YIKTOWN PROPERTIES LTD v. JEON BOK SOOL

HCA 2189/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2189 OF 2007

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BETWEEN

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J U D G M E N T

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1.  This is a landlord and tenant dispute.

2.  By a tenancy agreement dated 7 March 2007 (“the tenancy agreement”) the premises known as Shops 1 & 2, ground floor, Kiu Fung Mansion, 87 & 89 Kimberley Road, Tsim Sha Tsui, Kowloon (“the premises”) were let by the plaintiff as landlord to the defendant as tenant at a monthly rent of HK$80,000 per month exclusive of rates and management fees for a term of 2 years between 1 July 2007 and 30 June 2009.

3.  The period from 7 March 2007 to 30 June 2007 was a rent free period granted to the defendant.

4.  The defendant paid the plaintiff HK$160,000 as rental deposit under the tenancy agreement.  She also paid the plaintiff rent for the months of July and August 2007. However, since 1 September 2007 the defendant has failed or refused to pay any rent despite demands.

5.  The defendant delivered up the keys to the premises to the plaintiff on or about 4 December 2007.

6.  The plaintiff’s case is that the failure of the defendant to pay rent when it was due was a repudiatory breach of the tenancy agreement which was accepted by the plaintiff by the service of the writ shortly after the institution of proceedings herein on 17 October 2007. 

7.  The plaintiff claims arrears of rent, mesne profits and damages for the defendant’s breach of the tenancy agreement.

8.  The defendant denies that she is liable to the plaintiff at all for the reasons pleaded in the amended defence and counterclaim.  She also counterclaims for a declaration that the defendant has validly rescinded the tenancy agreement or alternatively, she asks for rescission of the tenancy agreement.  She also counterclaims the return of the rent paid in the total sum of HK$160,000, the return of the rental deposit in the sum of HK$160,000, and damages.  Although in the amended defence and counterclaim she also claimed loss of profits in excess of HK$20,000,000, the defendant withdrew this claim at trial.

9.  There is no dispute that the tenancy agreement was entered into on 7 March 2007.  However, the defendant has in the amended defence and counterclaim relied on a number of pleaded defences namely, that:

(1)  the defendant was at all material times representing All Best International Ltd (“All Best”) to enter into the tenancy agreement with the plaintiff (paragraph 4);

(2)  in order to induce the defendant to enter into the tenancy agreement Raymond Wan (“Wan”) on behalf of the plaintiff orally represented to the defendant in or about the end of February 2007

(i)  that the premises were fit for the operation of a restaurant;

(ii)  that Wan was also engaged in the interior decoration business and he could act as a consultant to carry out the fitting-out decoration for the restaurant at the premises; and

(iii)  that Wan would join in as one of the partners in the restaurant business and the plaintiff would then reduce the monthly rental to HK$75,000 or lower (paragraphs 5 and 6);

(3)  on or about 7 March 2007 Wan represented to the defendant and indicated on the floor plan which he had brought with him together with the tenancy agreement that the tenancy included the area occupied by the toilets as shown on the floor plan (paragraphs 7 and 8);

(4)  on or about 7 March 2007 Wan represented and expressly agreed that once All Best had been set up a fresh tenancy agreement would be signed between the plaintiff and All Best which would then supersede the tenancy agreement (paragraphs 9 and 10);

(5)  relying on the above representations which were false the defendant was induced to enter into the tenancy agreement (paragraphs 11and 28);

(6)  further or in the alternative the representations constituted a warranty to the defendant that the premises were fit for the purpose of a restaurant (paragraph 12);

(7)  further or in the alternative the said warranty was given as an express term of the tenancy agreement (paragraph 13);

(8)  further or in the alternative there was a collateral contract between the plaintiff and the defendant that the plaintiff warranted that the  premises were fit for the purpose of a restaurant (paragraph 14);

(9)  it was an express term of the tenancy agreement that the premises shall be fit for the purpose of a restaurant (paragraph 19(1));

(10)  the toilets as shown in the said floor plan were unauthorized building works under the Buildings Ordinance and Regulations and that for that reason an application for a food licence at the premises would not be granted (paragraphs 22 and 23);

(11)  the plaintiff knew or ought to have known that there were unauthorized building works in the premises namely, the toilets as it was in possession of the premises since 1990 and the plaintiff failed to inform the defendant of the unauthorized building works prior to entering into the tenancy agreement (paragraph 25);

(12)  the defendant requested the plaintiff to negotiate with the Incorporated Owners (“the IO”) of the building where the premises are situate to permit the defendant to use the common toilets for the purpose of the restaurant but the plaintiff failed to take action on obtaining the IO’s permission (paragraphs 34 and 35);

(13)  as a result of the plaintiff’s breaches the defendant rescinded the tenancy agreement and delivered vacant possession of the premises and the keys to the plaintiff on 4 December 2007 (paragraph 55);

(14)  the defendant is entitled to the relief counterclaimed.  The defendant, however, withdrew her claim for loss of profit at trial as I have said.

10.  The issues are:

(1)  whether the defendant was in breach of the tenancy agreement by failing to pay the agreed monthly rent of HK$60,000 for the months of September and October 2007;

(2)  whether any of the pleaded defences give rise to a defence to the plaintiff’s claims;

(3)  whether the plaintiff is entitled to the relief claimed;

(4)  whether the defendant is entitled to the relief counterclaimed.

11.  I heard evidence from Wan on behalf of the plaintiff.  I also heard evidence from the defendant and from Kim Sun Dok (“Kim”).

12.  Save that there are parts of Wan’s evidence which I did not accept as mentioned below because he was, in my view, mistaken, I accept the rest of Wan’s evidence.  I find that he was a truthful, honest and reliable witness.

13.  I cannot say the same for the defendant.  She was not an honest or reliable witness in my view. Where the evidence of Wan and the defendant are at variance I much prefer Wan’s evidence.  I accept his evidence and reject the evidence of the defendant.

14.  Kim, in my view, was a truthful witness.  Although in her witness statement she appeared to support the defendant’s evidence that Wan had made a representation that the premises were fit for the operation of a restaurant, it was clear from the cross-examination of Kim that she was unable to support the defendant’s evidence on this.  Kim’s evidence did not assist the defendant. 

15.  The applicable legal principles are well settled.

16.  It is clear that in the absence of an express term there is no covenant in a lease or tenancy agreement that the premises are fit for any particular purpose.  There is no implied warranty that the premises will be fit for any purpose that the tenant may have in view (paragraphs 3006 and 3007 Hill and Readman’s Law of Landlord and Tenant).

17.  Devlin J (as he then was) said in Edler v Auerbach [1950] 1 KB 359 at pages 373 to 374 that

“The relevant principle of law was enunciated by Parke B. in Hart v. Windsor, and quoted with approval by Scrutton L.J. in Bottomley v. Bannister, and is as follows :

‘There is no contract, still less a condition, implied by law on the demise of real property only, that it is fit for the “purpose for which it is let.” This principle has often been applied in cases where the premises are physically unfit for the purpose. I think it equally applicable where premises are, so to speak, legally unfit. It is the business of the tenant, if he does not protect himself by an express warranty, to satisfy himself that the premises are fit for the purpose for which he wants to use them, whether that fitness depends upon the state of their structure, the state of the law, or any other relevant circumstances.” ’

18.  The statement of the law by Devlin J. in Elder was expressly approved by Diplock LJ (as he then was) in the English Court of Appeal in Hill v Harris [1965] 2 QB 601 at page 615.

19.  The background facts are that the plaintiff became the registered owner of the premises on 31 May 1990.  From about June 1990 to the end of 2006 the premises were used as a nightclub under the name Club Riviera with a valid general restaurant licence and a liquor licence at all times.  Kim was the manager of Club Riviera which was ultimately owned by Wan.  Kim was running Club Riviera for Wan from about June 1990 to around December 1997 when it closed down.  From about October 1998 to December 2006 Club Riviera was Kim’s own business which she said she ran initially through a limited company and then as sole proprietor.  In December 2006 Kim closed down Club Riviera.

20.  The above facts are undisputed and I find them proved.

21.  The defendant was a friend of Kim who had helped Kim when she set up the nightclub in 1998.  According to Wan, he said that in or about February 2007 Kim told him that the defendant was a staff member who had worked at Club Riviera.  However, this was denied by Kim who said that the defendant never worked for her.  The defendant had merely assisted Kim as a friend doing translating work for her.  I prefer Kim’s recollection on this.  I accept Kim’s evidence on this and do not accept Wan’s evidence.  In my view, Wan was mistaken as to what exactly Kim had told him about the defendant.  

22.  I also accept the evidence of the defendant on this matter and find that she had not worked at the nightclub.  As both Kim and the defendant confirmed in evidence, they regarded their relationship with each other as close as sisters.  

23.  On the undisputed evidence it is clear that the defendant wished to operate a Japanese hotpot and Korean barbeque restaurant at the premises.  This was made known to Wan.  However, there is a dispute of fact as to whether Wan did represent that the premises were fit for the purpose of a restaurant.  There is also a dispute of fact as to whether Wan made the alleged representations to the defendant in February 2007 and on 7 March 2007 when the tenancy agreement was signed.

24.  On these disputes of fact, I much prefer the evidence of Wan to the evidence of the defendant and Kim.  

25.  It is clear from Kim’s evidence that she did not really understand the discussions between Wan and the defendant on either occasion in February 2007 and 7 March 2007 as they were conducted in Cantonese which Kim did not fully understand.  She said that she only had a minimum level of understanding Cantonese.  Kim accepted in evidence that she did not really understand what was discussed in Cantonese between the defendant and Wan at the end of February 2007 and again on 7 March 2007 when the tenancy agreement was signed.  She said that she was not clear about what had transpired in the meetings at the end of February 2007 and on 7 March 2007 as she was not familiar with Cantonese.  On her own evidence Kim was unable to support the defendant’s evidence of the representations alleged by her to have been made by Wan at the end of February 2007 and 7 March 2007. 

26.  On the disputes of fact as to what transpired at the meetings at the end of February 2007 and on 7 March 2007 when the tenancy agreement was signed, I much prefer the evidence of Wan to the evidence of the defendant.  I believe Wan and disbelieve the defendant.  

27.  I reject the evidence of the defendant that Wan made the alleged representations as pleaded in the amended defence and counterclaim.  I find that Wan did not make the alleged representations at the meeting at the end of February 2007 that the premises were fit for the operation of a restaurant.

28.  Wan said in evidence that in the course of rental negotiations the defendant offered to pay HK$70,000 as the monthly rental when the defendant responded by saying that he might as well be her partner.  That suggestion was rejected by the defendant and by Wan also as he said that he was always in San Francisco away from Hong Kong.  I accept Wan’s evidence.  There was never any agreement that Wan would become a partner of the defendant and nothing turns on the pre-contractual discussions which never materialized.  It is plain that it was eventually agreed, as set out in the tenancy agreement that the monthly rent would be HK$80,000.  I so find.

29.  Wan initially said that he handed a copy of the layout plan of the premises (page 66 Core Bundle) to the defendant which he had brought on 7 March 2007.  However, later on in evidence he said that the layout plan and other plans were not handed to the defendant but were handed to Norman Lin (“Lin”), a friend of the defendant who was assisting her, on a date after the tenancy agreement was signed.  I believe Wan.  It seems to me that when he said earlier that he had handed the layout plan to the defendant on 7 March 2007 he was mistaken as to this.  He corrected himself later on in evidence when he said that it was after the meeting on 7 March 2007 that he had a meeting with Lin when he handed over drawings and plans over to him when the defendant was not present.  I believe him and accept this part of his evidence.  

30.  The defendant gave evidence that on 7 March 2007 Wan brought with him an air-conditioning plan of the premises.  I would observe that the pleaded case is that Wan brought a floor plan with him.  I prefer the evidence of Wan to the evidence of the defendant on this matter and find that Wan did not bring any plans with him on 7 March 2007 when the tenancy agreement was signed.

31.  I find that the layout plan and other drawings including engineering drawings were handed over to Lin by Wan after the meeting on 7 March 2007.

32.  Wan also accepted that he did say to the defendant that he was a consultant and that he had people who could help the defendant provide designs for the premises.  That suggestion was not accepted by the defendant who said that she had her own design team with contractors which would incorporate Korean materials.  That evidence was undisputed and I accept it.

33.  What is plain is that throughout the years that Club Riviera was operating at the premises from 1990 to 2006 there was no difficulty in obtaining renewals of the general restaurant licence for the premises.  I so find. 

34.  There is also no dispute that the defendant had been to the premises prior to February 2007 and knew that there were kitchen facilities at the premises.  The defendant knew that Kim had held a valid general restaurant licence for the premises.  She also knew of the existence of the toilets at the premises.

35.  There was no expert evidence adduced before me to show that the toilets were unauthorized building works.  The defendant’s opinion that the toilets were unauthorized building works is inadmissible and I reject it.  Although the defendant said that there was in existence an undisclosed surveyor’s report to show that the toilets were unauthorized building works, she later on in the course of the trial on Day 4 informed me that she had been mistaken about this.

36.  Kim’s evidence that she did not know that the toilets inside the premises were illegal is likewise inadmissible and I reject it.

37.  The undisputed evidence is that there were kitchen facilities at the premises and the toilets, which consisted of one male and one female toilet, were at the premises as shown in the layout plan.

38.  It is clear from the tenancy agreement that the defendant signed the agreement in her personal capacity.  

39.  I reject the defence that the defendant was at all times representing All Best in entering into the tenancy agreement.  On the undisputed evidence All Best commenced business only on 15 May 2007.  The defendant gave evidence that she discussed with her accountants about acquiring All Best only after the tenancy agreement was entered into on 7 March 2007.  So it is clear that on 7 March 2007 the defendant had not even approached her accountants to acquire a company let alone a company by the name of All Best.  The defendant when pressed on this in cross-examination said that she did not mention the name of the company to Wan on 7 March 2007 contrary to her pleaded case.

40.  Her evidence was that she was going to sign on behalf of a company that was going to be acquired and that Wan represented and agreed that once that company was set up a fresh tenancy agreement would be signed between the plaintiff and that company which would supersede the tenancy agreement.  

41.  I do not believe the defendant’s evidence that on 7 March 2007 Wan on behalf of the plaintiff represented and agreed that when a company would be set up a fresh tenancy agreement would be signed between the plaintiff and that company which would then supersede the tenancy agreement.

42.  I reject the evidence of the defendant that Wan made such representations. I believe Wan and disbelieve the defendant on this matter.

43.  The defendant fails to establish that the pleaded representations were made by Wan on behalf of the plaintiff either at the end of February 2007 or on 7 March 2007.  I reject the pleaded defences that those representations were made and that the defendant was induced by the same to enter into the tenancy agreement.

44.  I also reject the defences raised that there was a warranty that the premises were fit for the purpose of a restaurant or that there was a collateral contract as alleged. 

45.  I also reject the suggestion that the tenancy agreement contained an express term that the premises were fit for the purpose of a restaurant.  I find that there was no such express term.

46.  There is also no merit in the plea that the plaintiff knew or ought to have known that the toilets were unauthorized building works and failed to inform the defendant of the same.  I reject these allegations which have not been established on the evidence.  This was denied by Wan.  I believe him and accept his evidence. 

47.  As I have said, there is no admissible evidence that the toilets were unauthorized building works.  There is also no evidence that the plaintiff knew that they were unauthorized building works.  I would observe that by the letter from Thomas Tsang Surveyors Ltd to Messrs Lai and Leung, former solicitors for the plaintiff,  dated 21 April 1998 (page 26 Core Bundle) the surveyors confirmed that the premises were constructed in accordance with the approved plans and that there were no structural alterations of the premises.

48.  It is clear that Lin was assisting the defendant in dealing with the interior designers for the proposed restaurant that she wanted to operate at the premises.  The plans of Mei Shing Restaurant Design Limited dated 12 April 2007 (page 231 of the Agreed Bundle B) showed the toilets at the premises.  However, the plans dated 12 May 2007 (page 232 of the Agreed Bundle B) showed that the toilets were replaced by a VIP room.  In his email to Wan sent on 25 May 2007 Lin informed Wan that

“We intended to remove the toilet changing to a VIP room…….”

49.  On the evidence, the toilets were indeed removed when the premises were renovated on behalf of the defendant.  As the design plans showed, it was intended to replace the toilets with a VIP room.  That was a decision made by the defendant or by those assisting her.  The plaintiff was not involved in that decision. I so find.

50.  The defendant said that she attempted to apply to use the common toilets of the building for the purpose of the restaurant.  She realized that she required the permission of the IO to do so.  There is no dispute that she requested Wan to assist in obtaining the permission of the IO to allow the defendant to use the common toilets for the purpose of the restaurant.

51.  It seems to me, and I so find, that there was no contractual obligation on the part of Wan to assist in obtaining the permission of the IO to allow the defendant to use the common toilets for the purpose of the restaurant.  However, Wan said, and I accept, that he did speak to someone from the management of the building about getting permission for the defendant to use the common toilets for the restaurant.  It is clear on the evidence, however, that permission was not given by the IO.

52.  It seems to me that having removed the toilets the defendant was facing difficulties in obtaining a general restaurant licence.  But the fact is, as she said in evidence, she never herself applied for a general restaurant licence.  She said that the interior decorator was responsible for the renovation works as well as applying for the licences.  There was no evidence that any application for a general restaurant licence was ever made by or on behalf of the defendant. 

53.  The defendant was also unsuccessful in her attempts to obtain permission from the IO to permit her to use the common toilets for the purpose of the restaurant.

54.  There was also evidence about an unpleasant incident when the defendant was arrested by the police and detained for a few hours in police custody.  This arose out of a complaint made by the IO that she had caused persons to make threatening phone calls after the IO had refused permission for her to use the common toilets for the restaurant.  The defendant denied the allegations leading to the complaint made by the IO.

55.  There is no dispute that on 4 December 2007 the defendant delivered the keys to the premises to the plaintiff.  It seems to me that as she was facing difficulties in relation to her intended operation of a restaurant she decided to terminate the tenancy.

56.  There is also no dispute that the premises were in a damaged state when handed over by the defendant.  This is clearly shown in the photographs in evidence.  I accept Wan’s evidence that it took a few days for him to get the premises cleaned up before putting it out for rent or sale with an estate agent.

57.  I find that the defendant was in repudiatory breach of the tenancy agreement by failing to pay rent for the months of September and October 2007.  There is no merit in the pleaded defences and I reject the same.  I am satisfied and find that the repudiation on the part of the defendant was accepted by the plaintiff by the service of the writ shortly after institution of proceedings herein on 17 October 2007.

58.  The plaintiff is entitled to arrears of rent for the months of September and October 2007 in the total sum of HK$160,000.

59.  The plaintiff is also entitled to mesne profits for the period from 1 November 2007 to 4 December 2007 in the total sum of HK$90,666.67 calculated at the rate of HK$80,000 per month for a total of 34 days.

60.  The plaintiff is also entitled to damages for the premature termination of the tenancy.

61.  In his closing submissions Mr Pao, for the plaintiff, submitted that the plaintiff was entitled to damages based on a reasonable time of 8 months to allow the plaintiff to find a replacement tenant.  It seems to me that the plaintiff should be allowed a reasonable time to find a replacement tenant but, in my view, 8 months is excessive.  I bear in mind that the defendant was given a rent free period of 3 months.  I also bear in mind that the premises were delivered in a damaged state which required a few days of clearing debris from the premises before the premises could be placed on the market with an estate agent.  It seems to me that a total of 5 months loss of rental at the rate of HK$80,000 amounting to HK$400,000 would be reasonable compensation to the plaintiff as damages for the defendant’s breach.

62.  The defendant is also entitled to a credit of HK$160,000 being the 2 months’ deposit she gave to the plaintiff upon entering into the tenancy agreement.

63.  The plaintiff is therefore entitled to judgment in the sum of HK$490,666.67 (HK$160,000 + HK$90,666.67 + HK$400,000 less HK$160,000).

64.  I give judgment to the plaintiff against the defendant in the said sum of HK$490,666.67 with interest thereon from 17 October 2007 to judgment at 1% above the best lending rate of HSBC and from judgment to payment at judgment rate.  The counterclaim is dismissed.

65.  I also make an order nisi that the defendant should pay the plaintiff its costs of the action and the counterclaim such costs to be taxed if not agreed.