SUNBROAD HOLDINGS LTD v. A80 PARIS HK LTD (formerly known as A80 ANOUFA PARIS HK LTD) AND ANOTHER

HCA 735/2020 & HCA 1174/2021

[2022] HKCFI 2251

HCA 735/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 735 OF 2020

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AND

HCA 1174/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1174 OF 2021

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(Heard Together)

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D E C I S I O N

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1.  The dispute arose out of the early termination of the lease of shop premises. The 1^st defendant was the tenant (“the Tenant”) and the plaintiff was the landlord (“the Landlord”). The 2^nd defendant was the guarantor (“the Guarantor”) of the Tenant’s obligations under the lease. The Landlord commenced these actions to recover, amongst other things, rent in arrears over different but consecutive periods.

2.  In the Landlord’s application for summary judgment in HCA 735/2020, the master granted unconditional leave to defend to the defendants while ordering them to make interim payment to the Landlord. Both sides now appeal. The Landlord also applies for summary judgment on its claim in the subsequent action HCA 1174/2021, which the defendants counter by applying for it to be struck out.

3.  The appeals in HCA 735/2020 and the applications in HCA 1174/2021 are now before this court.

Background

4.  The shop premises comprise Shops F, G, H on the G/F of No.15 Pak Sha Road, Causeway Bay, Hong Kong (the “Premises”) in the vicinity of one of the busiest shopping districts on Hong Kong Island.

5.  The defendants belonged to a group in the business of retail of beauty and hair products, having at the material times many stores in various locations in Hong Kong, Singapore and Macau as well as online retail business.

6.  The Landlord and the Tenant entered into the Lease on 19 August 2019. So did the Guarantor enter into the incidental guarantee in respect of the Tenant’s performance of its obligations under the Lease. Notably, this happened in midst of the then social unrest in various districts including the vicinity of the Premises in Causeway Bay.

7.  The Lease contained, amongst others, the following terms:

(1)  The Premises was let for a fixed term for 3 years commencing on 26 August 2019 (Third Schedule).

(2)  The rent of $240,000 (exclusive of management fees, government rates and utilities) was payable on first day of each calendar month (Clause 1, Section II; Third Schedule). Government rates was payable by the Tenant (Clause 2 of Section II).

(3)  Overdue interest was chargeable for unpaid rents and other charges at the rate of 3% per month until date of payment (Clause 1 of Section VIII).

(4)  In the event of default, the Landlord was contractually entitled to elect not to terminate the Lease (Clause 1 of Section IX).

(5)  All pre-contractual representation or warranties were waived by an entire agreement clause (Clause 6 of Section XI).

(6)  No warranty or representation was given by the Landlord over the user of the Premises. The Landlord did not warrant that the Premises were fit for any purposes for which they were let or for any other purposes whatsoever intended to be used by the Tenant, and the Landlord shall not be responsible or liable to the Tenant for any damages or loss (Cl. 7(b) and 7(c) of Section XI).

(7)  The Tenant would be responsible for obtaining or procuring all necessary licences and approvals for carrying on of lawful business at the Premises (Cl. 7(d) of Section XI).

8.  The Lease contained no break clause or other means for the Tenant to terminate it.

9.  The Tenant commenced business at the Premises in October 2019, but only to begin to request for rental reduction, referring to the impact of the social unrest in the city, particularly in the vicinity of the Premises, on its business beyond its assessment.

10.  Correspondence between the parties ensued.

11.  The Tenant’s request was for 50% rental reduction. In the meantime, it defaulted in paying the rent due for November and December.

12.  On 11 December 2019, the Landlord replied that it would be hard to consider granting rental concession unless the Tenant first settled the then due and outstanding rent.

13.  The Tenant then paid the rent overdue for November, but not that overdue for December 2019 until early January 2020.

14.  On 21 January 2020, the Landlord communicated its offer of a 10% rental reduction for a period of 6 months until the end of July 2020 on the terms as set out in an attached draft letter (“the Letter of Terms”). Essentially, apart from reiterating the pre-existing obligation of the Tenant to pay the rent and other charges punctually on the 1^st day of each calendar month, the terms provided that if the Tenant defaulted for more than 15 days after the due date during the rent reduction period, the Landlord would have the right to cancel the concession and the Tenant would be obliged to repay the Landlord all rent previously deducted. The Tenant was requested to countersign and chop the Letter of Terms in confirmation of acceptance. It was also made clear that the offer might be withdrawn if the then outstanding rent for January 2020 was not settled by 24 January 2020.

15.  The Tenant did pay the rent in arrears for January 2020 on 24 January 2020. However, there is no dispute that the Letter of Terms was never countersigned and returned by the Tenant. There is dispute as to whether the Tenant has accepted the terms orally on the telephone in mid-January 2020 as alleged by the Tenant or at all.

16.  The fact was that the Tenant did not pay the rent for February 2020 when the same fell due. It went on to cease operation at the Premises, which the Landlord discovered on about 17 February 2020. Notably this happened when the city began to feel the impact of COVID-19.

17.  On 10 March 2020, the Landlord demanded the Tenant to settle the rent in arrears since February 2020. In the meantime, the Landlord resent to the Tenant on 18 March 2020 the Letters of Terms. The Tenant still did not return the letter signed in acceptance.

18.  On 25 March 2020, the Tenant represented to the Landlord that it was not able to perform its obligations under the Lease in the then prevailing circumstances.

19.  By letters dated 6 April 2020, the Landlord demanded the defendants to settle all the rent in arrears. In reply on 9 April 2020 and 13 May 2020, the defendants proposed a set-off against the rental deposit and termination of the Lease by consent. Plainly the Landlord did not accept.

20.  On 21 May 2020, the Landlord commenced HCA 735/2020 for arrears of rent from 1 February 2020 until 20 May 2020, rates and overdue interest in the total amount of HK$987,787.91 together with further interest until payment. The defendants contested and filed their defence, which was last amended in September 2020.

21.  By summons filed on 14 October 2020, the Landlord applied for summary judgment in HCA 735/2020 or alternatively interim payment of 50% of the amount claimed.

22.  The Landlord’s application in HCA 735/2020 was disposed of on paper. The master handed down a written decision on 3 June 2021 whereby he gave unconditional leave to defend while ordering the defendants to make interim payment of a sum of HK$493,843.96 representing 50% of the amount claimed (“the Master’s Decision”).

23.  As mentioned, both the Landlord and the defendants appeal against the Master’s Decision by their summonses filed on 16 and 17 June 2021 respectively. The former seeks final judgment while the latter seeks to set aside the interim payment order.

24.  On 27 July 2021, the Tenant, through its solicitors, returned the key to the Premises to the Landlord’s solicitors. In its solicitors’ reply dated 28 July 2021, the Landlord stated that it did not accept the Tenant’s repudiation, and that the Lease was still valid and binding. The key would be treated as returned for the limited purpose of facilitating viewing of the Premises by potential replacement tenants and exploring the possibility of mutual discharge of the parties from the Lease by consent. By this and the subsequent letter dated 30 August 2021, the Landlord reiterated that the viewing of the Premises by potential tenants could not be viewed as taking back possession of the Premises or termination of the Lease.

25.  On 6 August 2021, the Landlord commenced HCA 1174/2020, claiming a total sum of HK$4,485,333.25 being further arrears of rent from 21 May 2020 until 31 July 2021, rates and overdue interest, together with further overdue interest until payment.

26.  By summons filed on 14 September 2021, the Landlord applied for summary judgment in HCA 1174/2021. The defendants countered by their summons filed on 16 September 2021, applying to strike out the claim in this action on the ground of abuse of process.

27.  On 26 November 2021, the Landlord informed the defendants that the Lease was terminated as a result of the latter’s ongoing repudiation and abandonment of the Premises, which the Landlord accepted. Possession of the Premises was taken back without prejudice to the Landlord’s claims in the two actions.

28.  Hence, the parties’ appeals in HCA 735/2020 as well as the Landlord’s application for summary judgment and the defendants’ application for striking out in HCA 1174/2021 now before this court.

The principles generally

29.  Concerning the appeals in HCA 735/2020 pursuant to O58, r1 of the Rules of the High Court, Cap 4A (“RHC”), this is a rehearing of the Landlord’s summary judgment and interim payment application before the master. Where the master has given a written decision, this court may but is not obliged to adopt his reasoning in the present consideration.

30.  Concerning the summary judgment applications in both actions, the principles are trite. While it is the burden of the Landlord to prove its claim, the defendants have the burden of condescending upon particulars, and raising issues of a credible defence that should go to trial or alternatively any other reason that the case ought to go to trial: see O14, rr3-4, RHC; Hong Kong Civil Procedure 2022 (Vol 1) (“HKCP”) at §§14/4/8-14/8/12.

31.  Interim payment may be sought within an application for summary judgment: see O29, r10(2) RHC. Relevant to the present case is O29, r11(1) which provides that the court, if it thinks fit, may order interim payment if it is satisfied that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against the defendant. Such amount should not exceed a reasonable proportion of the damages which in the opinion of the court are likely to be recovered by the plaintiff after taking into account defences such as set-off.

32.  Concerning the application for striking out in HCA 1174/2021 pursuant to O18, r19 RHC (and the inherent jurisdiction of this court), the principles are also trite. It is only in plain and obvious case that an order to strike out will be made on any of the grounds under the rule: see HKCP at §18/19/4.

The issues

33.  The itemization and quantification of the claim in the two actions are not in real dispute. It is the entitlement of the Landlord to such claim which is in dispute.

34.  The specific defences were summarized in the Master’s Decision, namely: (i) the “Rental Reduction Ground”; (ii) the “The Frustration Ground”; (iii) the “Mitigation Ground”. The master rejected the first two grounds but granted unconditional leave to defend on the third ground.

The Rental Reduction Ground

35.  The contention of the Tenant that the parties had agreed on rental reduction in mid-January 2020 must be assessed against the chronology of events set out above. As the stance of both sides is that the Lease was terminated, the issue of whether or not there was agreement on rental reduction with effect from February 2020 could only be relevant to the quantification of the claim, be that in the form of rent in arrears or damages for breach. However, for the reasons explained by the master[1], which in my view cannot be faulted, the Tenant simply could not be heard to hold the Landlord to the 10% rental reduction discussed at one stage for any purpose in the circumstances. The Rent Reduction Ground does not stand as a credible defence to the claim. At the present hearing, counsel for the defendants confirmed that they no longer pursued such contention.

The frustration ground

36.  The backdrop was the impact of the social unrest and the COVID-19 on the business and operation of the Tenant at the Premises. The social unrest and its impact on the vicinity of the Premises were clearly known by the Tenant when it decided to enter into the Lease. As explained by the master[2], this could not be the principal event of frustration. At the present hearing, counsel for the defendants confirmed that it is really the impact of COVID-19 that they rely on.

37.  Both sides refer to the principles on frustration of contract as explained in National Carriers v Panalpina (Northern) Limited [1981] AC 675. This is not the first occasion when a party seeks to apply these principles not only to a lease but also with reference to impact of COVID-19 as the cause of frustration of a lease in Hong Kong: see The Center (76) Ltd v Victory Serviced Office (HK) Ltd HCA 1020/2020 (19 November 2020); Holdwin Limited v Prince Jewellery and Watch Company Limited HCA 718/2020 & HCA 414/2021 (20 September 2021); and Vember Lord Limited v The Swatch Group (Hong Kong) Ltd HCA 1113 & 1114/2020 (20 January 2022). It should be noted that Holdwin Limited and Vember Lord Limited were handed down subsequent to and after consideration of the Master’s Decision.

38.  One can discern the following considerations from the above cases.

39.  Frustration takes place only when there supervenes an event which so significantly changes the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated at the time of its execution so that it would be unjust to hold them to the literal sense of the stipulations in the new circumstances. This is when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transformed the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.

40.  Frustration cannot be lightly invoked to relieve the contracting parties of normal consequences of (imprudent) commercial bargain or commercial risk, unless a common purpose could be said to have been frustrated by the most extraordinary circumstances which renders performance of a contract impossible.

41.  It follows that the threshold for proving frustration proper is very high. Mere incidence of expense, delay, less profitability or onerousness is not sufficient. Cases leading to a successful frustration are therefore extremely rare.

42.  As alleged in the previous cases, the impact of COVID-19, such as the closure of borders and reduced tourist traffic in 2020, operated adversely to the profitability of the business operation of the tenant at the leased property. Yet that has never been held to suffice in frustrating the lease.

43.  While each case is decided on its own fact, I would arrive at the same conclusion in the circumstances of this case as that in the previous cases.

44.  First, this was a commercial lease entered into by the Tenant which belonged to an established group claiming to possess at the material times over 80 stores covering key locations in Hong Kong, Singapore and Macau with strong localized market knowledge. There is no basis for questioning its capability of coming to a considered commercial decision not only to choose the Premises as suitable for its purpose but also to commit to a fixed term of 3 years without break clause at the relevant time.

45.  Second, whilst the Lease restricted the use of the Premises by the Tenant to the operation of a retail shop for selling beauty and hair products (clause 7 of Section V), the Landlord did not warrant that the Premises would be fit for such or any purpose whatsoever intended by the Tenant (clause 7(b) and (c) of Section XI). In any event, what the Tenant complains about is not the fitness of the Premises but the adverse retail market situation, including the reduced shoppers flow, which affected the profitability of operating business at the location of the Premises.

46.  Third, the nature and object of the Lease were letting and possession of the Premises. It was not a joint venture or commercial enterprise with a common purpose between the parties for the profitable operation of the Tenant’s business at the Premises. The Tenant’s use of the Premises, subject to the terms of the Lease, was really its concern alone. Amongst others, it committed to pay a fixed rate of rent for the entire term of the tenancy irrespective of any possible market fluctuation during the term. Its complaint is really that the market downturn due to COVID-19 exceeded its contemplation. Yet this generally applied across the board to the retail industry.

47.  Fourth, the Tenant referred to the alleged mutual understanding of the parties that the Tenant’s business relied on tourists from outside Hong Kong prior to entering into the Lease. That was neither here nor there. The vicinity of the Premises was well known as one of the busiest shopping districts on Hong Kong Island. As mentioned, the Tenant’s group claimed to have strong localized market knowledge. It is incredible that the Tenant would have failed to perceive such character and potential of the Premises for its business but for the introduction or representation by the Landlord. In any event, any representations made in this respect during the pre-contractual negotiation were excluded by the entire agreement clause of the Lease (clause 6 of Section XI) for the purpose of both parties to the Lease.

48.  Fifth, the Landlord’s obligations under the Lease were no different from those typically expected of any landlord, including that to warrant that the Tenant would have quiet enjoyment of its exclusive possession of the Premises during the term of the Lease (Section IV of the Lease). The obligation of the Tenant was no different from that of any ordinary tenant to pay the agreed rent and other charges on the agreed day of each month. Such obligation of the Tenant was not conditional upon any aspect of its business operation at the Premises or its performance.

49.  Sixth, as far as the COVID-19 situation was said to have exceeded the Tenant’s contemplation, the Lease indeed provided for events beyond the parties’ contemplation which would suffice to terminate the Lease. That was when the Premises became unfit for use or occupation as a result of destruction or damage for causes beyond the control of the Landlord and not attributable to the act or default of the Tenant. Force majeure, that was. Such events beyond control would be of character and magnitude that render the performance of the contractual obligations of the parties impossible. Commercial viability or profitability of the use of the Premises from the point of view of the Tenant was not even close to the events of such character.

50.  Seventh, whilst the business operation of the Tenant at the Premises might be compromised due to the specific restrictions and social distancing measures imposed by the government as well as the market situation, there is no allegation or evidence that the Premises have become inaccessible. There was no lockdown or temporary closure of the building where the Premises were or its vicinity. The Tenant’s possession and use of and operation at the Premises has never been rendered physically or commercially impossible. Nor has the Landlord’s discharge of its contractual obligation under the Lease been.

51.  Eighth, whilst is was alleged that the hair salon part of its operation at the Premises was prevented by the restrictive and social distancing measures imposed by the government in 2020, the Tenant could still carry on the retail part of its business at the Premises. Further, one need not argue whether or not the business of the Tenant heavily relied on foreign tourists. The well-known fact was that the Premises were located where both local shoppers and tourists would frequent. The Tenant’s shop and business were open to all customers, locals included. It would have been up to the Tenant to propose any modification of the mode or products of its business operation at the Premises as adaptation to the adverse business environment, which the Landlord could have considered consenting to pursuant to the Lease. That was never done.

52.  Ninth, whilst the defendants complained about the adverse market situation, one sees from the evidence that the defendants’ group was reported to have opened 7 new retail shops in 2020, which further grew to 30 shops in 2021. Many of them in Hong Kong were located in expensive high-end shopping complex or malls. This lends weight to the observation that it was not that the use and operation of business by the Tenant at the Premises or its location were commercially impossible, but only that it was considered to be not as profitable or commercially wise as contemplated compared to other locations.

53.  Objectively, the complaint about the impact of COVID-19 on the use and operation of the Tenant at the Premises has not fundamentally or radically changed the obligations of the parties under the Lease that exceeded their reasonable contemplation at the time of entering into the Lease. Such complaint did not suffice as event of such character and magnitude that would justifies bringing the Lease to an end. The frustration ground is not arguable.

The mitigation ground

54.  This is the only ground of defence that the master resolved not to rule out at the summary stage. Hence leave to defend.

55.  The cardinal principle is that the innocent party is not bound to accept repudiation of a contract. He is entitled to elect to affirm a contract and hold the defaulting party to its performance or at least entitled to consider his positon and keep all options open as a middle ground while having the contract to be alive: see Castle Global v. Ip Tai Hoi Paul CACV 255/2020 (22 October 2021) at §19.

56.  An action for rent in arrears is one for an agreed sum as a debt, which is not subject to a duty of mitigation: see: Chitty on Contracts at 27.002; Jervis v. Harris [1996] Ch 195 at 202G-H; Strong Offer Investment v. Nyeu Ting Chuang (2007) 10 HKCFAR 529 at §§46-47.

57.  The above is subject to restrictions such as where the innocent party requires the defaulting party’s co-operation to perform or has no legitimate interest in performing the contract, rather than claiming damages in which the court would decline to grant the remedy of an agreed sum: see White & Carter v McGregor [1962] AC 413.

58.  However, the cases in which the court will deny the innocent party’s entitlement to enforce his full contractual right to maintain the contract in force and sue for the contract price are said to be very limited. They would be where an election to keep the contract alive would be wholly unreasonable and that damages would be an adequate remedy or where the innocent party would have no legitimate interest in making an election: see Reichman v. Beveridge [2007] 1 P&CR 20 at §§17; 40.

59.  In Funfair v. Wong Lui Wing [2007] 3 HKLRD 609, the Court of Appeal explained (at §§20; 27) that a lease cannot be unilaterally terminated unless expressly provided for. A repudiation which was not accepted did not have effect in terminating a lease. A landlord is entitled to insist on payment of rent. The requirement of the defaulting party’s co-operation to perform is inapplicable to rent claims under a lease because an estate was already granted to the tenant at the commencement of the tenancy, which the tenant retained exclusively until the end of the term of the tenancy. Agreeing with Reichman (above), the court held that the only exception is where it would be wholly unreasonable for the landlord to hold onto the lease in the circumstances of the case.

60.  The burden of proving that it was wholly unreasonable for the landlord to hold onto the lease in the circumstances of the case is on the defaulting tenant. The burden is not discharged merely by showing that the benefit to the innocent landlord is small compared to the loss to the defaulting tenant: see Reichman at §41.

61.  Compounded with the pre-existing burden of raising issues of a credible defence in resisting summary judgment, the burden to demonstrate that it was wholly unreasonable for the Landlord to hold onto the Lease in the circumstances of the present case was squarely on the Tenant. As mentioned, the burden is a heavy one.

62.  In my view, the Tenant has failed to discharge such burden.

63.  The Tenant communicated its repudiation of and intention not to perform the Lease in February 2020. It reiterated such repudiation by seeking to return the key to the Premises in July 2021. The Landlord did not accept that until November 2021. The question therefore is whether the Landlord was wholly unreasonable in not accepting to terminate the Lease earlier than November 2021.

64.  As in the previous case, the Landlord clearly had the legitimate interest in holding onto the Lease instead of being expected to accept the repudiation by the Tenant and to terminate the Lease forthwith. To begin with, the Lease provided for the entitlement of the Landlord not to elect to terminate the Lease in the event of the Tenant’s default: see clause 1 of Section IX.

65.  Whilst the Tenant argues that the Landlord would still have been entitled to claim damages for early termination of the Lease, it was in the circumstances of the present case not wholly unreasonable for the Landlord to have taken the time while remaining protected by its entitlement to the contractual rent.

66.  The more the Tenant sought to argue about the impact of COVID-19 on the general retail market situation and the alleged specific compromise of the profitability of the retail business at the vicinity of the location of the Premises, the more the same would work to highlight the uncertainty in the Landlord’s chance of securing not only an alternative replacement tenant but also one which would be ready and willing to pay a comparable level of rent. One bears in mind that the term of the Lease sought to be terminated by the Tenant at the time still had a substantial remainder to run (until August 2022). The uncertainty faced by the Landlord manifested in the likelihood of its having to commit to a potentially lower rent than that under the Lease for a substantial term with any replacement tenant.

67.  The Landlord needs to put it no higher than the above, as it is not its burden to show that its refusal to accept the Tenant’s repudiation and to terminate Lease until the time when it did was reasonable. The burden was and still is for the defendants to show that the Landlord’s such conduct was wholly unreasonable. To suffice in discharging such burden of the defendants, one would have expected evidence such as that of the existence of a replacement tenant which was ready and willing to enter into a lease for at least the remainder of the term of the Lease at a comparable, albeit not the same, level of rent prior November 2021. There was no such assertion by pleading or evidence from the defendants.

68.  The evidence was that the Landlord did not merely sit back and relax with holding onto its entitlement to the rent under the Lease. Some 15 estate agencies were briefed with information flyer prepared for such purpose. The record of the viewings and enquiries made by agencies also speaks for itself. Readiness of the Landlord to separately let out the shop units was also communicated to the agencies. There was evidence of unsuccessful attempt to arrange viewing of the Premises by potential replacement tenants. Whether or not that had in any way to do with the occasional failure of the Tenant to co-operate, as the Landlord complained, the market, as the defendants indeed also tried hard to portray, was lukewarm. The same manifested in the extent of interest shown in renting the Premises. A tenant was eventually secured in October 2021. Hence the communication by the Landlord of its acceptance of the Tenant’s repudiation and thus termination of the Lease in November 2021.

69.  Any criticism about lack of genuine effort to secure a replacement tenant on the part of the Landlord will be flatly contradicted by the principle that the duty to mitigate has no place during the term of a subsisting lease. As mentioned, it was not that the defendants came up with concrete evidence of such ready and willing replacement tenant(s) reasonably acceptable to the Landlord during the period prior to November 2021 which the Landlord unreasonably failed or refused to secure.

70.  Other than criticizing the Landlord, the defendants have never indicated, not to mention undertaken, that they would be prepared to compensate the Landlord’s loss by way of damages. Therefore, what was expected would still be for the Landlord to have to quantify and to prove its claim for damages against the defendants by way of litigation, and thus taking the incidental litigation risk. That was relevant.

71.  In the circumstances, it is simply not shown by the defendants that it was wholly unreasonable for the Landlord to have affirmed the Lease instead of accepting the early termination of the Lease at any time prior to November 2021. The contention of the defendants, if accepted, would have reversed the allocation of the risks of the commercial decision in committing to the term and terms of the Lease from the part of the Tenant to the Landlord. This in the circumstances of this case cannot be right.

72.  The learned Deputy Judge in Holdwin Limited (above) commented (at §63) that the Master’s decision to grant unconditional leave to defend was the result of the lack of detailed submission on the issue of wholly unreasonable stance of a landlord, and the authorities and principles were not properly canvassed before him. To this court, it appears that what drove the master to his granting leave to defend on this ground in the present case was his consideration that the court in Funfair Company Limited seemed to leave room for argument and in that case the issue might well be fact sensitive (§72 of the Master’s Decision). Apparently, counsel for the defendants also emphasizes that in his submissions.

73.  With respect, what the master failed to adequately factor into his consideration was the starting principle that for the purpose of resisting the summary judgment application, it was the burden of the defendants to raise triable issues of a credible defence by evidence, including, for the present purpose, that it was wholly unreasonable for the Landlord to hold onto the Lease until November 2021. What is expected of the defendants in order to discharge the burden of showing that this case belongs to one of those very limited cases must be heavy. In arguing that the Landlord has made no concrete commercial justification in its affirmation to explain why it was entitled to keep the Lease alive, counsel for the defendants effectively sought to reverse such burden. This could not be correct.

74.  Properly considering the relevant principles and the circumstances of this case in the re-hearing, this court comes to the view that the defendants have simply failed to discharge such burden. There is therefore insufficient reason for denying the Landlord’s contractual entitlement and thus its claim.

INTERIM PAYMENT

75.  Following from the above adjudication, which entitles the Landlord to judgment on its claim, the issue of interim payment falls away as a consequence, and so should the defendants’ appeal in HCA 735/2020.

76.  Nevertheless, for completeness, I would deal with the argument in respect of the order for interim payment assuming that the defence is allowed to proceed. In such circumstances, I would have refrained from disturbing the master’s order for interim payment.

77.  It should be noted that the defendants are not arguing that the interim payment ordered was excessive. They argue that none should be ordered. If they were right, this must mean that the Landlord failed at all to meet the criteria under O19, r11(1)(c). In other words, the Landlord is said to fail to establish that if the action proceeded to trial, it would obtain judgment for substantial damages against the defendants.

78.  Such stance of the defendants could not be right.

79.  It is unrealistic for the defendants to have expected that their defence would absolve them from liability to make any compensation, be that in terms of rent in arrears or damages for premature termination of the Lease. I would endorse the observation of the master in this respect. The Tenant only vacated the Premises on 8 April 2020. If the action proceeded to trial, the Landlord would obtain a judgment for a substantial sum. This would be so, particularly when the issue of mitigation on the part of the Landlord would be assessed in the adverse market situation which even the defendants’ own case suggests. The same adverse situation should affect the Landlord’s ability to secure replacement tenants at a comparable rental rate as before. Such projection, albeit subject to proof, is not unreasonable.

80.  Reference was also made to the rental deposit equivalent to 3 months’ rent (HK$780,000) in the handed of the Landlord. Even assuming that such sum is liable to be given credit to in the assessment, regardless of the provisions of the Lease in this respect, this is not the same as saying that the 3 months’ rent would plainly suffice. 50% of the amount claimed in the action, in my view, cannot be faulted.

THE STRIKING OUT

81.  Essentially, the criticism is that Landlord should have included the claim in HCA 1174/2021 in the claim in HCA 735/2020, and therefore the commencement of the later action constituted abuse of process. Here enters the consideration of the rule in Eshelby v. Federated European Bank [1932] 1 KB 254.

82.  Essentially, amendment of the claim in an action takes effect by relation back to the date of writ. Therefore, a cause of action that arose only after the commencement of an action cannot be introduced by way of amendment to the claim in the action, as the cause simply did not exist as at the date of writ. Any cause of action which did not exist in the first place is liable to be struck out for being an abuse of process.

83.  The Eshelby rule remains generally applicable, though a flexible attitude may be adopted: see Wing Siu Co Ltd v. Goldquest [2003] 2 HKC 64 at §19; Tasty Catering Group v. Cheng Hung Kit CACV 573/2020 (23 August 2021) at §§22-25 that the Eshelby rule was still operational as good law and being as part and parcel of the Court discretion to be exercised in deciding whether post-writ matters could be pleaded. It was held that a proposed amendment introducing a new cause of action, which did not exist at the time of the writ, was rightfully rejected.

84.  The cause of the Landlord’s action in these case is rent in arrears and charges payable pursuant to the Lease. Contractually the rent fell due on the agreed day of each calendar month, subject to any grace period. The claim in HCA 735/2020 could only cover the rent in arrears and charges which have fallen due and become payable as at the date of the writ. The right to similar claims in the following months in HCA 1174/2021 did not arise or exist as at the date of writ in HCA 735/2020. Therefore, the Landlord argues that it was only proper for the claims to be advanced by way of separate actions.

85.  I agree. In question is not the entitlement of the Landlord to introduce pleading of facts concerning the existing cause of action that occurred after the commencement of action. It is the claim for rent and charges in arrears which did not accrue and exist at the time of the commencement of the existing action.

86.  It is further argued that the Landlord could not be expected and therefore criticized for not seeking leave to amend the claim in HCA 735/2020 to introduce the new claim, particularly when the action was a subject of summary judgment application and now under appeal. That said, the Landlord saw the sense of hearing the actions at the same time. Hence its application for directions for such order without delay, which was also ordered by the court. This court notices that the landlord in Holdwin Limited (above) adopted similar approach, and no issue was taken as to its propriety.

87.  I also agree with that approach.

88.  The defendants query that if the Landlord is right, it would be in a position to commence another action for further rent in arrears that accrued after August 2021. The answer is that in principle, the Landlord would indeed be entitled to do so together with any claim damages for breach since the termination of the Lease in November 2021.

89.  For the purpose of argument, even assuming that the Landlord could have sought to add to the claim in the existing action its claim in respect of that that accrued in the following months, one asks if it was plainly an abuse of process in the circumstances for the Landlord not to have done so but instead to commence the subsequent action. The answer in my view is in the negative. This would be procedural, not substantive. It follows that the defendants have failed in discharge of the requisite burden of striking out the claim in the subsequent action.

Conclusion and order

90.  The Landlord’s appeal in HCA 735/2020 is allowed. The master’s order in this action is set aside.

91.  Without a valid and credible defence or any other reason that the cases should go to trial, judgment is entered against the defendants in both HCA 735/2020 and HCA 1174/2021 in terms as claimed but with credit to any interim payment made by the defendants.

92.  The defendants’ application for striking out in HCA 1174/2021 is dismissed.

93.  Following the above event, I make a nisi order that the defendants shall jointly and severally pay the Landlord’s costs of both actions, including the costs of and occasioned by the applications below and the appeals in HCA 735/2020 as well as those of and occasioned by the applications in HCA 1174/2021. As this would be the costs of these actions, I do not accede to the request for summary assessment. Costs shall be taxed, if not agreed, with certificate for counsel. Unless any party applies within 14 days to vary, this nisi order shall become absolute without further order of the court.