XCHRX CHEUK KIN TRADING LIMITED v. THE PRUDENTIAL MALL LIMITED

1993, No. A9767

________________

H E A D N O T E

________________

The Plaintiff, an ex-tenant of the Prudential Mall Ltd. claimed return of the security deposit less certain agreed arrears of rent and charges, fees and rates. The Defendant landlord claimed an amount of loss and damages more than the agreed balance amount of the deposit. They at a later stage of the proceedings claimed a much more amount of loss and damages allegedly by way of longer rent free period and larger rental concession given to the next tenant..

1993, No. A9767

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

___________

_______________

J U D G M E N T

_______________

1. The Plaintiff is a company and ex-tenant of the Defendant at the Prudential Mall in Nathan Road. They are claiming a refund of the rental deposit of $1.8 million when their Lease expired on 25 April 1993. It is common ground that the Plaintiff had delivered vacant possession of the suit premises to the Defendant on 23 April 1993. The Plaintiff also agreed that after deduction of some items including arrears of rent and other charges, fees and rates, the balance is $1,502,565.30.

2. The Defendant claimed that the Plaintiff had failed to restore the premises to its original state and condition and the premises were not in good, clean and tenantable condition.

3. Originally, the Defendant alleged that the amount of loss and damages is $1,992,514.70. According to the provision of the Lease, the amount of damages which the Defendant is entitled to claim should be decided by arbitration. Hence the Defendant applied for a stay of the proceedings.

4. However, in one of the Plaintiff's affidavits filed recently on 16 August 1995, the Defendant put up a different basis of claim for the alleged loss and damages. The amount is now $4,232,574.56. This amount included further rent free period given to the next tenant and further rental concession that was given to the new tenant.

5. According to the Lease in s.3 Clause 32(b), it was provided that :-

"A certificate issued by the Landlord's Architect as to whether the Tenant had defaulted under sub-clause (a) of this Clause shall (in the absence of manifest error) be conclusive and binding on the parties hereto. The parties shall then endeavour to agree on the amount of damages suffered by the Landlord resulting therefrom and failing agreement the matter shall be referred to a chartered surveyor nominated by The President for the time being of The Royal Institution of Chartered Surveyors, Hong Kong Branch who shall assess the damage payable to the Landlord. The said Chartered Surveyor shall also have the power to determine on the question of costs. His determination on costs and his assessment damages shall be binding on the parties hereto."

6. Although s.3, Clause 32(b) contains an arbitration agreement, both sides agree that this is a domestic arbitration agreement and thus according to s.6 of the Arbitration Ordinance, Cap.341, the court has a discretion to refuse a stay of the proceedings on an application under a domestic arbitration agreement if there is sufficient reason to do so. The Plaintiff submitted that the court should exercise its discretion not to stay the proceedings on the ground that the Defendant has no valid claim to damages.

7. In a previous case before the Court of Appeal, the same landlord had a similar dispute with another tenant in a similar situation involving construction of s.XI(3). It is the case of Chou Kou Pim and Chiu Mary v. The Prudential Mall Limited, CA No.2 of 1990 (per Fuad V-P, Penlington JA and Bokhary J (as he then was) dated 29 November 1990). It was decided by the Court of Appeal that the last outstanding claim of the Defendant as referred to in s.XI(3) of the Lease must mean the "last outstanding valid claim". On the basis that no reinstatement work had taken place in the suit premises, the Court of Appeal had decided that the landlord, being the same Defendant in the action herein, had no valid claim to the security deposit and the tenant was entitled to summary judgment for return of the security deposit less the architect's inspection fees. Penlington, JA delivering the judgment of the Court said at p.2 that :-

"Kempster, J.A., considered that the words 'last outstanding claim' must be construed as 'last outstanding valid claim'. We agree and this point has not been argued. There was again no doubt that when the proceedings were commenced the 30 days referred to in the lease had elapsed.

The question of the condition of the premises and the rights of the parties in relation to any repairs which were required on the termination of the lease is covered by Clause 32 of Part III of the lease. This provides that on termination the landlord's architect should inspect the premises and issue a certificate recording the repairs he considered were required. The section then goes on in Clause 32(b)(iv) to provide that :

'failing to remedy damages by the tenant in accordance with (ii) above the tenant shall do such re-instatement. The parties shall then endeavour to agree on the amount of damages suffered by the landlord resulting therefrom and failing agreement the matter shall be referred to a chartered quantity surveyor nominated by the president for the time being of the Royal Institution of Chartered Surveyors, Hong Kong Branch, who shall assess the damages to the landlord.'

Kempster, J.A., found in relation to this clause that :

' It is conceded that no reinstatement took place. I think it is also conceded, implicitly, that no reinstatement could have taken place because new tenant had come in and I think I can take judicial notice of the fact that in shop-premises new tenants have their own ideas of fittings and decor and would immediately be concerned to put the shop into an appropriate state for the selling of their particular retail goods.

In the circumstances no valid claim to damages arose in favour of the landlord; there was no basis for an attempt to agree damages; nothing to be referred to a nominated chartered quantity surveyor and, a fortiori, no sum fell to be set off against the claim in these proceedings other than the $2,000 referred to above.'

Before us Mr Anthony Chan, who argued a difficult case ably, conceded that those assumptions made by Kempster, J.A., were correct. The new tenants had come in and had carried out a complete re-decoration. He relies, however, on authorities, and in particular Joyner v. Weeks [1891]2 QB 31, for the proposition that even if restitution of the building to its former state was impossible or impractical because of new incoming tenants or for any other reason, this did not extinguish the landlord's claim for damages. We accept those authorities but in this case clearly that does not affect the clear terms of the lease. If there had been reinstatement effected by the landlord, even if a totally worthless and a useless exercise because of the new incoming tenants, it may well be that the landlord would have had a claim. It would have been totally unmeritorious but nevertheless it may have been legally well founded. Here however the landlord has simply failed to comply with the clear terms of the lease and that being so he can have no claim for a deduction of any amount from the deposit, apart from the costs of the architect's certificate.

We entirely agree with the reasoning of Kempster, J.A., in dismissing the appeal from the order of Master Perrior. The appellant has failed to carry out the terms of the lease. That was not the position in Joyner v. Weeks on which the appellant relies."

8. In our case, there likewise is not a single shred of evidence that the Defendant had incurred any expenses on reinstatement works to the premises. The Defendant had only produced a number of quotations on the reinstatement works alleged to be required to be done. However from the 2nd affidavit of one Ms Yip Mei Yee, she simply confirmed that the Defendant had :-

(a) leased out the premises to Supreme Boss as from 15 June 1993; and

(b) no reinstatement work, however, whatsoever had been carried out by the Defendant before the premises were leased out to Supreme Boss.

9. Further, in my view the Defendant's position is not improved by the new claim put forward in Ms Yip's 2nd affidavit. The allegation that the Defendant had suffered loss in terms of longer rent free period and loss of rental by way of a larger concession is against contemporary documents and conduct of the Defendant. In none of the correspondences, did the Defendant refer to any loss in terms of longer rent free period and larger rental concession. Further the Defendant did not say that Supreme Boss had asked for longer rent free period and rental concession. Ms Yip only said generally that all intended tenants wanted to demolish all the then decoration or to have a larger rent concession. This rent concession period is unsubstantiated and is different to the previous rent free period granted to the Plaintiff. The Defendant managed to produce a report by M/s Chesterton Petty. However, the report did not give the basis for the valuation. This new claim of the Defendant in any event does not give the Defendant any valid claim to the security deposit according to the decision in Chou Kou Pim. This is not the kind of claim which can be certified by the Landlord's Architect either.

10. Accordingly I allow the appeal from the Master and I exercise my discretion not to stay the proceedings for arbitration. The Defendant's summons for arbitration is dismissed with costs to the Plaintiff including the hearing before Master Jennings with certificate for counsel in the Court below.