the counterclaim. 

109. The cost of the reinstatement work was in the sum of $1,345,674.  I am satisfied that this sum was paid by the defendant in respect of which an official receipt was issued dated 30 January 2007 (exh D1).  The detailed works comprising the total sum of $1,345,674 are described in the final account of Kin’s dated 17 November 2006 addressed to the defendant at Tab 21 of Bundle C(1).  This shows that there were extensive demolitions works of all existing built-in furniture and fixture, doors, partition wall, steel structures, glass partitions, and the existing raised platforms above the raised floor.  There were also works to the electrical installations, air-conditioning systems and fire service works.  This was presumably to restore the premises back to the original handover condition in 2000.

110. Apart from claiming the cost of the reinstatement works, the defendant also claims the loss of rental and the management fees and rates that it had to pay for the period from 1 July 2006 to 13 November 2006 during the period of the reinstatement works by Kin’s. 

111. Francis Law did not have personal knowledge about the works which were carried out but I am satisfied that the works as detailed in the final account of Kin’s were carried out.  I am satisfied that the defendant has paid for the same in the sum of $1,345,674.

112. I am also satisfied that the defendant has lost the rental during the period of the reinstatement works which took 4.5 months.  Mr Merry submitted that the works should have been carried out soon after 30 June 2006 in order to mitigate the defendant’s loss.  I am satisfied that the works started on or about 28 July 2006 when the approval was given by the management of the building to carry out the works.  Although there was a complaint of delay in the carrying out of the works, I am of the view that it was not unreasonable for Francis Law to wait for a short period to see whether TSL was willing to do the reinstatement before embarking on the reinstatement works which would lead to litigation eventually.  I find that the defendant acted reasonably in waiting for a short period before commencing the works and that there was no real delay.

113. I am also satisfied that the defendant has lost the rent that it could have obtained during the period as claimed and that it has also had to pay the maintenance fees and rates as claimed.

114. In the event that the matter goes further and it is held that the defendant was entitled to direct TSL to reinstate the premises to the handover condition in 2000, the defendant would, in my view, be entitled to set-off the deposit against the loss suffered.  The defendant would then be entitled to damages as counterclaimed in the sum of $2,171,972.30 with interest thereon at 1% above the best lending rate of HSBC from 13 November 2006 to judgment and thereafter at judgment rate until payment.

Conclusion

115. In view of my findings, I give judgment to TSL against the defendant in the sum of $1,789,872 with interest thereon at 1% above the best lending rate of HSBC from 4 July 2006 until judgment and thereafter at judgment rate until payment.  I also dismiss the counterclaim.

116. I also make an order nisi that the costs of the action and the counterclaim be costs to TSL to be paid by the defendant such costs to be taxed if not agreed.

129 [1982] 2 Lloyds’ Rep. 205, C.A.

130 The Independent, January 13, 1987.

131 [2000] H.C.A. 65.