QUICK SWITCH LTD v. SHINNING STAR SUPER SEAFOOD LTD AND ANOTHER

HCA 1325/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1325 OF 2010

____________

______________

J U D G M E N T

______________

Introduction

1.  There are before the court cross-summonses, the Plaintiff’s for summary judgment and the Defendants’ for a series of injunctions.

2.  The dispute arises out of two tenancy agreements dated 27 March 2008 under which the Plaintiff let adjoining premises to the 1st Defendant on the 2nd Floor, East Asia Gardens, Texaco Road in Tsuen Wan.  East Asia Gardens comprises a shopping arcade on its lower floors where these premises are situated.  Suffice it to say that one part of what was let to the 1st Defendant is larger than the other although as they adjoin each other they are used by the 1st Defendant as one unit, essentially as a Chinese restaurant at which mahjong can be and is played by those attending there.

3.  In view of the fact that the Plaintiff is seeking, amongst other things, a possession order in respect of both premises on the basis of breaches of covenant by the 1st Defendant, I need to refer to some of the terms of the tenancy agreements which are, for practical purposes, in identical terms.  The premises, as I shall refer to them collectively, were let to the 1st Defendant (the 2nd Defendant being a director of the 1st Defendant who stands as guarantor of its performance of the terms of the lease) for a term of 9½ years starting on 13 March 2008 and expiring on 19 September 2017.

4.  Suffice it to say the rent and other charges such as management fees and air-conditioning costs are substantial.  The essential term, for the purposes of this matter, is that under Clause 1.02 and Part IX of the Schedule to the Tenancy Agreements the premises were let for the operation of a Fraternity Association (restricted to mahjong amusement and ancillary meals).

5.  Having entered into the two tenancy agreements, the 1st Defendant engaged a licensing consultant to co-ordinate the process of obtaining the appropriate licences to enable it to lawfully operate the premises as a Fraternity Association as provided for in Clause 1.02, to which I have already referred.  The evidence of Mr Lai, is that the licensing consultant spent much time dealing with Goodwell-Fortune, the Plaintiff’s leasing agent, to obtain the appropriate documentation.  Complaint is made on the 1st Defendant’s behalf, which is rejected by the Plaintiff, that Goodwell-Fortune was not able to provide what was needed for a successful licence application to be made.  Correspondence has been exhibited by Mr Lai, in his first affirmation, passing between the licensing consultant and Goodwell-Fortune as to the attempts that had been made to obtain the necessary information and documentation.  This correspondence goes back to 2008 and culminated in a letter dated 2 November 2009 from Goodwell-Fortune to say that the premises had been let to the 1st Defendant on an “as is” basis and layout plans would need to be produced by the 1st Defendant before any alterations could be carried out at the premises.  The initial licence application had to be delayed because there was an inadequate number of fire corridors.  This had to be rectified by the 1st Defendant itself, who used about 10% of the area let to it in putting up partition walls to erect two fire corridors for public use at a cost of $155,000.  Having carried out these works, the 1st Defendant was granted a Provisional (Chinese) Restaurant Licence dated 15 July 2010 which expired on 14 January 2011, since when a further six-month Provisional Licence has been obtained which will expire on 14 July this year.  The law is that no further Provisional Licence can be granted to the 1st Defendant after the expiry of the current one.  This being so, the 1st Defendant has, provided no possession order is made against it, five months to get its house in order in respect of obtaining a full Restaurant Licence which, in my judgment, would be sufficient for it to operate the premises as a Fraternity Association although this could also be achieved by means of other licences, for example a clubhouse licence.

6.  The really significant feature in the case, which has resulted in this possession action, is that notwithstanding that it had not obtained a Provisional Licence until July 2010, the 1st Defendant had sufficiently fitted-out the premises to operate a chinese restaurant at which customers could and did, for a fee, play mahjong.  This came to the attention of the police who raided the premises on 12 April 2010 and found that within the curtilage of the smaller of the two premises, 32 individuals were playing mahjong.  The police prosecuted the 2nd Defendant, Mr Lai, for operating a gambling establishment as well as prosecuting the individual mahjong players. This prosecution was brought due to the absence of any appropriate licences relating to the premises.  Mr Lai was convicted at Tsuen Wan Magistrates Court, sentenced to one month’s imprisonment suspended for 12 months and fined $15,000.

7.  Based on this conviction, the Plaintiff has purported to forfeit the lease in respect of both premises, there being a provision in the lease that a breach of covenant at either of the premises amounts to a breach of the other as well.  The basis of the action is that under Special Condition (13) Part X of the 1st Tenancy Agreement [A5/5/76] and Special Condition (14) Part IX of the 2nd Tenancy Agreement [A/6/134], the 1st Defendant undertakes to the Plaintiff that it will obtain the relevant licence from the appropriate authority to operate the premises as a Fraternity Association within 12 months of the start of the tenancy.

8.  In this regard, the Plaintiff’s case is perfectly straightforward.  There is no doubt that by the time of the police raid in April 2010, the 1st Defendant had not obtained any licence and was therefore in breach of covenant.

9.  Based on this breach, the Plaintiff has purported to forfeit the lease and has brought this action and seeks judgment on its claim for possession and also on its monetary claims.  The 1st Defendant’s response is for the injunctions that it seeks to compel the Plaintiff to produce documentation and answers to questions which will enable it to prepare its application for a full Restaurant Licence which will enable it to lawfully operate a Fraternity Association from the premises.

10.  There is no doubt that an impasse has been reached.  The Plaintiff, having taken the view that it has validly forfeited the lease, has adopted the position that it is under no obligation and refuses to provide any assistance to the 1st Defendant.  It wants the 1st Defendant out of the premises.  The 1st Defendant’s position is that it is to a considerable measure the Plaintiff’s fault that it now finds itself in the situation of not having a full licence.  Mr Lee, who appears for the two Defendants, submits that the parties to a contract are under an implied mutual duty to cooperate with each other in the performance of their contractual obligations.  He submits that it is a general rule that each party to a contract is taken to agree that it will do all such things as are necessary on its part to enable the other party to have the benefit of the contract.  For this proposition he relies on Mackay v Dick (1881) 6 App. cases 251, and the decision of the CFA in Kensland Realty Ltd v Whale View Investment Ltd & Anr [2002] 1 HKLRD 87, as well as the Australian case of Secured Income Real Estate Ltd v St. Martins Investment Pty (1979) 144 CLR 596.

11.  Mr Lee has pointed to the evidence during the initial 12-month period and beyond, up to the point of the police raid in April 2010, as tending to show that the Plaintiff has been most uncooperative in assisting the 1st Defendant to obtain the appropriate licence.  Mr Lee submits that this evidence raise triable issues as to whether the Plaintiff is entitled to forfeit the lease and, even if the Plaintiff is entitled to possession, that at the very least the evidence must provide a sufficient basis for the 1st Defendant to be given relief from forfeiture.  He submits that the evidence favouring the 1st Defendant’s position is sufficiently strong to require both issues to go to trial.

12.  Mr Bernard Mak, perfectly reasonably in my view, submits that these premises were leased on an “as is” basis and the obligation was distinctly on the 1st Defendant to set about obtaining the appropriate licence or licences to enable it to comply with its covenant to operate a Fraternity Association from the premises.  There is no duty on the Plaintiff to assist in that process.  The 1st Defendant had a year to get things right, in fact it had much longer than that and still failed to do what was necessary, which was highlighted by the police raid in April 2010 over two years after the start of the tenancies.  He supports his submission by reference to the case of North Sea Energy Holdings NV v PTT [1999] 1 Lloyds Law Reports 483 (CA).  The passage which he relies on in particular is at p.492.  The relevant part is this:

“But the duty to co-operate cannot be imposed on a party so as to compel him to do something which the contract on its true construction relieved him from doing, and cannot be used to compel a party to do something which he is in fact unable to do.”

This case is more apposite than the authorities relied on by Mr Lee because, he submits that the Plaintiff is and was under no duty to assist the 1st Defendant to obtain its licence.  In such circumstances, there can be no justification in the face of a proven breach of covenant from holding up the Plaintiff and it ought to have its possession order.

13.  In respect of relief from forfeiture, the breaches are irredeemable, 12 months are long past in any event and so no relief should be given.

14.  Mr Mak has helpfully produced for my assistance two suggested forms of order, one of which, as a minimum, he should have the benefit of.  One is based on the issue of forfeiture not being triable but relief for forfeiture being triable, the other with judgment being entered but relief from forfeiture being granted on terms.

15.  Despite Mr Lee’s admirable efforts to the contrary, it seems to me that there has been no justification after all this time for the 1st Defendant not to have obtained its restaurant licence.  Even if the Plaintiff could be shown to have been less than obliging, the 1st Defendant has failed to demonstrate sufficient effort to achieve what it had contracted to do and obtain an appropriate licence.  There simply is no triable issue on this.

16.  I propose to enter judgment on the Order 14 summons but to grant the 1st Defendant relief from forfeiture which will therefore be in the shorter form of order produced by Mr Mak.  I will discuss the precise form of the order with counsel in a moment.

17.  I now turn to the 1st Defendant’s application for injunction.  Since it purported to forfeit the leases, the Plaintiff has resolutely refused to assist the 1st Defendant.  Now that I have granted relief from forfeiture, it seems to me that I ought to give the 1st Defendant some assistance in obtaining its licence and in so doing give effect to my order granting relief.  I am satisfied that I ought to direct the Plaintiff to provide (b) and (c).  (d) is not now being asked for and as to (a) this will have to be for the 1st Defendant to deal with.  These corridors have been put up by the 1st Defendant on the demised premises and it will have to give the licensing authority the appropriate assurances that this is so and provide the background as to why these corridors were erected.

18.  I refuse the prohibitory injunctions which are unnecessary and, in any event, would amount to orders which would lack any precision.  The injunctions which I have granted are in support of the relief from forfeiture and have been made because I am satisfied that the Plaintiff is well able to provide this information and, unless ordered to do so, appears to be unwilling to comply with what I regard as perfectly reasonable requests.