XCHRX YU TAI HING CO. LTD. AND ANOTHER v. AFFA LTD. AND OTHERS

HCA 8347/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8347 OF 2000

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J U D G M E N T

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Background:

1. The plaintiffs are mortgagees of various properties owned by the defendants. Since the end of 1996, the defendants had been in arrears in paying interest and were in serious financial difficulty by the end of 1998, owing the plaintiffs $144 million by way of interest and outstanding principal. On 15 March 2000, a bankruptcy order was made against the 3rd defendant. As a result of repeated oral and written demands from time to time made by the plaintiffs and as the defendants were unable to repay the mortgaged loans, the defendants agreed to surrender possession of the mortgaged properties. On or about 30 May 2000, the defendants signed 18 letters of surrender and delivered possession of 18 vacant self-contained cubicles. 55 similar letters of surrender were signed on 22 June 2000. Another 3 letters of surrender were signed on 11 July 2000. Two of these were in respect of two units in Kwun Ngan House which were occupied by the defendants. These two letters were back dated to 1 June 2000 as previously agreed. The third letter was related to another property which had been omitted due to an oversight. After delivery of possession, the plaintiffs and defendants entered into an agency agreement under which the defendants were appointed as the plaintiffs' agents for collecting rent from the mortgaged properties at a monthly fee of $85,000. The defendants duly accounted to the plaintiffs in respect of the rent so collected until 2 August 2000 when they issued notices to tenants asking them to pay rent to Billion Up International Limited instead of to the plaintiffs. On 18 August 2000, the plaintiffs obtained an ex parte injunction order against the defendants restraining them from, inter alia, trespassing the mortgaged properties and collecting or attempting to collect deposits, rents, licence fees and monies in respect of the occupation of the mortgaged properties from the tenants. The defendants now seek to discharge the injunction order. In the meantime, having filed a statement of claim seeking a declaration that the defendants have delivered possession of the mortgaged properties by the letters of surrender, damages and other injunction relief, the plaintiffs issued an Order 14 summons against the defendants.

2. The plaintiffs claimed that as mortgagees in possession of the mortgaged properties, they have the right to receive rents and profits by virtue of their legal or equitable ownership conferred upon them as mortgagees, and have full powers to manage the mortgaged properties and to grant leases; and the defendants are not entitled to interfere with the plaintiffs' rights as mortgagees in possession. Miss Cheung, on behalf of the defendants did not dispute the correctness of these propositions of the law. Her defence is that there was no formal agreement to deliver possession of the mortgaged properties and the so called letters of surrender were signed in escrow subject to certain conditions which were breached by the plaintiffs. Alternatively, she argued that the letters of surrender are unenforceable for lack of consideration.

Consideration:

3. The issue of consideration can be disposed of briefly. The defendants have been in arrears with their interest payment since 1996 which resulted in a very substantial amount of $144 million owing. The situation deteriorated into 1998 and was not rectified by May 2000. The plaintiffs had been making repeated oral and verbal demands, which were not met. They were entitled to take legal action. Miss Cheung submitted that the defendants could have adopted a delaying tactic to wait for the plaintiffs to obtain an order under Order 88. In my view, there is no defence to an action under Order 88. Such delay would only add to the amount of interest owing and legal costs which will have to be borne by the defendants. It could be readily inferred in the circumstances that the plaintiffs' forbearance to sue constituted the consideration required to support the surrender agreement.

The letters of surrender:

4. Miss Cheung submitted novelly that these letters were not agreements to deliver possession of the mortgaged properties as they were not signed by both parties but were mere confirmations and declarations on the part of the defendants. I know of no rule of law that requires a mortgagee to sign on such an agreement. The words used speak for themselves. The letters referred to the respective mortgage agreements and acknowledged that the defendants were unable to repay the loan. In that contest, the defendants confirmed and declared that they handed over the title to the properties to the plaintiffs who may at their absolute discretion sell or dispose of the properties and to apply the proceeds thereof for repaying the loan. For the 18 vacant properties, possession was handed over as well, while for the tenanted property, the defendants gave notice to the tenants to pay rent to the plaintiffs. Written confirmations such as these must acknowledge the underlying agreement to surrender the properties. A declaration of intention together with handing over of physical possession or constructive possession has the same effect. These letters are best evidence of a concluded agreement to surrender.

Other conditions:

5. Miss Cheung next submitted that the agreement to deliver the mortgaged properties was partly oral and partly in writing and sought to adduce extrinsic evidence to prove the other terms of the agreement which were made orally. According to the affirmation of the 3rd defendant, there was a long standing business relationship between the plaintiffs and the defendants and despite the defendants were in arrears, they were still on good terms with Lo Siu Tong, the majority shareholder and managing director of the plaintiffs. He averred that he agreed with Lo orally that the defendants would deliver possession of the mortgaged properties on conditions, including:

(a) in the event of any existing tenants terminating the tenancy, the plaintiffs would be responsible for refunding the deposits which had been received by the defendants;

(b) the plaintiffs will pay arrears of management fee, maintenance fee, rates, refuge charges, water and electricity charges for some of the properties;

(c) Two units in Kwun Ngan House will be rented to the defendants through Billion Up International Limited;

(d) A property in Siu Lam will be sold to a Wong Yuk Keung and a mortgage loan for up to 90% of the purchase price will be financed by the plaintiffs at prime rate instead of the higher interest rate charged by the plaintiffs; and

(e) The defendants be remunerated $85,000 per month for managing the mortgaged properties and collecting rent for the plaintiffs.

He averred that the defendants signed the letters of surrender upon the oral assurance of Mr Chu Kwok Ming of the plaintiffs that these terms would be included in an agreement to be prepared.

6. This does not appear credible when tested against the documents exhibited in the affirmation of Chu. Firstly, none of these terms were included in the letters of surrender. Secondly, there was a consultation process in the drafting of the second batch of 55 letters. A sample letter from the first batch of 18 was used as a discussion draft. According to Chu, the 3rd and 4th defendants proposed certain amendments, which were then faxed to the plaintiffs' solicitors for approval. This amended draft was exhibited by Chu which then became the standard letter in respect of the 55 tenanted properties. These 55 letters were not thrust onto the defendants for their signatures. The defendants actively participated in their drafting, yet they chose not to include the so called conditions which the 3rd defendant alleged.

7. The 3rd defendant then averred that despite repeated requests, the plaintiffs did not finalise the agreement, as a result, the 4th defendant gave the plaintiffs a draft on 22 June 2000 for Lo's consideration, which was the same one dated 1 July 2000 as exhibited by Chu in his affirmation. The 3rd defendant alleged that this draft did not contain condition (d) as they trusted Lo would honour their oral agreement.

8. His allegation is inconsistent with the draft dated 1 July 2000 which included the following terms:

(a) Surrender of the mortgaged properties on 1 July 2000;

(b) the plaintiffs to be responsible for all rental deposits which had been paid by tenants and to enter into new tenancy agreements with the tenants;

(c) the plaintiffs will pay arrears of management fee, maintenance fee, rates, refuge charges, water and electricity charges for some of the properties;

(d) Two units in Kwun Ngan House will be rented to the defendants through Billion Up International Limited;

(e) A property in Siu Lam will be sold to a Wong Yuk Keung at a price of $6 million;

(f) Billion Up International Limited will be appointed as the plaintiffs' managing agent for the mortgaged properties and to be remunerated $85,000 per month;

(g) All income received from the mortgaged properties for the month of June 2000 net of management fees and expenses shall be handed over to the plaintiffs.

Despite the defendants have taken the trouble of drafting the agreement and making provision for the Siu Lam property, yet they did not include their very important term that the plaintiffs shall provide the purchaser with financing at prime rate. The 3rd defendant's allegation that these terms existed as part and parcel of the agreement to surrender is hardly credible.

9. According to Chu, on 11 July 2000, the 3rd and 4th defendant attended the plaintiffs' office to discuss, among other things, the lease of the two units in Kwun Ngan House to Billion Up International Limited. They produced a prepared draft dated 1 July 2000. The outcome was that the two units were not leased to Billion Up International Limited but to Tsui Wan and Tsui Ting and also that the defendants and not Billion Up International Limited were appointed as the plaintiffs' agents. The letters of surrender in respect of these two units were also dated 11 July 2000. These letters support Chu's version and contradicted the 3rd defendant's version that the discussion were held on 22 June 2000. Whether the discussion was held on 22 June or 11 July 2000, the important fact remains, as pointed out by Chu in his affirmation, that the discussion about appointment of the defendants as the plaintiffs' agents and the sale of the Siu Lam property and its financing were discussed as a separate exercise outside the surrender agreement.

10. When seeking to withdraw from the letters of surrender, the defendants' solicitors wrote on 5 August 2000 alleging that the defendants were of the opinion that the letters "could not protect their interests in this matter." The solicitors were supposed to have taken full instruction before issuing the letter of 5 August 2000. Yet they made no mention of the alleged oral assurance or breach of assurance. The defendants' defence now is probably an afterthought or recent concoction. It is incredible as being no more than mere assertions, unsupported, and in fact contradicted, by contemporaneous documents.

11. In view of the above finding, it may not be necessary to deal with the defendants' allegation of breach of the oral assurance. I shall nevertheless consider them for completeness. The defendants alleged that Lo had agreed to provide financing to the purchaser to purchase the Siu Lam property at prime rate but insisted to charge interest at 18%. According to Chu, the dispute was that the defendants insisted on 100% financing, without the buyer having to pay the minimum of 10% deposit. There is no affirmation from Lo to rebut the accusation. Be that as it may, the assurance as put forward by the defendants and as supported by the draft agreement was that the plaintiffs were to finance Wong Yuk Keung to purchase the property and not Golden Noble which has substituted Wong as the purchaser. The negotiation for financing for Golden Noble must be outside the terms of the surrender agreement, whether with or without the oral conditions.

12. The 3rd defendant alleged that the plaintiffs refused to refund three tenants their rental deposits which resulted in the defendants having to pay the deposits out of their own funds. This is contradicted by the accounts prepared by the defendants which show that the defendants had deducted the deposits from the rental income which they should account to the plaintiffs.

13. The accusation that the plaintiffs refused to pay utility bills is also contradicted by the documents. There are certain disputes as to what exactly happened. However, these expenses had been deducted from the income which the defendants should account to the plaintiffs.

14. The accusation that the plaintiffs refused to sign the tenancy agreements in respect of the two units in Kwun Ngan House is also refuted by Chu. The letters of surrender of these properties were only signed by the defendants on 11 July 2000, after which the leases were entered into. According to Chu, the tenancy agreements were then forwarded to the Stamp Duty Office for stamping. The agreements were stamped on or about 3 August 2000.

15. The accusation about the plaintiffs' refusal to maintain some of the properties is also incredible. The defendants only faxed the plaintiffs a list of properties requiring repairs on 13 July 2000. There were then correspondence over the matter ending on 31 July 2000, when the negotiation was overtaken by the defendants' wrongful act.

16. These accusations are about trivial matters and are not credible. They can be dismissed as mere excuses and not bona fide triable issues, even if there were such oral assurance as alleged.

Conclusion:

17. It is more convenient to deal with the plaintiffs' Order 14 application first. The plaintiffs are mortgagees in possession of the mortgaged properties. In law they are entitled to take the rents and profits by virtue of their legal or equitable ownership conferred upon them by the mortgage. They appointed the defendants as their agents to collect rent and to manage the properties. The defendants had acknowledged their rights as mortgagees in possession and given notice to the tenants and accounted to the plaintiffs for income from the properties. As such they are entitled to judgment unless the defendants satisfy the Court that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial. The burden is on the defendants.

I have duly considered the defendants' defence and allegations in the light of the uncontroverted documents. For reasons as I have explained, these are simply not believable or credible. The defendants have failed to satisfy me that there is a triable issue and judgment must be entered in favour of the plaintiffs with costs in the terms of their summons dated 9 October 2000. Having so entered judgment, it also remains for me to dismiss the defendants' application to discharge the injunction order granted by the Hon Mr Justice Hartmann with costs.