SIME DARBY MOTOR GROUP LTD. v. SKY STATES PROPERTIES LTD.

HCA 5934/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5934 OF 1998

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REASONS FOR JUDGMENT

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Introduction

1. These 2 actions were consolidated by an order dated 11 May 1999. The Plaintiff brings these actions against the 2 Defendants asking for the return of the rent deposits paid by the Plaintiff under 2 tenancy agreements. The Plaintiff also claims to be reimbursed for its payment of the management fund deposits in October 1994. The Defendants allege that the Plaintiff has breached the tenancy agreements and the rent deposits were forfeited as a result. They also deny that the Plaintiff is entitled to be reimbursed for the management fund deposits. The Defendants indicate at trial that para. 11 of the Defence will no longer be relied upon.

2. At the end of the trial on 26 September, 2000, I entered judgment in the Plaintiff's favour in each of the 2 actions in the sum of $113,200.00 with interest and costs. The sum represents:-

(a) return of rent deposit	$165,000.00
(b) (less) rent for 25.6 to 24.7.97	$52,500.00
(c) reimbursement of management fund deposit	$700.00
Total	$113,200.00

The following are the reasons for the judgment.

3. The Plaintiff used to be the tenant of 2 shop premises at Pak Sing Building, 27-41 Tong Mi Road, Kowloon, Hong Kong ("the Shops"). The Shops were used by the Plaintiff as one unit and as a showroom of the commercial vehicles for which the Plaintiff is the Hong Kong sole agent. The Shops were owned by the 2 Defendants but the person acting for them was a Mr Ip Lam On ("Ip").

4. The building in which the Shops were located was completed in 1988 and the Plaintiff started to rent them from the Defendants since then. A series of tenancy agreements were entered into between them over the years. The tenancy agreements relevant to these actions were both dated 25 June 1995. The Shops were let to the Plaintiff for 2 years from 25 June 1995 to 24 June 1997. By a Notice to Quit dated 6 January 1997, the Defendant required the Plaintiff to quit the Shops on 24 July 1997. It happened around that period the Plaintiff also intended to move its showroom to Cheung Sha Wan.

5. The following facts are undisputed in these actions:-

(a) the Plaintiff has paid to the Defendants rent deposits of $165,000.00 pursuant to each of the 2 tenancy agreements;

(b) by 15 July 1997, the Plaintiff has vacated the Shops;

(c) a joint inspection of the Shop took place on 15 July 1997. This was attended by Ip for the Defendants. The Plaintiff was represented by the following persons: a Mr Eric Lam ("Lam") (the Manager of the Property Department of Sime Darby Management Services Limited (the Plaintiff's subsidiary)), a Mr Lam Tak Ming and Mr Ng Ngai Lai (both also from the said Property Department) and a Mr Lau Shek Kim ("Lau") (the Senior Sales Manager of Universal Cars Limited (also the Plaintiff's subsidiary) who used to be in charge of the showroom at the Shops). A Mr Siu Yau ("Siu"), a contractor engaged by the Plaintiff, was also present;

(d) fittings (such as the Plaintiff's sign and light-box), installations (such as air-conditioning and lighting) and decorations were made to the Shops when they were used and occupied by the Plaintiff;

(e) the said fittings, installations and decorations were not removed by the Plaintiff when it vacated the Shops.

6. It is also undisputed that the tenancy agreements contain the following terms:-

(1) Clause 2(aa):-

"[The Plaintiff] hereby agrees with [the Defendants] ... Unless [the Defendants] otherwise agree in writing, to re-instate and restore [the Shops] to their original condition and to make good all damage caused or occasioned by the erection and removal of alterations partitions or other erections" ("Cl. 2(aa)");

(2) Clause 5(a):-

"[The Plaintiff] shall on the signing hereof deposit and maintain with [the Defendants] a deposit ... to secure the due observance and performance by [the Plaintiff] of the agreements, stipulations and conditions herein contained and on [the Plaintiff's] part to be observed and performed. The said deposit shall be retained by [the Defendants] throughout the said term free of any interest to [the Plaintiff] and in the event of any breach or non-observance or non-performance by [the Plaintiff] of any of the said agreements, stipulations or conditions aforesaid, [the Defendants] shall be entitled to terminate this Agreement and to forfeit the said deposit by way of liquidated damages ... " ("the 1st limb of Cl. 5(a)");

(3) Clause 5(a):-

this Clause also stipulates that " ... Notwithstanding the foregoing, [the Defendants] may in any such event at [their] option elect not to terminate this Agreement and forfeit the deposit but to deduct therefrom the amount of any monetary loss incurred by [the Defendants] in consequence of the breach, non-observance or non-performance by [the Plaintiff] in which event [the Plaintiff] shall as a condition precedent to the continuation of the Tenancy deposit with [the Defendants] the amount so deducted ... " ("the 2nd limb of Cl. 5(a)").

7. The Defendants allege that the Plaintiff breached Cl. 2(aa) by failing to remove the said fittings, installations and decorations. The Plaintiff contends that at the joint inspection on 15 July 1997, the Defendants told the Plaintiff that there was no need to remove them. In these circumstances, the Plaintiff argues that:-

(a) the Defendants have waived the requirements of Cl. 2(aa);

(b) the tenancy agreements have been varied such that the Plaintiff did not need to remove the said fittings, installations and decorations;

(c) the Defendants are estopped from relying on Cl. 2(aa) or from withdrawing from the indication that there was no need to remove the said items.

8. Before dealing with the individual issues, I should observe that in view of the undisputed matters set out above, the burden is on the Plaintiff to establish its case of waiver, variation and/or estoppel. This is because in the absence of such waiver, variation and/or estoppel, the Plaintiff would have been liable under the terms of the tenancy agreements to reinstate the Shops failing which it would have been in breach of them and thus the rent deposits would have been liable to be forfeited.

9. Further, the Plaintiff's case of waiver, variation and/or estoppel depends on the credibility of the witnesses' testimony because the respective account given by the Plaintiff and the Defendants in testimony contradicts each other.

CREDIBILITY OF WITNESSES AND FINDING OF FACTS

The Plaintiff's Witnesses

10. It is understandable from Lam's post as the Manager of the Property Department that he was primarily responsible for the discussion with Ip at the joint inspection on 15 July 1997. In fact, he also said so in his testimony. His testimony about that incident can be summarized as follows:-

(a) the Plaintiff received the Notice to Quit in January 1997. Coincidentally, the Plaintiff also did not wish to renew the tenancy agreements because it intended to re-locate its showroom to Cheung Sha Wan;

(b) Siu was the successful bidder for the decoration contract relating to the new Cheung Sha Wan showroom;

(c) in a telephone conversation in May 1997 between Lam and Ip, it was agreed that the Plaintiff could occupy the Shops up to 24 July 1997 to enable it to prepare for the relocation of its showroom;

(d) by a fax dated (and sent) on 10 July 1997, Lam invited Ip to attend a joint inspection at the Shops on 15 July 1997;

(e) in the meantime, the showroom was moved to Cheung Sha Wan and on or about 12 July 1997 the Shops became vacant;

(f) the purpose of the inspection on 15 July 1997 was to find out what reinstatement work was required by Ip;

(g) the inspection on 15 July 1997 was attend by the people set out above. Siu was asked to go there to enable him to know directly from Ip what reinstatement work was needed by Ip;

(h) after discussions, it was agreed between the Plaintiff (through Lam) and the Defendants (through Ip) that (1) there was no need for the Plaintiff to reinstate the Shops and all furnishings and fittings were to be left untouched and (2) matters relating to settling the account between the Plaintiff and the Defendants were to be dealt with by the parties' respective accounting department/accounting personnel after the relevant receipts and documents were checked. For this purpose, Ip asked Lam to contact a Ms Pat Wong of a Janicity Limited;

(i) after Ip has checked the locks to the main entrance door and the sliding door, he asked Lam to change them. Lam agreed to do so and asked Siu to deal with the matter. Ip also told Lam/Siu to deliver the keys to a lady in a cafe near the Shops;

(j) Lam was concerned about the "Mitsubishi" sign (which consisted of a plastic/acrylic sheet with words and logo) outside the Shops and told Ip that it should be removed. Ip promised to arrange to have it removed later because after the sign was removed, the electric installations behind would be exposed and would cause danger if it rained. Lam agreed to this;

(k) despite Ip's said promise, the sign was not removed. The Plaintiff was only a licensee of the "Mitsubishi" logo. Further, Lam received a complaint about the sign from the Owners' Incorporated concerned. He therefore sent a fax on 26 August 1997 to Ip urging him to remove the sign even if the Plaintiff had to contribute to the expenses for doing so.

11. The testimony of Lau and Siu in relation to what happened during the inspection on 15 July 1997 is substantially consistent with that of Lam's. Further,

(1) Lau testified that after the showroom was moved to Cheung Sha Wan, he passed by the Shops from time to time and saw that someone had parked private cars inside the Shops and the furnishing and lighting left behind were used by the occupants;

(2) Siu testified that the Plaintiff's tender included work for demolishing the fittings, installations and decorations of the Shops. He also said it was common for landlords to keep the tenant's fittings and installations because they could be used by the new occupants/tenants.

12. Mr Lau of counsel for the Defendants submits that the Plaintiff's testimony is untruthful because:-

(a) prior to 15 July 1997, the parties frequently communicated in writing. It is therefore unlikely (and therefore unbelievable) that an agreement would be reached orally between them at the inspection on 15 July 1997;

(b) further, Lam should be very experienced in tenancy and property matters. It is unlikely that he would not obtain some kind of written confirmation or evidence from Ip if an oral agreement had been reached on 15 July 1997;

(c) there was no apparent reason why the Defendants would want to keep the "Mitsubishi" sign because this would be of no use to the Defendants;

(d) Lau testified that the last month's rent was to be set-off against the rent deposits. This is clearly contradicted by items 4 and 5 of the Plaintiff's fax dated 15 July 1997 which stated: "4. [The Defendants'] accountant will check and return 3 months rental deposit to us. 5. Water, electricity, management fee, rate etc. will be checked and we will reimburse you any outstanding charges";

(e) the alleged arrangement for the handing over of the keys is unusual because they could have been delivered to the Defendants' office. The Plaintiff's witnesses need to put up this story to support their testimony that the Defendants had agreed to re-possess the Shops despite the lack of reinstatement.

13. Having considered Mr Lau's submissions, I find the testimony of the Plaintiff's witnesses to be truthful and reliable. Further, their testimony is supported by the contemporaneous documents regarding matters in issue in these actions. The more important documents include:-

(1) the "Form of Tender" of Sime Darby HK Limited dated 7 May 1997 (awarded to Siu) for the renovation of the Cheung Sha Wan showroom. Item 7 thereof is concerned with "Reinstatement works" at a cost of $45,000.00;

(2) the Plaintiff's fax dated (and sent) on 15 July 1997 confirming the matters covered at the inspection on 15 July 1997. These include: (1) handing over the Shops in their present condition, (2) the main entrance door and sliding door keys would be returned to the Defendants the next day, (3) the lease was to last until 24 July and rent would be paid up to then, (4) the Defendants' accountant would check and return the rent deposits, (5) utilities charges would be checked and would be reimbursed to the Defendants and (6) copy document for the management fund deposits was enclosed;

(3) the Plaintiff's faxes dated (and sent) on 26 August and 10 September 1997 asking the Defendants to remove the sign;

(4) the Plaintiff's faxes dated (and sent) on 21 October and 14 November 1997 and 9 February 1998 chasing for payment.

Further, it is obvious from the "Form of Tender" that the Plaintiff was prepared to reinstate the Shops. This supports its case that reinstatement work was not carried out only because the Defendants told it not to do so.

14. As regards Mr Lau's submission at sub-para. (d) above, if semantics are left aside, there is no real difference between what Lau testified and items 4 and 5 of the Plaintiff's fax of 15 July 1997. Even if there is a difference, Lau has conceded in his testimony that the arrangement about the return of the rent deposits and related matters was made between Lam and Ip and he was not entirely sure of that arrangement.

15. Mr Lau contends that the "Form of Tender" has not dealt with erecting a partition wall between the Shops. When Siu testified, he said this could be dealt with as an item of additional work if the need to do so should arise.

16. Mr Lau also argues that even if I should find the testimony of the Plaintiff's witnesses to be truthful, their testimony does not establish that any agreement has been reached on 15 July 1997. This is because Lam agreed that some matters were left to be dealt with by the accounting department/accounting personnel. I do not agree with this argument because, when understood in its proper context, Lam's testimony is that an agreement has been reached regarding the need for reinstatement of the Shops. The matters left to be dealt with later were only related to settling the accounts such as checking rates and utilities charges (see item 5 of the Plaintiff's fax dated 15 July 1997).

The Defendants' Witness

17. Only Ip testified for the Defendants. In brief, I am totally unimpressed by his testimony. He was an arrogant witness who did not make any real attempt to assist the court. For example, he would simply say that he had no recollection of dates or other details even though there may be documents or records to assist his memory. His account of the events is skeletal and brief. For example, he said that it was Lam who suggested there would be no reinstatement work. Ip said he immediately refused this suggestion and left the Shops, not caring what the others were doing inside the Shops. If this account is correct, there is no explanation as to why Ms Pat Wong's name would appear in the Plaintiff's fax dated 15 July 1997. Further, if the disagreement between the parties was so immense, it is inconceivable that Ip would ask the Plaintiff to attend to the matter of settling the accounts. Besides, if the costs of reinstatement were in dispute, it would have been impossible to settle the accounts; the Defendants would also have to hold on to the rent deposits to meet the potential costs.

18. Ip's explanation that he was not in the habit of replying in writing to the Plaintiff's faxes is also unbelievable. Not only is Ip alleging that the Plaintiff's witnesses lied in court as to what happened on 15 July 1997, as early as 15 July 1997 Lam sent a fax setting out lies which do not reflect the facts. Moreover, according to Ip, by reason of the Plaintiff's failure to reinstate the Shops, the Defendants would have to incur a substantial sum (according to Ip, this would exceed the amount of rent deposits held by the Defendants) to do so. I also find it unbelievable that not only did the Defendants fail to respond in writing to the Plaintiff's faxes chasing for payment, there was no document (prior to the letter from the Plaintiff's solicitors) stating the complaints how made by the Defendants.

19. The Shops have been sold by the Defendants in August, 1999. No reinstatement work has in fact been carried out thereat. Although a quotation for the costs of reinstatement was obtained, Ip frankly admitted in his testimony that this was obtained after the commencement of these actions and for the purpose of providing documentary proof. I notice that the space in the quotation for the Defendants to acknowledge their acceptance of the quotation was left blank. In these circumstances, I conclude that there was no genuine intention on the Defendants' part to reinstate the Shops. This also reflects adversely on the credibility of the Defendants' allegations.

20. For the above reasons, I reject Ip's testimony.

Findings of Fact

21. I find that the Plaintiff has established the following facts:-

(a) the Defendants (through Ip) told the Plaintiff that there was no need to reinstate the Shops and the installed items could be left behind at the Shops and the Plaintiff agreed to this;

(b) Ip only asked the Plaintiff to change the locks and told Lam/Siu to leave the keys with a lady in the café nearby and the Plaintiff also agreed to this.

22. It is unnecessary to set out other findings of fact for the purpose of this judgment. I will only state for the record that since I accept the Plaintiff's witnesses to be truthful and reliable witnesses, I find their testimony given in evidence-in-chief to be the facts of these actions.

CONCLUSION ON THE PLAINTIFF'S CASE OF WAIVER, VARIATION AND ESTOPPEL

Waiver

23. Chitty on Contracts (1999) 28th Ed., para. 23-039 states:-

"Where one party voluntarily accedes to a request by the other that he should forbear to insist on the mode of performance fixed by the contract, the court may hold that he has waived his right to require that the contract be performed in this respect according to its original tenour. Waiver ... may also be held to have occurred if, without any request, one party represents to the other that he will forbear to enforce or rely on a term of the contract to be performed or observed by the other party, and the other party acts in reliance on that representation".

24. Chitty, para. 23-040 states:-

"A waiver may be oral or written or inferred from conduct even though the provision waived is found in a contract required to be made in or evidenced by writing. ... An oral forbearance or concession made by one party to the other does not require to be so evidenced, even if made at the latter's request. Thus, what is ineffective as a variation may possibly have effect as a waiver ... ".

25. Para. 23-01 states:-

"The party who forbears will be bound by the waiver and cannot set up the original terms of the agreement ... ".

26. By reason of the matters aforesaid, I find that the Plaintiff has established a waiver by the Defendants of the stipulations in Cl. 2(aa). As a result, they cannot rely on Cl. 5(a) to forfeit the rent deposits and must return them to the Plaintiff.

Variation

27. Mr Lau argues that even if I accept the testimony of the Plaintiff's witnesses, there was no consideration to support the variation of contract contended for by the Plaintiff. I do not agree. The Plaintiff's witnesses mentioned that it is common for landlords in Hong Kong to request tenants to leave behind installed items in the premises. The reasonable inference from this is that these landlords consider these items to be of value; for example, these items will benefit the premises in that potential incoming tenants may be attracted because they may find the items useful. The consideration in support of the variation is thus this: in exchange for the landlords releasing the tenants from the contractual obligation to reinstate the premises, the tenants agree not to remove the installed items (as requested by the landlords).

28. By reason of the matters aforesaid, I find that there was consideration in support of the variation of the tenancy agreements in these actions.

29. This variation is not required by law to be made in or evidenced by writing, and hence may be varied orally: Chitty, para. 23-033, esp. text to nn. 19 and 21.

Estoppel

30. I agree with Mr Lau's argument that there is no evidence that the Plaintiff has acted to its detriment by relying on the Defendants' representation. This defence is therefore not established.

PLAINTIFF'S CLAIM FOR REIMBURSEMENT OF MANAGEMENT FUND DEPOSITS

31. According to Lam, Ip promised on 2 occasions to reimburse the Plaintiff for this item at the end of the tenancy agreements. The first was in October 1994 when the Plaintiff was asked by the Owners' Incorporated to pay the deposits. The other was on 15 July 1997. Ip denies that the Defendants ever promised to reimburse the Plaintiff.

32. The deposits were recorded in the minutes of 2 general meetings of the Owners' Incorporated. In the one dated 31 July 1994, the Owners' Incorporated resolved (among other things) that the owners were to contribute to the water and electricity deposits for the common area (item (8) thereof). In the one dated 6 August 1994, the Owners' Incorporated reported that the amount of contribution to the said deposits had been worked out. Further, there is also a letter dated 22 August, 1994 from the Owners' Incorporated demanding payment of the said deposits by the owners. The amount was stated in the letter to be $700 for each of the Shops.

33. I find that deposits of this nature are commonly payable by the owner of the property. Further, copies of the above documents were enclosed by Lam in the Plaintiff's fax dated 15 July 1997.

34. In these circumstances, I also accept Lam's testimony and reject that of Ip regarding this matter and find that the Defendants have agreed to reimburse the Plaintiff at the end of the tenancy agreements.

OTHER MATTERS

S. 58 of the Conveyancing and Property Ordinance, Cap. 219

35. Mr Leung of counsel for the Plaintiff argues that:-

(a) the Defendants have not counterclaimed for, or proved by evidence, damages for the Plaintiff's failure to reinstate the Shops;

(b) even if the Plaintiff has breached Cl. 2(aa), it was a one-off breach of the tenancy agreements rather than a continuing breach: Farimani v. Gates (1984) EGLR 887, 889;

(c) The Defendants failed to serve the notice required by s. 58 of Cap. 219 which provides:-

"A right of ... forfeiture under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice ... " (emphasis supplied): see also In re Riggs [1901] 2 KB 16, 20.

36. There is no evidence that the Defendants have served any such notice on the Plaintiff and I agree with Mr Leung that the Defendants cannot enforce Clause 5(a).

The 2nd Limb of Cl. 5(a)

37. Although no reliance was placed on the 2nd limb of Cl. 5(a) in the Defence, Mr Lau relies on this part of Clause 5(a) in his final submissions. I consider that he does so in an attempt to meet Mr Leung's argument based on s. 58 of Cap. 219. Mr Leung objects to Mr Lau raising a new point in the absence of proper pleading. I am, however, prepared to deal with this point on the merits without deciding whether Mr Lau is entitled to raise it.

38. The 2nd limb of Cl. 5(a) refers to an election on the Defendants' part to continue the tenancy upon the condition that the Plaintiff should "top up" the rent deposits. There is however no evidence such an election has been made by them. Mr Lau argues that the Notice to Quit was an act of election. However, this was served prior to any alleged breach, non-observance or non-performance of the tenancy agreements on the Plaintiff's part and thus could not fall within the 2nd limb of Cl. 5(a). Mr Lau argues that the agreement to allow the Plaintiff to stay until 24 July 1997 could also be an act of election. However, I do not see how the Defendants can establish such an agreement without (at the same time) relying on the Plaintiff's case. As stated earlier, according to the Plaintiff's witnesses, an agreement was reached at the inspection on 15 July 1997. The agreement was recorded in the Plaintiff's fax dated 15 July 1997 and included a reference to the lease expiring on 24 July 1997. On the other hand, the Defendants' case is that no such agreement was reached and the said fax was in effect a fabrication. If the Defendants rely on the Plaintiff's case, they cannot at the same time contend the Plaintiff has breached the tenancy agreements.

39. For the above reasons, I do not find that there is any substance in this part of the Defendants' arguments either.

Costs

40. There is no valid reason not to follow the usual rule that costs should the event. Costs of these actions are to be paid by the respective Defendants to the Plaintiff to be taxed if not agreed.