SHUM TSUNG FAI v. CHIAP HENG CHENG (H.K.) LTD.

HCA8941/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.8941 OF 1998

-------------

-------------------------

J U D G M E N T

-------------------------

The tenancy

1. The plaintiff is the registered owner of the premises known as Shop B on the Ground Floor (including Cockloft B) of Nos.188 and 190 Wing Lok Street, Hong Kong ("the Premises"). By a tenancy agreement dated 22 July 1995 ("Tenancy Agreement"), the Premises was let to the defendant for a term of two years, commencing from 1 August 1995 and expiring on 31 July 1997 at $60,000 per month. The Premises was used for commercial purpose by the defendant.

2. An option to renew is included in this Tenancy Agreement :

"The Tenant shall have the option to renew this Agreement for a further term of 2 years from the expiry of the term hereby created PROVIDED that the Tenant shall before the expriation [sic] of the term hereby created give to the Landlord not less than two (2) calendar month notice in writing to exercise the said option and provided that the Tenant shall on the expiry of the term hereby created have paid the rent reserved by and performed and observed the covenants herein contained then Landlord shall upon receipt of the Tenants notice in writing in exercising the said option grant to the Tenant a further term of TWO YEARS commencing from the 1st day of August 1997 to the 31st day of July 1999 (both days inclusive) on the same terms and conditions herein contained save the option to renewal at the revised monthly rental in respect of the renewed term of HK$72,000.00 (inclusive of rates). The revised rental deposit in respect of the renewed term shall be in the sum of HK$164,000.00. Each party shall be responsible for its own legal costs and expenses relating to the preparation and signing of the Tenancy Agreement in respect of the renewed term."

The renewal

3. Under this clause, the written notice should be served by the defendant before 31 May 1997 if it wished to exercise the option. The defendant did not serve the required notice before 31 May 1997. What happened instead was that, according to the plaintiff's evidence, he went to the Premises to collect rent on 1 July 1997, and Mr Cheng of the defendant discussed with him on the tenancy. He informed Mr Cheng that the rental was to be increased on the following month, then the parties had a discussion on the amount of the rent to be increased. The plaintiff said that the rental would be $2,000 less, at $70,000 per month. This is probably a reference to the rental for the new two-year term under the option which provides for a monthly rental of $72,000, although the parties did not refer to this option in the discussion. Mr Cheng, however, asked the plaintiff not to increase that much and he asked for a 10% increase only. The plaintiff then agreed to an increase at $6,000 and said that the new tenancy would be at $66,000 per month. The parties then agreed that since the defendant had a deposit of $140,000 with the plaintiff, in respect of the then existing Tenancy Agreement, it would be treated as the deposit for the new term. The plaintiff considered that the new tenancy was for a term of two years just as before.

The termination

4. The defendant, however, served a notice to quit on the plaintiff on 31 March 1998, terminating the tenancy on 30 April 1998. The defendant delivered vacant possession of the Premises on 30 April 1998.

The plaintiff's case

5. The plaintiff's pleaded case is that the defendant had exercised the option to renew the tenancy for another two years, alternatively, the parties had agreed on a new two-year term. The defendant had repudiated the agreement by early determination. The plaintiff had accepted the repudiation and is entitled to seek damages from the defendant. The plaintiff claims that he was only able to find a new tenant in November 1998 when he entered into a new tenancy agreement dated 12 November 1998 for a term of two years, commencing from 15 March 1999 to 14 March 2001. The plaintiff's claim is based on loss of rental for the unexpired period after giving adjustments. A claim for the legal cost of the new tenancy agreement entered into by the plaintiff with his new tenant was also made.

The defendant's case

6. The defendant's case is that it intended to buy its own premises, and when it renewed the lease in July 1997, Mr Cheng had informed the plaintiff that it was on a temporary monthly basis. In December 1997, the defendant informed the plaintiff that the defendant would be moving out from the Premises because it had found its own premises. It also asked its solicitors to serve the notice on 31 March 1998.

No discussion on temporary tenancy

7. The plaintiff denies that Mr Cheng had mentioned in July 1997 that the new agreement was for a temporary month-to-month tenancy. My finding of this aspect is as follows. I accept the defendant's evidence that the defendant wished to acquire its own premises. Mr Poon of the defendant had instructed Mr Cheng to discuss with the plaintiff on renewing the tenancy on a temporary basis. Although Mr Poon stated that he had instructed Mr Cheng that the new tenancy was on a temporary month-to-month basis, I find that all he had instructed Mr Cheng to do was to renew it on a temporary basis. Mr Cheng confirms this to be Mr Poon's instructions. I find, however, that Mr Cheng did not inform the plaintiff that the renewal was on a temporary basis. I find the plaintiff to be a truthful witness in this regard. If the plaintiff were told that the renewal was on a temporary basis only, I would expect him to ask how long did the defendant intend to stay on the Premises. This would be a natural reaction on a landlord's part and also on the plaintiff's part as well.

8. In Mr Cheng's re-examination, he said that when he told the plaintiff that the renewal was on a temporary basis, the plaintiff responded by saying that they had a tenancy agreement. This is a reference to a Chinese agreement that the parties had signed prior to the formal Tenancy Agreement of 22 July 1995. This agreement stated that :

"永樂街190號地下及閣樓，出租給捷興莊，每月租金港幣陸萬元正，租期為2 年，後加兩年租金增加百分二十。裝修期10天（有三天出入）。從1995年8月1日起租，壹個月上期，兩個月按金。定於1995年7月6日到律師樓簽約。

	（簽名）
	95-6-30"

9. This alleged response by the plaintiff was not even put to the plaintiff in cross-examination. Mr Cheng probably may be referring to the reaction of the plaintiff subsequently when the defendant informed him that it would be vacating the Premises. Certainly, I find that this was not part of the discussion on 1 July 1997.

10. Mr Poon said that he had overheard the words of "$66,000 and temporary rental" from the conversation of Mr Cheng and the plaintiff. The evidence of Mr Poon on this aspect is not satisfactory. In his evidence, he said that he was not next to Mr Cheng and the plaintiff when they discussed the renewal. I specifically asked him whether he could hear their conversation. After a considerable pause, he answered "No". But a few answers later, he said that he could hear part of the conversation, namely, he heard "$66,000 and temporary rental". I find it odd that Mr Poon should come out with such answers. Afterall, in paragraph 7 of his witness statement, he had stated this : he was not paying particular attention to the conversation but he "recall that Mr Cheng told the Plaintiff that the Defendant wished to remain in occupation of the premises on a temporary basis and would be prepared to pay an increased rental of HK$66,000.00 per month inclusive of rates.". This paragraph was not treated as part of Mr Poon's evidence-in-chief. His witness statement was made on 12 January 2000. No explanation was given by Mr Poon why he should change his case twice on this issue. I think the only inference to be drawn is that he did not hear the conversation.

Option not exercised

11. What happened on 1 July 1997 was that the parties were discussing the new terms of the tenancy after 31 July 1997 without any discussion that the tenancy was on a temporary basis. But it is the plaintiff's case as well that at this discussion, there was also no mentioning of a further two-year term. The plaintiff's pleaded case is that the defendant had exercised the option in July 1997 and hence the parties had agreed to a two-year term. I do not find that the discussion between the parties in July 1997 was an exercise to renew the option. The option was not exercised by notice before 31 May 1995 as required by clause 6, and the formality for granting a new tenancy was not observed. Even if, for the purpose of argument, that the plaintiff had waived the notice requirement, what was eventually agreed was still not in accordance with the term of clause 6 because instead of a rental at $72,000, the parties agreed on $66,000 only.

12. In the absence of an express agreement on the duration of the new tenancy and the rental was different from the one provided in the option, it would go too far to say, nonetheless, that both parties intended another term of the option, namely, the two-year term, should have binding effect on them. In my view, the defendant had not exercised the option in July 1997, instead the parties had reached a new agreement to extend the tenancy without specifying the duration of this new tenancy.

13. I do not consider that the plaintiff can rely on either clause 6 or the earlier Chinese agreement in support of his contention that the parties must necessarily intend to abide by the agreement to have another two-year term. Although the plaintiff at some part of his evidence seems to refer to a four-year term, it is clear from the Chinese agreement that the term was not a four-year term with different rentals for two different periods. This earlier agreement, in any event, was replaced by the Tenancy Agreement which specifically provides with an option to renew. Unless the plaintiff can bring his case within the ambit of the option, then it is a bold assertion that the parties had in 1997 agreed on the further two-year term.

Periodic tenancy

14. While the parties had a consensus of mind that the Tenancy Agreement was to be renewed, there was no consensus on its length. It may well be that the plaintiff believed their understanding was for a two-year term, the defendant's intention was a different one. Neither of them had expressed their intention to the other. Mr Cheng may well believe that the plaintiff was proceeding on the basis of a two-year term, but in the absence of an express discussion on this topic, I cannot see how a consensus of mind on the duration could have been reached, particularly by 1 July 1997, the defendant had intended to move out of the Premises when they found a suitable place. I accept that the defendant had actively been looking for other premises at that time.

15. In the absence of an express agreement for a fixed term tenancy, then a tenancy must be a periodic tenancy on a monthly basis. Although there was a reference in the Defence to a holding-over by the defendant, I do not think that was intended to mean a holding-over by a tenant at the expiration of a fixed term with the consent of the landlord resulting in a tenancy at will or tenancy by sufferance . The holding-over is pleaded to be the result of an agreement between the parties, hence one is concerned with the situation of an express agreement for a new tenancy between the parties. Ms Chow, counsel for the defendant, had confined herself to the creation of a periodic tenancy.

16. The existence of a monthly tenancy can be inferred by the fact that a $66,000 monthly rent is to be paid. The inference of a monthly tenancy can be made by reference to the period to which the rent is calculated and a letting at a monthly rent gives rise to a presumption of monthly tenancy, see Woodfall Landlord and Tenant, Vol.1, paragraphs 6.054 and 6.055. Although reference is made to the word "presumption", ultimately it is a matter of inference from all the circumstances of the case as to the nature of the tenancy.

17. Mr Cheung, counsel for the plaintiff, submitted that the discussion would be meaningless if the parties had not intended a two-year tenancy. I do not consider that this must be so because a monthly tenancy is a recognized form of tenancy. The defendant wished to have a tenancy on a temporary basis. A monthly tenancy which can be determined by short notice enables it to occupy the Premises on a temporary basis. Mr Cheung also referred to other matters, such as the discussion took place before the Tenancy Agreement had expired, the term of two years was contained in the option and in the Chinese agreement, and when the plaintiff referred to the deduction of $2,000 per month, he clearly was referring to the term contained in the option.

18. I have already dealt with many of these matters earlier. In my view, even recognizing all these, one still cannot say categorically that what the parties had agreed on 1 July 1997 was only capable of one and only one inference, namely a two-year term had been agreed between the parties. In my view, in this case, a periodic tenancy on a monthly basis is one that should be inferred.

Tenancy properly terminated

19. It is not disputed that a monthly tenancy can be determined by a tenant by giving a one month notice of termination. The tenancy in question was terminated by the defendant and the plaintiff is not entitled to claim damages for the remaining part of the alleged two-year lease.

Counterclaim

20. As to the counterclaim, the defendant initially counterclaimed for $140,000, being the deposit held by the plaintiff. The plaintiff cannot use this amount to set off the rent for the alleged unexpired term of the new agreement. The defendant accepted that he had not paid rent for April 1997 and the sum of $66,000 should be deducted, leaving $74,000 to be paid by the plaintiff.

Conclusion

21. Accordingly, I shall dismiss the plaintiff's action and give judgment to the defendant for the sum of $74,000. Costs of the action and the counterclaim be to the defendant.