DRAGON WORKSHOP LTD AND ANOTHER v. TREASURE EXPRESS INDUSTRIAL LTD AND ANOTHER

DCCJ 2497/2018 &
DCCJ 4006/2018
(Consolidated)

[2022] HKDC 839

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2497 OF 2018

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4006 OF 2018

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(Consolidated by Order of Mr Registrar Ho dated 16 October 2018)

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JUDGMENT

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Introduction

1.  It is a landlord-and-tenant case where the landlords claim for the loss suffered as a result of the alleged breach of the leases by the tenant in its failure to transfer certain food and beverage licences back to the landlords (to be offset against the remaining deposits in the sum of HK$40,144.73 retained by the landlords), while the tenant denies and counterclaims for the refund of the remaining deposits.

2.  Dragon Workshop Limited (“Dragon Workshop”) has been the registered owner of the premises known as all those portion A of Unit B on Ground Floor (including the yard thereof) and Unit B on the First Floor of Legend Court, No. 33 Yin Chong Street, Kowloon (“Premises A”). Huge Target Limited (“Huge Target”) has been the registered owner of the premises known as Unit A on the First Floor (including open yard thereof) of Legend Court, No. 33 Yin Chong Street, Kowloon (“Premises B”). For convenience, I shall refer to Premises A and Premises B as the “Premises”.

3.  By a lease dated 13 June 2014 (“Lease A”) in respect of Premises A between Dragon Workshop as landlord and Treasure Express Industrial Limited (“Treasure Express”) as tenant, Dragon Workshop let to Treasure Express Premises A for a term of 3 years from 15 June 2014 to 14 June 2017 at a monthly rent of HK$55,000 (exclusive of rates, management charges and government rent). On the same day, by a lease dated 13 June 2014 (“Lease B”) in respect of Premises B between Huge Target as landlord and Treasure Express as tenant, Huge Target let to Treasure Express Premises B for a term of 3 years from 15 June 2014 to 14 June 2017 at a monthly rent of HK$45,000 (exclusive of rates, management charges and government rent). Treasure Express has at all material times under the control of its sole shareholder and director Lai Yu San (“Lai”). For convenience, I shall refer to Dragon Workshop and Huge Target collectively as the “Landlords”, and I shall refer to Treasure Express as the “Tenant”.

4.  Also on 13 June 2014, Lai executed a personal guarantee in favour of Dragon Workshop in respect of Lease A, and a personal guarantee in favour of Huge Target in respect of Lease B.

5.  By preliminary tenancy agreement dated 7 July 2017 between the Landlords and Tung Wing Yin, the Landlords let the Premises to the new tenant for a term of 3 years starting from 25 July 2017. Subsequently, formal leases were executed, whereby the tenant became Fo Shui Lo Company Limited, which operated a food restaurant known as “Fo Shui Lo” in the Premises. For convenience, I shall refer to Tung Wing Yin or Fo Shui Lo as the “New Tenant”.

6.  In this trial, Mr Ng Tung Man (also known as Truman Ng) (“Ng”), manager of the Landlords, and under subpoena, Mr Lam Chi Ming (“Lam”), manager of the New Tenant, gave evidence for the Landlords. Lai gave evidence for the Tenant and himself.

Terms of the Leases

7.  Both Lease A and Lease B contained the following express terms:-

Clause 2(x): “The Tenant hereby covenants with the Landlord… to indemnify and keep the Landlord fully indemnified from and against all actions proceedings demands costs expense liabilities and claims whatsoever by… any third party in respect of any act or liability caused by or arising from the act, neglect or default (irrespective of whether wilful or not) of the Tenant…”

Clause 4(d)(i): “The Tenant shall pay to the Landlord the sums as specified in Part II of the Third Schedule hereto as deposit for securing the due payment of the rent and any other moneys payable by the Tenant hereunder and to secure the performance and observance of the said covenants, restrictions, stipulations and conditions herein contained on the part of the Tenant to perform and observe…”

Clause 4(d)(ii): “At the expiration or sooner determination of the term hereby created if the Tenant shall have paid all rent and other moneys payable hereunder and if there shall be no breach of any of the said covenants, restrictions, stipulations and conditions on the Tenant’s part to be observed and performed the Landlord will repay to the Tenant the said sum without any interest thereon within fifteen (15) days after the Tenant shall have surrendered to the Landlord vacant possession of the Premises or within fifteen (15) days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach, non-observance or non-performance of any of the said covenants, restrictions, stipulations and conditions whichever is later.”

Clause 16: “In consideration of the Tenant agreeing to take up the lease of the Premises under the terms herein contained, the Landlord hereby undertakes to assign and transfer the food licence and liquor licence to the Tenant or its nominee(s) upon execution of this Lease provided that the Tenant shall re-transfer and re-assign at its own costs and expenses the food licence and liquor licence to the Landlord or its nominee(s) (as the case may be) upon the expiry or sooner determination of the term of lease hereby created.”

8.  In respect of these terms, it is not in dispute that:-

(1)  The deposit for securing the due payment of the rent and other moneys payable and due performance of Lease A was HK$165,000 and that of Lease B was HK$135,000.

(2)  The “food licence” referred to in Clause 16 was the general restaurant licence issued by the Food and Environmental Hygiene Department (“FEHD”) in respect of Premises A and B.

9.  Further, I note, and counsel for the Tenant and Lai, Ms Abigail Liu, fairly accepts, that the re-transfer and the re-assignment under Clause 16 was not conditioned upon the refund or the full refund of the deposits under Clause 4(d)(ii). Nor is it the pleaded case of the Landlords or the Tenant that the re-transfer and the re-assignment under Clause 16 was conditional upon the refund or the full refund of the deposits under Clause 4(d)(ii). This makes sense because otherwise, the purpose of Clause 4(d)(ii) to empower the Landlords to retain the deposits as a fallback for the Tenant’s failure to compensate the Landlords for any loss and damage as a result of the Tenant’s breaches of the Lease would for no good reason exclude breaches of Clause 16.

Transfer of the Licences to the Tenant

10.  Upon entering into the Leases, the Landlords applied to assign and transfer the food licence and the liquor licence (collectively, the “Licences”) to Lai and one Ms Ma Siu Ling as nominee of Treasure Express. In processing the applications for the transfer, FEHD issued a letter dated 27 August 2014 to Hobby Kitchen Limited (“Hobby Kitchen”), run by the Landlords, stating that:-

“Further to our letter ref. (13) in this series dated 7.8.2014, inspection by staff of this Department at the captioned address on 21.8.2014 found the following irregularity(ies) still in existence –

(1) Replacement of full height wall by a full height door in the female/disable[d] toilet; and

(2) Removal of electric fryer and [and] [sic] electric oven[;]

thereby breaching Standard Condition No. 1 as contained in our letter (Ref (25) in FEHD KR 11/178) dated 27.5.2011 to you, namely-

‘The layout of the premises, other than furniture, shall be kept in strict conformity with that shown in the final plan approved by the Director of Food and Environmental Hygiene, and no alteration or addition shall be made to the premises without the prior approval of the Director of Food and Environmental Hygiene.’

Since you are the licensee of the above premises, we have to warn you that you must rectify the irregularity(ies) within 12 days from the date of this letter by-

Complying with the Standard Condition as stated above.”

11.  This letter arose from FEHD’s inspection prompted by the applications for transfer. The original door to the female/disabled toilet faced the interior of the Premises. This setting was understandably unattractive because a considerable area in front of the original door could not be used to serve customers, as no customers would like to be seated near the door of a toilet. Thus, that door was locked up, and instead, a new entrance was opened by demolishing the wall facing the exterior of the restaurant, and to reach that new entrance, customers would have to pass through the fire exit. However, the new entrance, it is not in dispute, was not authorised by the Building Authority, and FEHD would not grant or renew licences on layouts with such an unauthorised entrance.

12.  According to Lai, in response to the said FEHD’s letter, a plaster wall or board was erected to cover the unauthorised entrance and the original door was unlocked. As a result, FEHD approved the transfer of the Licences. I accept Lai’s evidence here. Erecting a plaster wall or board to cover the unauthorised door would be the most cost-effective way to satisfy FEHD’s inspection – the unauthorised door became out of sight and the original door was readily unlocked.

13.  Not only that. It would also be cost-effective to reinstate the unauthorised entrance after FEHD approved the transfer. The photos downloaded from OpenRice and produced before this Court (the contents of which are not in dispute) show clearly that in March 2017, near the front of the original door were placed some dining tables and in fact, one of the photos shows that two customers were eating at the dining table just in front of the original door. Despite the photos, Lai alleged that the Tenant still used the original door for the female/disabled toilet, and he never removed plaster board and the unauthorised entrance was still covered. Lai further said that he did not reinstate the unauthorised entrance because FEHD would carry out ambush inspection and regular inspections on restaurants, and FEHD would discover this unauthorised use and the Licences could be revoked.

14.  However, there was no toilet sign on the original door at all, while on the door to the fire exit, there was a sign which appeared to be a toilet sign. When asked about this, Lai’s answer was rather unattractive – he did not remember what that sign on the fire exit door was and customers would have to ask his staff where the toilet was. This answer is, in my view, dishonest. He operated the restaurant there for three years, and it was impossible for him not to know what that sign was. Further, it just defies common sense that a restaurant would have no sign on the toilet door (usually to distinguish between male and female toilet) but would rather have the customers inconveniently ask the waiters / waitresses as Lai alleged. The explanation that there was no such sign on the original door because one would not want the customers to know that the door was a door to the toilet or else the customers would refuse to dine at tables near the door cannot be maintained, because the customers would eventually know and it would only be more troublesome if the customers be seated there and then requested for changing tables. This would even gain the restaurant a bad reputation of misleading the customers to sit near the toilet. In no likelihood the Tenant would do that.

15.  There is another unauthorised structure alleged by the Tenant, namely, the storage room which he alleged was an unauthorised structure used to house customers by the New Tenant. When he was pointed out that he also used the same to house the customers during the Leases and asked why he would not be worried about FEHD’s inspections, Lai answered that it had already been like that when he rented the Premises. Strangely enough, for this, he was not as worried as about FEHD’s discovery of the toilet.

16.  I find Lai’s evidence in this respect evasive and unreliable. I find him to be dishonest in this respect. I find that during the Leases, the original toilet door was locked up and the Tenant did use the unauthorised entrance behind the fire exit door for the female/disabled toilet. Further, Lai’s evidence could only mean that there was no reinstatement works done to cover up the unauthorised entrance (because on his evidence which I reject, the entrance had all the time been covered up) and thus I find that when the Tenant delivered possession of the Premises back to the Landlords on 30 June 2017, no reinstatement work was done at all and the structure of the toilet remained as it had been throughout the term of the Leases, namely, the unauthorised entrance was still there without any wall or board covering up.

Expiry of the Leases

17.  On 27 June 2017, Ng, on behalf of the Landlords requested, via Whatsapp, the Tenant for various documents in preparation of the transfer of the Licences pursuant to Clause 16 of the Leases.

18.  Although the term of the Leases was stated to expire on 14 June 2017, both parties agree that the Tenant delivered vacant possession of the Premises on 30 June 2017.

19.  There were two consequences arising from the expiry of the term and delivery of vacant possession:-

(1)  Upon the expiry, by Clause 16, the Tenant was obligated to transfer the Licences back to the Landlords or the nominees of the Landlords at the Tenant’s costs.

(2)  Upon the delivery of vacant possession, by Clause 4(d)(ii), the Landlords were entitled to retain the deposits for 15 days from the delivery of vacant possession or 15 days from the settlement of the Landlords’ “last outstanding claim” against the Tenant, whichever would be later.

20.  There are three matters worthy of note here in respect of the retention of the deposits:-

(1)  The retention of the deposits under Clause 4(d)(ii) was, read together with Clause 2(x), obviously to allow 15 days upon delivery of vacant possession for the Landlords to check whether there had been any breaches of the Leases and if there were, the retention of the deposits beyond the 15 days would allow the Landlords to deduct from it for any losses arising from the breaches.

(2)  The “last outstanding claim” in Clause 4(d)(ii) should in my view be interpreted broadly to include legal actions and any claims without commencement of legal action because it appears that the parties expected that the matter in Clause 4(d)(ii) could be fairly quickly settled while to commence a legal action, even at the Small Claims Tribunal, the matter may take 9-12 months from commencement until the conclusion.

(3)  If the Landlords made the “claim” after 15 days of the delivery of vacant possession, then the Landlords would still be entitled to retain the deposits. Of course, if at the end of the day, it is found that the “claim” was not justified, then the Tenant shall be entitled to the refund of the deposits and interest thereon accruing from the 15^th day of the delivery of vacant possession.

Request for the Tenant’s assistance in transferring the Licences to the New Tenant and Tenant’s claim for refund of deposits

21.  On 3 July 2017, while the Tenant had yet to supply the documents previously requested by Ng on 27 June 2017, and although the Tenant was not yet entitled to the refund of the deposits, the Tenant requested Ng for the refund of the deposits. On 4 July 2017, Ng answered that he had to seek his boss’ approval first.

22.  On 6 July 2017, Ng requested the Tenant again for the documents previously requested. On 7 July 2017, the Tenant did send the documents as requested (except for those which the Tenant did not have) to the Landlords.

23.  Also, as mentioned at the outset, on 7 July 2017, the Landlords entered into preliminary tenancy agreement with the New Tenant in respect of the Premises for a term of 3 years commencing from 25 July 2017 with 30 days’ rent-free period. The preliminary agreement contained the following term:-

“業主同意將食及酒牌轉名給租客使用（轉名費用由租客支付），每牌收取按金$50000。租約完結時，租客需將此兩牌照轉回業主名（或業主指定名字）。轉名費用由租客負責，租約完結時，業主將按金退回租客。”

24.  I understand the “transfer fee” (轉名費) refers to the administrative fees involved in the transfer, but not to any costs and expenses such as construction works that have to be carried out to satisfy the FEHD before it would approve the transfer. Such costs and expenses should be borne by the Landlords, as it was the Landlords’ obligation to transfer.

25.  On 17 July 2017, Ng texted Lai acknowledging the receipt of the documents previously requested and telling Lai that the New Tenant would contact Lai on the transfer of the Licences. In response, Lai texted “無問題，另按金退回事宜請跟進，謝謝。”

26.  Nothing eventful happened until 24 July 2017. On that day, a representative of the New Tenant, namely, one Mr Harry Yau (“Yau”), texted Lai via Whatsapp requesting the copies of the ID cards of the licence-holders of the Liquor Licence and Food Licence. Yau was a staff member of Hungto Consultant Company (“Hungto”), a consultant which had been engaged by the New Tenant to handle licence matters in respect of its other food and beverage business and was also engaged to handle the licence matters in respect of the Premises. At that time, Lai did not know who Yau was.

27.  After a chaser on 25 July 2017 and another on 26 July 2017, Lai replied on 26 July 2017 that “業主方面未有交代，暫時未有資料比你”. I accept Lai’s evidence that by this message on 26 July 2017 he meant that because the Landlords had yet to tell him who of the New Tenant would contact him, he would not send the information to Yau. This is consistent with the text messages showing that although Ng texted Lai on 17 July 2017 that the New Tenant would contact Lai, the first time Ng told Lai the identity of who would contact Lai was 27 July 2017 when Ng texted Lai that it would be Yau. Consistently, on 28 July 2017, Lai then sent the copies of the ID cards to Yau.

28.  According to Ng, Yau told him sometime before 27 July 2017 that the Tenant would not sign the forms for the transfer applications until the Landlords would repay the deposits in full. This is not inconsistent with Lai sending the copies of ID cards to Yau on 28 July 2017 because obviously Lai, whose business was a transferee of such licences, well knew that for the applications for transfer, copies of ID cards would not be sufficient but the important matter was that he should sign certain forms for the transfer applications.

29.  On 31 July 2017, the Landlords decided to refund HK$200,000 of the deposits to the Tenant. Also on 31 July 2017, Ng texted Lai via Whatsapp that:-

“黎生，剛了解過，按金本應早退給你們，但會計告知老闆酒及食牌尚未轉我們名，她怕受責，故遲遲未有回應。抱歉，你們尚有24萬按金在我司，公司決定先將20萬按金退回你們，這兩三天可隨時派人到我司領取。剩下約4萬按[金]在完成牌照轉名手續後即退回給你們。以上安排，都是方便大家做嘢，還望接受。對於給你們造成之不便，深感抱歉，還望見諒。”

“黎生，剛才通電話後，我再問了出牌師傅，轉牌一事，並不是一次簽名即辦好，在簽了轉讓表格後，必須向食環署申請，食環署審批無問題後，約4 – 6周後會約雙方 (新舊持牌人) 去食環署見幫辦會面，在幫辦面前簽妥轉讓表格才算完成。故整個程序並非如你所說簽名即可，租約清楚列明租客在租約期滿後必須將牌照轉回我們或指定人仕。故此，我們仍然堅持先退還你們20萬按金。餘款在兩牌照完成轉讓回我們或指定人仕後立即退回給你們。若同意上述安排，明天可聯絡我們會計黃小姐 … 即安排取款20萬。不然就要等我8月14號回來後再處理。我們都是理性人，希望能解決問題。煩予考慮。謝謝” (emphasis added)

30.  Despite lack of any agreement on the full refund of the deposits, the Landlords still issued cheques in the total sum of HK$200,000 to the Tenant, who received and banked them in on or around 3 August 2017. According to Ng, it was a gesture of goodwill, hoping that with such a large refund, the Tenant would render further assistance in the transfer applications. Lai also agreed in cross-examination that these messages meant that the remaining deposits should be refunded to him upon the completion of the transfer. He alleged that he accepted the cheques on this understanding.

31.  On 10 August 2017, the Tenant issued a letter (the “10 August 2017 Letter”) to the Landlords stating that the Tenant’s business had ceased operation and they would not be liable for any breach of the Licences as a result of the operation of the New Tenant in the Premises, and alleging that they had done their part for transferring the Licences to the New Tenant as requested (“持牌人已按業主指示的新租客要求進行轉名手續”). This obviously is not true – as already stated in the 31 July 2017 messages, signing of the forms and interview with FEHD would also be required, but no such signing and interview had been done.

32.  On 17 August 2017, the Tenant commenced a civil claim SCTC No 32271 of 2017 (the “Small Claim”) in the Small Claims Tribunal for HK$46,544.73. This amount is more than the remaining deposits in the sum of HK$40,144.73. According to the handwritten claim form attached to the Claim Form therein, Lai claimed interest on the deposits at the same time, and this explains why Lai claimed more than the remaining deposits. However, it is not clear what the basis was for claiming this interest of about HK$6,000, and what the interest rate was at which the Tenant claimed. It is not in dispute that the Leases contained no provisions that would entitle the Tenant to interest. Even if I were to assume that the interest rate was the usually pre-judgment interest rate of 1% above prime rate, it would be approximately HK$200 per month on the remaining deposit of HK$40,000 odd.

33.  On 18 August 2017, Ng texted Lai (via Lai’s father), saying that his boss would like to apologise to Lai and that his boss had prepared cheques for the refund of the remaining deposits after deduction of certain expenses. Then on 21 August 2017, Ng texted Lai (via Lai’s father) again asking the latter how to handle the deposits. The next day, 22 August 2017, Ng texted Lai (via Lai’s father) again saying that he apologised again and asked for forgiveness, that both parties should look to the friendly relationship and to the future, that it was hoped that the little dispute should be settled. Ng requested Lai (via Lai’s father) to tell him how to deliver the cheques for the remaining deposits. On 24 August 2017, Ng even offered an additional HK$8,000 as “compensation” in the hope of “大事化小”.

34.  In evidence, Lai told this Court that in response to these messages, he did ask for the cheques but the Landlords did not respond, while Ng’s evidence is that Lai did not respond at all. The Tenant and Lai seem to suggest that the Landlords’ repeated offers for paying the cheques were not genuine but attempts to dress the Tenant to look as if the Tenant had been irresponsive to the requests for signing the forms for the transfer applications despite the Landlords’ repeated offers to pay. This suggestion has a flaw – what if the Tenant did reply by text messages asking the Landlords where the forms were and telling the Landlords how the cheques could be delivered? If the Landlords then refused to deliver the forms and the cheques or were irresponsive, their such attempts (if any) would be scuffled. Another plausible explanation is that indeed, the Landlords were in fact asking the Tenant to sign the forms but the Tenant refused and insisted upon full refund first. This explanation is more consistent with Ng’s tone in all the messages in August 2017 being so apologetic and appeasing – besides the Small Claim, Ng needed Lai’s assistance in the transfer of the Licences so that the Landlords could discharge their obligations to transfer the Licences to the New Tenant. This explanation seems to be more likely than the flawed suggestion. In the light of my finding based on the first hearing of the Small Claim below, I find that this latter explanation is the true explanation.

35.  It is Ng’s evidence that the Landlords knew sometime in August 2017 that the New Tenant decided to make fresh applications on its own due to lack of cooperation from the Tenant. I find no reason not to accept this evidence. I note that there is no inconsistency between the Landlords still asking the Tenant to sign the forms for the transfer applications and the Landlords’ such knowledge, because the Landlords were still concerned about whether they would be able to perform their obligations to have the Licences transferred and thus were doing their best to appease the Tenant in the hope that the latter would change their mind and help the Landlords to perform such obligations.

36.  On 15 September 2017, the first hearing of the Small Claim took place. Ng told this Court that before attending the hearing, he asked the New Tenant if the latter would still like to have the transfer of the Licences, and the New Tenant’s answer was in the affirmative, because transfer would usually save time and costs than for a fresh application. I accept this evidence as a matter of common sense. As such, any suggestion that once the New Tenant commenced fresh applications, it would mean that the New Tenant would not need the Tenant’s assistance to transfer the Licences back to the Landlords or their nominee must be rejected. It is only when the fresh applications had advanced to such a stage where the transfer would not be worth anymore then such suggestion would have some validity. This is not the case here, as by 15 September 2017 when it had just or even not yet lodged the new applications, the New Tenant would still prefer to have the Licences transferred.

37.  What Ng and Lai said at the first hearing are very probative. The relevant parts of the audio recording of the hearing (starting from morning, and adjourned to the afternoon) show that:-

(1)  In the morning hearing, Ng offered to pay HK$40,144.73, and indeed had with him the cheques for that total sum made payable to the Tenant at the hearing. However, he would pay only upon Lai’s signing of the forms for the transfer applications.

(2)  In the morning hearing, Lai said that he would also agree to sign the forms, but he was not given the forms to sign.

(3)  In the morning hearing, upon the adjudicator’s prompting, Ng agreed to bring over the lunch break the forms for the transfer applications to the Tribunal for Lai to sign.

(4)  In the afternoon, Ng told the adjudicator that he had brought the forms to the Tribunal. The adjudicator then requested the parties to sign the forms outside the courtroom. In response, Lai said that the amount offered by Ng was less than the amount claimed by the Tenant and without the HK$8,000 offered by the Landlords on 24 August 2017 as mentioned above. So, in effect, he refused to sign.

(5)  The matter was then adjourned for another call-over hearing.

38.  Initially, only the recording of the afternoon hearing was played, and in that part of the hearing, only “signing documents” was mentioned, instead of “signing forms for transfer applications”. With that part of the hearing only, Lai alleged in cross-examination that he did not remember what documents he was asked to sign, and that the documents may simply be documents to acknowledge the receipt of the money. It was upon such an allegation that the Court and the parties had to listen to the audio recording of the whole morning hearing of the Small Claim to put the afternoon hearing in context. After hearing the recording of the whole hearing, Lai simply could not deny that the documents he was asked to sign were documents for the transfer applications. I do not accept his explanation that this matter happened a long time ago and he could not remember it well. The Small Claim is in fact the Tenant’s present counterclaim, and that hearing was the first hearing of the Small Claim that took the parties from the morning till the afternoon, and the very reason for taking such a long time was the need to bring the forms to the Tribunal during the lunch break. It is unbelievable that Lai would have no recollection at all of what documents he was asked to sign. Further, while he alleged that he had no recollection, he would still try to suggest to this Court, rather distractingly, that the documents may simply be documents to acknowledge the receipt of the cheques.

39.  With no room to deny that the documents were indeed the forms for the transfer applications, when asked about why he refused to sign the documents, his answer was that he was not given the documents for his sight, and he could not be sure if the documents were indeed the forms, apparently suggesting that the Landlords may actually still have not brought the forms. However, in context, it was clear enough, and Lai should have known, that the documents, even if I assume that they were not given to him for a sight, were the documents for the transfer applications. Also, if he were really concerned about what documents they were, he would not have told the adjudicator, in response to the adjudicator’s requests for the parties to go out and sign, that the Landlords did not pay the amount he was claiming, but would rather have told the adjudicator that he did not sign because he had not seen the documents. Further, if it were really true that he did not sign because he was not given a sight of the documents, then such response to the adjudicator would only mean that he simply did not care about what the documents were because he had no interest in knowing at all without any full refund. Lai’s evidence here is, like his evidence in respect of the toilet door, evasive and dishonest. Upon such unsatisfactory evidence in these two respects (namely, the toilet door and the Small Claim), I find that Lai is an incredible, dishonest witness in general. Thus, I am very sceptical of his evidence concerning the first hearing of the Small Claim and in general.

40.  As mentioned above, in the Small Claim, Lai demanded interest on the deposits. However, as canvassed above, the Tenant was not entitled to interest on the deposits, and even the usual pre-judgment rate of 1% above prime rate would not tally with his claim for interest of about HK$6,000 on the remaining deposit of HK$40,000 odd for two months (from 15 July 2017 (expiry of 15 days from the delivery of vacant possession) to 15 September 2017 (the date of the mention hearing of the Small Claim)). Regardless, the salient point here is that the practical effect of what Lai told the adjudicator (mentioned in paragraph 37(4) above) obviously was that he conditioned his signature upon full payment of not only the remaining deposits but also interests thereon.

41.  In his oral evidence, when asked about whether he would agree to the suggestion that he conditioned his signature as such, Lai just answered that he did not think through the matter thoroughly. Further, Ms Liu, at closing submissions, tried at pains to persuade me that the evidence of the hearing of the Small Claim does not necessarily mean that the Tenant did so condition Lai’s signature, but just that because the Landlords bundled the settlement of the Small Claim together with the signing of the forms, the Tenant did not sign the forms because the Small Claim could not be settled due to the Landlords’ refusal to pay interest or the HK$8,000 the Landlords had offered on 24 August 2017 as mentioned above.

42.  I can accept neither Lai’s answer (which is illogical and in any event incredible given Lai’s incredibility in general) nor Ms Liu’s submissions. If Lai, on behalf of the Tenant, had indeed been genuinely willing to sign the forms independently of whether there was a full refund (as alleged in Lai’s words, signing the forms and refund were two separate matters), or if he had genuinely intended to act upon the understanding of 31 July 2017 that there would be full refund upon completion of the transfer, he would have signed the forms on 15 September 2017 in any event, irrespective of whether the Small Claim would be settled or not. It must be noted that all along, Lai alleged that he could not sign the forms because no forms had ever been given to him. But on 15 September 2017, the Landlords told the adjudicator that the forms were now there; nevertheless, Lai’s response to the adjudicator’s request that they should go out and sign the forms was that the Landlords refused to pay interest or the HK$8,000. His answer was not that he did not know what the forms were, or that because the Landlords bundled the settlement together with the signing of the forms, it was his thoughts that he should not sign lest he would be taken to agree to the settlement of the Small Claim. But I do not even accept that Lai did have such thoughts because such thoughts did not make any sense: Lai could still sign the forms, refuse the cheques and continue to pursue the Small Claim.

43.  Ms Liu also suggested that Lai refused to sign on 15 September 2017 because he had discovered unauthorised use of the storage room to house customers, as evidenced by his message to Ng on 4 September 2017. I reject such suggestion. First, his response to the adjudicator’s request for signing the forms was not that he had noticed some unauthorised structures in the Premises and thus was worried about his liability under the Licences if he would sign the forms. Second, in that message, he just demanded remedial action, or else he would hold the Landlords or the New Tenant liable. Had this really be the real cause for him not to sign the forms, and/or had it really been Lai’s intention to sign the forms, one would expect that in that message, Lai would have said something like “because of the storage room, I would not sign the forms for the time being.” In my view, that message was sent to make sure that pending the signing of the forms upon full refund of the remaining deposits, if there were any breach of conditions of the Licences which were still under the name of the Tenant’s nominees, the Tenant would hold the Landlords or the New Tenant liable.

44.  I thus find that on 15 September 2017, the Tenant’s attitude was that there would be signing of the forms only upon the full refund of the remaining deposits (and even plus interest or the HK$8,000 to which the Tenant were not entitled), despite Lai’s understanding that when he accepted the partial refund of HK$200,000 on 3 August 2017, the Landlords expected that the remaining deposits would be fully refunded only upon completion of the transfer. I also find, due to lack of any material change of circumstances and Lai’s response to the adjudicator’s request for signing in the first hearing of the Small Claim, that the Tenant’s such attitude was the attitude they had harboured from the outset since sometime in July 2017.

The New Tenant’s fresh applications for licences

45.  The New Tenant could not wait indefinitely for the Tenant to sign the forms for the transfer. In such circumstances the New Tenant had to apply afresh for a food licence and a liquor licence on its own. According to Ng, he was informed that sometime in August 2017, the New Tenant decided to make such fresh applications on its own, although even by 15 September 2017, the New Tenant would still be prepared to have transfers rather than fresh applications.

46.  Accordingly, in September 2017, the New Tenant lodged applications with FEHD for a food licence and a liquor licence on its own. Hungto was still engaged.

47.  According to the New Tenant, Hungto advised that inconsistent with the plans approved by the Building Authority, the location of the entrance to the toilet had been moved and the original door of the toilet had been covered up, and that work would have to be carried out to reinstate the original door before general restaurant licence and liquor licence would be granted by FEHD. Such works were carried out accordingly.

48.  As a result, the New Tenant paid HK$78,000 to the Consultant for the applications. For the works in relation to the toilet, the New Tenant paid HK$35,000 to the renovation workers, whose invoice set out the following items:-

(1)  清拆現有廁所地台: HK$8,500；

(2)  現有潔具一裝一拆: HK$4,500；

(3)  修補現有廁所牆身: HK$4,000；and

(4)  新造廁所地台及輕磚封門: HK$18,000。

49.  For these sums of consultancy fee and the renovation works, totalling HK$113,000, the New Tenant issued a debit note to the Landlords. To me, whether a debit note was issued or not, so long as the Landlords were imposed an obligation to transfer the Licences to the New Tenant (expressly with the administrative fees excepted as these were to be paid by the New Tenant), the Landlords would be liable to the New Tenant for any costs and expenses (except the administrative fees) incurred by themselves and/or on their behalf as a result of the Landlords’ failure to perform that obligation, and as a result the Landlords would suffer loss and damage as a result of the Tenant’s breach of Clause 16 (if any) that caused the Landlord’s failure.

50.  Thus, the Landlords commenced DCCJ No 2497 of 2018 claiming for the consultancy fee (HK$78,000) and the costs for the toilet works (HK$35,000). The Small Claim was then transferred to District Court to become DCCJ No 4006 of 2018, which was then consolidated with DCCJ No 2497 of 2018.

Issues

51.  On the pleadings, the issues before me are:

(1)  Whether the Tenant breached Clause 16 of the Leases by refusing to render assistance for the transfer of the Licences so that the Landlords became entitled to retain the remaining deposits for deduction for the Landlord’s loss and damage suffered as a result of the breach(es);

(2)  If the Tenant did breach Clause 16 of the Leases: -

(a)  whether the consultancy fee of HK$78,000 arose as a result of the Tenant’s refusal to render such assistance; and

(b)  whether the renovation fee of HK$35,000 arose as a result of the Tenant’s refusal to render such assistance;

(3)  If the Tenant did not breach Clause 16, whether the Landlords breach the implied term (the “Implied Terms”) (if any) in the Leases that:-

(a)  “the [Landlords] would not hinder or prevent the [Tenant], or do any acts which would cause additional obstacles and/or difficulties to be imposed on the [Tenant] in executing the re-transfer and re-assignment of the [Licences]” (see Re-Re-Amended Defence and Counterclaim §2(a)(1)); and

(b)  “the [Landlords] would cooperate with and do all such things necessary to facilitate the [Tenant] in executing the re-transfer and re-assignment of the [Licences] (see Re-Re-Amended Defence and Counterclaim §2(a)(2)).

Whether the Tenant breached the Leases by refusing to render assistance

52.  As I have found above, the Tenant refused to render further assistance by signing the necessary forms unless and until the Landlords would repay the deposits in full, not even to mention about attending interviews by FEHD. I have also found above that the Tenant’s obligations to render such assistance were not conditional upon the refund of the full deposits. It follows that the Tenant breached Clause 16.

53.  As regards the date of the breach, as mentioned above, on 28 July 2017, the Tenant still sent copies of the ID Cards of the licencees to the New Tenant. However, on 31 July 2017, despite the Landlords’ offer to repay HK$200,000, the Tenant still insisted upon full refund before they would render further assistance in respect of the transfer of the Licences, and then on 3 August 2017, the Tenant still banked in the cheques for the HK$200,000 with the understanding that the Landlords paid the sum in the hope that the Tenant would sign the forms for the transfer applications, although the Tenant was not prepared to do so (as I have found above). Upon banking in the cheques on 3 August 2017, however, one week later, on 10 August 2017, as mentioned above, the Tenant issued the 10 August 2017 Letter alleging that they had already done their part for the transfer as requested, ignoring the 31 July 2017 messages stating that signing forms and interview with FEHD would also be required. This letter, in my judgment, evinced a clear intention not to honour the understanding upon which the cheques were accepted and not to sign the forms. Thus, I find that the date of the breach is 10 August 2017. It is thus legitimate for the New Tenant to make fresh applications on its own after 10 August 2017.

Whether the consultancy fee of HK$78,000 arose as a result of the Tenant’s refusal to render such assistance

54.  But for the failure to render the assistance in breach of Clause 16, in all likelihood the Licences would have been transferred (like in the past when the same were transferred to the Tenant) to the New Tenant as they were to the Tenant without the need for fresh applications. As a result, more work had to be done and the consultancy fee payable to Hungto increased. According to Lam’s evidence (which I have no reason not to accept), the usual consultancy fee for a transfer application was about HK$10,000 – HK$20,000 only. The consultancy fee incurred here was HK$78,000. Taking that the mid-point of the range of HK$10,000 – HK$20,000, being HK$15,000, I find that as a result of the Tenant’s breach of Clause 16, the New Tenant incurred HK$63,000 more (HK$78,000 minus HK$15,000).

55.  Ms Liu contended that the Tenant should not be liable for the consultancy fee. I disagree. The Landlords had the obligation to transfer the Licences to the New Tenant, and under Clause 16, the Tenant had the obligation “at its own costs and expenses” to re-transfer the Licences to the Landlords or the Landlords’ nominee. As it was the Tenant’s breach of Clause 16 that caused the Landlords to fail their obligation to the New Tenant, the Tenant should be liable for any loss caused by the failure and incurred on behalf of the Landlords.

Whether the renovation fee of HK$35,000 arose as a result of the Tenant’s refusal to render such assistance.

56.  Although I have found above that during the term of the Leases, the Tenant opened the unauthorised entrance to the female/disabled toilet and that the Tenant had not since carried out any renovation work to remedy the situation before delivering the possession of the Premises back to the Landlords on 30 June 2017, the question remains: was this renovation fee of HK$35,000 caused by the Tenant’s refusal to render assistance in breach of the Leases?

57.  For the Tenant to re-transfer the Licences “at [their] own costs and expenses” (Clause 16), the Tenant would have to remove the unauthorised entrance (by filling in or covering up) and reinstate the original toilet door. Thus, the Tenant should be responsible for the removal and reinstatement. However, I cannot see how Item (1) 清拆現有廁所地台；Item (2) 現有潔具一裝一拆；Item (3) 修補現有廁所牆身; and part of Item (4), namely, 新造廁所地台 can be related to the removal and reinstatement. With respect to Item (3) 修補現有廁所牆身, Lam said that it was painting of all the walls of the toilet. While I would normally agree that because of the filling in or the covering up of the unauthorised entrance, painting all the walls was reasonable, here it was not, because according to Lam himself, he did not intend to keep the filling in or the covering up and would like eventually to use the unauthorised entrance (probably for the same reason as stated in paragraph 11 above). Thus, I would only allow part of Item (4), namely輕磚封門. I can only do my best to apportion an appropriate costs to this part. Both parties agree that if any apportionment is necessary, half of Item (4) should be apportioned. I agree half is the best I can do and so I allow HK$9,000.

Whether the Tenant breached the Implied Terms and the Tenant’s application to amend the re-re-amended defence and counterclaim at Closing Submissions

58.  The question of whether the Tenant breached the Implied Terms (if any) would arise only if the Tenant did not breach Clause 16 in the first place. If the Tenant breached Clause 16 in the first place as I have found, then the Landlords and the New Tenant would have to (as the New Tenant did) make its own fresh applications. I shall however analyse this issue for the sake of completeness only.

59.  I should first mention that in her closing submissions, Ms Liu applied to amend the Tenant’s re-re-amended defence and counterclaim by adding that the Implied Terms should be performed as soon as reasonable, and she pinpointed that the Implied Terms were breached anytime between 10 August 2017 and 12 September 2017.

60.  10 August 2017 was chosen because it was when the 10 August 2017 Letter was issued. Putting aside whether I would allow the amendment, I am unable to accept this date as the earliest date of breach of the Implied Terms, because it was the Tenant who issued the 10 August 2017 Letter and I cannot see why this act of Tenant could not be attributed to the Landlords to become a breach by the Landlords. One may have more sympathy if the case was pitched that after this 10 August 2017 Letter, the Landlords still did nothing for the transfers. However, this could not be the case because as I have found above, this 10 August 2017 Letter evinced a clear intention on the Tenant’s part not to render any further assistance in respect of the transfers, in breach of Clause 16. In other words, I would find the breach of the Implied Terms to be sometime after the Tenant had already breached Clause 16 on 10 August 2017; thus it became legitimate for the New Tenant on 10 August 2017 to make its own fresh applications for the Licences, and the Tenant would be prevented from saying that the Landlords failed to perform the Implied Terms promptly, which failure was caused by their own breach of Clause 16. As the amendment, even if allowed, would not advance the Tenant’s case, I would disallow this late application.

61.  In any event, I reject the explanation given for such late application. Ms Liu’s reason for the lateness is that the audio recording of the first hearing of the Small Claim was adduced as evidence only during the trial, and the amendment was necessary as a result of such new evidence. What Ms Liu in effect said for the lateness was that because now the hearing of the Small Claim shows clearly that by the first hearing on 15 September 2017, the Tenant conditioned the signing of the forms upon full refund of what Lai thought the Tenant was entitled to, the date of the breach of the Implied Terms would be important because if the breach occurred before 15 September 2017, then Lai’s conditioning the signing of the forms upon full refund would not be wrongful.

62.  But this cannot be a valid reason for this amendment. First, it had all along been the Tenant’s case that there were such Implied Terms, and the time for performance of such Implied Terms should have been pleaded, irrespective of what happened in the first hearing of the Small Claim. This would only be fair to the Landlords, who might then suggest, by way of evidence, that the deadline should be some other date. Second, in fact, the evidence of the first hearing was actually not a direct cause for the necessity for this amendment. What happened at the 15 September 2017 hearing were known to both parties. Thus, both parties, had they properly evaluated their cases and evidence (presumably they would have been full and frank with their legal advisers), would have been alerted that for the Tenant to succeed on the Implied Terms, the breach should have been sometime before 15 September 2017. The audio recording of the Small Claim hearing was just a piece of cogent evidence of confirmation of what the parties had already known.

63.  Therefore, I dismiss the Tenant’s application for leave to amend the re-re-amended defence and counterclaim.

64.  In any event, I would find that the Landlords did not breach the Implied Terms at all because the Landlords had been requesting the Tenant to sign the forms necessary for the transfer but it was just the Tenant who had since 10 August 2017 at latest insisted upon signing only if the deposits would be fully returned. Thus, after 10 August 2017, there could, as explained above, not be any breach of the Implied Terms.

Conclusion

65.  In the circumstances, the Tenant, and thus Lai, are liable to the Landlords for the loss in the sum HK$63,000 and HK$9,000, totalling HK$72,000. By virtue of Clause 4(d)(ii), the Landlords are entitled to deduct it from the retained deposits of HK$40,144.73, and the Tenant and Lai shall pay the Landlords the remaining balance of HK$31,855.27.

Apportionment and scale for taxation of costs

66.  The Landlords are partially successful in their claim, but the amount of this partial success is within the jurisdiction of the Small Claims Tribunal. Had the Landlords properly considered the evidence they themselves adduced in respect of quantum, they should have known that the costs and expenses I disallowed above were not related to the breach of Clause 16 at all. This would have been, in my judgment, obvious to the Landlords even without any legal advice but just with some common sense, and thus it was unreasonable for the Landlords to commence their claim in the District Court.

67.  I have heard preliminary submissions from the parties on this matter, on the basis that I would make a costs order nisi only. Taking into account that the Landlords have succeeded wholly on the liability issue (which took a substantial amount of time in this action) but partially on quantum, and taking into account that it was, as I have found above, unreasonable for the Landlords to commence the claim in District Court: see Lui King Tong v Hospital Authority [2019] HKDC 376 at §§11-12, I make a costs order nisi that the Tenant do pay the Landlords 85% of the costs be taxed on a scale allowed for cases brought before the Small Claims Tribunal.

Order

68.  In the circumstances, I make the following order:-

(1)  The 1^st and 2^nd defendants (that is, the Tenant and Lai) in DCCJ No 2497 of 2018 do pay the 1^st and 2^nd plaintiffs (that is, the Landlords) HK$31,855.27.

(2)  There be pre-judgment interest at 1% above prime rate accruing from the date of the Writ of Summons in DCCJ No 2497 of 2018.

(3)  There be judgment interest at judgment rate.

(4)  The counterclaim in DCCJ No 4006 of 2018 be dismissed.

(5)  A costs order nisi that 85% of the costs of the action in DCCJ No 2497 of 2018 (including the counterclaim in DCCJ No 4006 of 2018) be to the 1^st and 2^nd plaintiffs in DCCJ No 2497 of 2018, to be taxed on a scale allowed for cases brought before the Small Claims Tribunal, if not agreed.