MASTER YIELD LTD v. HO KAN BAU AND ANOTHER

HCA866/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 866 OF 2008

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BETWEEN

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J U D G M E N T

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1.  The plaintiff appeals against the decision of Master Kwang given on 23 February 2009 whereby the Master gave summary judgment to the defendants on the defendants’ counterclaim against the plaintiff.

2.  At the start of the hearing of this appeal, I granted leave to the plaintiff to amend its pleadings to include a plea of set-off. The initial application by the plaintiff was only to amend the Statement of Claim. When it was pointed out by counsel for the defendant that the proposed plea of set-off of the arrears of rent had no place in the Statement of Claim since the claim for arrears of rent was only raised in the defendant’s counterclaim, the plaintiff accepted that the plea of set off ought properly to be included in the Reply and Defence to Counterclaim.

3.  In the circumstances, leave was given to the plaintiff to amend both the Statement of Claim as well as the Reply and Defence to Counterclaim.

4.  Leave was also granted to the plaintiff to file two further affirmations, being the 3^rd Affirmation of Yeung Ka Yee Carrie, and the affidavit of Chan Ching May Esther.

BACKGROUND

5.  The defendants are the registered owner of Shop SLG2 on the sub-lower ground floor of Westland Garden Nos. 1025-1037 King’s Road, Nos. 2-10, 12A-12H Westland Road Hong Kong (hereinafter referred to as “the Shop”). The Shop could only be used for business purposes.

6.  On 19 September 2007, the plaintiff entered into a Provisional Tenancy Agreement with the defendant whereby the plaintiff became the tenant of the Shop taking up possession thereof as from 1 November 2007.

7.  On 5 December 2007 a formal tenancy agreement (“the Agreement”) was entered into between the parties in respect of the Shop. The term of the tenancy was to commence from 5 December 2007 until 9 December 2009 at the monthly rent of $150,000 to be paid in advance on the 10^th day of each month with a rent-free period expressly stated therein to be from 5 December 2007 until 9 January 2008. Apart from the rent, the plaintiff had also to pay the management fees, government rates as well as the sewage charges.

8.  Upon entering into the Agreement, the plaintiff had paid the first month’s rent being the first month after the rent-free period.

9.  Dispute having arisen between the parties over the tenancy, it is common ground that apart from the first month’s rent, the plaintiff had not paid any further rent to the defendant as from February 2008, nor had the plaintiff paid any management fees, government rates or sewage charges after April 2008.

10.  The Writ with Statement of Claim was issued by the plaintiff on 16 May 2008.

11.  The Defence and Counterclaim of the defendant was filed on 30 June and amended on 26 September 2008.

12.  The present application for summary judgment on the counterclaim was issued by the defendant on 26 September 2008 and was heard by Master Kwang on 23 February 2009.

13.  By the time this application was heard by the Master, possession of the Shop had been returned by the plaintiff to the defendants on 10 January 2009.

THE PLAINTIFF’S CLAIM

14.  By its Amended Statement of Claim, the plaintiff pleads misrepresentation, breach of duty of disclosure and breach of the Agreement by the defendants.

15.  It is the plaintiff’s claim that before entering into the Provisional Tenancy Agreement with the defendants, the plaintiff had inspected the Shop with estate agents and the 1^st defendant. On that inspection air conditioners were seen at the external wall of the Shop. Unknown to the plaintiff at that time, the defendants were being sued by the Incorporated Owners of Westland Gardens in the Lands Tribunal for the installation of air conditioners on the external wall. This fact was never made known to the plaintiff. The plaintiff had intended to make use of the Shop as a spa and for that would have had to install some 12 air conditioners on the external wall.

16.  An injunction order was granted against the defendants by Lands Tribunal in case no. LBDM 292/2006 on 8 November 2007 ordering the defendants to dismantle the air conditioners already installed on the external wall. The granting of the injunction order was also not made known to the plaintiff by the defendants at the time it was granted.

17.  After taking possession of the Shop, the plaintiff had started to carry out decoration works.

18.  It was only on 8 December 2007 that the plaintiff was informed by the management office of Westland Gardens of the injunction.

19.  As a result negotiations took place between the plaintiff and the defendants concerning the problem of the air conditioners, which could only be resolved with the involvement of the Incorporated Owners of Westland Gardens.

20.  One part of those negotiations concerned the payment of rent pending the resolution of the problem.

21.  It is the plaintiff’s case that by an email dated 7 March 2008 from the daughter of the 1^st defendant (acting as the agent of the 1^st defendant) agreement was reached between the parties that the rent free period would be extended until the resolution of the problem with installing air conditioners on the external wall.

22.  On this footing the plaintiff claims that it was induced by misrepresentation to enter into the Agreement and/or Provisional Tenancy Agreement when it otherwise would not have done so, as well as claiming for breach of the Agreement.

23.  By way of reliefs the plaintiff seeks declarations that the plaintiff was entitled to and has validly rescinded the Agreement and is relieved from further obligations being performed thereunder. There is also a claim for damages to be assessed for the aforesaid breaches.

DEFENDANT’S DEFENCE AND COUNTERCLAIM

24.  The defence denies any misrepresentation, breach of duty of disclosure or breach of the Agreement.

25.  By its counterclaim, the defendants counterclaim for :

(a) forfeiture of the deposit of $300,000;

(b) an order for possession; (possession of the Shop was returned by the plaintiff after the Defence and Counterclaim had been filed)

(c) $718,760.86 being arrears of rent, rates, management fees and sewage charges outstanding as at 30 June 2008; and

(d) mesne profit at the rate of $150,000 plus rates, management fees and sewage charges per month from 1 July 2008 until delivery up of possession.

APPEAL FROM MASTER’S DECISION

26.  As already indicated, the Master had given summary judgment to the defendants on their counterclaim.

27.  In this appeal against the Master’s decision, a number of points were taken by the plaintiff upon which, it was submitted, leave ought to be granted for unconditional leave to defend the counterclaim. In the alternative, it was submitted that even if judgment was to be given on the counterclaim, there should nevertheless be a stay of execution on that judgment pending the trial of the plaintiff’s claim.

28.  The matters relied on by the plaintiff are as follows :

(a) there was an agreement between the parties after the problems arose to extend the rent-free period until such problems could be resolved;

(b) failure of the defendants to comply with section 58 of the Conveyancing and Property Ordinance to give proper notice of forfeiture;

(c) if forfeited, credit ought to be given for the $300,000 deposit in respect of the other claims;

(d) equitable set-off; and

(e) stay of execution if judgment is given on the counterclaim.

29.  It would be necessary to deal with each of the points raised separately.

Agreement to extend rent-free period

30.  The Agreement expressly provides in Clause 1 that the rent-free period would be from 5 December 2007 to 9 January 2008.

31.  The plaintiff alleges that after the problem with the air conditioners was discovered by the plaintiff, and in the course of their negotiations, an oral agreement was reached between the parties that the rent-free period would be extended until that problem with the air conditioners was resolved. In this the plaintiff relies on an email dated 7 March 2008 sent by Miss Ho (the 1^st defendant’s daughter) to Miss Carrie Yeung of the plaintiff, as evidencing such oral agreement. The plaintiff also relied on the evidence of Carrie Yeung and that of Esther Chan contained in their respective affirmation/affidavit.

32.  The relevant part of the affirmation of Carrie Yeung states :

“In view of the delay in approval of the air-conditioning installations and delay in the decoration works, we did push the Defendants in allowing us a longer rent-free period. Miss Ho, on behalf of the Defendants had by her email dated 7^th March 2008 varied the terms of the Tenancy Agreement in that the rent-free period of the Property was to be extended until the final resolution in relation to the installation of air-conditioners at the meeting of the Incorporated Owners.”

33.  Esther Chan in her affidavit states :

“Carrie Yeung asked me to talk to the landlord about extending the rent-free period until the air-conditioning installation problem was resolved. I recall conveying the same message to Ms Ho and Ms Ho confirmed that she agreed that the rent-free period could be postponed and would be dealt with after the question of air-conditioning was resolved.”

34.  Looking at their evidence, I cannot see on that evidence any concluded agreement as alleged by the plaintiff.

35.  At best, from the evidence of Esther Chan there was only an agreement to defer the matter for future resolution but no agreement as such ‘to extend the rent-free period until the problem was resolved’. The evidence of Carrie Yeung relies on the email dated 7 March, the relevant part of which (from the translation agreed between the parties for the purpose of this appeal) states :

“Good day, I have contacted your decoration master, the management office requested for Registered AP to submit data and snitched that the Incorporated Owners will hold meeting very soon and will discuss in the course of the meeting, regarding rent free wait after the pass of the Incorporated Owners then discuss, but the charges below you have to pay my father first, moreover regarding electricity deposit, your refund of electricity, water supply postal address, you change it by your own.”

36.  Once again in this email, the relevant words “regarding rent free wait after the pass of the Incorporated Owners then discuss” clearly show that there was no concluded agreement as suggested by the plaintiff. All that those words showed was that the matter concerning rent-free was to be further discussed after the Incorporated Owners had met and made their decisions.

37.  On the evidence before me there is simply no evidence of any agreement reached between the parties that the rent-free period was to be extended until after the problem with the air conditioners had been resolved.

38.  The Master cannot be faulted for rejecting this part of the plaintiff’s case.

No notice of forfeiture

39.  The plaintiff points to the counterclaim of the defendants whereby it was pleaded that the defendants, by its counterclaim, forfeit the Agreement and re-enters the Shop, to say that there was no prior notice of forfeiture given by the defendants forfeiting the Agreement. Therefore it does not comply with section 58 of the Conveyancing and Property Ordinance.

40.  However, as pointed out by Mr Lo in his submission, counsel for the plaintiff has obviously overlooked sub-section 10 of section 58 which expressly provides that section 58 does not (with one exception which has no application here) affect the law relating to re-entry or forfeiture or relief in case of non-payment of rent.

41.  That is the short answer to this point raised by the plaintiff which is, with respect to counsel for the plaintiff, entirely without merit.

Whether credit to be given for the forfeiture of the deposit

42.  Clause 4(a) of the Agreement provides that if any part of the rent is in arrears for 15 days or if there is any breach of any of the agreements by the tenant, then the landlord shall be entitled to re-enter the Shop and the Agreement shall absolutely determine :

“AND the deposit paid hereunder shall be forfeited to the Landlord as and for liquidated damages….but without prejudice to the Landlord’s rights to claim any further damages which the Landlord shall have sustained or may sustain” [emphasis supplied]

43.  Clause 4(d) of the Agreement further provides that at the expiration or sooner determination of the Agreement…. subject to prior forfeiture in accordance with Clause 4(a) the Landlord will repay to the Tenant the deposit paid but without interest thereon but if there shall be any arrears of rent or other outstanding charges in connection with the enjoyment of the premises :

“the Landlord may apply such deposit towards payment of such arrears of rent and outstanding charges and if there shall be any breach of the said agreements or any of them the Landlord shall pay or apply the said deposit or such part thereof towards remedying such breach…. and shall only pay the balance (if any) of the deposit to the Tenant.”

44.  It seems clear from the above wording in the clauses cited that the deposit, if forfeited, is forfeited as liquidated damages and not as a penalty. Moreover, the Landlord is entitled to claim “any further damages” over and above the amount of such deposit forfeited.

45.  Therefore the intention between the parties must be that the forfeiture of the deposit is not absolute. When rent is in arrears, the deposit may be used to pay off such arrears of rent. It follows therefore that credit will need to be given for the forfeiture of the deposit where rent is in arrears.

46.  In Orient Bright International Ltd v Hiang Kie Hong Ltd [2005] 2 HKC 663, Le Pichon JA, faced with a similar situation, decided in that case that the landlord was entitled to forfeit the deposit without have to give any credit. However, in that case, the wording of the relevant clause in the tenancy agreement differed from the wording in the present case in that there it was provided that in the event of breach or non-observance by the tenant of any of the agreements, stipulations or conditions :

“the Landlord shall be entitled to terminate this Agreement and to forfeit the said deposit absolutely but without prejudice to the Landlord’s rights to claim from the Tenant damages or monetary loss which the Landlord may incur as a result of such non-observance or non-performance by the Tenant…” [emphasis added].

47.  There was also a further clause in the tenancy agreement in the case of Orient Bright International Ltd which provided that in no event shall the tenant be entitled to treat the deposit as payment of rent.

48.  Those two clauses referred to above in the case of Orient Bright and also their difference in wording sufficiently distinguish the decision in that case from the present case.

Set-off

49.  The plaintiff submits that even if the plaintiff is liable to the defendant for payment of the rent, the plaintiff should be entitled to set of such rent due by way of equitable set-off against the damages claimed by the plaintiff by reason of the fact that the claims of the plaintiff are so closely connected with the Agreement.

50.  The plaintiff’s obligation to pay rent is set out in Clause 1 of the Agreement which provides that the rent is :

“payable in Hong Kong currency in advance on the 10^th day of each and every calendar month without any deduction or set-off (legal or equitable) SUBJECT to a rent free period from 5^th December 2007 to 9^th January 2008 both days inclusive…”

51.  Not only is that obligation to pay rent under the Agreement not expressed to be subject to or conditional upon compliance by the defendant of its obligations under the Agreement, Clause 1 of the Agreement expressly prohibits any set-off whether legal or equitable in respect of the rent payable.

52.  It is therefore clear that the obligation to pay rent is to operate independently from the other contractual obligations of the defendants under the Agreement.

53.  The only clause in the Agreement which provides for the suspension of rent is Clause 4(f) which provides for the rent to be suspended if [the Shop] is damaged or destroyed by fire or other causes not attributable to the act or default of [the plaintiff] so as to be unfit for habitation or use.

54.  On a proper construction of the Agreement therefore, set-off, even equitable set-off, is not available to the plaintiff.

55.  The further argument put forward by the plaintiff in submitting that equitable set off is available to the plaintiff is that it was the misrepresentation by the defendant which caused the plaintiff to enter into the Agreement. But for such misrepresentation, the plaintiff would not have entered into the Agreement and would not have been bound by the terms contained in it. Since the plaintiff is now claiming that the Agreement is rescinded because of the misrepresentation, Clause 1 of the Agreement should not be engaged to prevent equitable set off from being available to the plaintiff.

56.  That submission by the plaintiff overlooks the fact that although the true facts (on the plaintiff’s case) upon which the misrepresentation claim was based became known to the plaintiff on or about 8 December 2007 when the plaintiff learned from the management office of the injunction order against the defendants, the plaintiff had retained possession of the Shop until 10 January 2009, well after the defendants had served its counterclaim in which it claimed for possession.

57.  The only basis which would have enabled the plaintiff to have retained possession of the Shop until the plaintiff delivered up possession on 10 January 2009 was the Agreement.

58.  In those circumstances, I cannot really see how the plaintiff can resile from being bound by the terms of the Agreement.

59.  Accordingly, I am of the view that the Master was correct not to have acceded to the plaintiff’s contention of equitable set-off.

60.  That would still be the same position even if the plaintiff could show that both the claim and the counterclaim arises out of the same transaction and are so closely related to each other.

61.  I am therefore not persuaded that the plaintiff is entitled to equitable set-off in this case.

Stay of Execution

62.  Given the circumstances of this case as already set out above, I am of the view that the plaintiff’s claim based on the misrepresentation and/or failure to make full disclosure is sufficiently closely connected with the Agreement entered into between the parties to warrant there to be a stay of execution of the judgment obtained by the defendant on the counterclaim pending the trial of the plaintiff’s claim.

CONCLUSION

This appeal is therefore allowed to the following extent :

(a) in respect of the amount of the judgment ordered on the counterclaim, credit will need to be given for the amount of the deposit paid by the plaintiff; and

(b) there will be a stay of execution of the judgment on the counterclaim pending the trial of the plaintiff’s claim.

In all other respects, the substantive order of the Master (with the exception of the costs order) is to stand.

Costs

63.  In view of the fact that this appeal from the Master’s order has been allowed in part, the parties are to lodge written submissions as to costs within 14 days from the date of handing down of this judgment. The submission as to costs to be lodged is to include the costs of this appeal as well as to the cost below.

64.  Upon receipt of such written submissions on costs, I will give a further written ruling on costs to be handed down in due course.