COMPOSITE INTEREST LTD v. TRINITY INTERNATIONAL DEVELOPMENT LTD

HCA 1019/2020

[2023] HKCFI 1499

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1019 OF 2020

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BETWEEN

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JUDGMENT

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Introduction

1.  This is an assessment of damages in the present action concerning a breach of a tenancy agreement. The plaintiff is the landlord and the defendant is the tenant under the tenancy agreement dated 1 March 2019 (“the Tenancy Agreement”). The Tenancy Agreement was for a term of six years from 19 April 2019 to 18 April 2025.

2.  The subject property is Shop Nos 5 & 6 on Ground Floor, Shops Nos 18 & 18A on 1^st Floor, the whole of 2^nd Floor, Flat No 18 on 3^rd Floor and Flat No 8 on 4^th Floor, Alhambra Building (the “Building”), Nos 383, 385, 385A, 385B, 387, 387A, 387B, 389, 389A-389C Nathan Road & Nos 15-17 Kansu Street, Kowloon (the “Property”).

3.  The defendant operated its restaurant business at the Property but had started defaulting rental payment since April 2020. By the issue of the Writ herein dated 19 June 2020 claiming vacant possession of the Property and recovery of the outstanding rents and related sums entitled under the Tenancy Agreement, the plaintiff accepted the repudiation of the defendant.

4.  The defendant has never taken part in these proceedings. The plaintiff obtained a default judgment dated 8 October 2020 (“the Default Judgment”). The Default Judgment entitles the plaintiff to the following monetary reliefs in addition to vacant possession of the Property:

(i) The sum of HK$2,157,516.00 together with interest thereon at the rate of 2.75% per month in the sum of HK$98,943.93 from the date(s) due for payment up to the date of the writ of summons, ie, 19.06.2020 and thereafter at judgment rate until payment;

(ii) Mesne profits at the rate of HK$639,000 per month from 01.07.2020 to the date of delivery of vacant possession of the Property;

(iii) Service charges at the rate of HK$53,102 per month from 01.07.2020 to the date of delivery of vacant possession of the Property;

(iv) Rates to be assessed from 01.07.2020 to the date of delivery of vacant possession of the Property;

(v) Damages to be assessed; and

(vi) Costs to be taxed.

5.  Despite the notice of this hearing having been validly served on the defendant, the defendant did not appear at the hearing. This court proceeded with the assessment in its absence.

6.  Ms Sandy Leung is the only factual witness of the plaintiff. She has been responsible for the leasing matters relating to the Property. She simply adopted the contents of her witness statement as her testimony. Her evidence is clear and well supported by contemporaneous documents. It goes without saying that her evidence is not challenged. I have no reason not to accept her evidence in its entirety.

Background facts

7.  Prior to the Tenancy Agreement, the plaintiff and the defendant entered into another tenancy agreement dated 24 September 2013 (“the Old Tenancy Agreement”) whereby the Property was leased to the defendant from 19 April 2013 to 18 April 2019 (“the Old Term”).

8.  Under the Old Tenancy Agreement, the defendant was required to pay a rental deposit of HK$2,130,000 and a service charge deposit of HK$100,000. These two deposits were treated as the deposits under the Tenancy Agreement and the plaintiff agrees that credit has to be given to these deposits.

9.  Similarly, the defendant provided a bank guarantee of HK$2,130,000 issued by Bank of China (“the Bank Guarantee”) to cover the Old Term. Under the Tenancy Agreement, the defendant was merely required to provide a bank guarantee of HK$1,704,000 to cover the term from 19 April 2019 to 18 April 2025.

10.  Accordingly, the defendant applied to amend the Bank Guarantee to cover the period from 19 April 2019 to 4 June 2025 for the same amount.

11.  On 19 January 2021, the plaintiff received a sum of HK$2,130,000 from the account of the defendant with Bank of China in settlement of the Bank Guarantee.

12.  Likewise, the plaintiff agrees to give credit to this sum of HK$2,130,000 in the calculation of the damages payable by the defendant.

13.  Under the Tenancy Agreement, the defendant was obliged to pay a monthly rent of HK$639,000 on the 1^st day of each calendar month. Further, the defendant was required to pay the management fees defined as “service charge” in the Tenancy Agreement. Such service charge was specified to be such amount chargeable from time to time by the manager of the Building.

14.  Lastly, the defendant was required to pay rates which were to be imposed or levied on the Property by the Government of the Hong Kong SAR.

15.  After the plaintiff’s acceptance of the repudiation of the Tenancy Agreement, to mitigate its loss, after about 6 months, the plaintiff managed to find a new tenant and concluded with the new tenant a tenancy agreement dated 14 January 2021 (“the New Tenancy Agreement”). The lease term is from 1 February 2021 to 31 January 2024. The new tenant known as Hiu Kwong (Ping On) Nursing Centre Co Ltd (“Hiu Kwong”) operates an elderly home at G/F - 2/F of the Property.

16.  3/F to 4/F of the Property are excluded from the New Tenancy Agreement and they are still vacant as at the date of the hearing.

17.  The monthly rent under the New Tenancy Agreement is HK$700,000 with 7 months’ rent-free periods. The actual monthly rent is therefore HK$563,889 (HK$700,000 x 29/36).

The plaintiff’s monetary claims

18.  Mr Chan, for the plaintiff, helpfully summarizes the monetary claims of the plaintiff by way of the table below (“the Table”):

Items		Calculation	Amount (HK$)
Loss of rents
1.	1/4/2020 – 19/6/2020	$639,000/month × 3 months	1,917,000.00
2.	20/6/2020 – 31/1/2021	$639,000/month × 7 months	4,473,000.00
3.	1/2/2021 – 31/1/2024	$639,000/month × 36 months - $700,000/month × (36 - 7) months - $11,750/month × 36 months - $12,240/month × 36 months	1,840,360.00
4.	1/2/2024 – 18/4/2025	/	0.00
Loss of service charges
5.	1/4/2020 – 19/6/2020	$53,102/month × 3 months	159,306.00
6.	20/6/2020 – 31/1/2021	$53,102/month × 2 months + $55,472/month × 5 months	383,564.00
7.	1/2/2021 – 31/1/2024	/	0.00
8.	1/2/2024 – 18/4/2025	/	0.00
Loss of rates
9.	1/4/2020 – 19/6/2020	$81,210/quarter × 80/91 quarter	71,393.41
10.	20/6/2020 – 31/1/2021	$81,210/quarter × 11/91 quarter + $81,209/quarter × 1 quarter + $81,210/quarter × 1 quarter + $81,209/quarter × 31/90 quarter	200,207.58
11.	1/2/2021 – 31/1/2024	/	0.00
12.	1/2/2024 – 18/4/2025	/	0.00
Other losses
13.	Commission to estate agent	/	700,000
14.	Stamp Duty	($33,834.00 + $5.00) ÷ 2	16,919.50
Deductibles
15.	Deposit	/	(2,230,000)
16.	Bank Guarantee	/	(2,130,000)
	Total (excluding interests and legal costs):		5,401,750.49

19.  It can be seen that for the purpose of the computation of its loss of rents, service charges and rates, the plaintiff has identified 4 different periods.

20.  The plaintiff characterizes the period from 1 April 2020 (date of default) to 19 June 2020 (date of termination of the Tenancy Agreement) as “the Pre-Termination Period”.

21.  The plaintiff characterizes the period from 20 June 2020 to 31 January 2021, before the commencement of the term of the New Tenancy Agreement, as “the Vacancy Period”.

22.  From 1 February 2021 to 31 January 2024 being the term of the New Tenancy Agreement, the plaintiff characterizes this period as “the New Tenancy Period”.

23.  Lastly, from 1 February 2024 to 18 April 2025 when the Tenancy Agreement was to expire, the plaintiff characterizes this period as “the Post-New Tenancy Period”.

The Pre-Termination Period losses

24.  For the losses suffered by the plaintiff during the Pre-Termination Period, the computation is straightforward. The monthly rent of HK$639,000 is applicable for the 3 months and I accept the loss of rent should be HK$1,917,000 (HK$639,000 x 3).

25.  I have examined the receipts issued by the Incorporated Owners of the Building evidencing payments of management fees by the plaintiff. The service charge was HK$53,102 per month and hence the plaintiff’s loss is HK$159,306 (HK$53,102 x 3).

26.  For the rates, it was HK$81,210 (HK$80,500 + 317 + 393) for the period from 1 April 2020 to 30 June 2020 as evidenced by the printed demands for rates issued by the Rating and Valuation Department. Thus, the rates payable by the defendant from 1 April 2020 to 19 June 2020 should be HK$71,393.41 (HK$81,210 x 80/91).

The Vacancy Period

27.  The Vacancy Period from 20 June 2020 to 31 January 2021 is seemingly a bit long. However, this court is aware of the general economy condition of Hong Kong then hard hit by the Covid-19 pandemic.

28.  The plaintiff has a duty to mitigate its loss. There is no allegation of the plaintiff’s failure to do so, let alone evidence in this regard.

29.  I accept Mr Chan’s submission that the duty to mitigate is not onerous and that landlord is expected to act reasonably to take such steps as are necessary to re-let the vacant premises at market rent: Roco Investment Ltd & Anor v Guschbauer (Hong Kong) Ltd [2019] HKCFI 2272 per Master Queenie Lau at paras 22-23.

30.  In the present case, the unchallenged evidence of the plaintiff is that it engaged two property agents on or about 6 August 2020 to look for a new tenant for the Property, just three days after the defendant returned the keys. Eventually one of agents managed to obtain the offer of Hiu Kwong on 4 November 2020. The New Tenancy was only commenced on 1 February 2021 by reason of the fact that Hiu Kwong took some time to obtain a licence for the operation of an elderly home at the Property and to reinstate the Property.

31.  On the evidence, I am satisfied that the plaintiff has acted reasonably to re-let the Property after the acceptance of the repudiation of the defendant. There is no issue of failure to mitigate its loss.

32.  In the circumstances, I accept that the plaintiff is entitled to recover its loss of rents in the sum of HK$4,473,000 (HK$639,000 x 7), loss of service charge in the sum of HK$383,564 (HK$53,102 x 2 + 55,472 x 5) and loss of rates in the total sum of HK$200,207.58.

The New Tenancy Period

33.  The New Tenancy Period covers the entire term of the New Tenancy Agreement and the losses are the differences between what the plaintiff would have obtained from the defendant during that period and what the plaintiff actually obtained from Hiu Kwong under the New Tenancy Agreement.

34.  In the first place, as stated above, there is no plea of failure to mitigate. There is nothing to suggest that the rent under the New Tenancy Agreement is not in line with the prevailing market rent.

35.  Mr Chan draws my attention to the rateable values of the Property which tend to show that the rent under the New Tenancy Agreement is actually higher than the prevailing market rent.

36.  Mr Chan refers to White Dragon Ltd v Evertime Technology Development Ltd (unreported, LDPD 643/2017, 09.8.2017) where Mr Lawrence Pang, members of the Lands Tribunal, held that in the absence of other evidence, the rateable value of the premises is a useful reference of its market rent.

37.  On such evidence, I am satisfied that the rent under the New Tenancy Agreement is the prevailing market rent and the plaintiff has acted reasonably in accepting the new rent.

38.  For the New Tenancy Period, the plaintiff asks for damages for its loss of rent only. Its service charge and rates have been paid by Hiu Kwong.

39.  The plaintiff accepts that, for the purpose of this assessment, 3/F to 4/F of the Property are assumed to have been rented out at the market rent for the same period and notional rents of these areas in the respective sums of HK$423,000 and HK$440,640, in addition to the total rent payable under the New Tenancy Agreement (HK$20,300,000), are to be deducted.

40.  Hence, the loss of the plaintiff recoverable should be HK$1,840,360 (HK$23,004,000 – 20,300,000 – 423,000 – 440,640).

The Post-New Tenancy Period

41.  The plaintiff very fairly accepts that it will be able to find another new tenant to start a new tenancy in exactly the same terms under the Tenancy Agreement immediately after the expiry of the New Tenancy Agreement.

42.  Thus, the plaintiff does not ask for any damages for this period.

Other losses

43.  The plaintiff further seeks to recover two other heads of damages.

44.  First, the plaintiff has paid the estate agent who assisted in the conclusion of the New Tenancy Agreement a sum of HK$700,000 as its commission being 1 month’s rent thereunder. This payment is evidenced by the receipt issued by the estate agent.

45.  I accept that the plaintiff is entitled to recover this sum from the defendant, which was incurred by reason of the defendant’s repudiation.

46.  Second, the plaintiff paid its half share of the stamp duty for the New Tenancy Agreement in the sum of HK$16,919.50. The plaintiff was contractually bound to make this payment and it should be entitled to recover this sum from the defendant.

47.  In the premises, all of the plaintiff’s claims set out in the Table are made out.

48.  The monetary award of the sum HK$2,157,516 under the Default Judgment has to be deducted from the plaintiff’s claims as agreed by Mr Chan. The plaintiff is therefore entitled to recover HK$3,244,234.49 (HK$5,401,750.49 – 2,157,516) from the defendant as damages.

49.  I allow interest on the said sum at the rate of 1% per annum above the prime rate from the date of the Writ to the date of this judgment and thereafter judgment rate until full payment.

50.  The plaintiff seeks indemnity costs against the defendant. I am satisfied that the plaintiff is entitled to indemnity costs pursuant to the Tenancy Agreement and I can see no reason to disturb the bargain of the parties. I grant an order for indemnity costs against the defendant accordingly.

51.  For completeness, the plaintiff expressly abandons its entitlements under (ii) to (iv) of the Default Judgment.

Conclusion and Order

52.  I accept the undisputed evidence of the plaintiff and I assess the damages at HK$3,244,234.49. The defendant should pay the said sum to the plaintiff together with interest thereon at the rate of 1% per annum above the prime rate from the date of the Writ to the date of this judgment and thereafter judgment rate until full payment.

53.  I further make an order nisi that the defendant do pay the plaintiff costs of this assessment on an indemnity basis, to be taxed if not agreed, with certificate for counsel. This order nisi will become absolute in the absence of any application by summons for variation within 14 days from the date of this judgment.

54.  Lastly, I thank Mr Chan for his fair and able submissions.