AUTO PLAZA LTD v. DUCKCROWN INVESTMENTS LTD

HCA761/2008
& HCA724/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 761 OF 2008

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AND

ACTION NO. 724 OF 2008

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BETWEEN

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D E C I S I O N

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A.      INTRODUCTION

1. APL is the registered owner of 13/F, Auto Plaza, No. 65 Mody Road, Kowloon; Light Box Nos. 3 and 4 of Auto Plaza facing Peninsula Centre; and Signage located at various places of Auto Plaza (“the 13/F”, “the Light Boxes” and “the Signage” respectively).

2. Since 1989, DIL had been APL’s tenant for the 13/F.  It operates a high-class health spa, sauna and massage business there.

3. The parties had over the years entered into successive written tenancy agreements.  The latest one was dated 14 February 2007 (“the 2007 Tenancy Agreement”) for one year between 1 December 2006 and 30 November 2007 at the monthly rent of HK$260,000.  Since 2001, APL had licensed the Light Boxes and the Signage to DIL on a monthly licence at the fees of HK$1,000 and HK$2,000 respectively.  DIL uses the Light Boxes and the Signage in connection with its business operated on the 13/F.

4. APL’s case is that the 2007 Tenancy Agreement expired upon effluxion of time.  APL allowed DIL to remain in possession of the 13/F until it gave DIL a notice to quit dated 28 March 2008.  By letters also dated 28 March 2008, APL purported to terminate the monthly licences for the Light Boxes and the Signage as well.  DIL was asked to deliver up the vacant possession of 13/F, the Light Boxes and the Signage on or before 30 April 2008 and to pay the outstanding rent/licence fees, rates, management fees and extra air-conditioning charges between 1 October 2007 and 31 March 2008.

5. DIL refused to accede to the demand.  On 28 April 2008, it started HCA724/2008 and claimed against APL for damages exceeding HK$5 million allegedly suffered as a result of water leakages, air-conditioning malfunctioning and renovation works at the external walls of Auto Plaza.

6. On 2 May 2008, APL commenced HCA761/2008.  It pleaded, among other things, that the term of the 2007 Tenancy Agreement expired on 30 November 2007 and DIL was permitted to continue to occupy the 13/F on a monthly licence verbally granted by APL subject to DIL’s compliance with the duties similar to those under the 2007 Tenancy Agreement.  The oral licence is evidenced by a letter dated 4 January 2008 issued by APL’s solicitors, Deacons, to DIL (“the January Letter”).  APL claimed for delivery up of vacant possession of the Premises, the Light Boxes and the Signage; outstanding rent/licence fees, rates, management fees, etc in the sum of some HK$2 million and mesne profit.

7. APL now applies for summary judgment against DIL.  DIL applies for consolidation of HCA724/2008 and HCA761/2008.  By consent, I will first deal with APL’s application and then give directions for the disposal of DIL’s on paper.

B.      DEFENCE

8. Opposing APL’s claim of possession, DIL alleged that on or about 17 October 20007, the parties entered into an oral tenancy for the 13/F for one year upon the expiry of the 2007 Tenancy Agreement on the same terms (“the Oral Agreement”).  Further, the Oral Agreement contained an implied term that the monthly licenses for the Light Boxes and the Signage would continue during the duration of the new tenancy.  Thus DIL is entitled to remain in possession of the 13/F, the Light Boxes and the Signage despite the expiry of the 2007 Tenancy Agreement.

9. As to APL’s monetary claims, DIL sought to raise the defence of equitable set off by virtue of their claims against APL in HCA724/2008.

C.      DISCUSSION

C.1.   APL’s failure to make out its case

10. Ms Tong, counsel for DIL, submitted that APL’s pleaded case is deficient.  I disagree.  There is no deficiency in its statement of claim.  She also complained that the plea of oral licence is vague and lacking in particulars.  Again I disagree.  For present purposes, the plea as it now stands is sufficient.

11. Ms Tong then submitted that APL’s pleaded case contradicts its own evidence by taking essentially two points.

12. First, Ms Tong contended no evidence has been filed in support of the plea.   However, the affirmation of Mr Wu Kee Hang, APL’s market manager (“Mr Wu”), filed on 21 May 2008 in support of APL’s application did verify the contents of the statement of claim.  This point must fail.

13. Second, Ms Tong submitted that the January Letter did not evidence the alleged oral licence because it stated that DIL had remained in possession without any agreement on APL’s part.  Thus APL has failed to make out its own case.  There cannot be any basis for summary judgment.

14. Upon a closer analysis, the alleged inconsistence between APL’s pleaded case of oral licence and the January Letter is more apparent than real.  APL’s pleaded case did not state when the parties made the oral licence.  On a proper reading of the January Letter, the monthly licence was granted on or before 4 January 2008.  Further, according to the January Letter, APL’s case is that up to 4 January 2008, DIL had remained in possession of the 13/F without its consent.  APL was nevertheless prepared to grant DIL a monthly licence for its continuous occupation of the 13/F.  In other words, APL took no issue on DIL’s unauthorised occupation of the 13/F between 1 December 2007 and 4 January 2008 when the monthly licence was granted.  Thus analysed, there is no inconsistence between the pleading and the January Letter.  The second point taken by Ms Tong also fails.

C.2.   The Oral Agreement

15. I now turn to examine the substance of DIL’s defence and begin with its case on the Oral Agreement.

16. The burden rests on DIL to raise an arguable case that the Oral Agreement existed.  When considering if DIL has discharged the burden, the court should examine its assertions not in isolation but in the context of all the relevant circumstances including contemporaneous documents which are either undisputed or not capable of being seriously disputed.  See Hong Kong Civil Procedure 2008, Vol. 1, para. 14/4/9 at pp. 190-191.

17. According to Mr Leung Kee Wai (“Mr Leung”), the personal assistant to DIL’s director Mr Benedict Chan Hon Kwong (“Mr Chan”), the Oral Agreement came into existence thus :

“21.  On or around 17 October 2007, Mr Wu called me about the then upcoming expiry of the 2007 Tenancy Agreement on 30 November 2007.  To the best of my recollection, the following was said during that telephone conversation :

(1)     Mr Wu said that the expiry of the 2007 Tenancy Agreement was coming up and asked me whether the Defendant would like to continue leasing the Premises.  Mr Wu further stated that if the Defendant wished to continue leasing the Premises and to enter into a new tenancy, it would have to settle the then outstanding rent and management fees first.

(2)     I informed Mr Wu that the Defendant would not be able to settle the outstanding rent and management fees in arrears at the time and all at once.  I told him that the Defendant had cash flow problems due to the significant loss of business which resulted from the Plainitff’s renovations of the external wall of the Building from May to November of 2007 (the ‘Renovations’), in respect of which the Defendant had previously complained to the Plaintiff.  I should mention at this juncture that the substantial loss and damage caused to the Defendant by the Renovations is now the subject of the action in HCA 724 of 2008 commenced by the Defendant against the Plaintiff on 28^th April 2008. …

(3)     I then asked Mr Wu whether the Plaintiff could provide some concession to the Defendant, given that significant damage has been caused to the Defendant’s business as a result of the Renovations, which were arranged by the Plaintiff without sufficient prior notice to the Defendant and without disclosing/informing the Defendant of the same before the 2007 Tenancy Agreement was entered into.  I asked Mr Wu to reflect our proposal to the Plaintiff and Mr Wu agreed.

(4)     Mr Wu was apologetic and sympathised with the Defendant’s position.  He then expressly offered (on behalf of the Plaintiff) to continue leasing the Premises to the Defendant upon the expiry of the 2007 Tenancy Agreement for another one-year period and on the same rent (i.e. HK$260,000 exclusive of management fees and rates) and other terms as the 2007 Tenancy Agreement (the ‘Offer’).  He also expressly stated that the Offer was on condition that the Defendant must, by the end of October 2007, make payment of all outstanding management fees, extra air conditioning fees, signage fees and rates up to 31^st July 2007 (the ‘Condition’).

(5)     I asked Mr Wu whether the Plaintiff would agree to a new tenancy for a term of two years instead of one year.  However, Mr Wu refused.

(6)     I considered that the Offer was a favourable one (given that the Plaintiff did not propose to increase the rent), and the Defendant had the financial means at the time to meet the Condition.  I therefore accepted the Offer on behalf of the Defendant and informed Mr Wu that I would arrange for the Condition to be satisfied as soon as possible.

(7)     Mr Wu then promised to arrange for a formal written tenancy agreement to be prepared and sent over to the Defendant for execution in due course, as was the case in previous years.

22.    After my telephone conversation with Mr Wu, I immediately arranged for 4 separate cheques (in the aggregate sum of HK$510,899) (the ‘Cheques’) to be issued by the Defendant in favour of the Plaintiff in satisfaction of the Condition :

(1)          Cheque no. 1691 dated 17 October 2007 in the amount of HK$21,000.00 being signage fees in arrears from December 2006 to June 2007.

(2)          Cheque no. 1692 dated 17 October 2007 in the amount of HK71,422.00 being rates in arrears from January 2007 and April 2007.

(3)          Cheque no. 1693 dated 22 October 2007 in the amount of HK$219,117.00 being management fees, extra air conditioning fees, signage fees and rate for the month of July 2007.

(4)          Cheque no. 1694 dated 22 October 2007 in the amount of HK$199,360.00 being extra air conditioning fees in arrears from January 2007 to June 2007.”

APL then had all the cheques cashed for payment.

18. Mr Leung went on to say that after the expiry of the 2007 Tenancy Agreement, APL did not provide any formal written tenancy agreement for execution.  He then chased Mr Wu but to not avail.  He was not particularly bothered because such delay on APL’s part in providing formal agreements for signing was not unusual.

19. Mr Leung further said that he was surprised when he received the January Letter.  He called Mr Wu who said that it was just a formality pending the execution of the formal written agreement.  Mr Leung then reported the matter to Mr Chan.

20. In his affirmation, Mr Chan said that given the relatively harmonious relationship between the parties at the time and given that over the years, a formal written tenancy agreement would not be signed until some weeks/months after the preceding agreement had expired, he accepted Mr Leung’s explanation.  Mr Chan said he assumed that it did not affect DIL’s rights under the Oral Agreement.  Thus they decided not to pursue the matter further with APL.

21. The evidence of Mr Leung and Mr Chan did not bear a closer scrutiny.

22. First, how the Oral Agreement came about did not sit well with the past dealings of the parties.

23. It is the undisputable evidence of Mr Wu that over the years, “if the due-to-expire tenancy was intended by the parties to be renewed for another fixed term…a written offer letter would have invariably been issued prior to its expiry…and would have been duly signed by both parties prior to/at or about the commencement of the new tenancy.  It was only after the written offer had been signed by both parties that the actual written tenancy agreement would then be prepared for the parties’ execution.”  All the written offers signed over the years are exhibited to Mr Wu’s 2^nd affirmation filed on 7 July 2008.

24. The issue and signing of the written offers is important because it preserved the landlord-tenancy relationship for the time being pending the execution of the formal tenancy agreement.  I fail to see any reason why the parties would depart from this course of dealing, which was always adopted by the parties throughout the entire landlord-tenant relationship.

25. Second, it is factually incorrect to assert, as Mr Leung and Mr Chan did, that APL always delayed in providing DIL with the new written tenancy agreement for execution some weeks or months after the expiry of the preceding one.  There were two occasions where the new tenancy agreement was signed before the expiry of the preceding one.  The tenancy agreement dated 19 March 1998 was signed before the preceding one expired on 30 March 1998.  The tenancy agreement dated 17 November 2004 was signed before the preceding one expired on 30 November 2004.

26. Third, the January Letter contradicted the Oral Agreement.  DIL did not write back to refute the allegation made by APL through Deacons or to put the record straight.  The inaction would no doubt cause prejudice to DIL.  DIL’s case is that it would take nine months for them to relocate to other premises to continue its business.  But according to the Letter, DIL was a mere monthly licencee and APL could ask it to quit by giving a one-month notice.  Plainly, DIL should have written back if the parties had indeed entered into the Oral Agreement.  The excuse put up by Mr Leung and Mr Chan for the inaction simply defies common sense.

27. Fourth, APL’s case is that it did not renew the tenancy with DIL upon the expiry of the 2007 Tenancy Agreement.  It is not disputed that DIL “had kept maintaining 2 to 3 months rental and management fee outstanding” and APL had in the past commenced distraint actions against DIL, although they were invariably withdrawn after DIL paid up the arrears.  There was sound commercial reason for APL not to renew the tenancy.

28. Having considered all the circumstances, I am of the view that DIL’s case on the Oral Agreement is incredible.  Plainly, DIL was a mere monthly licencee for the 13/F after the expiry of the 2007 Tenancy Agreement, and the monthly licence was terminated when APL issued the notice to quit on 28 March 2008.  Absent the Oral Agreement, the licences for the Light Boxes and the Signage must have also come to an end when the notices of quit were issued on the same day.

29. In short, DIL has no defence to the claim for possession of the 13/F, the Light Boxes and the Signage.

C.3.   Equitable set-off

30. I next come to DIL’s defence to APL’s monetary claims.

31. For the use and occupation of the 13/F, APL first claims for the arrears of :

(1)     the monthly licence fee of HK$260,000 for the period between 1 January 2008 and 30 April 2008, totalling HK$1,040,000;

(2)     rates for the period between 1 December 2007 and 30 April 2008, totalling HK$55,714.29;

(3)     management fee for the period between 1 December 2007 and 30 April 2008, totalling HK$750,085; and

(4)     extra air-conditioning charges for the period between 1 December 2007 and 30 April 2008 totalling HK$165,760.

APL then claims mesne profit and/or damages up to the delivery of the vacant possession of the 13/F.

32. For the use and occupation of the Light Boxes and the Signage, APL claims for the arrears of the licence fees between 1 December 2007 and 30 April 2008 and mense profit and/or damages until the delivery of vacant possession.

33. It is not in dispute that DIL had only paid HK$260,000 for the use and occupation of the 13/F ever since the termination of the 2007 Tenancy Agreement.

34. The monthly licence granted to DIL for its continuous use and occupation of the 13/F is on the same terms of the 2007 Tenancy Agreement.  Under the 2007 Tenancy Agreement, no set off is available to DIL for the arrears of rent (now licence fees), management fees and extra air-conditioning charges : see Clauses 2(1) and 2(3) and Special Condition 1(3)(b), Part 8 of the Schedule.  It follows that it is not open to DIL to raise the purported defence of equitable set off based on its claims in HCA724/2008 against the claims for arrears totalling HK$1,955,845 in paragraph 31(1), (3) and (4) above. 

35. Mr Ma, counsel for APL, fairly conceded that for present purposes, the anti-set off provisions do not apply to the balance of APL’s monetary claims.  Absent those provisions, I am of the view that DIL is entitled to rely on its claims in HCA724/2008 as a defence of equitable set off against those claims.

D.      ORDERS AND DIRECTIONS

36. For the above reasons, I will enter judgment for APL for possession of the 13/F, the Light Boxes and the Signage and HK$1,955,845 with interest at the judgment rate from the date of writ until payment.  I will give DIL unconditional leave to defend the balance of APL’s claims in HCA761/2008.

37. On costs, counsel have already made submissions.  I am of the view that APL is entitled to 75% of the costs of its application and that the balance should be costs in the cause.  And I so order.

38. On DIL’s application for consolidation, the parties are directed to file the proposed agreed directions (failing which their respective proposed directions) within 14 days from the date of this Decision.  I will then dispose of it on paper.