LUVPA LTD v. HONOR CITY HK PHARMACY LTD

LDPE 1375 & 1376/2020(Heard Together)

[2021] HKLdT 40

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 1375 of 2020

____________________

____________________

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 1376 of 2020

____________________

____________________

_________________

JUDGMENT

__________________

Background

1.  The applicant is the registered owner of Shop A, Shop B, Shop C and Shop D on Ground Floor of Taurus Building, 21A and 21B Granville Road, Tsimshatsui, Kowloon (hereinafter referred to as “Shop A”, “Shop B”, “Shop C”, “Shop D” or collectively “the Premises’ where appropriate).

2.  By a tenancy agreement dated 8 February 2018 (hereinafter referred to as “A Agreement”), Shop A, Shop C and Shop D above were let by the applicant as Landlord to the respondent as Tenant for a term of 3 years from 1 March 2018 to 28 February 2021, the monthly rent being $620,000 for the first two years and $720,000 for the last year all exclusive of management fee, rates and government rent. Four months’ rental, management fee, rates and government rent in the sum of $2,636,696 was paid as security deposit.

3.  By a tenancy agreement dated 8 May 2020 (hereinafter referred to as “B Agreement”), Shop B above was let by the applicant as Landlord to the respondent as Tenant for a term of 1 year from 1 March 2020 to 28 February 2021 at a monthly rent of $100,000 exclusive of management fee, rates, and government rent. Four months’ rental, management fee, rates and government rent in the sum of $452,156 was paid as security deposit.

4.  At section F of either agreement, there is a clause (2) on interest (“the interest clause”) which states as follows:

“Notwithstanding anything herein contained in the event of default in payment of rent or other monies payable by the Tenant hereunder on the date on which the same falls due for payment (whether formally demanded or not) the Tenant shall pay to the Landlord on demand daily interest on all such sums outstanding at the monthly rate of 2.5% calculated from the date on which the same shall be due for payment … until the date of payment as liquidated damages and not as penalty provided that the demand and/or receipt by the Landlord of interest pursuant to this Clause shall be without prejudice to and shall not affect the right of the Landlord to exercise any other right or remedy hereof (including but without prejudice to the generality of the foregoing the right of re-entry) exercisable under the terms of this Agreement.”

5.  On 17 November 2020, the applicant filed an application, ie LDPE 1375/2020, to the Lands Tribunal (“the Tribunal”) for recovery of possession of Shop A, Shop C and Shop D on the ground that the respondent had failed to pay rent for the period from 1 November 2020 plus outstanding rates and government rent. The applicant also applied for order for mesne profits till the date of delivery of vacant possession of Shop A, Shop C and Shop D, costs and interest at 2.5% per month pursuant to the interest clause.

6.  Also on 17 November 2020, the applicant filed an application, ie LDPE 1376/2020, to the Tribunal for recovery of possession of Shop B on the ground that the respondent had failed to pay rent for the period from 1 November 2020 plus outstanding rates and government rent. The applicant also applied for order for mesne profits till the date of delivery of vacant possession of Shop B, costs and interest at 2.5% per month pursuant to the interest clause.

7.  In response, the respondent filed two Notices of Opposition, each in respect of one application by the applicant, on 23 November 2020 merely stating that its business was affected by Covid-19 and was short of cash flow.

Previous hearings

8.  The hearing of these two applications first took place on 5 January 2021 but owing to the lack of information on rates and government rent outstanding, the applicant asked for an adjournment which was granted by the Tribunal till 9 February 2021.

9.  Upon the hearing on 9 February 2021, the applicant asked for a further adjournment so as to negotiate settlement with the respondent.

10.  The hearing was adjourned to 24 March 2021 when the Tribunal was informed that vacant possession of the Premises was delivered on 26 February 2021 to the applicant by the respondent who had also paid all outstanding rents, rates and government rent (if set-off from the deposits was included). However, the respondent disputed whether the interest as much as 2.5% per month (or 30% per annum) should be payable because it was a penalty. Meanwhile, there were correspondence exchanges between solicitors acting on behalf of the parties disputing the final account on outstanding payments (if any). By the letters of Messrs Lo & Lo, solicitors acting for the applicant, dated 18 February 2021 and 19 March 2021, for instance, there enclosed a remark at the page of calculating the balance outstanding which stated for Shop A, Shop C and Shop D that “under our rent concession agreement, in the case the tenant breach of the agreement, all the reduced rental will be null without any effect and the Tenant is required to repay all the reduced rent for the total amount of HK$160,000 + $177,000 = $337,000 as per agreement.”

11.  The hearing was further adjourned to 12 April 2021. Then the Tribunal learned that the parties had reached agreement save on the issues of whether the interest at 2.5% per month was payable by the respondent and whether the applicant can claim back the reduced rent of $337,000. The hearing was adjourned to 29 April 2021 so as to allow the parties to make final submission on these two issues.

Interest or Penalty?

12.  On 23 April 2021, the respondent filed its final submission in which it referred firstly to Philips Hong Kong Limited v The Attorney General of Hong Kong (1993) (61 BLR 49, PC). In this case, the Privy Council cited the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co [1915] AC 79 at page 86, when he said:

“… I shall content myself with stating succinctly the various prepositions which I think are deductible from the decisions which rank as authoritative: -

1. Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.

2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage (Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6.).

3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v Hills [1906] AC 368 and Webster v Bosanquet [1912] AC 394).

4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. ….

…

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties (Clydebank Case, Lord Halsbury; Webster v. Bosanquet, Lord Mersey [1912] AC at page 398).”

13.  However, the law in this field was reviewed and restated by the Supreme Court in Cavendish Square Holding BV v Makdessi [2016] AC 1172 which heralds a new approach to contractual provisions which might be regarded as penalties, based around principles of commercial justification, proportionality and unconscionability. Lord Neuberger and Lord Sumption said at [32]:

"31. The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party's conduct is to be influenced are 'unconscionable' or (which will usually amount to the same thing) "extravagant" by reference to some norm.

32. The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin's four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter's primary obligations."

14.  They continued with these cautionary words at [33]:

"The penalty rule is an interference with freedom of contract. It undermines the certainty which parties are entitled to expect of the law. Diplock LJ was neither the first nor the last to observe that 'The court should not be astute to descry a "penalty clause"': Robophone at p. 1447. As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 41, 59, 'the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld', not least because '[a]ny other approach will lead to undesirable uncertainty especially in commercial contracts'"

15.  Also, Lord Mance stated at paragraph 152 as follows:

“…it is most easily explained on the basis that the dichotomy between the compensatory and the penal is not exclusive. There may be interests beyond the compensatory which justify the imposition on a party in breach of an additional financial burden…. What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served and protected by the clause, and, second, whether, assuming such an interest to exists, the provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable. In judging what is extravagant, exorbitant or unconscionable, I consider (despite contrary expressions of view) that the extent to which the parties were negotiating at arm’s length on the basis of legal advice and had every opportunity to appreciate what they were agreeing must at least be a relevant factor.”

16.  It has been suggested that the previous principles, heavily based on the two dichotomies - deterrent penalty or genuine pre-estimate of loss, overlooked the principal test formulated by Lord Dunedin in Dunlop by reference to extravagance and unconscionability. The modern approach thus appears to accept that a clause providing for the payment on breach of a sum of money that exceeds the amount that a court would award as compensation may not be regarded as penal if it can be justified commercially and if its predominant purpose is not to deter breach. This question as to whether the provisions are legitimate as commercially justified and also whether or not they are exorbitant or unconscionable in amount or in their effect should depend on evidence as to the circumstances in which the contract was agreed and evidence as to standard market rates, the latter being “the most important evidence” (per Bryan J in Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm) at [63]).

17.  The “exorbitant or unconscionable” test in Cavendish Square had since been applied by Lam V-P of our Court of Appeal in Bank of China (Hong Kong) Ltd v Eddy Technology Co Ltd [2019] 2 HKLRD 493 at 502, paragraph 38, and forms part of the laws of Hong Kong. 

18.  The court must also have regard to the general principle of the common law that a party who signs a written agreement knowing that it is intended to have legal effect will generally be treated as having read its terms and to be bound by them. As Moore-Bick LJ said in Peekay Intermark Ltd v Australia & New Zealand Banking Group Ltd [2006] 2 Lloyd’ Rep 511 at 520, this is an “important principle of English law which underpins the whole of commercial life; any erosion of it would have serious repercussions far beyond the business community.”

19.  The respondent’s primary argument is that 2.5% per month is extravagant, exorbitant or unconscionable. It has provided no evidence to show that the interest rate was penal in nature; on the other hand, the applicant has not adduced evidence to show that the interest rate was a genuine pre-estimate of damages. But it has now been made clear in Cavendish Square that the mere fact that the clause is not a pre-estimate of loss does not by itself mean that it is penal in nature.

20.  As is acknowledged in Cavendish Square, the rule against penalties is an interference with freedom to contract (see for example paragraph 43 of the judgement of Lords Neuberger and Sumption and paragraph 259 of the judgment of Lord Hodge). In the present case, the provision for interest is unexceptionable. The default interest at the rate of 2.5% per month may be on the high side but it is not an exorbitant rate of interest. Citing the words of His Honour Judge Downey (as he then was) in Discovery Bay Services Management Ltd. v. David Buxhaum [1995] HKDCLR 7, if it were, most financial institutions providing credit card services would be unable to enforce the terms of their agreements.  In the previous hearing on 24 March 2021, Ms Wai Fong on behalf of the applicant already referred to the Money Lenders Ordinance where an effective rate of interest which exceeds 60% per annum is taken to be excessive while that exceeds 48 per cent per annum shall be presumed to be a transaction which is extortionate. This is of course not a case here.

21.  As the applicant’s claim is based on a contractual entitlement, it is entitled to that interest as of right. This is not a case of a rate of interest that increases in the event of default; no interest would be payable if the debt were discharged promptly. The applicant had a legitimate and obvious interest in receiving payment quickly and on time. It has done nothing to encourage the respondent to continue in default if the resultant sum turns out to be high. Both the A Agreement and the B Agreement are of a type normally prepared by solicitors and according to the parties, had been preceded by a few earlier tenancies between the parties; the respondent had notice of its obligation to pay 2.5% per month in the event of default in payment of rent etc.  

22.  Having regard to the decision of the Supreme Court in Cavendish Square, I am satisfied the 2.5% clause is enforceable, and I allow the applicant’s claim of HK$214,615.44 for Shop A, Shop C and Shop D and HK$35,098.02 for Shop B[1].

Recoupment of Reduced Rent

23.  As said, the applicant seeks the repayment of $337,000 being the rental concession during the lease period of the A Agreement on the ground that the respondent has breached the tenancy agreement when it defaulted in the rental payment.

24.  It is the case of the respondent that Shop A, Shop B, Shop C and Shop D were occupied as a single premises (which was not disputed by the applicant). While the A Agreement was for a term of 3 years and the predecessor of B Agreement was for a fixed term of 2 years plus an option for renewal for another 1 year. When the fixed term of the predecessor of B Agreement was due to expire on 29 February 2020, the respondent was induced to continue the tenancy by the rental concession offered by the applicant. This resulted in the signing of the B Agreement in place of its predecessor at a reduced rent of $100,000 per month (instead of $200,000 per month). The voice messages dated 28 February 2020 also disclosed that the applicant was willing to return the extra deposit of $386,000 for the B Agreement because of the reduction in rental.

25.  But soon thereafter on 2 March 2020, the applicant sent a letter to the respondent as follows:

“In view of the detrimental effect caused by the coronavirus to the business of the Tenant, we as the landlord of the Premises, amicably agree to reduce monthly rental from HK$620,000.00 to HK$460,000.00 per month from 1 to 29 February 2020 and from HK$720,000.00 to HK$543,000.00 per month for 1-28 February 2021 for shop A, C and D of Taurus Building. This remedial rental deduction is granted on condition that the tenant will occupy the entire premises throughout the term as agreed under the Tenancy Agreement dated on 8 February 2018. In the case the Tenant in breach of the Agreement, all the reduced rent granted will be null without any effect and the Tenant is required to repay all the reduced rent. All rights reserved under the said Tenancy Agreement remain intact.”

26.  Mr Li King Wa Kelvin (“Mr Li”) on behalf of the respondent denied there was such a condition when he reached agreement in the rental concession with Ms Lisa Ho of the applicant on 20 February 2020, 26 February 2020 and 27 February 2020. With the leave of the Tribunal, Mr Li showed me the WhatsApp exchanges between him and Ms Ho[2]. There was no mentioning of the condition as suggested in the letter of 2 March 2020.

27.  To the extent that the respondent suggested its business was adversely affected by Covid-19, this did not impose any obligation on the applicant to reduce the rental reserved in the respective tenancy agreements. In Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), [2019] EGLR 17, the tenant, an agency of the European Union (“EU”), held a lease granted in 2014 of part of premises in Canary Wharf, London, for a term of 25 years. The agreement for lease had been entered into in August 2011. But in 2017, the United Kingdom (“UK”) decided to withdraw from the EU. The tenant contended that the UK’s withdrawal from the EU would frustrate the lease on the grounds that, inter alia, the tenant could no longer lawfully exercise the rights conferred on it by the lease. It followed that the tenant would have no power to meet its future obligations under the lease, including the obligation to pay rent. The English court held, inter alia, the UK withdrawal from the EU was not relevantly foreseeable in August 2011. There was no mutual contemplation that if the lease could not provide a permanent headquarters for the tenant for the next 25 years, the common purpose of the lease had failed. The tenant who agreed to enter into a lease had assumed the risk of change in that time, including that it might involuntarily have to close its business at the premises. The financial implications of the lease would have been subject to intense and carefully scrutiny by the tenant. The nature of the supervening event might affect adversely the tenant’s right under the lease but that did not render its occupation of the premises impossible and did not render the tenant’s performance under the lease something “radically different”.

28.  Similarly, summary judgment was granted in favour of the Landlord for rental in arrears in Commerz Real Investmentgesellschaft mbh v TFS Stores Limited [2021] EWHC 863 (Ch) despite the tenant’s business was adversely affected by Covid-19 and government lockdown measures.

29.  However, when the applicant agreed to grant the rental concession in February 2020 in persuading the respondent to continue its tenancy for Shop B, the applicant was estopped from reneging its promise to the detriment of the respondent. Neither can additional condition be imposed retrospectively after the agreement was reached and the respondent has acted accordingly. In Central London Property Trust Limited v High Trees House Limited [1947] KB 130, [1956] 1 All ER 256, it was held that the promise to accept lower rent by the landlords, being intended to be legally binding and to be acted on, and having been acted on by the tenants, was binding on the landlords to the extent that they would not be allowed to act inconsistently with it. Therefore, I do not allow the applicant to recoup the $337,000 as well as the legal expenses that may be incurred incidental thereto, ie the legal cost of $6,200 being claimed by the applicant.

30.  The interest in respect of Shop A, Shop C and Shop D is HK$214,615.44 and in respect of Shop B is HK$35,098.02.

Order

31.  I now make the order that the respondent do pay the applicant interest in the sum of $249,713.46.

32.  I dismiss the further claim by the applicant for the repayment of rental concession in the sum of $337,000 as well as the legal costs of $6,000.

Costs

33.  There be no order as to costs.

[1] See Exhibit A1.

[2] This was 4:27 pm on 29 April 2021.