VICTOR ONWARD PRINTING & DYEING (HONG KONG) LTD v. JEKCO ELEVATORS LTD

DCCJ 5363/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5363 OF 2002

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Judgment

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The plaintiff was the landlord and the defendant the tenant of a workshop in Cheung Sha Wan, from June 1996 to 11 November 2002 when the defendant gave the plaintiff vacant possession. The Writ was issued on 27 August 2002 for vacant possession and arrears of rent and/or mesne profits, building management fees and Government rent. This summons for summary judgment under Order 14 was issued on 24 September 2002. The defendant vacated the premises on 11 November 2002, and now admits owing a total of $64,924.65 for the period up to that date. However, the defendant now says that it should be permitted to set off a rental deposit of $25,600.00 held by the plaintiff, i.e. it should pay only $39,324.65 and that the parties should bear their own costs.

2. The parties entered into a written tenancy agreement in 1996 for a term of two years from 11 June 1996 to 10 June 1998 at rental of $12,800 per month. In June 1998 they entered into a further written tenancy agreement for a term of two years, this time at a rental of $11,800.00 per month. This latter agreement ("the 1998 Agreement") provided by Clause 8 for a deposit of two month's rent, which could be forfeited by the landlord on termination of the agreement for breach of the tenant's covenants, and was refundable after determination of the agreement only within 30 days after the settlement of all claims, and provided that vacant possession had been given up and there was no rent due. It also provided by Clause 10 for the tenant to be liable for the landlord's costs of enforcing its rights against the tenant on an indemnity basis. By Clause 2(5) it obliged the tenant to keep the interior of the premises including "all electrical installations" in "a good clean tenantable substantial and proper repair and condition and in proper working condition and function."

3. When the 1998 Agreement expired on 10 June 2000 the parties did not enter into any further written agreement, but verbally agreed a rental of $9,212.00 per month. Then in June 2000 they verbally agreed a rental of $8,752.00 per month. The plaintiff's position is that the verbal agreements merely continued the 1998 Agreement and the parties remain bound by its terms. The defendant's position is that the parties sought to negotiate new terms in June 2000 and June 2002 but did not reach any agreement save that the defendant would pay the rent at the agreed figure, as well as rates, government rent, management fees and other outgoings, and the parties are not bound by the 1998 Agreement.

4. The defendant got into arrears of rent and other payments from May 2002. This is not in dispute. The defendant's director says that since 1998 the plaintiff had accepted that the defendant could defer payment of rent for about two months. However the plaintiff's witness denies that there was any such acceptance; according to him, the defendant was simply a bad payer and had to be chased for the rent.

5. The defendant's director and general manager says that in about April 2002 the plaintiff put forward a draft written Chinese tenancy agreement for the period from 11 June 2002 to 10 June 2004. In May 2002 the air-conditioner in the premises broke down. The defendant asked the plaintiff to repair it; the plaintiff would not. So the defendant refused to accept the proposed draft 2002 agreement and withheld the rent until the air-conditioner should be repaired. The plaintiff took some steps to repair it and claimed that it was in workable condition but it was not. The plaintiff's director says that air-conditioner repair was, under the 1998 Agreement, a matter for the defendant, but that in any event the defendant never provided any evidence that the air-conditioner was out of order or to establish the loss if any which it suffered as a result.

6. On 28 June 2002 the plaintiff wrote to the defendant terminating the lease. After that the plaintiff through solicitors demanded payment. On 24 July 2002 the defendant's solicitors wrote to the plaintiff's solicitors "without prejudice save as to costs" in the following terms:

"As to save time and costs in further dispute, our client proposes to pay your client for any outstanding amount after setting off the deposits which have been given you our client to your client at the commencement of the Tenancy Agreement if the air-conditioners in the above property have been repaired within 7 days from the date hereof. We are also instructed that our client would surrender the lease no later than 10 November 2002 if your client agrees with the above proposal".

7. The plaintiff's solicitors replied on 27 September 2002 that the proposal was unacceptable. They said that the defendant was not entitled to set-off the rental deposit against outstanding rent, and in reliance on Clause 2(5) of the 1998 Agreement said that the plaintiff was not obliged to repair the air-conditioner. The defendant's solicitors wrote again on 28 September 2002 that the defendant would pay the then outstanding balance of $43,014.00 less the rental deposit. The plaintiff's solicitors asked what proposal there was for payment of costs; the defendant's solicitors replied on 15 October 2002 that the defendant would pay $67,333.00 less the deposit of $25,600.00 and vacate the premises on 10 November 2002, but would pay no costs.

8. There is a very silly aspect to this case. I am now told, although it is not in evidence, that it would have cost about $6,000.00 or so to repair the air-conditioner. It is unfortunate that one side or the other did not just pay that, or split it between them. Air-conditioner repairs cost a lot less than litigation.

9. The defendant argues that it should not have to pay costs, because it was always willing to pay what it owed, (minus the rental deposit) so long as the plaintiff repaired the air-conditioner. Even after the issue of the writ it was still willing to pay. The defendant could not use the premises for its work without air-conditioning because the premises would be too hot; the premises were not reasonably fit for their use by the defendant as tenant. If the plaintiff had simply fixed the air-conditioner, the defendant would not have refused to pay rent, and there would have been no need for it to leave the premises; so the litigation was unnecessary.

10. Unfortunately there is no evidence that the defendant could not work without air-conditioning. I am also told that the plaintiff had installed the air-conditioner in the first place and had paid for its maintenance in previous years but that more recently there had been a change of management in the plaintiff, which led to the plaintiff's taking a different attitude. Unfortunately there is no evidence of that either. I am even told that the defendant was willing, in July 2002, to pay rent in advance up to the proposed termination date in November; but again, I cannot take what the defendant's solicitor says in argument as evidence; he cannot give evidence from the bar table.

11. It seems clear from the 1998 Agreement that the defendant as tenant would have been responsible for the upkeep of the air-conditioner, it being an electrical appliance. Whether the defendant was holding over, after the expiry of the 1998 Agreement, on the same terms (save for the amount of the rent) is a question of fact which is in dispute and which cannot be decided on the affidavit evidence; but if there was a new, oral tenancy after June 2000 or even after June 2002 there is no evidence that it regulated, in any way, the liability of the parties as to maintenance of the air-conditioner. There is no evidence, as I have indicated, that the plaintiff had installed the air-conditioner or undertaken its maintenance. In the normal way, air-conditioning is a matter for the tenant, not the landlord, unless there is some kind of central air-conditioning system for the building and there is no evidence of that. I cannot therefore find that the defendant was in any way justified in refusing to pay rent, pending the repair of the air-conditioner.

12. If the defendant was holding over on the terms of the 1998 Agreement then it would certainly not be able simply to set off the rental deposit against outstanding rent. The deposit would only be refundable after everything else was settled. The fact that the rental deposit remained at the original 1996 figure would imply that the provisions of the original agreement relating to it would still apply. If however the defendant was not holding over under the 1998 Agreement, and there was a new oral agreement, there is no evidence of any express agreement as to what was to be done with the deposit, but it seems to me that, applying the "officious bystander" test, there would have to be an implied term that the deposit continued to be held as a guarantee for payment of rent, and would only be refundable after all claims had been settled. After all, there is no other point in keeping the deposit of two months' rent at the original 1996 figure. It would follow that the plaintiff could entirely properly refuse to accept the proposal made in July 2002 that the defendant simply pay what it owed, less the rental deposit, and leave in November, especially since there was nothing in the proposal relating to rent payable up to November, and the deposit would in no way have covered that.

13. It follows in my view that the plaintiff was entirely justified in raising its action and in continuing the same. At that stage the defendant was in the premises, and not paying rent. I do not see how it can be said that the litigation was unnecessary. The plaintiff must have judgment for the agreed outstanding sum. In view of my findings above concerning the rental deposit, I will not order that it be set off against the outstanding sum. The defendant may seek its refund once all the outstanding matters have been settled.

14. I do not see how the defendant can avoid paying costs. Since I cannot decide on affirmation evidence whether the defendant is holding over under the terms of the 1998 Agreement, I cannot apply the provision therein for indemnity costs so the costs must be on the party and party basis.

15. There will accordingly be judgment in favour of the plaintiff in the sum of $64,924.65 with interest thereon at the best lending rate plus 1% from the date of the Writ until the date of judgment and thereafter at the judgment rate, and the costs of the action including the costs of this summons to be taxed if not agreed.