HOBEN CO LTD v. ALLIED WORLD LTD

HCA2947/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2947 OF 2004

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Dates of Hearing : 4, 5, 7, 8, 11 and 12 August 2008

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JUDGMENT

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1. In 2004, the plaintiff (“the purchaser”) agreed to buy certain shop premises (“subject property”) from the defendant (“the vendor”). 

2. Alleging that the monthly rent under the then existing tenancy was $40,000, not $45,000 as the vendor represented and contracted it to be, the purchaser called off the transaction.

3. The purchaser sued the vendor for repayment of the deposit and other reliefs and the vendor counterclaimed for forfeiture of the deposit.

Facts not in dispute

4. The written tenancy agreement (“the tenancy agreement”) made between the vendor and Wong Yau Fung (“the former tenant”) was dated 21 August 2004.  It was for a term of three years from 1 September 2004 at the rent of $45,000 per month, exclusive of rates, government rent, management fee and other outgoings, with an option on the part of the former tenant to renew for the further term of two years at the revised monthly rent of not higher than 15%.  September 2004 was rent free, but rates, government rent, management fee and other outgoings were payable by the former tenant.  $108,000 was paid as deposit under the tenancy agreement.  The further sum of $45,000 had been paid in advance as rent for October 2004.

5. After the making of the tenancy agreement, possession of the subject property was given on 25 August 2004 by Mrs Chung Lai Mak Mui (“Mrs Chung”) on behalf of the vendor to the former tenant.  On that occasion, Mrs Chung agreed with the former tenant to be responsible for up to $2,000 for the cleaning of the range hood and the former tenant signed a note evidencing the agreement. 

6. The provisional sale and purchase agreement (“the provisional agreement”) was dated 15 September 2004.  In addition to the vendor and the purchaser, Midland Realty (Comm. & Ind.) Limited (“Midland”) was a party to that agreement.  The purchase price was $8 million.  It provided for signing of the formal agreement by 28 September 2004 and completion by 16 December 2004.  An initial deposit of $200,000 had been paid and a further deposit of $600,000 would be payable (and was subsequently paid) at the time of signing of the formal agreement.  Clause 16 provided that the Chinese version prevailed.  Clauses 3, 4 and 17 provided as follows :

“負擔或債項     3.    該物業是以免除所有負擔或債項的情况下售予買方，買方之提名人或其承讓人。

Encumbrances     The said premises is to be sold to the Purchaser or its nominee(s), sub-purchaser(s) free from encumbrances.”

“交吉    4.    買賣完成時，買方同意連同該物業現有之租約一起購入該物業。

Vacant possession     Upon completion, the Purchaser agrees to purchase the said premises subject to the existing tenancy.”

“備註  17.    租約內容！租客名稱！WONG YAU FUNG ID NO: [omitted] 現營‘客棧圍村盆菜特式火煱店’ 每月租金HK$45,000全不包至2007年8日31日. 另加2年生約加幅為15%.

Remarks”

7. The formal sale and purchase agreement (“the formal agreement”) in respect of the subject property (10 equal undivided 73^rd parts or shares of and in New Kowloon Inland Lot No. 3723 and the building thereon known as Yu Shing Building, with the sole and exclusive right to use Shops A and B on the ground floor) made between the vendor and the purchaser was dated 28 September 2004.  Clause 22(a) and (b) provided as follows :

“22.   (a)   The Property is sold subject to the existing Tenancy Agreement dated 21^st August 2004 made between the Vendor as landlord and Wong Yau Fung (‘the Tenant’) as Tenant (‘the Tenancy Agreement’) a copy of which is attached hereto and the Purchaser shall be deemed to purchase with full knowledge thereof.

    (b)   The Vendor warrants that he has not received any premium key or construction money or other consideration of the like nature for the granting of the Tenancy Agreement and that the terms of the said Tenancy Agreement has not been and will not be altered.”

8. On or about 16 November 2004, Mrs Chung went to the subject premises to collect rent and other payments. 

(a)  Mrs Chung received a cheque for $43,000 from the former tenant.

(b)    She gave the former tenant a receipt for $45,000 as payment of rent for November 2004.  The receipt identified the cheque for $43,000.

(c)  She gave the former tenant another receipt for rates and government rent for October–December 2004 and management fees for October and November 2004 in the sum of $10,830.  The original figure and words for $3,830 had been crossed out.  No cheque was identified in the receipt which contained a note that $5,830 was owing. 

(d)  The former tenant gave Mrs Chung a cheque for $5,830.  The former tenant said he gave her this cheque on that occasion, but Mrs Chung said the cheque was collected a couple of days later.

(e)  A hand-written note on page 15 of a photocopy of the tenancy agreement recited the vendor’s agreement to pay and to deduct part of the expenses for cleaning and maintenance/repair of the range hood in the sum of $11,255.  Mrs Chung said it was signed by the former tenant on that occasion, but the former tenant said it was signed at about the time when he was negotiating the surrender of the tenancy.

9. On the cheque stud for the $43,000 cheque, the former tenant filled in the entries as follows :

日期 Date	“18-11-04”
支與 To	“$43,000-”
用途 For	“客棧11 月租”

10. On the cheque stud for the $5,830 cheque, the former tenant filled in the entries as follows :

日期 Date	“20-11-2004”
支與 To	“$5,830.”
用途 For	“客棧10月11月差餉管理尾數”

11. By letter dated 4 December 2004, Messrs Iu, Lai & Li, solicitors for the purchaser, wrote to Messrs So, Long & Associates, solicitors for the vendor, alleging that :

“… The Tenant told our client that although the rent payable under the Tenancy Agreement of the Property between your client and the Tenant was stated to be HK$45,000.00 per month, there was in fact a verbal agreement between your client and the Tenant that the Tenant would only be required to pay HK$40,000.00 per month.  In fact, for the month of October 2004, the Tenant had only paid the sum of HK$40,000 to your client.  The sum of $40,000.00 included a sum of HK$2,000.00 odd for miscellaneous charges payable by the Tenant.  As such, the net rental paid by the Tenant to your client for the month of October was only HK$38,000.00 per month.”

Through its solicitors, the purchaser felt able to accuse the vendor of “conspiring with” the former tenant in the following terms :

“Our client purchased the Property for investment purpose.  The rental yield from the Property was a decisive factor in our client’s decision to purchase the Property.  Your client knew, at all material times, that the actual rental agreed for the Property was only HK$40,000.00 per month.  By representing to our client that the monthly rent from the Property was higher than the actual rental, namely HK$45,000.00 per month and by conspiring with the Tenant to entering [sic] into a Tenancy Agreement for a term of years at HK$45,000.00 per month with full knowledge that that was not the correct or agreed rental, your client had misrepresented to our client a very essential information leading to the conclusion of the agreement for the purchase of the Property.”

Solicitors for the purchaser requested the vendor’s “proposal to rectify the wrong done to [the purchaser] in respect of the sale and purchase of the [subject property]”.

12. Solicitors for the vendor replied by letter dated 6 December 2004 stating that rent for October 2004 in the sum of $45,000 had been paid and that $43,000 had been paid as rent for November 2004 after setting off the sum of $2,000 for cleaning of the range hood.

13. Relying on the alleged conspirator’s version, solicitors for the purchaser responded by letter dated 10 December 2004 as follows :

“… the reference to ‘October’ in … our letter to you dated 4^th December 2004 should in fact be changed to ‘November’.

On further investigation into this matter, the Tenant informed our client that prior to the signing of the Tenancy Agreement whereby the Tenant agreed to pay monthly rent of HK$45,000.00 per month, there was an oral agreement between your client and the Tenant that if income from the business operation at the Property could not sustain the rental payment of HK$45,000.00 per month, your client would reduce the rent of the Property.  After operating the Property for the months of September and October, the Tenant found that the business was sluggish and requested your client to reduce the rent in reliance of [sic] the oral agreement.  Your client agreed to allow the Tenant to reduce the rent agreed to allow the Tenant to reduce the rent by HK$5,000.00 per month.

For the rent of November 2004, taking into account the apportioned cleaning charges of HK$2,000.00 payable by your client, the Tenant issued a cheque number 329NB323623 for HK$43,000.00 to your client and was given a rental receipt number 0313060 dated 16^th November 2004 for HK$45,000.00.

The agreed reduction in rent in the sum of HK$5,000.00 was given to the Tenant by having the said sum deducted from HK$10,830.00 being the rates and management fee payable by the Tenant to your client particularized below :

(i)  HK$6,960.00 being rates from 1^st October 2004 to 31^st December 2004;

(ii)  HK$3,870.00 being management fee from 1^st October 2004 to 30^th November 2004.

Instead of accepting payment of HK$10,830.00 from the Tenant, the Tenant was only required to pay HK$5,830.00 (being HK$10,830.00 less HK$5,000.00), which was settled by a cheque No. 329NV323624 dated 20^th November 2004 for HK$5,830.00.  However, your client insisted on giving a receipt for HK$10,830.00 to the Tenant even though your client had not received the shortfall of HK$5,000.00.

It is evident that despite the terms of the Tenancy Agreement that the rent was stated to be HK$45,000.00 per month, there was in fact an oral agreement between your client and the Tenant that your client agreed to reduce the rent if and when the income from the business could not sustain the rent payable.  In fact, your client’s agreement to accept a reduction of rent by HK$5,000.00 as from November 2004 served to substantiate that such an oral agreement had existed prior to the signing of the Tenancy Agreement.

In reliance of [sic] the oral agreement between your client and the Tenant, the Tenant had in fact asked for a further reduction of rent to HK$35,000.00 per month which according to the Tenant, was the amount of rent which he could afford to pay based on the current income from the Property.

In view of the above, our client maintains that our client’s agreement to purchase the Property at the purchase price of HK$8,000,000.00 was a result of your client’s misrepresentation of the rental income from the Property was HK$45,000.00 per month when in fact there was an oral agreement between your client and the Tenant that the monthly rent would be adjusted downward if the business could not sustain such income and such an oral agreement was not disclosed to our client.”

The letter concluded by demanding “an offer to compensate [the purchaser] for all losses and damages [sic] which [the purchaser] would incur”.

14. By letter dated 15 December 2004, solicitors for the vendor enclosed a copy of the documents referred to in paragraphs 5 and 8(e) above and denied that there was any other written or verbal agreement.

15. By letter dated 16 December 2004, the purchaser called off the transaction.  Through its solicitors, the purchaser asserted that “false figures” were “purportedly recorded down” in the receipts.  The letter read as follows  :

“We take note of what you said about the agreement between your client and the tenant on the payment of the ‘repairing charges’.  However, although this matter had also been addressed by us in our letter dated 10^th December 2004 to you based on information gathered from the tenant, it still escapes us as to why the repairing charges had to be deducted from the rent (which as we said previously had been reduced to HK$40,000) when the same had allegedly been paid by your client.

Putting aside the matter aforesaid, we again take note that your client has maintained its denial that there was a collateral oral agreement to the Tenancy Agreement that the tenant had the right to ask for reduction of rent depending on his business at the Property and indeed such collateral agreement was duly implemented for the month of November 2004 with the amount of rent being fixed at HK$40,000.  Your client’s refusal to acknowledge the truth and failure to suggest any remedial measure is regretted.  We repeat what we have said previously in our letter dated 10^th December 2004 to you which as you would appreciate is based on information gathered from the tenant.  Without doubt, your client would have been reminded that the exact amount paid by the tenant to it can be easily verified by objective documents notwithstanding the receipts issued, which for reason best known to your client, purportedly recorded down false figures.  In this regard, for your client’s information, we understand that the tenant is also ready and willing to give evidence to back up the case on the actual agreements made with your client on the rent.

As we have already said, plainly our client relies on the rental yield under the Tenancy Agreement as represented by your client in deciding whether to purchase the Property.  Indeed, that also explains why there are detailed provisions in clause 22 of the Sale and Purchase Agreement governing the sale of the Property subject to the tenancy under the Tenancy Agreement.  In particular, your client has given an unequivocal warranty that the terms of the Tenancy Agreement has [sic] not been and will not be altered.

In the circumstances, your client’s representation about the tenancy is false and your client has breached its warranty as aforesaid.  The misrepresentation is material and the breach is fundamental.  Not only will our client collect less rental than agreed if it completes the purchase but also our client will face uncertainty on how much rent it will manage to obtain from the tenant (as the agreement between your client and the tenant is to have the rent adjusted based on the tenant’s business).

In the premises, our client has no alternative but to rescind the Sale and Purchase Agreement or alternatively accepts your client’s repudiation of the same which our client does by this letter.  For the avoidance of doubt, if not for your client’s misrepresentation and/or breach of warranty, our client is ready willing and able to complete the purchase.”

16. Solicitors for the vendor responded by letter dated the same date calling for completion in accordance with the formal agreement. 

17. The purchaser did not complete by 5 p.m. (or at all).  By its solicitors’ letter also dated 16 December 2004, the vendor determined the formal agreement, rescinded the sale and forfeited the deposit.

18. By a deed dated 31 January 2005 made between the vendor and the former tenant, the tenancy agreement was cancelled as from that date.

The purchaser’s pleaded claim

19. On 24 December 2004, the purchaser sued the vendor for rescission of the formal agreement, repayment of the deposit and damages for breach of warranty and misrepresentation and damages for breach of the formal agreement.

20. The primary case on warranty and representation was pleaded in paragraph 2 of the Statement of Claim as follows :

“(a)    As evidenced by a promotional pamphlet issued by Midland Realty, the Defendant had through Midland Realty (Comm. & Und. [sic]) Limited (‘Midland Realty’) advertised the sale of the Property (‘the promotion pamphlet’).

(b)  In the promotion pamphlet it was stated that the Property was subject to a tenancy with a monthly rent payable by the tenant at HK$45,000 (exclusive of any other expenses) as from 1^st September 2004 to 31^st August 2007 and with an option to renew for 2 years subject to an increase in rent of 15% (‘the said warranty and representation’).

(c)  The Plaintiff had received the promotion pamphlet and relying on the same came to purchase the Property as an investment by entering into a Provisional Agreement for Sale and Purchase dated 15^th September 2004 whereby the Plaintiff as the purchaser agreed to purchase and the Defendant as the vendor agreed to sell the Property at a price of HK$8,000,000 subject to the existing tenancy of the Property (‘the Provisional Agreement’).

(d)  Midland Realty was also a party to the Provisional Agreement in its capacity as the agent.”

21. A repetition of the “said warranty and representation” was asserted in paragraph 3(b) in these terms :

“With reference to clauses 4 and 17 of the Provisional Agreement, the Defendant had repeated the said warranty and representation”.

22. The Statement of Claim was amended by Mr Anson M K Wong.  The Amended Statement of Claim was dated 13 July 2007.  He felt able to plead fraud and did so by adding sub-paragraph (c) to paragraph 8.  Before setting out paragraph 8, I interpose here to note that the purported particulars of knowledge are not particulars of knowledge that the purchaser purchased based on the yield.

“(a)    By virtue of clause 22(a) of the Agreement, the said warranty and representation was repeated in the Agreement save that the same was varied by clarifying that the tenant would start to pay rent starting from 1^st October 2004 (‘the Defendant’s warranty and representation’.)

(b)  Further an alternatively, clauses 22(a) and (b) of the Agreement were fundamental terms of the Agreement by reason of the background fact that the Plaintiff purchased the Property as an investment based on the yield of the Property under the Tenancy Agreement, a fact known or ought to have been known to the Defendant.

   Particulars of knowledge

The Plaintiff refers to the promotion pamphlet by which the Defendant had through Midland Realty made the said warranty and representation with the intention that the potential purchaser might be attracted by the rental yield under the Tenancy Agreement to make a decision to purchase the same.  If the Defendant did not intend the potential purchasers to rely on the rental yield of the Property in making any decision to purchase the same, the Defendant would not have given the information on the rental yield in the promotion pamphlet.

(c)  By reason of the matters pleaded in the foregoing sub-paragraphs and also the matters pleaded in sub-paragraphs 9(a), (b), (c) and (f) below, the Plaintiff avers that the Defendant’s warranty and representation were known to the Defendant to be false and inaccurate and they were made knowingly or fraudulently by the Defendant with the intention to induce potential purchasers including the Plaintiff, to purchase the Property from the Defendant.”

23. I interpose again to note that paragraph 8(c) added by amendment is difficult to follow.  In contrast with “the said warranty and representation” as defined in paragraph 2(b) of the Statement of Claim, “the Defendant’s warranty and representation” is defined with reference to clause 22(a) of the formal agreement.  At the time of the negotiation on the terms and provisions of the formal agreement, the purchaser was already bound by the provisional agreement to purchase; “potential purchasers” had dropped out of the picture and there was no question of the publication of “the Defendant’s warranty and representation” to “potential purchasers”.  It is not easy to see how the allegation of fraud in relation to “the Defendant’s warranty and representation” takes the purchaser’s case any further.

24. By paragraph 9(a), the purchaser alleged a “collateral agreement” in these terms (the last sentence was added by amendment) :

“Wrongfully and in breach of the Defendant’s warranty and representation or further or alternatively the terms of the Agreement, the Defendant had indeed by one Mrs. Chung, a director of the Defendant made a collateral oral agreement with [the former tenant] at the time of entering into the Tenancy Agreement that the monthly rent payable by Wong could be adjusted downwards if [the former tenant’s] business as operated at the Property could not sustain the monthly rent of HK$45,000 (‘the collateral agreement’).  Insofar as necessary, the Plaintiff avers that the collateral agreement was an integral part of the tenancy arrangements made between the Defendant and [the former tenant] in that but for the collateral agreement, [the former tenant] would not have entered into the Tenancy Agreement with the Defendant.”

The vendor’s pleaded defence and counterclaim

25. The vendor denied any prior knowledge of or agreement to the publication of any promotional pamphlet.  Midland’s authority to publish any promotional pamphlet on its behalf is also denied.

26. By November 2004, the former tenant was required to pay the following sums to the vendor :

Particulars	$
Rates for September – December (payment in advance) ($2,320 x 4)	9,280
Management fees for September – November ($1,935 x 3)	5,805
Rent for October & November ($45,000 x 2)	90,000
Total :	105,085

27. The vendor and the former tenant initially agreed that the vendor would contribute a sum of $2,000 towards the cleaning of the range hood.  It was later agreed that the vendor would contribute a total of $11,255 towards cleaning and repair.

28. The vendor counterclaimed for forfeiture of the deposit.

Witness statements not stand as evidence-in-chief

29. This is a case in which the purchaser alleged fraud and dishonesty on the part of the vendor.  Much turns on the credibility and reliability of the witnesses.  In Hanwa Kozai (HK) Co. Ltd v. Hangyiu Ltd and another [1995] 1 HKLR 333 at p. 334, Keith J (as he then was) said :

“… Mr. Bell … based his resistance to the witness statements standing as the witness’ evidence-in-chief on the fact that the case turned so much on the credibility and reliability as witnesses of Mr. Lee and Miss Wat relating to their discussions in September and October 1993.

I agree with that argument for two reasons.  First, I know from my own experience at the Bar how frequently witnesses fail to come up to proof even in evidence-in-chief.  It does not follow that their witness statements necessarily reflect at the date of trial their recollection of the events to which the statements relate.  When witness statements reveal a significant conflict of evidence between two or more witnesses, it would be unwise to assume that the witness statements represent the witness’ last word on the topic.  If a witness gives evidence-in-chief orally, the risk that the witness’ statement may not truly represent the witness’ recollection at the time of trial can more easily be eliminated.

Secondly, I think that the judge is likely to be assisted in resolving the conflict in the evidence which the witness statements reveal if he hears the witnesses give their evidence-in-chief orally.  He would be better able to assess for himself the reliability and credibility of the witness than if the witness’ oral evidence was limited to cross examination and reexamination.  As Donaldson MR said in Mercer v. The Chief Constable of the Lancashire Constabulary[1991] 1 W.L.R. 367 at p.371G, where ‘the evidence of a particular witness is likely to be controversial and his credibility is in issue ... the way in which he responds to oral examination in chief may be of great importance’.  Indeed, in Richardson Greenshields of Canada (Pacific) v. Tze  Yim (HCA 6690/87), Kaplan J. declined to permit a witness statement to stand as the witness’ evidence-in-chief where the statement was a short one and there was ‘a head on clash of evidence’.”

30. Applying Hanwa Kozai, I did not permit the witness statements of the witnesses to stand as the witness’ evidence-in-chief.

31. According to an affirmation of a litigation manager of the solicitors for the purchaser, he :

(a)  telephoned one Mr Ko Kin Yip on 3 July 2008 to inform him of the dates of trial and was told by him that he was not prepared to attend to give evidence;

(b)   caused a writ of subpoena to be issued on 23 July 2008;

(c)  was told by process servers of solicitors for the purchaser that they were unable to serve the writ of subpoena on Mr Ko; and

(d)   was told by Mr Ko on the phone on 5 August 2008 that he would not attend to give evidence.

32. On 7 August 2008, counsel for the purchaser ran out of witnesses because Mr Leung Kwok Man failed to turn up.  He applied to admit the witness statement of Mr Ko as hearsay evidence.  Counsel for the vendor opposed the application.

33. In my judgment, this is an academic exercise.  Having refused to allow the witness statements of the witnesses to stand as evidence-in-chief, I attach no weight to the witness statement of Mr Ko, assuming in favour of the purchaser that I rule in its favour on the question of admissibility.

34. The application did succeed in buying time for Mr Leung Kwok Man to turn up to give oral evidence.

Whether agreement to reduce rent by time of the tenancy agreement

35. The former tenant gave the following evidence on the amount of rent :

“Concerning the negotiation process, during the first meeting, concerning the rental, Mrs Chung said $50,000 and then I discussed with my partners and after a site visit, we gave a reply of rental $40,000.

We gave a reply concerning the price – we suggested $40,000.  During the negotiation, Mrs Chung suggested $45,000.  I worried that the business could not sustain the rental.

Mrs Chung then said, at first let’s set the price, the rental at $45,000 and you tried to do the business first.  If during the on-going business operation, if the business was not good, then there might be a reduction of $5,000 of rental.”

36. That there “might” be a rent reduction is not an agreement to reduce rent.  This evidence is decisive against the purchaser on any agreement to reduce rent.  Absent the factual premise of a rent reduction agreement by the time of the tenancy agreement, the purchaser’s case on the following fails :

(a  Misrepresentation by the “promotional pamphlet”;

(b)  Misrepresentation by the provisional agreement; and

(c)  Misrepresentation by the formal agreement.

37. Moreover, Mrs Chung was a tough negotiator.  It is common ground that she refused to entertain any discussion on reduction of the sale price of the subject property by $200,000 from $8 million to $7.8 million.  $5,000 over a 3-year period (not taking the option into account) means a total reduction of $180,000, or $5,000 times the number of rent-reduction months.  There is no evidence of any urgency or need on the part of the vendor to have a quick letting of the subject property.  I do not consider it probable for her to agree to a continuing reduction.  See also paragraph 45 below.

Misrepresentation by the promotional pamphlet

38. Having found against the purchaser on the rent reduction agreement issue, there is no need for me to deal with other issues on misrepresentation by the promotional pamphlet.  I shall nevertheless deal with them briefly.

39. A “pamphlet” should have more than one piece of paper.  Only a 1-page document (“the promotional sheet”) is produced in evidence and found its way into the bundles. 

40. The promotional sheet was clearly a Midland document.  There is no evidence that it was published with the agreement or authority of the vendor.  That the vendor supplied a copy of the tenancy agreement to Midland is a far cry from agreeing or authorising Midland to publish the “promotional pamphlet” on behalf of the vendor or to make representations on behalf of the vendor.  The wordings in the “promotional pamphlet”, provisional agreement and the formal agreement, including in particular, the “subject to” wording, not “subject to and with the benefit of”, indicate the disclosure of an encumbrance with particulars of the encumbrance, rather than a representation on rent.  I am not satisfied that the promotional sheet was published with the knowledge, agreement or authority of the vendor. 

41. I also find that the purchaser did not rely on the promotional sheet.  The reasons are that :

(a)  There was no reference to any pamphlet in the letters written by solicitors for the purchaser before calling off the transaction.  There was no allegation of any reliance on any pamphlet in such letters.  No explanation has been offered for the absence of such reference or allegation.

(b)  There was no reference to any pamphlet and no allegation of any reliance on any pamphlet in any of the witness statements of Mr Cheng Chi (“Mr Cheng”).  No explanation has been offered.

(c)  It was expressly stated in the promotional sheet that the information was only for reference – “以下資料只作參考用途一切以正式合約為依歸”.  Mr Cheng admitted that he knew that what was written down on the promotional sheet was only for reference.

(d   Mr Cheng said he had received a fax transmission of the promotional sheet.  He said he discarded it on the same day or the next day and that he treated it as a disturbance.  Mr Leung said that, apart from faxing, he had not sent the promotional sheet to Mr Cheng in any other way.  If Mr Cheng had relied on the promotional sheet transmitted by fax, he would have contacted Midland on his own initiative (which he did not), instead of discarding the fax.

Whether agreement to reduce rent in mid-November 2004

42. The former tenant gave the following evidence on his requests for rent reduction made after having operated his eatery for about 1½ months :

“In fact, after the first and a half months, after it has opened for one and a half months, in fact the business was very difficult and I already talked with Mrs Chung whether the rental could be reduced by $5,000 because there is no business for dinner time.”

“Initially, she encouraged me, she encouraged me, to make efforts to sustain, to try to keep on doing it and I asked her to reduce the rental because initially she orally agreed to have it reduced by $5,000.  And seeing that the business was not good, I said that to her.”

“All along, there’s only phone conversation talking about the reduction of rental.  Over the phone, there’s no firm rejection over the phone by her.  In mid November, she came to the shop concerning about collection of rent.”

“In mid November, she came to the shop to collect rent.  We talked about a reduction of rent again.  We sat there and had a talk.”

“We sat there to have a talk.  I reflected to her the real situation.  Concerning a reduction of rental to $40,000, Mrs Chung said yes and she said that if in future, the business turned good and then she would have the rent increased again.”

43. Taking the former tenant’s evidence at its face value, the fact that the former tenant phoned Mrs Chung to ask “whether the rental could be reduced by $5,000”; the fact that there was “no firm rejection over the phone by her”; and the fact that the former tenant’s response was to continue pleading for a reduction, instead of protesting against breach of an earlier agreement on rent reduction; shows that there was no earlier rent reduction agreement. 

44. Mrs Chung testified that on 16 November 2004 she went to the subject property to collect rent and other payments.  The former tenant asked for a reduction in rent.  She knew that she had sold the property and it was not for her to reduce rent.  The former tenant persisted in his plea.  She saw for herself that the business was poor.  She agreed to sponsor $5,000 for maintenance/repair of the range hood.  The former tenant continued to ask for more favours.  In the end she agreed to waive the rates and management fee for September 2004.  The hand-written note referred to in paragraph 8(e) above was written out.  The former tenant signed.

45. I have no hesitation in preferring the evidence given by Mrs Chung and in rejecting the former tenant’s evidence.  I find as a fact that there was no agreement to reduce rent, whether at any time prior to the making of the tenancy agreement or in mid-November 2004.  My reasons follow :

(a)  Paragraphs 37 and 43 above are repeated.

(b)  If the alleged rent reduction agreement had been made by the time of the making of the tenancy agreement, the former tenant should have asked for a reduction of rent for October 2004 but he had not.

(c)  If Mrs Chung had agreed, whether at or before the making of the tenancy agreement or when Mrs Chung came to collect rent in mid-November 2004, the former tenant would not have paid $43,000 as rent for November 2004.  He would not have paid more than $40,000 (or $38,000 after setting off $2,000 for cleaning the range hood) as rent.  The cheque stud for the $43,000 cheque was a contemporaneous document written out by the former tenant himself.  The choice of words was entirely his and there is no suggestion to the contrary.  His own choice of words written on the cheque stud, a contemporaneous document, was that the cheque for $43,000 was for the eatery’s rent for November – “客棧11 月租”.  On his version, part of $43,000 must have been for rates or management fee.  In contrast with what he wrote on the cheque stud for the $5,830 cheque(“客棧10 月11 月差餉管理尾數” – balance of the eatery’s rates and management fee for October and November), there was no mention of rates or management fees as a purpose of the $43,000 cheque.  What he wrote was consistent with the rent being and having always been $45,000, with a set-off of $2,000 for cleaning of the range hood.

(d)  He referred more than once to the amount of $45,000, again in his own words, as “正價” – the “proper” or “correct” amount.  Using it in the sense of the “original” amount as translated by the interpreter, $45,000 was still the starting point.  There was nothing improper or incorrect about giving $45,000 as the amount of rent.  $45,000 was in his own words – 正價。

(e)  Mr Leung said that at the meeting with the former tenant on 9 December 2004, the former tenant “talked about something concerning the air-conducting duct and repair, that sort of thing with the landlord.  Then he said those expenses were added to the rental and it was $45,000.”  Taking Mr Leung’s evidence at its face value, it was consistent with Mrs Chung’s version that the reduction was for maintenance/repair of the range hood.

(f)  When confronted with the hand-written note referred to in paragraph 8(e) above, the former tenant said it was signed at about the time when he was negotiating the surrender of the tenancy.  I reject his assertion.  I prefer Mrs Chung’s evidence and find as a fact that he signed it on about 16 November 2004.  The hand-written note clearly contradicted his version.  If it had come into existence on about 16 November 2004 as alleged by Mrs Chung, he would have to explain why he signed it and how the sum of $11,255 was made up.  He tried to avoid these questions by alleging that it only came into existence at a later stage when Mrs Chung had an interest to deny any rent reduction agreement.  In my judgment, the hand-written note had come into existence by 15 December 2004 at the latest, see paragraph  14 above.  The original fax to solicitors for the vendor was produced for inspection at trial and its authenticity has not been challenged.  The date of transmission printed on the original fax was 4 December 2004 which means that the hand-written note must have come into existence by 4 December 2004.  As at 4 December 2004, negotiation for termination of the tenancy had not commenced and there was no reason why the former tenant would sign a note which might contradict his case on rent reduction if there were a rent reduction agreement by 16 November 2004.  His denial that he signed it on 16 November 2004 did his credibility as a witness no good.

(g)  On the other hand, the contemporaneous documents are consistent with the evidence of Mrs Chung. The amount due by the former tenant by November 2004 was $105,085, see paragraph  26 above.  $105,085 - $11,255 - $5,830 (the amount of the cheque referred to in paragraph 8(d) above) = $88,000.  It is common ground that $45,000, as rent for October 2004 had been paid in advance, leaving a balance of $43,000 which was paid by the cheque referred to in paragraph  8(a) above.

(h)  There is a world of difference between a one-off reduction or waiver agreed sometime in November 2004 and a rent reduction agreement over the remainder of the term under the tenancy.  According to the land search, the vendor acquired the subject property in September 2003 at the consideration of $4.3 million.  With a $3.7 million gain (not taking rental income into account) over a 15-month period, Mrs Chung could afford to be sympathetic to the plights of the former tenant on a one-off and ex gratia basis.  She agreed a one-off and ex gratia reduction or waiver.

Assessment of the witnesses

46. I should add that I am not impressed by the former tenant or Mr Cheng as witnesses.  Mr Cheng had no difficulty answering questions in chief as translated by the interpreter.  When it came to cross-examination, he pretended to have a hearing problem and made the interpreter repeat almost every question.  However, I attach much more weight to inherent probabilities and contemporaneous documents. 

Conclusion

47. Having found against the purchaser on any rent reduction agreement whether by the time of the making of the provisional agreement or in November 2004 or at all, the purchaser (the plaintiff) fails on all its claims and the vendor (the defendant) succeeds in its counterclaim.

Orders

48. I order that :

(a)  the plaintiff’s claims be dismissed;

(b)  a declaration be made that the defendant was and is entitled to forfeit the deposit in the sum of $800,000; and

(c)  the sum of $1,600,000 paid into Court pursuant to the Order of Mr Registrar C. Chan dated 11 May 2006, and interest from the interest bearing account be released to the defendant.

49. I also make an Order Nisi under Order 42 rule 5B(6) of The Rules of the High Court, Cap. 4, that the costs of the defendant in the claim and the counterclaim, be taxed (unless agreed by the plaintiff and the defendant) and paid by the plaintiff to the defendant.