INTERNATIONAL TRADEMART CO LTD v. CLUB REGENCY LTD

HCA 1243/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1243 OF 2008

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J U D G M E N T

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Background:

1.  Club Regency Ltd, (Club Regency), operates a high quality private members club comprising leisure and dining facilities in a building owned by International Trademart Co Ltd, (ITC), in Kowloon.  The club, which comprises some 210,000 ft.² of floor space over several floors, has been in existence since about August 2003.

2.  In addition to making its facilities available to members, the restaurant and banqueting facilities are available for public hire, and the club has become popular as a location for wedding receptions, with reservations extending into the future for some time.

3.  An issue has arisen as to whether or not Club Regency is entitled to renew its lease, which expired on 30 June 2008. 

4.  Mr Yu for ITC says that Club Regency has failed to comply strictly with the provisions of the lease, and that consequently Club Regency is not entitled to a renewal.  Proceedings have been commenced by ITC seeking possession of the premises, and the usual ancillary orders.  ITC now seeks an interlocutory injunction restraining Club Regency from remaining on or using the premises otherwise than for the purpose of vacating the premises or the orderly delivery up of vacant possession.  The injunction seeks also that Club Regency be restrained from accepting future bookings or reservations from any person for the use of any of its facilities located in the premises.

5.  Mr Clough for Club Regency says that, at the least, there is an arguable case that there has not been any relevant breach of the lease, and that accordingly the injunction ought not to be granted.

The Lease:

6.  The premises are located in a building known as the Hongkong International Trade & Exhibition Centre.  By a lease dated 26 September 2003 ITC leased the premises to Club Regency for a term of five years commencing on 1 July 2003 and expiring on 30 June 2008 together with an option to renew for a further term of five years.

7.  The rental payable is set out in the Second Schedule to the lease in the following terms:

“1. The monthly rent for the Premises during the Term are as follows:-

Year	Monthly Rent
1-2	20% of the monthly Gross Turnover of the Tenant (as hereinafter defined)
3-5	Basic Rent of HK$500,000 or 17.5% of the monthly Gross Turnover of the Tenant, whichever is the higher

The rent is inclusive of rates, government rent, air-conditioning charges (excluding extra air-conditioning charges payable by the Tenant as stipulated in Special Condition 12 in the Fifth Schedule hereto) and management fee.

2.  The rent shall be paid by the Tenant in the following manner:-

(A)    The monthly Basic Rent (if payable) shall be paid in advance on the first day of each and every calendar month.

(B)    The Gross Turnover rent in respect of any month shall be paid in arrears by the tenant by the last day of the calendar month immediately following the relevant calendar month and the following provisions shall apply for the purpose of determining the Gross Turnover Rent:

(Gross Turnover definition omitted)

(C)    The Tenant shall not later than the last day of each month furnish to the landlord a monthly account of the Gross Turnover of the Tenant’s business at the Premises and the Licensed Area during the previous month together with the monthly rent payable for that month.  The monthly account shall be certified by a director of the Tenant.”

8.  The lease contains an option to renew, the relevant portion of which is in the following terms:

“20.   Option to Renew

(a)   It is hereby agreed that if there shall not at the expiration of the Term hereby granted be any arrears of rent or other payments or any existing breach by the Tenant of any of the terms or conditions of this Lease the Tenant shall have an option to renew, to be exercised by the Tenant by giving to the Landlord at least six calendar months’ previous notice in writing prior to the end of the term….”

The Accepted Facts:

9.  It is common ground between the parties that the notice required by Clause 20(a) of the lease was duly given.

10.  On 6 June 2008, in response to the notice that had been given on 21 December 2007 by Club Regency exercising the right of renewal, a new lease was sent to them.  The letter forwarding the new lease contained the following paragraphs:

“Subject to the conditions stipulated in the option to renew clause (special condition 20 of the fifth schedule of the Lease) namely, that there shall not at the expiration of the term granted under the Lease be any arrears of rent or other payments or any existing breach by your company of any of the terms or conditions of the Police, we enclose for your approval a draft lease in respect of the renew term (the “new Lease”).

Please note that nothing in this letter or the draft New Lease enclosed is binding on us unless and until a formal New Lease is executed by us.  And we reserve the right not to renew the Lease with your Company if the conditions stipulated in the option to renew clause as mentioned above are not satisfied hence invalidating your option to renew the Lease.” (My emphasis).

Consequently, Club Regency was on clear notice that strict compliance with the renewal provision was required.

11.  Mr Clough, correctly on the evidence, acknowledges that as at 30 June 2008 the rent due for May 2008, being both the Basic Rent of $500,000, and the Gross Turnover Rent ($253,210.93 being 17.5% of the Gross Turnover, i.e. $753,210.93, less the Basic Rent of $500,000) and the Basic Rent for June 2008, had not been paid.  The total sum of $1,253,210.93 was paid on 7 July 2008.

The law on the right to renew:

12.  It is common ground between the parties that, as a matter of law, if a tenant wishes to exercise and take the benefit of an option to renew his lease he must comply strictly with any conditions precedent imposed by the option: see Finch v Underwood (1876) 2 Ch D 310; West Country Cleaners (Falmouth) Ltd v Saly [1966] 1 WLR 1485; Bairstow Eves (Securities) Ltd v Ripley (1992) 65 P & C R 220. 

13.  It is also common ground that, as a matter of law, on the true interpretation of the option to renew, past breaches of the lease by Club Regency which have been remedied will not prevent it from obtaining a renewal of the lease.

14.  On the evidence ITC contend that there were other breaches of the lease, contending that certain other charges due prior to 30 June 2008 had not been paid.  These contentions include assertions that since 1 April 2008 and continuing on 30 June 2008, contrary to requirements in the lease, a restaurant on the 13th floor of the premises had not been kept open for business; and that Club Regency had failed by 30 June 2008 to rectify a water leakage into the car park on Basement 1. 

15.  In the proceedings before me Mr Yu was content to rely solely upon the non-payment of rental due as the basis upon which he could argue that Club Regency was no longer entitled to a renewal of the lease.  However he did not abandon the other breaches.

Interpretation of the rental clause:

16.  In the course of argument it became plain that the rental provision was capable of two different interpretations.  That there are two interpretations arises from the presence of the expression “if payable” in clause 2(A) of the rental provision in the lease.

17.  The first interpretation, that argued by Mr Yu, is that expression “if payable” simply refers to the distinction in the calculation methods of rent for the period between years 1-2, and years 3-5.  In years 1-2 no Basic Rent is payable.  But during the years 3-5, the monthly Basic Rent, by definition, must be paid in advance on the first day of each and every calendar month.  The balance of the monthly rent, being the Gross Turnover rent less the Basic Rent already paid, must be paid by the last day of the month following the month upon which the Gross Turnover is calculated.

18.  On this interpretation the rental arrears amount to $1,253,210.93.

19.  The alternative interpretation, argued by Mr Clough, is that the expression “if payable” refers to the distinction between monthly Basic Rent and Gross Turnover rent.  Basic Rent, says Mr Clough, is only payable in circumstances where the Basic Rent is less than the Gross Turnover rent.  Thus, says Mr Clough, in the months when the Gross Turnover rent exceeds the Basic Rent, no payment is due on the first of the month, and the full sum of the Gross Turnover rent is due on the last day of the following month.

20.  It is not necessary for me to resolve this difference in interpretation because in the course of argument Mr Clough was obliged to accept that even on his interpretation of the rental provision, the whole of the rent for May 2008 a sum of $753,210.93, would have been due on 30 June 2008.  It is not in dispute that that sum had not be paid by that date.

21.  On the face of it therefore, on 30 June 2008, there were arrears of rent and consequently Club Regency had forfeited its right to the renewal option.

The argument for Club Regency:

22.  It is therefore necessary for Club Regency to establish an arguable case that notwithstanding either interpretation of the rental provision there is a basis upon which it can be said that no rent was outstanding on 30 June 2008.

23.  To achieve this position, the case for Club Regency is that there was either, (1) a consensual variation of the contractual arrangements so that any rent will only be payable once the Gross Turnover has been calculated and an invoice/payment advice has been supplied by ITC to Club Regency; or (2) if there was no binding contractual variation, there was an equitable forbearance arising from the conduct of ITC in relation to the delivery of invoice/payment advices; or (3) an estoppel by convention.  If any one of these three scenarios is arguable, a case may be made by Club Regency that the rent was not in arrears.

A variation of the lease:

24.  Mr Clough took me carefully through the documentary evidence to argue that, throughout the whole of the period of the lease, Club Regency had made payment of the rental instalments only after having received either an invoice, or later a document described as a “payment advice”, from ITC.  This he said established a practice which amounted to a consensual variation of the lease. On the basis of such a variation, Mr Clough said, the rental due on 30 June 2008 for the month May 2008, was properly paid on 7 July 2008.

25.  Mr Clough acknowledged that such a variation must be supported by consideration and said that the consideration came from the fact that the system had been established by ITC, apparently for its practical benefit, and that practical benefit provided the consideration: see Williams v Roffey Bros & Nichols (Contractors) Ltd [1991] 1 QB 1. 

26.  Mr Clough argued that such a variation was consistent with two previous occasions on which the parties had varied the lease.  The first, prior to the commencement of the term, was when Club Regency agreed to pay to ITC an initial cash float of $500,000 to be applied towards the monthly rental by deduction during the first period of the lease, (years 1-2).  The second, during the second period of the lease, (years 3-5), was when, at the request of ITC, Club Regency relocated part of its premises in the building and were entitled to a sum of $3.5 million by way of compensation.  The parties agreed that the sum would be held by ITC and an agreed schedule was established providing for deductions from that sum on a monthly basis towards the Basic Rent.

27.  I am satisfied that the proposition that there had been a variation of the lease is simply not arguable.

28.  First, the alleged variation apparently made as a result of a “practice” was not recorded in writing.  Such an unrecorded variation is entirely inconsistent with the practice of the parties in respect of the two variations referred to by Mr Clough, both of which were reduced to writing and signed by the parties.  Additionally, the alleged variation is entirely inconsistent with a specific provision of the lease, that is Clause 2(C) of the rental provision, which clearly places the obligation on Club Regency to supply to ITC a monthly account Gross Turnover not later than the last day of the month following the relevant month, together, (my emphasis), with the monthly rent payable.

29.  Second, the alleged variation is entirely inconsistent with the actual practice of Club Regency.  The evidence establishes that from August 2007, to February 2008, Club Regency tendered rental payments without having received any payment advice at all from ITC.  It is right that those rental cheques were rejected by ITC, (see paragraphs 27(iii), (iv) & (v) below), but that is beside the point.  What is relevant is that the rental payments were made in the complete absence of a payment advice.

30.  Third, the alleged variation is entirely inconsistent with the course of correspondence between the parties.  Through an exchange of seven letters, the details of which I now set out, no suggestion was made at all that there had been any variation of the lease in relation to the time or method of payment of rent.  To the contrary it is plain from Club Regency’s solicitors correspondence that Club Regency considered itself obliged to pay the rent in terms of the lease.

(i)  28 August 2007, Club Regency’s solicitors to ITC’s solicitors:

“Since the obligation to pay (rent) remains with our client, our client doesnot wish to give any person the impression that our client has failed to pay rent when it is due.  If your client is afraid of acceptance of rent tendered by our client will be construed as waiver of any of it rights under the relevant Lease, your client can rest assured that our client will not rely on any waiver arising from acceptance of rent on the part of your client in the disputes now between respect of clients.” (sic)

(ii) 30 August 2007, ITC’s solicitors to Club Regency’s solicitors:

“In view of what you said in your letter and without prejudice to our client’s rights in respect of any breach by your client of the subject Lease and Supplemental Deed, our client will accept the two cheques (one for $705,315.19 and the other for $238,028.19) enclosed in your letter in respect of the payments mentioned therein.”

(iii)    4 March 2008, Club Regency to HITEC, (ITC’s building manager):

“We hereby put on record that your accounts office has been returning our rental payments for a number of months without reasons, despite the fact we have duly presented the payment in full accordance of our tenancy agreement as we did in the past few years.  In view of the repeated return of the rental payment cheques without reasons, we hereby inform you that we shall withhold further payment of rent unless receipt of formal notice in writing from the Landlord that you will not reject payment further.”  (sic)

(iv)    20 March 2008, HITEC to Club Regency:

“In view of the above and notwithstanding that there may still be outstanding breaches to be rectified, we now notify you to pay to our company on before 31 March, 2008 all overdue rent payable for the period from September 2007 to March 2008 and/or other charges payable for the period from 1 July 2007 to March 2008 totalling HK$5,725,469.49 in aggregate (with the breakdown and invoices as per the attached which, for the avoidance of doubt, does not include the turnover rent (if any) for March 2008 but we have already taken into account the 30% discount of the air-conditioning charges for Premises G and the waiver of air-conditioning charges for “Area (1)” (the 2 organizer rooms outside Premises G) and the “Substituted Premises” (the area next to the main entrance of the Exhibition Hall C on the Ground Floor) as agreed in about December 2006.”

(v) 15 April 2008, Club Regency’s solicitors to HITEC:

“Regarding the non-payment of rent, we are instructed that our client has tendered cheques and Payment Advices to you on each month in September 2007 for payment of rent.  We are instructed that on each occasion, you refused to accept the cheques for no reason.  Having said that in pursuant to your demand, we send you herewith client’s cheques and Payment Advices again in the total sum of $5,355,623.01 in payment or rental, sundries, electricity charges from September 2007 to February 2008.  Please note that the payment does not include the alleged discount of 30% on the air-conditioning charges.”

(vi)    17 April 2008, HITEC to Club Regency:

“Further, for the avoidance of doubt, please note that our acceptance of the sum of $5,355,623.01 shall not be construed in any way as a waiver by us of any rights in respect of any breach, non-observation or non-performance by you of any covenants, terms or provisions of the lease to your company.”

(vii)   21 April 2008, Club Regency’s solicitors to ITC:

“Meanwhile, we are instructed to send you herewith our client’s cheque for $1,857,737.55 in payment of the basic rent and full amount of your various charges for March and April 2008.

Once our client has finalised their account for March and April 2008, they will pay you any surplus between the turnover rent and the basic rent.”

31.  There is nothing in the correspondence to indicate any assertion on the part of Club Regency that the payment provision in the lease had been varied.  To the contrary the correspondence from Club Regency’s solicitors’ asserts recognition by Club Regency of the obligations under the lease.

32.  Two aspects of this correspondence are particularly significant.  First, the attachment to the letter from HITEC to Club Regency dated 20 March 2008, was a schedule setting out how the total sum due was calculated.  It is not without significance that the monthly Basic Rent, and the extra Gross Turnover rent were separately calculated, with the Basic Rent being shown due on the first of the applicable month, in other words pursuant to Mr Yu’s interpretation of the rental provision.  In particular, an entry was made indicating a payment already due on 1 March 2008 of monthly Basic Rent for the month of March 2008 in the sum of $500,000.

33.  If, as is now contended by Club Regency, there had been a variation of the lease resulting in the Basic Rent not being due until a Payment Advice was delivered during the following month, then undoubtedly the schedule would have been returned appropriately amended.  It was not returned and the sum calculated pursuant to the schedule was paid in full without challenge to the form of the schedule.

34.  Second, in particular, no suggestion is made in the letter dated 21 April 2008 from Club Regency’s solicitors to ITC that, by way of practice, there had been a variation of the lease resulting in a changed arrangement for payment of rental.

35.  Both of these circumstances are entirely inconsistent with there having been a variation of the lease pursuant to a practice.  I am satisfied that there is simply no arguable basis upon which it can be contended that there has been a variation of the lease arising either by practice or by oral arrangement between the parties.

An equitable forbearance:

36.  Mr Clough next argued that if there was no binding contractual variation there had been an equitable forbearance on the part of ITC in relation to the late payment of rent.  He relied upon the following passage from Chitty on Contracts, 29^th Ed para 22-035:

“A mere forbearance or concession afforded by one party to the other for the latter’s convenience and at his request does not constitute a variation, although it may be effective as a waiver or in equity such a forbearance or concession need not be supported by consideration, and can be made orally even when the contract is one which is required to be made or evidenced in writing.”

37.  While the proposition is a correct statement of the law, in this case it simply cannot stand on the facts.  First, as is demonstrated by the correspondence above, ITC was scrupulous in ensuring that it recorded that the acceptance of any arguably late payments did not constitute a waiver or a condoning of the breach.

38.  But in any event, the lease contained a stipulation to that effect.  Section VIII (2) of the Lease provides:

“The acceptance of any rent by the Landlord hereunder shall not operate or be regarded by the Tenant as a waiver by the Landlord of any right to proceed against the Tenant in respect of any breach non-observance or non-performance by the Tenant of any of the covenants agreement stipulations terms and conditions herein contained and on the part of the Tenant to be observed and performed.”

39.  Mr Clough contended that such a clause was unenforceable, relying on Woodfall’s Law of Landlord and Tenant, para 17.095, and Hill & Redman’s Law of Landlord and Tenant, para 8944.  Mr Yu responded, contending that such a clause was unenforceable only in relation to a forfeiture.

40.  Where a breach of a lease gives rise to a right of election by a landlord, i.e. to forfeit the lease or accept the rent and continue the lease, it is clear that the landlord may not “blow hot and cold”.  He may not, for example, to accept the rent, but at the same time reserve his rights to forfeit the lease on the ground of late payment of rent: see Lord Atkinson in R v Paulson [1921] 1 AC 271 at 283.

41.  The landlord must make an election in such a circumstance and he will be bound by that election.  In each of the authorities cited by the textbooks in support of the proposition relied upon by Mr Clough, the issue was a question of an entitlement by the landlord to forfeit the lease upon a breach having occurred.  In each case it was open to the landlord to elect to waive the breach, and to treat the lease is continuing.

42.  In the present case no question of an election on the part of the landlord arises.  The landlord does not rely upon non-payment of rent, (of which there may have been a previous forbearance in relation to late rent), to give him a right to terminate the lease.  Here the landlord relies upon the fact of arrears of rent to disentitle the tenant to renewal of the lease in terms of the renewal clause.  There is nothing in the authorities cited to indicate that the waiver clause would not be enforceable in those circumstances.

43.  There is no arguable basis upon which it may be contended that there has been a relevant equitable forbearance on the part of ITC.  I am satisfied that any waiver or forbearance that might have been given by ITC to Club Regency is, by reason of both the provisions of the lease, and ITC’s express terms of acceptance of rent, not such as to give rise to an equitable forbearance.

An estoppel by convention:

44.  Finally, Mr Clough contended that there had been an estoppel by convention.  This doctrine has recently been considered and affirmed by the Court of Final Appeal in Unruh v Seeberger & Anor (2007) 10 HKCFAR 31, so I do not need here to restate the principles.

45.  This factual basis for the argument was that the conduct of the parties in relation to the payment of rent over the second term of the lease, (years 3-5), had resulted in a common assumption being shared by the parties that any rent would only be payable once the Gross Turnover had been calculated and an invoice/payment advice had been supplied by ITC to Club Regency.

46.  For the same reasons that no agreement had been reached in relation to a variation of the lease, I am satisfied that no such common assumption was shared by the parties.

47.  In particular the complete absence of any suggestion in the correspondence between the parties set out above, that there was such a common assumption, is a strong argument that there was in fact no common assumption.  In Unruh v Seeberger, the court found it “inexplicable” that if the common assumption did exist, as contended, the party to be charged with the common assumption, the public company of which Mr Seeberger was chairman of directors, was only added to the proceedings some 16 months after the proceedings were commenced.

48.  It is equally inexplicable that, if the common assumption did exist, Club Regency apparently gave no instructions to that effect to its solicitors prior to 30 June 2008.  It is equally inexplicable that the correspondence between the parties prior to that date, particularly correspondence from Club Regency’s solicitors, which directly addressed the issue of rental liability, made no reference whatsoever to the common assumption now asserted by Mr Clough.

49.  I am satisfied that it is quite unarguable that an estoppel by convention has arisen.

Conclusion as to renewal option:

50.  I am satisfied that on 30 June 2008 Club Regency was in arrears of rent in at least the sum of $753,210.93.  The law is clear.  If the tenant is to take advantage of the renewal option he must comply strictly with the terms of the relevant provision.  By being in arrears of rent on 30 June 2008, Club Regency is not entitled to a renewal of the lease.

51.  Mr Wong, the managing director of Club Regency, has expressed the view that it would be unjust and against commercial morality, particularly in the light of the co-operation of Club Regency in ITC’s request for a pre-payment of rent, and the renovation ordeal, if the Club were not able to renew the lease. 

52.  Unfortunately it is absolutely plain that Club Regency were on notice from ITC that strict compliance with the lease terms, particularly the renewal provision, was required.  Club Regency had the funds, and it was open to it to make payment of the outstanding rent on ITC’s interpretation of the rental clause on or before 30 June 2008.  Instead Club Regency chose not to make payment on that date but to wait until 7 July 2008 to make payment.  They must take the consequences of that decision.

Should the interlocutory injunction sought be issued:

53.  The issuance of an interlocutory injunction is a matter of discretion.  Mr Clough contends that there is no genuine urgency to justify interlocutory steps.

54.  The evidence establishes that despite the termination of lease, Club Regency is publicly asserting a continuing right to the premises, and soliciting and apparently accepting bookings from the public for the use of the facilities in the future.  The effect of my decision is that Club Regency has become a trespasser as at 1 July 2008.  It would be quite wrong in my view to defer any injunction when unsuspecting members of the public may make commitments to the premises which will not be able to be fulfilled.

55.  The law is clear.  A landowner whose title is not in issue is entitled to an injunction to restrain a trespasser on his land, whether or not the trespasser harms him: Patel v Smith  [1987] 1 WLR 853 at 858F.  It is no argument to say that no harm has been done to the landowner because trespass, being an invasion of a property right, itself constitutes the harm: Woolerton and Wilson Ltd v Richard Costain Ltd [1970] 1 WLR 41.

56.  Once the plaintiff can show a violation of his legal rights he is entitled, prima facie, to an injunction: Jaggard v Sawyer [1995] 1 WLR 269, and the burden is on the tenant to establish a right to continue in possession: Portland Managements Ltd v Harte & Ors [1977] 1 QB 306.

57.  Club Regency, has no arguable case to persist in occupation of the premises.  The lease terminated on 30 June 2008, and Club Regency is now a trespasser and not lawfully entitled to a renewal of the lease.  In those circumstances, there being no arguable case that the Club should remain in occupation, American Cyanamid questions of the balance of convenience, status quo and damages being an adequate remedy, simply do not arise: see Stephen Gee, Commercial Injunctions, para 2.1016(3) and Patel v Smith at 861C.  That Club Regency might suffer irreparable damage as a consequence of the issue of an injunction is therefore irrelevant.

58.  The injunction seeks to restrain Club Regency from occupying the premises otherwise than for the purpose of vacating them, and to restrain Club Regency from accepting further bookings or reservations in relation to the premises.  I am satisfied that no arguable case has been made out that the injunction should not be granted in terms.

Orders:

59.  An injunction will accordingly issue forthwith in terms of paragraphs 1 & 2 of ITC’s summons dated 9 July 2008.  There will be an order nisi that costs on the summons will be the Plaintiff’s costs in the cause.