Imagine Motion Ltd v. Kalex Ltd

DCCJ 15855/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15855 of 2000

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Judgment

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1. This was a landlord and tenant dispute.

2. The Plaintiff was the tenant and the Defendant was the landlord. They signed a formal tenancy agreement (the tenancy agreement) dated 29 November 1999 in respect of a shop at Ground Floor, Block B, 108 Boundary Street, Kowloon ("the Premises") for a term of two years commencing on 1 December 1999 for a monthly rental of $27,000. There was a rent-free period from 1 December 1999 to 15 January 2000. On 2 February 2000, the Plaintiff's solicitor returned the keys of the Premises on behalf of the Plaintiff to the Defendant rescinding the tenancy agreement on ground of the Defendant's breach of an implied term. The Defendant asked for return of three months' rental deposit, one month's rental in advance and damages for decoration and cleaning expenses. On 11 February 2000, the Defendant's previous solicitor wrote to the Plaintiff's solicitor, holding the Plaintiff in wrongful termination of the tenancy agreement, accepted the alleged breach by the Plaintiff.

3. On 9 May 2000, the Plaintiff issued proceedings in the High Court for rescission of the tenancy agreement, return of deposit and damages. The Defendant counter-claimed against the Plaintiff for damages for breach of the tenancy agreement. The said proceedings were transferred to the District Court by consent on 11 November 2000 and became the present action.

The Plaintiff's case

4. The Plaintiff is a limited company. It was bought in 1999 by PW1, Madam Tong Wang Mei ("Madam Tong"). She was the only witness of the Plaintiff.

5. In November 1999, Madam Tong was looking for premises to set up and operate a learning centre. She noticed an advertisement for the lease of the Premises and she went to view the Premises subsequently.

6. It is the Plaintiff's case that Madam Tong inspected the Premises on two occasions, once by herself and once with her partner, and that on both occasions, representations were made by Mr. Chan (DW2) on behalf of the Defendant in respect of the Premises which led her to enter into the tenancy agreement on the Plaintiff's behalf. Those representations turned out to be false subsequently.

7. Madam Tong said that when she came to view the Premises the first time, Mr. Chan introduced himself as the representative of the Defendant. During the viewing, Madam Tong made known to Mr. Chan the purpose of renting the Premises was for operation of a learning centre and that a licence granted by the Education Department was essential for that purpose. Mr. Chan made representations, inter alia, that there would be no problem for a learning centre and there was no problem about the condition of the Premises. On that viewing, Madam Tong noticed partitions and an enclosed light-shaft with cockloft and toilet at a conspicuous spot at the Premises.

8. Madam Tong and her partner came to view the Premises again about a week later. On this second inspection, Madam Tong enquired about the fire exit of the Premises and Mr. Chan replied that the rear exit was good for that purpose. On that afternoon, Madam Tong came to the Premises again with her decoration contractor to take measurements of the Premises and discussed about the necessary alterations. Mr. Chan also took part in the discussions. Madam Tong said that Mr. Chan never said that the Premises would only be let on "as-is" basis. Further, Mr. Chan agreed that alterations could be made to the Premises.

The Provisional Tenancy Agreement

9. On 29 November 1999, Madam Tong and her partner went to the Defendant's office to sign a Provisional Tenancy Agreement. Prior to signing of the said provisional agreement, Mr. Chan represented again that there would not be any problem for her to get a licence for the learning centre. Relying on Mr. Chan's representations, Madam Tong decided to sign the provisional agreement in her name. After going through the provisional agreement prepared by the Defendant, Madam Tong asked to add a clause for a rent-free period and a Break Clause (Clause 14) so that she could terminate the tenancy in case she could not get a licence from the government to operate the learning centre at the Premises. These two terms were then added to the provisional agreement. Madam Tong signed it and paid the Defendant a few cheques amounting to a total of $108,000 representing a three-month rental deposit and one-month advance rental.

The Formal Tenancy Agreement

10. After signing the provisional agreement, Madam Tong purchased the Plaintiff, a shelf company. On 6 December 1999, she signed the formal tenancy agreement in respect of the Premises on behalf of the Plaintiff for a term of two years commencing on 1 December 1999 for a monthly rental of $27,000. All the provisions of the provisional agreement were reproduced in the formal tenancy agreement.

11. There is no English translation of the provisional and formal tenancy agreements provided by the parties. However both parties reached agreement as to the English translation of two clauses, Clauses 8 and 14, which are material in the proceedings.

Clause 8

"Prior consent of Party A (Landlord) shall be obtained for alteration, addition or removal of the original appliances and partitions inside the Premises. The decoration, partitions, window frame and electrical appliance fixed to the wall after Party B (tenant) entered into possession, except with the consent of Party A, shall not be removed so as to maintain the completeness of the Premises. If Party A consents, Party B may remove the same but the Premises shall be reinstated".

Clause 14

"If Party B (tenant) shall not obtain registered school licence, (Party B) may terminate forthwith this tenancy by giving one month's written notice to Party A (landlord) and the deposit shall be refunded".

Subsequent to the Formal Tenancy Agreement

12. After entering into the formal tenancy agreement, Madam Tong engaged contractors to carry out cleaning and decoration work at the Premises. A quotation was obtained from her contractor, Lok Ming Decoration Company ("Lok Ming") for the decoration of the Premises. The first stage work cost $167,000. Madam Tong paid an advance payment of $40,000 on behalf of the Plaintiff. In December 1999, as decoration work progressed, Madam Tong made a further payment of $40,000 to Lok Ming. She also paid another company cleaning fees in the total sum of $23,000.

13. In the meantime, Madam Tong was in the process of applying for a licence from the Education Department for the learning centre to operate at the Premises. This involved obtaining certificates of approval issued by the Buildings Department and the Fire Services Department.

Discovery of Unauthorised Structures

14. The Buildings Department made an inspection of the Premises on 4 January 2000 when the decoration work had started. After the inspection, Lok Ming informed Madam Tong there were unauthorized structures at the Premises, which must be removed before the licence could be issued. Madam Tong immediately contacted Mr. Chan and arranged to meet him. On 8 January 2000, they met and discussed about the matter. Mr. Chan, refused to demolish the unauthorized structures saying this was not the landlord's responsibility. On 13 January 2000, Madam Tong wrote to the Plaintiff giving notice of the unauthorized structures at the Premises and seeking their demolition and a rental reduction. Madam Tong enclosed in the letter a sketch identifying three areas of unauthorized structures. At the end of January 2000, Mr. Chan informed Madam Tong that the Defendant's request was not accepted.

Termination of the tenancy agreement

15. On 2 February 2000, the Plaintiff instructed its solicitors to issue a letter to the Defendant complaining that there were unauthorized structures at the Premises and that it was an implied term of the tenancy agreement that an unauthorized structure should not exist or form part of the Premises. As a result of the unauthorized structures, the Plaintiff was unable to carry on its business within the Premises. The Plaintiff therefore had no alternative but to rescind the tenancy agreement and to claim for the return of the deposit already given and other damages for decoration suffered by the Plaintiff. At the same time, the Plaintiff's solicitor returned the keys to the Premises to the Defendant.

16. Although the tenancy agreement provided for a Break Clause in case the Plaintiff could not get the required licence, Madam Tong did not consider the Break Clause applicable in the case. Miss Po, counsel for the Plaintiff, further confirmed that the Plaintiff was not relying on the Break Clause in terminating the tenancy agreement. Miss Po does not seek to rely on this clause in her argument.

17. On 11 February 2000, the Defendant instructed its solicitors to write to the Plaintiff. In the letter, the Defendant denied any knowledge of the unauthorized structures and any implied term of contract as the Plaintiff alleged. The Defendant further claimed to accept the Plaintiff's repudiatory breach of the tenancy agreement reserving its rights for damages for reinstatement of the Premises to its original condition.

Unauthorized structures

18. In the sketch enclosed in its letter dated 13 January 2000, the Plaintiff identified the 3 areas of unauthorized structures of a total area of about 57 sq. ft.:

(a) an extension step protruding from the shop front;

(b) the covered rear exit; and

(c) a solid structure inside the Premises (referring to the enclosed light-shaft)

19. After the Plaintiff terminated the tenancy agreement, it received a letter dated 12 February 2000 from the Buildings Department which

notified that the following unauthorized structures were observed during their site inspection of the Premises on 12 January 2000:

(a) Canopy over the pavement.

(b) Advertisement signboard attached to the canopy.

(c) Shopfront overhead signbox projecting more than 600 mm from the external wall.

(d) Shopfront extension and step encroachment on pavement more than 300 mm.

(e) The existing rear exit structures with solid walls and door erected on the common area.

20. In a nutshell, the Plaintiff seeks the rescission of the tenancy agreement on the basis of misrepresentation, or alternatively, breach of implied terms of the said tenancy agreement.

The Defendant's case

21. The Defendant's case is quite simple. It is a company involved in property investment. It denies the existence of the alleged misrepresentations and implied terms. It is the Defendant's case that it never made any representation of fitness for purpose as alleged and that there was no illegal alteration of the Premises. Nor had it represented that a licence for learning centre would be granted. Moreover, if there were any misrepresentations, the Plaintiff placed no reliance and was not induced to enter into the tenancy agreement. Relying on the principle of caveat emptor, the Defendant denies the existence of implied terms as to the condition of the Premises as alleged by the Plaintiff.

22. DW 1, Mr. Au, is the managing director of the Defendant. He testified that he bought the Premises in 1999. The Premises were used by the former owner for running of a cookery school and was partitioned into a number of cubicles. After he bought it, he instructed Mr. Chan, the property officer of his company, to obtain possession of the Premises and to handle the leasing of the property. Mr. Au denied the suggestion of the Plaintiff that as the provisional sale and purchase agreement signed by himself and the former owner provided that the property was sold on "as is" basis and the Plaintiff accepted the condition of the property as it was, he must have known there was unauthorized structure. Mr. Au said it was just a common clause for sale and purchase of old property.

23. DW2, Mr. Chan, is the property officer of the Defendant responsible for the management, leasing and rent collection of the properties owned by the Defendant. He testified that he told Madam Tong that the Premises was let on "as-is" basis. He accepted that Madam Tong had told him that she intended to operate a learning centre and the Premises would require a licence to do so. Mr. Chan frankly admitted that he had used the expression "no problem" to describe the property. He had also said that the rear exit of the property could be used as fire exit. However he denied making any representation or warranty that the Premises were fit for use as a learning centre and that there were no unauthorized structures or any other structure in the Premises which would hinder or prevent the Plaintiff from getting a school licence. He did not have any experience in running a learning centre nor did he have any knowledge of the requirement for obtaining a school licence. Apart from the enclosed light-shaft, which he suspected to be unauthorized structure, he was not aware of any unauthorized structures within the property. In any event, during the viewing of the property, he had pointed out to Madam Tong the enclosed light-shaft. Madam Tong also indicated that if she would rent the property, she would dismantle this structure and he agreed. He had also provided Madam Tong with a copy of the floor plan of the Premises at her request during one of her viewing of the Premises. He agreed that the original decorations could be removed but only on the condition that it would not affect the condition of the Premises.

24. On or about 13 January 2000, having received the letter regarding the alleged unauthorized structures, Mr. Chan told Madam Tong that since the Premises were let on "as-is" basis, the Defendant would not remove the alleged unauthorized structures. However the Defendant agreed that the Plaintiff could remove the alleged structures themselves and the Defendant would pay them $3000 as subsidy. However Madam Tong asked for $10,000 and therefore no agreement was reached.

25. After the Defendant repossessed the Premises, it could not find a new tenant until May 2001 when the Defendant was able to let out the Premises and entered into a new tenancy agreement with a new tenant for a term of two years from1 June 2001 to 31 May 2003 with a monthly rental of $30,000 and also a monthly allowance for decoration expenses of the Premises of $5,000 per month to be deducted from the monthly rental payable during the period from 1 July 2001 to 31 May 2002. The allowance was given as compensation to the new tenant for the damaged state of condition of the Premises.

Facts in dispute

26. There are not much factual disputes in the case. In my view, the only material dispute is whether Mr. Chan made misrepresentations to Madam Tong to the effect that the Premises would be fit and suitable to be used as a learning centre and that a licence would be granted. However I do not think the finding of fact in this regard would affect the result of the case. I am sure that whether or not such representations had been made, the Plaintiff could not have relied on such representations. For the sake of completeness, I shall make such finding of fact first and then state the reasons why I find the Plaintiff placed no reliance on the alleged misrepresentations.

Misrepresentation

27. I have carefully observed Mr. Chan when he gave evidence. I find him a straight-forward witness. He admitted quite frankly that he did say to Madam Tong that the Premises had no problem but that was said with reference to structural safety only. He also admitted that he suspected the enclosed light-shaft was an unauthorized structure. He had also agreed that the original decoration could be removed on the condition that it would not affect the safety of the Premises. He agreed that Madam Tong had disclosed to him that the Premises would be used as a learning centre. However he strongly denied that he had made any warranty or representation that the Premises would be fit for use as a learning centre and that there were no unauthorized structures.

28. On the other hand, I also find that the contemporaneous correspondence of the Plaintiff do not support its case on the point of misrepresentation. When one looks at the letter dated 2 February 2000 sent by the Plaintiff's solicitor to the Defendant purporting to rescind the contract, one will immediately notice that the only complaint raised in the letter was the implied term of the contract that an unauthorized structure should not exist or form part of the Premises. The Plaintiff or its solicitor did not raise any complaint about or mention any misrepresentation at all.

29. Having considered the evidence of Mr. Chan and Madam Tong, I prefer the evidence of the former. I find that Mr. Chan did not make such representations as Madam Tong claimed. I also accept that Mr. Chan had told Madam Tong that the Premises was let on "as-is" basis.

Inducement

30. Further, I find that Madam could not have placed any reliance on the alleged misrepresentations. Madam Tong knew very well that there were strict requirements to be complied with before she could get a licence. She knew that Mr. Chan was only a staff of the Defendant and he did not claim any expertise in the business of running a learning centre. It is an affront to common sense that Madam Tong would rely on the misrepresentations that she alleged.

Implied Terms

31. The Plaintiff also pleaded a breach of implied terms of the contract. The implied terms pleaded in a convoluted way in the Statement of Claim but what they really come down to are simply 2 categories: (i) those concerning the condition of the property and the licence, and (ii) those concerning the quiet enjoyment of the property.

Condition of the Property

32. The first category is in fact a claim that it was a term of the contract that the Premises were fit for running of a learning centre. However it is trite law that there is in general no implied warranty on the part of a landlord that the demised premises are fit for the purpose for which they are taken or that it may be lawfully used for the purpose for which it was let. And there cannot be any implied term in a tenancy agreement that the property leased is free of any unauthorized structure. The intending tenant is presumed to make his own inquiries as to its condition, and, in the absence of a special stipulation, he takes the house as it stands.

Quiet Enjoyment

33. Insofar as the argument of the implied term of quiet enjoyment is concerned, no doubt a tenant is entitled to quiet enjoyment. However I cannot see how the term was breached in this case. The unauthorized structures pointed out by the Building Department in its letter of 12 February 2000 are:-

(a) canopy over the pavement;

(b) advertisement signboard attached to the canopy;

(c) shopfront overhead signbox projecting more the 600 mm from the external wall;

(d) shopfront extension and step encroachment on pavement more that 300 mm;

(e) the existing rear exit structure with solid walls and door erected on the common area.

34. The enclosed light-shaft is not one of the unauthorized structures identified in the letter. I suspect it might have been removed during the visit by the Building Department. In any case, none of the unauthorized structures identified in the letter are extensions or additions within the Premises. In my judgment, the existence or removal of these structures would not result in diminution of enjoyment of the property. The Plaintiff also seeks to argue that the unauthorized structures would create a risk of the Government's re-entering the property. Given the nature of the unauthorized structures and the remoteness of the risk, I think the argument is too far fetched. Such remote risk of re-entry cannot amount to a breach of covenant as to quiet enjoyment.

35. The Plaintiff also seeks to rely on the letter of the Building Department and the possible enforcement action under Sections 24 and 40 of the Building Ordinance. Yet the Building Department has not taken such enforcement actions. Even if such actions were taken, order of demolition of unauthorized structures would have to be served on the owner, i.e. the Defendant, who is the person to comply with the order. There is simply no sufficient evidence that such order will be issued and, if issued, that it will not be complied with by the Defendant. In my view, given the minor nature of the unauthorized structures, the rectification could have been done by minor works. This argument cannot help the Plaintiff.

The Break Clause

36. The Break Clause was added by the Plaintiff in the tenancy agreement. It was intended to provide a leeway to the Plaintiff in case it was unable to obtain a learning centre licence. However, the Plaintiff did not and does not seek to rely on the clause to terminate the lease. I therefore do not have to decide whether the Plaintiff could have relied on the clause to terminate the lease. But in passing, there is no evidence in the case that the Plaintiff was unable to obtain a learning centre licence. It must be noted that when the Building Department and the Education Department issued their letters dated 12 February 2000 and 15 February 2000, the Plaintiff had rescinded the tenancy agreement on 2 February 2000 respectively.

Result of the claim

37. The Plaintiff through its solicitors returned the keys of the Premises to the Defendant indicating clearly the rescission of the tenancy agreement. As I found that there were no misrepresentations or any breach of implied terms of the tenancy agreement on the part of the Defendant, the Plaintiff was therefore in wrongful repudiation of the tenancy agreement. The Plaintiff's claim for damages must therefore fail. Insofar as the rental deposit is concerned, it can only be returned subject to any set-off of damages which the Defendant is entitled to counterclaim against the Plaintiff.

The Counter-claim

38. The Defendant counterclaims for loss of rental income and damages as a result of the Plaintiff's wrongful repudiation of the tenancy agreement. It claims that it was unable to find a new tenant until 5 May 2001. The new tenancy agreement is for a term of 2 years from 1 June 2001 to 31 May 2003 at a monthly rent of $30,000. It further provides a decoration allowance of $5,000 per month to the new tenant from 1 June 2003 to 31 May 2004 as allegedly compensation for the damaged state of condition of the Premises. The Defendant purported to apply the one-month advance rental of the Plaintiff to pay the rent for February 2000. On this basis, the Defendant claims for loss of rental for the unexpired term of the relevant tenancy agreement from 1 March 2000 to 31 May 2001 in the sum of $405,000 ($27,000 x 15 months) and the loss of rental for the rent-free period granted to the new tenant in the sum of $27,000. Further it claims for damage done to the property by way of decoration allowance granted to new tenant in the sum of $55,000 ($5000 x 11 months).

Mitigation

39. It is trite law that where a breach has occurred, the injured party must take all reasonable steps to mitigate the loss occasioned by the breach. It is the Defendant's case that after the repossession of the Premises, the Defendant did not take any steps to re-let the Premises for 3 to 4 months. Thereafter the Defendant engaged estate agents to find tenants. I find that one of the reasonable steps ought to be taken to mitigate its loss is the engagement of estate agents to find new tenants. However apart from the Defendant's mere assertion, there is no evidence from any estate agents or documentary evidence in support of the claim that estate agents had been engaged. There is not even a copy of the usual form of instructions to estate agents produced to the court. I find there is no sufficient evidence to prove that the Defendant actually sought the assistance of estate agents to find new tenants. The Defendant has failed to take all reasonable steps to mitigate its loss.

Loss of Rent

40. Having said that, I find that it would be fair to say that even if the Defendant had taken all reasonable steps, it would still take a reasonable period of time to find a new tenant. The Defendant would lose the rental income for this reasonable period of time. In this case, from the time the Plaintiff started to view the Premises until the expiry of the rent-free period, almost 3 months had expired. Given the sluggish economy during the relevant period which this court can take judicial notice, I think it is fair to say it would have reasonably taken the Defendant at least 4 months to find a new tenant. In this connection, I award the Defendant damages for loss of rental income for 4 months ($27,000 x 4 =$108,000).

Alteration of Premises

41. Insofar as the alleged unauthorized alterations are concerned, I accept Madam Tong's evidence that the alterations were approved by the Defendant through Mr. Chan. In any event, I find that the Defendant fails to prove any loss arising from the alterations. On the Defendant's evidence, the Defendant did not carry out any repair or re-instatement work to the Premises after the Plaintiff's departure. While the Defendant alleges that it suffers loss by giving the $5,000 monthly allowance to the new tenant for 11 months, it is difficult to understand how this allowance can be connected with the alterations. The allowance is more likely a commercial arrangement between the Defendant and the new tenant other than compensation. I find that it is totally unconnected with the alterations. I find that the Defendant fails to prove any damage arising from the alterations.

Arrears of Rent

42. The rent-free period ended on 15 January 2000 and the Defendant failed to pay rent thereafter. The Defendant accepted repudiation of the tenancy agreement on 11 February 2000. The Defendant is entitled to arrears of rent from 16 January 2000 to 11 February 2000 in the sum of $25,200 (27 x $28,000/30).

Damages

43. The total damages of the Defendant are therefore assessed at $133,200. The damages must be set off against the 4-month rental deposit retained by the Defendant. That leaves a balance of $25,200 to be paid by the Plaintiff to the Defendant.

Judgment

44. The Plaintiff's claim is dismissed and the Defendant's counterclaim is allowed. There will be judgment for the Defendant against the Plaintiff in the sum of $25,200 with interest thereon at judgment rate from the date of service of writ of the High Court until payment. I also make an order nisi for costs of the proceedings to the Defendant against the Plaintiff, to be assessed on the District Court scale. The order nisi shall be made absolute after 14 days.