XCHRX FIRST ORIENTAL HOLDINGS LTD. v. LONGLUXE INVESTMENT LTD.

A10294/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10294 OF 1999

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DECISION

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1. This is an application for summary judgment for a sum of $174,399.00, which the Plaintiff had paid to the Defendant as deposit of 3 months rent, management charges and air-conditioning charges, and 1 month's rent paid in advance for the month 15 July 1999 to 14 August 1999, for an office unit in Convention Plaza.

Facts

2. The matter arises in this way. The Defendant was the registered owner of the office unit which was mortgaged to a bank. The Mortgage provided that written consent of the bank was required prior to the letting of the office unit.

3. The Plaintiff wished to rent the office unit, but it was aware of the provision in the Mortgage. Consequently the parties entered into a Tenancy Agreement dated 11 May 1999 for a term of two years starting 15 May 1999, but which provided at Clause 20:

" IT IS HEREBY AGREED BY THE parties hereto as follows:-

The said premises are at present subject to a Mortgage and a Second Mortgage respectively registered in the Land Registry by Memorial Nos. 7100496 and 7100497 and made between the Landlord as Mortgagor of the one part and THE NATIONAL COMMERCIAL BANK LIMITED as Mortgagee of the other part by which it is stipulated (inter alia) that the Landlord shall obtain the consent in writing of the Mortgagee for the granting of tenancy or lease thereof. This Agreement is conditional upon the written consent of the said Mortgagee failing which this Agreement shall become null and void at the discretion of the Tenant." (my emphasis)

4. The Second Schedule to the Tenancy Agreement further provided:

"Notwithstanding anything to the contrary hereinbefore contained the Tenant shall be allowed a rent-free period of TWO MONTHS from the 15th of May 1999 to 14th of July 1999 for the fitting out and decorating the said premises. Notwithstanding anything hereinbefore contained, the rates, management fees, air-conditioning charges and all other outgoings of a non-capital or recurring nature payable by the Tenant under this Agreement in respect of the said premises shall commence to be payable by the Tenant from the 15th May 1999."

5. The Plaintiff was given possession on 14 May 1999. It is common ground that upon entering into possession, the Plaintiff caused the existing internal partitioning to be demolished. The Defendant says that on top of that, the Plaintiff had also demolished the reception counter, the wooden signboard, and stripped the wallpaper and carpet.

6. In this respect, Mr Ho, on behalf of the Defendant, has asked the Court to note that in Cl. 3(b) of the Tenancy Agreement, the Plaintiff agreed that:

"Before making any internal decorations, alterations and fittings to submit details and plans thereof to the Management Office or the Landlord for its prior written approval (such approval not to be unreasonably withheld or delayed) and only to carry out such internal decorations, alterations and fittings in accordance with such approved details and plans ..."

7. It is common ground that the Plaintiff had never submitted plans for fitting out and decorations to the Defendant.

8. There are also a number of other provisions in the Tenancy Agreement which have been pleaded in the Defence and Counterclaim and which I have considered, imposing various obligations on the Plaintiff (amongst other things) not to alter the office unit without the Defendant's consent.

9. Two weeks after the commencement of the term, i.e. on 29 May 1999, the Plaintiff "rescinded" the Tenancy Agreement on the ground that the mortgagee's consent had still not been obtained. The Defendant does not deny that the Plaintiff was entitled to avoid the Agreement under Cl.20 and that it did so by the letter from the Plaintiff's solicitors dated 29 May 1999.

10. The Plaintiff thereupon asked the Defendant for the return of the deposit and the 1 month rent paid in advance for the month 15 July 1999 - 14 August 1999 totalling $174,399.00.

11. The Defendant has refused to return these moneys on the basis that it would cost it $216,900.00 to reinstate the office unit to its original state, and further that the Plaintiff was liable to pay $10,636.02 being the rates, management fees and air-conditioning charges for the period 15 May 1999 to 31 May 1999 when the Defendant received the keys to the office unit from the Plaintiff.

Clause 20

12. Before I deal with the application, it may be useful to consider the nature of Cl. 20 and its effect on the Tenancy Agreement. The operative words were that if the consent of the mortgagee was not obtained, the Agreement "shall become" null and void "at the discretion of the Tenant".

13. In my view, it is clear from the operative words that Cl. 20 is a condition subsequent, in that the obligations of both parties were subject to the condition that they were to be immediately binding, but upon the non-occurrence of a future event (i.e. the failure to obtain the mortgagee's consent), the Plaintiff had the right to avoid the contract (Chitty on Contracts 27th ed. General Principles § 12-028).

No loss suffered

14. I shall deal first with the Defendant's submission that it is entitled to deduct from the deposit the amount of loss alleged to be incurred by it as a result of the Plaintiff's demolition work.

15. There is a factual issue between the parties as to whether the Plaintiff only demolished the internal partitioning or whether its demolition work went beyond that. However, this issue is irrelevant to my decision on this application, because even if the Plaintiff had demolished more than the partitioning, the Defendant is not entitled to make any deductions since (as will appear later) there is no evidence that it has suffered any loss.

16. The Plaintiff submitted that irrespective of whatever demolition had taken place, the Defendant could not seek damages for it because the Defendant knew from the Second Schedule that the two months from 15 May 1999 - 14 July 1999 were for fitting out and decoration, and that it was the Defendant's failure to procure the mortgagee's consent that caused the Plaintiff to avoid the Agreement at the end of May 1999.

17. The Defendant's submission was that although the rent for the first two months of the term were waived to enable the Plaintiff to fit out and decorate the office unit, the fact remained that the Plaintiff had not sought any approval for fitting out and decoration pursuant to the terms of Cl. 3(b). Therefore the Plaintiff could not carry out any fitting out or decoration. The demolition was part of the fitting out and decoration. The Defendant's failure to obtain the mortgagee's consent entitled the Plaintiff to avoid the Agreement, but it did not exonerate the Plaintiff from paying for reinstatement of the office unit which it (the Plaintiff) had no right to alter.

18. If the facts were only these, then I would have granted leave to the Defendant to defend. It is I think arguable that demolition is necessarily incidental to fitting out and decoration, so that prior to obtaining approval from the Defendant, the Plaintiff would not have been entitled to execute the works which it had undertaken before it avoided the Agreement.

19. However, the Plaintiff has rightly pointed out that the Defendant has not incurred any costs of reinstatement and the Defendant has no intention of doing so, because the mortgagee has taken possession of the office unit. Mr Ho, on behalf of the Defendant, has frankly acknowledged that that is so.

20. Mr. Ho says however that it may be that as a result of what the Plaintiff had done, the mortgagee may suffer delay whether in selling or letting the office unit, in which event the Defendant would have to be liable for more interest, or it may be that the mortgagee may be unable to obtain a higher price or rental for the premises, in which event the value of the Defendant's equity would be decreased.

21. In my judgment, the Defendant has failed to discharge the burden upon it to show that there is a triable issue, or that for any other reason, there should be a trial. Since it has not incurred any costs of reinstatement and has no intention of doing so, it has suffered no loss and it has no real claim against the Plaintiff such that it could make any deductions against the deposit.

22. It is now clear law that the proper application of the general principle governing damages for breach of contract (that where a party sustains loss by virtue of breach of contract he is so far as money can do it to be placed in the same situation in respect of damages as if the contract had been performed) required the court to ascertain the loss the Defendant here had in fact suffered by reason of the breach - it was not the monetary equivalent of specific performance.

23. The Defendant here has in fact suffered no loss. It has not incurred any costs of reinstatement, and it has no intention of undertaking reinstatement works. It has adduced no evidence to the Court that the mortgagee's sale or letting of the office unit has been delayed, or the value thereof adversely affected, as a result of the Plaintiff's demolition works, such that the Defendant would suffer any consequential loss.

Set-off for value of services

24. However, I find that the Defendant is arguably entitled to set-off against the Plaintiff's claim the sum of $10,636.02 being the rates, management fees and air-conditioning charges for the period of the Plaintiff's occupation. Although the Tenancy Agreement was avoided by virtue of Cl. 20, the Plaintiff was in occupation of the office unit, and it is therefore at least arguable that it was liable on a quantum meruit for the value of those services. Mr Poon for the Plaintiff has not put forward any substantial arguments otherwise.

Order

25. Accordingly I would enter judgment in favour of the Plaintiff in the sum of $163,702.98 being the sum claimed less the value of those services, and give the Defendant unconditional leave to defend in respect of the said amount of $10,636.02.

26. There will be interest on the said amount of $163,702.98 at the commercial rate of prime + 1% from the date of issue of the writ until judgment, and thereafter at judgment rate until payment.

27. As the Plaintiff has substantially succeeded, I would also give an order nisi that the Defendant pay the Plaintiff's costs of the application.