LEUNG WAI LING ISEWESG v. SUCCESS BASE ENGINEERING LTD

CACV 58/2020

[2021] HKCA 310

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 58 OF 2020

(ON APPEAL FROM HCA 2/2019)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  The Plaintiff was the landlady of the premises of 6^th Floor, Well Industrial Building, Lam Tin Street, Kwai Chung (“the Property”). By a tenancy agreement of 25 April 2018 (“the Tenancy Agreement”), she leased the Property to the Defendant for 36 months at the monthly rent of $44,500 starting from 27 April 2018. A rental deposit of $133,500 was paid by the Defendant.

2.  The Tenancy Agreement was in Chinese and contained, amongst others, the following terms:

“ 2. 本租約是二年梗約，一年生約

3. 承租人於簽訂正式租約時，須交相當於3個月之租金按金港幣$133,500.00予業主（不另發收據），承租人在租約期滿，（不計利息）領回按金. 承租人應清楚明白該按金不能用作來支付租金. 如在所訂承租期未滿前退租，承租人自知中途毀約自願放棄收回此項按金之權利。業主亦可同時追討餘下未完成租約之租金

4. 承租人之租金必需於每月租期之首日以上期形式繳納，不得藉詞拖欠，如過期五天，業主可在該物業門口當眼地方張貼告示，催促承租人交租。如承租人仍未將租金交到業主或承租人不履行合約內任何條件，業主有合法權利將此合約終止，當作承租人毀約自動退租，另將樓宇租與別人及向承租人追討未完成租期之租金，而由此而引起的一切費用及開支將構成租客欠業主的債項，業主有權向租客連同利息一併追討所欠款項的全數

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6. 承租人承租上述地址純粹作為工業性質之用

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8. 租客必須遵守香港一切法律規則及遵守大廈公契內的所有條款

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11. 該物業內如大門、鉄閘、電箱、鋁窗及2個洗手間等設備租客需負責修理及保養。並於退租時完好無缺；還回原狀交還業主

12. 承租人不得拒絕業主派遣之人員，在適當時間入內保養及維修物業內主要結構部份，包括排污渠、喉管等。

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18. 本合約取代雙方過往之談判，聲稱，理解及協議

免租期：2018/4/17 至2018/5/17 共(21)天

退租權　儘管與前文不符，任何一方可給予另一方不少於2個月的書面通知，或2個月租金作為代通知金以換取可提前終止租約，但租客必須租滿24個月方可提出

附加條款:  業主與租客同意於2018年4月27日上午收取物業鎖，由當日2018年4月27日至2018年5月17日共21天為免租期，上期租合$13,350.00為2018年5月18日至2018年5月26日，另加壹個月上期租金為$44,500.00為（2018年5月27日至2018年6月26日）上期租金共$57,850.00.00 ”

3.  The Defendant used the Property for storage of construction materials.  Shortly after the commencement of the tenancy, some neighbours expressed concern over the impact of such storage on the loading capacity of the building and made enquiries with the Building Department.  In light of the advice obtained from the Building Department, the Incorporated Owners (“IO”) passed a resolution on 5 July 2018 restricting the loading limit of the building at 400 kilograms per square metre.  A notice was issued by the IO to the Plaintiff accordingly. 

4.  The Plaintiff forwarded a copy of the notice to the Defendant on 5 July 2018.

5.  Subsequently, the Defendant complained in August 2018 to the Plaintiff about water seepage and structural deterioration at the Property.  A joint inspection took place on 3 September 2018.  According to the Defendant, the Plaintiff agreed to make good the defects.

6.  The Defendant ceased payment of rent on 27 September 2018.  By a letter of 9 October 2018 from its solicitors, the Defendant purported to accept the repudiation of the tenancy by the Plaintiff on account of the new loading restriction and the lack of progress in the making good of the defects.  The Defendant also attempted to surrender the Property by giving the keys to the Plaintiff.

7.  The allegations were refuted by the solicitors for the Plaintiff in a letter of 18 October 2018 and demanded the Defendant to pay the arrears of rent.  The solicitors also returned the keys to the Defendant’s solicitors. 

8.  The Defendant’s solicitors refused to accept the keys and there was subsequent correspondence between the solicitors.

9.  The Plaintiff issued a writ on 2 January 2019 claiming for possession, arrears of rent, mesne profits and damages.  A defence and counterclaim was filed by the Defendant on 15 February 2019.  The Plaintiff filed a Reply and Defence to Counterclaim on 15 March 2019. 

10.  By a summons of 14 March 2019, the Plaintiff applied for summary judgment under Order 14.  The summons was heard by Master Queenie Lau on 5 September 2019.  The master granted conditional leave to defend.  The Plaintiff appealed against that order. 

11.  The appeal was head by Deputy High Court Judge Blair (“the Judge”) on 6 January 2020.  The Judge allowed the appeal, gave judgment to the Plaintiff with leave to the Plaintiff to re-amend the Statement of Claim to add a prayer for forfeiture.  The plea of forfeiture had already been put forward at paragraph 15 of the original Statement of Claim. The re-amended Statement of Claim was filed on 16 January 2020.  The judgment was for the forfeiture of the deposit in the sum of $133,500 and arrears of rent in the sum of $133,500.  Mesne profit in the sum of $8,400 was also awarded.  The Judge dismissed the counterclaim and gave the Plaintiff the costs of the action.

12.  The Defendant appealed.  After hearing submissions, we dismissed the appeal on 7 January 2021 with costs.  Here are our reasons for dismissing the appeal.

13.  Based on the submissions advanced before us, the Defendant’s grounds of appeal can be discussed under three heads:

(a)  Structural defects;

(b)  New loading restriction; and

(c)  Forfeiture.

Structural defects

14.  In respect of structural defects, the Defendant had to present an arguable case on the following sub-issues in order to have an arguable defence:

(a)  there is an implied duty to repair;

(b)  if there were such implied duty, the Plaintiff acted in breach of the implied duty;

(c)  the breach was so serious that it constituted repudiation of the Tenancy Agreement; and

(d)  the breach provided a defence to the termination of the tenancy by the Plaintiff on account of non-payment of rent.

15.  This was an unfurnished letting for industrial purpose.  It is common ground that there was no express term imposing any duty to repair on the part of the Plaintiff.  The only provision for repair is Clause 11 which imposed a duty to repair on certain parts of the Property on the Defendant. 

16.  Though Clause 12 provided for a right of access on the part of the Plaintiff to execute repairs for the main structural parts of the Property including sewage and pipes, such a provision by itself did not give rise to a positive obligation on the part of the Plaintiff to execute such repair, see Woodfall’s Law of Landlord & Tenant Vol 1 (2020) paragraph 13.007.1 where the following proposition was stated:

“ The mere fact that the parties contemplate that in practice the landlord will carry out repairs, and that the tenancy reserves to him a right of entry for that purpose does not give rise to any implied obligation.”

17.  Mr Lui (appearing in this appeal but not below for the Defendant) submitted that the common law should be re-aligned in light of the English Court of Appeal decision in J N Hipwell & Sons v Szurek [2018] L & TR 15[1].  Counsel contended that it is at least arguable that as a matter of law a clause giving access to the landlord to repair, maintain connoted an implied obligation to execute such repair and maintenance.  At the same time, Mr Lui accepted whether the term is to be implied must be a matter of fact.

18.  Counsel was constrained to accept that ultimately the issue is whether the term can be implied on the facts of the case.  In J N Hipwell & Sons v Szurek, supra, the Court of Appeal found that there was an implied duty to maintain and repair the electrical wiring based on the special facts and circumstances of that case alluded to at [33] and [34] of the judgment concerning the acceptance by the landlord of the obligation to maintain the same as it was necessary where the leased premises were part of a development including other business premises for which the electricity supply was from a common source. 

19.  It is also clear from [30] of the judgment in J N Hipwell & Sons v Szurek, supra that the test, as expounded by Lord Neuberger in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co [2016] AC 742 is still one of necessity (viz whether without the term the contract would lack commercial or practical coherence) at the date when the contract was made.   

20.  We do not regard J N Hipwell & Sons v Szurek, supra as making a fundamental change in the law.  Otherwise, some of the authorities which we shall refer to below would have been discussed.  In particular, we do not read that judgment as laying down a proposition of law that a clause giving access to the landlord to do repairs is sufficient by itself to give rise to an implied obligation on the part of the landlord to do such repairs.  Thus, the principle discussed at [16] remains good law.  The question of implied duty of a landlord to do repair is to be determined by the test of necessity at the date when the contract was made.

21.  The Judge rejected the Defendant’s case on implied duty because they failed to put forward a proper factual basis for such implication, see [15] of the judgment. 

22.  Mr Lui submitted that the Judge erred in so holding as he failed to take account of Clause 12 and the Defendant’s evidence (disputed by the Plaintiff) that the Plaintiff herself agreed to rectify the structural defects during the joint inspection on 3 September 2018.

23.  Since the test of necessity has to be applied by reference to the circumstances at the time when the contract was made, the agreement of the Plaintiff to rectify (if any) at the joint inspection which took place five months after the making of the Tenancy Agreement could not assist the Defendant.  Further, there could be many reasons why a landlord would agree to undertake repair works on a particular occasion.  It is not, by itself, evidence of admission of an implied duty to repair on her part. 

24.  Mr Lui accepted that the Defendant did not plead nor adduce any evidence with regard to any special circumstances leading to the execution of the Tenancy Agreement to support the contention of implied term of repair.  At paragraph 10 of proposed amended Defence and Counterclaim (attached to a summons of 16 October 2019 which was before the Judge), it was only averred that as a matter of law and necessity that the Plaintiff was to be responsible for repairs and maintenance of the structural parts or elements of the Property without stating any circumstances giving rise to such necessity.

25.  The only other matter which Mr Lui relied upon is Clause 12 and the lack of reference to structural repair under Clause 11. Though these clauses were pleaded, there was no specific argument on the same before the Judge and the cases now relied upon by Mr Lui were not cited to the Judge.  There was no plea or evidence to the effect that such duty to repair on the part of the landlord is necessary for the purpose of the tenancy.  In our view, the Judge could not be faulted for not discussing a point which had not been canvassed before him.

26.  In any event, as we have discussed above, the mere fact that Clause 12 provided for access to the Plaintiff for repair and maintenance of the structural parts is not sufficient to give rise to an implied duty to repair.  Mr Lui placed emphasis on the obvious gap in respect of the repair covenant of the Defendant under Clause 11, echoing what was said by Hildyard J at [32] in J N Hipwell & Sons v Szurek, supra.  But as we have seen, the learned judge in that case went on to discuss the specific evidence in that case at [33] and [34] to support the necessity for the implied term.

27.  In Demetriou v Robert Andrews (Estate Agencies) Ltd (1991) 62 P & CR 536, the English Court of Appeal held that there may be situations in which there is no repairing obligation imposed either expressly or impliedly on anyone in relation to a lease.  In Adami v Lincoln Grange Management Ltd (1998) 30 HLR 982 another division of the English Court of Appeal held that where a lease is silent as to repairing obligations, the correct inference may be that neither party was intended to repair.  The mere fact that the parties contemplate that, in practice, the landlord will carry out repairs, and that the lease reserves to him a right of entry for that purpose, does not give rise to an implied obligation.  These authorities were not discussed in J N Hipwell & Sons v Szurek, supra.   

28.  In the circumstances, Mr Lui failed to persuade us that the Judge erred in holding that the Defendant did not put forward an arguable case for an implied duty to repair on the part of the Plaintiff.

29.  Further, on the Defendant’s own evidence the Plaintiff could not be said to be in breach of the implied duty to repair since she indicated she would rectify the defect and the Defendant did not give any ultimatum to the Plaintiff to execute the repair before they defaulted on the payment of rent and unilaterally decided to surrender the Property. 

30.  By reason of Clause 4 of the Tenancy Agreement, the Defendant could not withhold the payment of rent.  The default to pay rent since 27 September 2018 gave rise to the consequences specified in that clause and clause 3 with regard to forfeiture of deposit.  The expert evidence relied upon by the Defendant only referred to the impact of the lack of repair on fitness of the Property for storage of construction materials.  But there is no evidence to suggest that the Property could not be used for general industrial use.  The Defendant had actually been occupying and using the Property in the meantime.  In light of these matters, even if there was a breach in terms of delay in the execution of the repair it could not afford a defence to the claims of the Plaintiff. 

The new loading restriction

31.  As regards the new loading restriction imposed by the IO, the Tenancy Agreement only provided that the Property was to be used for general industrial purpose.  There was no covenant by the Plaintiff to warrant to the Defendant that the Property was fit for its storage purposes. In such circumstances, the legal position is that the Defendant took its own risk on leasing the Property for its storage purposes, including the loading capacity connecting with the use of the Property.     

32.  As the Judge rightly noted at [19] of the judgment, there was no implied obligation on the part of the Plaintiff to maintain the building in accordance with the loading capacity set out in the approved building plans in 1973. 

33.  In our judgment, it is not unreasonable for some owners to take the view that in light of the age of the building, there could be safety concerns on loading capacity.  On the other hand, whether the IO has the power to pass the resolution of 5 July 2018 in light of the advice they obtained from the Building Department is not an issue to be resolved in this appeal.  The IO was not a party to this action and we have not heard submissions on the issue.

34.  It is not the Defendant’s case that the Plaintiff had instigated other owners to take action on tightening loading restriction.  On the contrary, the evidence was that the Plaintiff had tried to seek a more liberal restriction but her effort was rejected by the IO.

35.  There is no suggestion that the new loading restriction rendered the Property unfit for general industrial use. 

36.  In such circumstances, we do not see any reasonable basis for Mr Lui’s contention that the new loading restriction imposed by the resolution of 5 July 2018 was a derogation of grant or breach of the covenant of quiet enjoyment on the part of the Plaintiff.  If the Defendant maintained that the IO had no authority to impose the new loading restriction, it could litigate with the IO.  But it cannot be a ground for non-payment of rent or termination of the Tenancy Agreement.

Forfeiture

37.  As regards forfeiture, it is governed by Clause 3.  Mr Lui’s submissions in this respect focused on procedural fairness and his complaint was that the Judge erred in allowing the Plaintiff to amend the Statement of Claim after the decision on summary judgment had been given. 

38.  The Judge had set out the circumstances leading to such development in his second judgment of 6 January 2020.  It is clear from the transcript that the Judge had offered the solicitor acting for the Defendant the opportunity to address the court on the proposed amendment and the construction of Clause 3.  The solicitor only said he disagreed with the claim and had nothing further to say.  He did not say he needed more time to consider the matter or that the Defendant needed to file some evidence to contest the validity of that clause. 

39.  Under such circumstances, the Judge was entitled to form the view that the Defendant was not prejudiced by the late amendment and that the amendment should be allowed.  Hence the grounds set out in paragraph (5) of the Notice of Appeal of 10 March 2020 and paragraph 22 of the skeleton submissions of Mr Lui have no merit.

40.  It was only after this court referred counsel to the case of Ip Ming Kin v Wong Siu Lan CACV 201/2012, 28 May 2013 that Mr Lui attempted to put forward an argument based on penalty.  But he was faced with the difficulty that up to the hearing of the appeal the Defendant did not put forward any evidence to mount such challenge and the onus rests squarely on it (see [38] of Ip Ming Kin). 

41.  Though initially some confusion arose from the fact that the Plaintiff was awarded $133,500 for arrears of rent together with a forfeiture of deposit in the sum of $133,500, Mr Ismail explained clearly to us at the hearing that the two sums served different purposes. 

42.  The arrears of rent were for the period from 27 September 2018 to 26 December 2018, see paragraph 14 of the Re-amended Statement of Claim.  Then there was also agreed mesne profit of $8,400 in respect of 27 December 2018 to the commencement of the action.  These awards were to cover the period when the Defendant was regarded in law as having possession of the Property. 

43.  The forfeiture of the deposit was to cover the loss suffered by the Plaintiff as a result of the premature termination of the tenancy and the deposit is a genuine pre-estimate of such loss.  Thus, the original claim for damages to be assessed (in addition to the claim for arrears of rent and mesne profit) pleaded at prayer (d) was deleted.

44.  Since there was no duplication, there was no reason for holding that the Plaintiff could not claim both the arrears of rent and the forfeiture of the deposit.

45.  Mr Lui was driven to argue that Clause 3 was a penalty because it could deter the Defendant from exercising the option of early termination under Clause 18.  That option was not engaged on the facts since it could only be exercised after the tenancy had run for 24 months. Further, having regard to Clauses 2 and 18, and construing the Tenancy Agreement as a whole, we do not find it arguable that the forfeiture provision under Clause 3 is applicable in the case of exercise of the option under Clause 18.  The use of the expression “毁約” in Clause 3 makes the position crystal clear.

46.  For these reasons, there was no arguable defence and we upheld the judgment below and dismissed the appeal accordingly.