PENDEX INDUSTRIES LTD v. WONG WAN CHU

HCA 1194/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1194 OF 2000

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J U D G M E N T

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1. In this action the Plaintiff landlord claimed arrears of rent amounting to $2,767,043.00 from the Defendant tenant who counterclaimed for damages of $275,966.00.

Plaintiff's Claim

2. The Plaintiff claims that for the period 28-3-98 to 27-2-99 the Defendant paid only $50,000.00 p.m., instead of the stipulated rent of $138,000.00 p.m. and that for the period from 28-2-99 to the 27-11-99, the date the lease expired, paid no rent at all.

3. Further, in breach of Clauses 4 and 5 of the Tenancy Agreement the Defendant is alleged to have failed to reinstate the kitchens and toilets of the original 3 flats, when she surrendered the premises.

4. The Defendant admits paying rent in the lesser sum and admits too that for the last 9 months of the tenancy she made no rent payments. She alleges, and relies on, an oral agreement between the Plaintiff and herself for payment of rent at the reduced rate, when, for reasons beyond her control, she was obliged to stop running her business. The Plaintiff concedes that some minor rent concessions were made in the early stages of the tenancy, at Defendant's request, but denies any agreement.

5. The Defendant on about 1-3-99 told the P she would deliver vacant possession of the premises on 23-11-99 and asked the Plaintiff to deduct rent for that period from the deposit. She counterclaims for the difference between the rental deposit and the 9 months reduced rental. She contends that the deposit, which is equivalent to 5 months rent, is a penalty, because it is much greater than the usual deposit of 2-3 months rent and thus cannot be forfeited, as the Plaintiff claims it can.

6. The Defendant claims in addition the difference between the government rent which she paid on behalf of the Plaintiff and arrears of rates. The Plaintiff conceded that such payments had been made and adjusted its claim in acknowledgement.

7. Although on 4-3-99 the Plaintiff's solicitors sent a letter demanding full payment of rent arrears the Plaintiff had not taken any earlier action to recover the unpaid rent. Payment at the reduced rate of 50,000.00 p.m. had continued for 11 months prior to the letter being sent. The Plaintiff took no further action to recover rent arrears between the date of the solicitor's letter and the date of the Writ, 1-2-00. The Defendant argues that even if there was no agreement to accept reduced payments, or no implied promise which might give rise to a promissory estoppel, the Plaintiff must be taken to have waived its rights to the full rental, at least for the 11 months during which the reduced payments were made.

Facts

8. The Plaintiff was the registered owner of residential premises known as Canberra Villa, Hang Lok Lane, Tung Lo Wan Hill, Shatin which comprised 3 flats and 7 car parking spaces. Mr and Mrs Chan were the directors and shareholders of the Plaintiff.

9. The Defendant wanted premises to use as a rest home; she, at the time, operated 3 such businesses. She saw Canberra Villas when her friend, Madam Cheung, was inspecting the premises with a view to leasing it as a rest home. When Madam Cheung signed the preliminary agreement the Defendant made it very plain to the agent and the Chans that if Madam Cheung did not take up the lease she wanted it herself. When Madam Cheung did not proceed, the Defendant, with the agreement of the Plaintiff, took over the lease and the preliminary deposit.

10. The Provisional Agreement and the formal Tenancy Agreements were signed on 28-11-96.

11. The Tenancy Agreement was drafted to make it clear that although the lease was of domestic premises the Plaintiff had no objection to the premises being used as a rest-home, if all government requirements and licensing were complied with.

12. The relevant terms of the Tenancy Agreement for the purposes of the dispute that has arisen between the parties, are Clauses 1, 3, 4, 5, 10 and 18.

"(1) Party A lets the whole building of Canberra Villa, Hang Lok Lane (alteration)(ignitials), Tung Lo Wan Hill, Shatin together with its seven parking spaces in the low level car-park (Nos. 1, 3, 5, 8, 11, 15 and 16) (hereinafter called "the said premises") to Party B. Both sides agreed at the monthly rent of HK$138,000.00 (separate rent receipts to be issued on collection of rents). The term of tenancy is agreed at 3 yeas commencing 28 November 1996 to 27 November 1999. It is agreed that during the term of tenancy the tenant may not withdraw from the tenancy, otherwise rent shall be calculated on remainder of the term.

(3) The rent for the said premises must be paid in advance on the first day of each month. No delay on any excuse will be allowed. If Party B fails to pay the rent to Party A after 10 days in arrears, the Party A shall be entitled to charge a monthly interest rate of 2% against the outstanding rents; or in case Party B does not perform any of the conditions in this Tenancy Agreement, then Party A shall be lawfully entitled to terminate this Tenancy Agreement, to let the said premises to others and to demand the outstanding rents.

(4) When Party B moves out, Party B shall have to remove all the decorations and restore the said premises to its original complete state unless Party A gives other instructions. Party B shall have to remove all furniture within the term of tenancy in order to clear the procedure. In case Party B does not return the key to the door on any excuse, or leaves behind old and broken trunks and cabinets etc. without taking the same away in order to intentionally cause delay in time, then Party B will be regarded as having abandoned its rights three days after its moving out without taking the items left. Party A shall then be entitled to sell these items in the presence of one witness without going through procedures of police station or tenancy tribunal and to rent he said premises to others. The proceeds from the sale shall be used to pay up the rent in arrears. If there is still any deficiency, Party B shall still be responsible without objection.

(5) Party B does not have to pay any construction fee or premium to Party A, but Party B shall have to pay a deposit equivalent to five months' rents, i.e. HK$690,000.00 to Party A (receipt to be issued separately). When Party B has moved out and paid up all the sundry charges and rents and have removed all the decorations reinstating the original state, Party A shall then return the said sum of deposit without interest to Party B within 30 days together and retrieve the receipt. In case Party B has not settled all the rents or any other sundry charges, or the decorations have not been totally removed to restore the original complete state of the said premises, Party A shall then be entitled to deduct the same from the deposit.

(10) Party B understands that the said premises shall only be used for domestic purpose. Party A does not guarantee that the said premises can be used for the operation of the Home for the Aged. Party B shall have to apply for the relevant license from the respective departments of the Hong Kong Government or other agencies and to observe all ordinances of the Hong Kong Government. In case of any breach of ordinances of the Hong Kong government and the Crown lease, Party B shall have to vacate forthwith and restore the decorations of the said premises according to the request by Party A.

(18) In case Party B breaches any of the provisions in this Tenancy Agreement, Party A shall confiscate the rental deposits of five months rent forthwith or deduct any fees in relation thereto from the deposits."

13. The Defendant wished to convert the premises, which was 3 separate flats, into a single unit. To that end she needed to alter the kitchens and bathrooms and to remove part of some walls to ensure easier supervision of the inmates.

Cessation of Business

14. The Defendant operated the premises as planned from 28-11-96. A rent-free period of 2 months was granted to allow the Defendant to prepare the premises. Rental payments began on 27-1-97. Mrs Chan confirmed that payments were made in full, although not made punctually. Payments were made by Defendant to the Plaintiff's bank account.

15. In August 1997 the Defendant asked the Plaintiff to reduce the rent, claiming she had financial difficulties. The Plaintiff agreed to reduce the rent by $10,000.00 p.m. for 3 months, but the Defendant took the concession further than agreed and paid the reduced rate for 5 months. The Plaintiff took no action to recover the unauthorised shortfall.

16. On 8-2-98 a mudslide occurred near the access road leading to the premises. Residents of the home had to be evacuated and housed elsewhere. The road reopened on 8-3-98, but only to pedestrian traffic. There was significant delay in repairing and reopening the road to vehicular traffic. This meant continued closure of the rest home, as emergency services such as fire and ambulance could not service it. Access by emergency services aside, it was not possible for the Defendant to operate the rest home, as a steep approach to the premises meant inmates and visitors had to go to and from the building by vehicle.

17. In November 1998 the Social Welfare Department (SWD) refused to further extend the Defendant's exemption from holding a full rest home licence. This, from Defendant's evidence, was not connected with the premises being inaccessible, but related to government attempts to regulate the rest-home industry by a policy which required, eventually, that all such businesses would operate under a full licence, the terms of which placed greater burdens on operators.

18. The delay in repairing the road meant it was not possible to be sure when it would reopen. This, coupled with the loss of her exemption, influenced the Defendant's eventual decision to close the business.

19. The Defendant claims she discussed her problems with the Plaintiff after the road closure and that Mr Chan agreed that from 28th March 1998 she could pay rent of $50000.00 p.m. until the road was repaired and SWD allowed her to reopen the rest home. She paid rent on that basis until February 1999.

20. The Plaintiff denied any such agreement. The Plaintiff refused to halve the rent, as Defendant asked initially, but agreed to waive rent for February and March 1998. Thereafter the Defendant, without the Plaintiff's consent, paid rent for the ensuing 11 months at $50,000.00 p.m. No alteration was made to the Tenancy Agreement to confirm the alleged change. Mrs Chan denied any request by Defendant for such alternation. Rent payments were made to the Plaintiff's bank account as before, but the Plaintiff did not issue any rental receipts.

21. In November 1998, after the Defendant was told by the SWD that her licensing exemption would not be renewed, she told the Plaintiff she intended to terminate the agreement.

22. In March 1999 the Defendant left the premises and handed the keys to the Plaintiff's solicitors. The Plaintiff inspected the premises and found they had not been reinstated as required by Clause 4 and 5 of the Tenancy Agreement. The Plaintiff's evidence was that kitchen and bathroom fittings had been removed and not replaced. In particular, 3 bath tubs and a water heater were missing.

Was There An Agreement Between The Parties As To A Reduced Rent?

23. It was necessary to consider whether there was an oral agreement between the parties that the Defendant could pay reduced rent until the road reopened and she was permitted by SWD to operate the rest home. The Defendant argued that even if there was no such agreement, that the Plaintiff promised she need not pay the full rental while her business was inoperable. She relied on that promise to her detriment - the detriment consisting in her continuing with the tenancy rather than terminating it immediately. If, despite Plaintiff's contrary assertion, there was such a promise, had it been revoked by the letter of demand so that the Defendant was obliged to pay full rent for the remainder of the tenancy?

24. The Defendant claimed that when, after the mudslip, she told Mr Chan she was unable to operate the business, he suggested she pay half the rent. The Defendant disagreed and, after argument, the Plaintiff agreed to reduce the rent to$50,000.00 p.m. until the road was reopened and the Defendant's licence was resumed. The Defendant said she asked for a rental reduction note to evidence this change, but the Plaintiff refused, saying it was unnecessary. She made no other attempt to obtain proof of the alteration, believing she could rely on the bank deposit slips to prove the reduced payments if a dispute arose. In evidence she was rather vague about the details of when and how the alleged agreement was reached.

25. Mrs Chan in evidence said that she told the Defendant she would do her best to help her if she had difficulties, at which point the Defendant said that all she could pay was $50,000.00. Mrs Chan explained that the Plaintiff intended to help by allowing the Defendant to give partial payment "for the time being", but denied accepting the Defendant's offer to pay $50,000.00. She said it was only because of the large amount the Defendant spent on renovation and because she said she would renew the Tenancy Agreement that the part payments were received.

26. According to Defendant she continued paying $50,000.00 p.m., without complaint from the Plaintiff. Mrs Chan disputed this, claiming she had made many telephone calls seeking payment of arrears, although she took no other action.

27. On 1-3-99 the Defendant telephoned Madam Chan, said she would not return to the premises and told her to deduct the 9 months' rental remaining from the rental deposit of $690,000.00. The Defendant claimed that as the Plaintiff did not object to this course, she expected, after deduction of the 9 months rental at the reduced rate, to receive the balance of deposit, i.e. $240,000.00.

28. Instead she received a solicitor's letter dated 4-3-98 demanding full rental and payment of arrears. On 27-5-98 her own solicitors advised the Plaintiff's solicitors that the property had been reinstated and was ready for reletting. This letter also contained details of the alleged agreement for reduced rent, but the Plaintiff's solicitors neither addressed that matter nor made any reply.

Was An Agreement Entered Into?

29. The Plaintiff appears to have been a compliant and forbearing landlord. The Defendant's early request for a rental reduction set the tone of the relationship. Having been granted a $10,000.00 reduction for 3 months the Defendant took advantage of it for a further 2 months, without the consent of the landlord, but without the landlord pursuing her for the balance.

30. The Defendant, in dealing with the Plaintiff and when giving evidence, seemed to regard herself as running a charity, rather than a business. Her requests for reduced rent payments were made out to be, not, as they were in reality, a solution to her financial difficulties, but necessary to prevent the alleged suffering of the rest home inmates. Her view throughout the tenancy, appeared to have been that it was the duty of the landlord to reduce her rent, so that she could run a profitable business.

31. Having considered the Defendant's evidence I was unable to accept that the parties had ever agreed that the rent should be reduced to less than half the stipulated amount, although the Defendant, perhaps emboldened by having been given some remission of rent, chose to behave as if that were the case.

32. Nor did I find that there was any promise by the Plaintiff, express or implied, to allow the Defendant to pay partial rent until she could resume business. At most the Plaintiff agreed to try its best to help, without spelling out in detail what form such help might take. There was nothing clear and definite about the assurance being given, nor was there any certainty as to which term, or terms, of the contract it was agreed were not to be enforced, nor any clarity as to how long such forbearance from enforcement would last. What did need to be considered however, was whether leaving aside the question of promises or assurances, the Plaintiff had by its behaviour waived its right to full rental for the period during which the partial payments were made.

33. The Plaintiff's behaviour in respect of the partial payments was unusual, as little or nothing was done to recoup the arrears for 11 months. Mrs Chan attributed this inactivity, extremely unusual for a HK landlord, to her preoccupation with caring for her mother-in-law who was undergoing extensive cancer treatment. She explained that her husband had been preoccupied with business matters as well as his mother's illness, so had not taken any action either.

34. Madam Chan's evidence that she made numerous telephone calls to Defendant requesting full payment, did not explain satisfactorily why, if she could do that, it was not possible to instruct solicitors at an earlier time. Such lengthy inaction indicates, if not necessarily the agreement to accept reduced rental claimed by the Defendant, at least an unusually prolonged acquiescence in her continuing default; an acquiescence which apparently led the Defendant to believe that her underpayments were acceptable to the Plaintiff in lieu of the full rental. The Plaintiff neither refused to accept, nor attempted to return any of the underpayments.

35. Madam Chan believed that because no receipts were issued, the Defendant must have known the partial payments were not accepted. However the evidence suggested that the Plaintiff issued rental receipts only at irregular intervals during the period of full payment, so it is unlikely that the Defendant saw the absence of receipts as an indication that her part payments were not accepted.

36. The parties did not agree on the number of receipts issued. Madam Chan said she had issued about 10 receipts in all but had not kept copies, or counterfoils, so was unable to produce any. The Defendant claimed that only 4 receipts were issued during the period she was paying full rental. When giving evidence she produced 4 receipts, having failed to produce, or refer to, such receipts at any time before trial, thus raising questions as to whether the number produced tallied with the number issued. The only point established by this evidence was that no receipts were issued during the 11 months the partial payments were made.

37. Even after the issue of the solicitor's letter, the Plaintiff took no other action until the issue of the Writ, 11 months later. The Plaintiff's solicitors had not replied to the letter from Defendant's solicitors setting out the alleged agreement. This evidence of inactivity, silence and acceptance of partial payments, serves to establish that the Plaintiff can be considered to have waived its rights to the full rental for the period from 28-3-98 to 28-2-99.

38. However once the letter of demand was issued by the Plaintiff's solicitors the Defendant could not have been in any doubt that the period of waiver was at an end and that her choices were to terminate the Tenancy Agreement immediately, or to resume paying the monthly rental as stipulated in the Tenancy Agreement.

Nature and Size of Deposit

39. The amount of the deposit agreed between the parties was $690,000.00, the equivalent of 5 months rental. The question was whether this sum was a rental deposit, or as the Defendant argued, a penalty which could not be forfeited. If it was not a penalty it was necessary to decide whether the Defendant had breached the tenancy Agreement so that Plaintiff could forfeit the deposit, or whether the Defendant should be allowed to set off the deposit against any sums found to be outstanding under the Tenancy Agreement.

40. The Defendant argued that the deposit was too high and outside the usual range of such deposits which, normally, were the equivalent of 2 or at most, 3, months' rental. It was Defendant's evidence that both she and Mrs Cheung argued with Mr Chan for a lesser deposit, without success, when negotiating the tenancy.

41. Madam Chan agreed the deposit was substantial, but considered it necessary to ensure that the Defendant abided by the terms of the Tenancy Agreement, in particular because the Defendant's plan to make one unit of the 3 flats, would make it difficult or impossible to re-let the premises quickly, if the Defendant abandoned the premises and/or failed to reinstate them during the term of the tenancy.

42. A further fear was that in the event of abandonment a longer than average delay in re-letting the premises was likely, because some prospective tenants would be reluctant to rent premises used as a rest home and where, possibly, deaths had occurred. The Plaintiff pointed out that although the deposit was high, the Defendant had benefitted from a 2 month rent holiday rather than the usual 1 month.

43. The combined effect of Clauses 5 and 10 of the Tenancy Agreement show that the deposit was security for the Defendant's performing all obligations under the lease, not just against a failure to pay rent. The Plaintiff would be justified in withholding repayment of the deposit if, on repossession the premises were in poor condition, or if some other term of the agreement had been breached.

44. Here the breaches alleged were the failure to reinstate and failure to pay rent for the last 9 months of the tenancy. As the deposit was security for performance of all obligations, the Defendant was not justified in failing to pay rent for the final months of the tenancy, nor in telling the Plaintiff to apply the deposit to the rent as she had done.

45. The contention that the deposit was too high, must be viewed in light of the rental negotiation. The Defendant was keen to secure this tenancy not just as a new venture, but also because she needed alternative premises for the inmates of another of her rest homes. She knew that premises suitable for use as rest homes were few and, from what the agent told her, believed other rest home operators were interested in the suit property. For those reasons she was quick to say that if Madam Cheung did not take up the tenancy she would do so herself.

46. The 3 flat premises were empty and fairly spacious. The outlook was attractive and although access to the premises was steeper than desirable for a rest home, necessitating the use of vehicles for visitors and staff, the Defendant believed those problems could be overcome.

47. The Defendant may have questioned the amount of the deposit, but I have no doubt that she agreed to it quickly. The deposit was large, but as the Defendant was taking over 3 premises the Plaintiff was justified in setting it at a high level. Madam Cheung agreed to that deposit - if, on taking over the agreement, the Defendant was unhappy about the deposit she was not obliged to agree to it nor to take on the tenancy. Her acceptance confirms her desire for the tenancy.

48. A deposit of 2-3 months rental might have been more usual, but was not a legal requirement. Such a deposit is in the nature of a contractual term agreed between the parties. The Defendant has not succeeded in establishing that the level of deposit was unconscionable, which might have justified its being treated as the penalty provision the Defendant claims it was. As long as the deposit was a reasonable amount a clause providing for its forfeiture will not be treated as a penalty. In deciding whether the amount is reasonable the court must consider the nature of and the circumstances pertaining to the letting. Having done so I find the rental deposit was of a reasonable amount.

Forfeiture of Deposit

49. In the ordinary course of events the landlord does not have to return a deposit if he has the power to forfeit it and if that power is properly exercised. Here the power of forfeiture has been set out in Clauses 5 and 18.

50. There is authority which suggests that the courts cannot strike out such clauses, except in cases where they can be seen as unconscionable, thus allowing the court to relieve the tenant from all or part of the forfeiture. Such an approach may be too restrictive. The better approach is that justice, recognising the true nature of the deposit as a security protecting a landlord from loss, requires the deposit to be used in satisfaction, or part satisfaction, of the landlord's loss.

51. In the instant case it would be unjust given the large sum deposited, that it be forfeited and I order that it be used to set-off the amount adjudged to be owed by the Defendant.

Reinstatement

52. The Plaintiff claimed $90,000.00 as the estimated costs for reinstating the toilets and kitchens of the premises. Para. 5 of the Amended Statement of Claim set out as one of the breaches of the Tenancy Agreement that the Defendant had dismantled 3 bath tubs and water heater in the toilet and kitchen and had not replaced them.

53. Although the Plaintiff produced a quotation for $90,000.00, dated 14 July 2000, Mrs Chan confirmed, when giving evidence, that no reinstatement work had been done. The quotation was detailed and contained works that Mrs Chan, in cross-examination, agreed exceeded reinstatement.

54. The Defendant did not agree that reinstatement had not been done. She said such work began in March 1999 and was completed by May 1999. The work included the replacement of 3 walls as well as painting and the replacement of broken windows. She alleged that the Plaintiff had agreed at the time of negotiating the Tenancy Agreement that the 3 baths and water heater referred to in the Plaintiff's claim were in such poor condition they need not be replaced. She claimed the water heater did not work and the 3 bath tubs, one of the 2 on each floor, could not drain as the water pipes had rusted.

55. There was no clear evidence about the condition of the premises when the Defendant took it over, but it was agreed that she had to carry out work to covert the 3 flats to one unit. Defendant's evidence about the nature of the reinstatement work undertaken when she gave up the premises was unsupported.

56. It was common ground however that the 3 bath tubs and the water heater had not been replaced. The parties did not agree about how, and to what extent, walls which had been demolished, or partly demolished, had been reinstated. The Defendant claimed that all necessary work had been done - the Plaintiff did not agree, but did not lead evidence to establish in what ways the reinstatement was substandard.

57. This disagreement could not be resolved by the court because the evidence was inadequate. It was not possible to discern from the elements of the quotation obtained by the Plaintiff, what work was necessitated by the Defendant's alleged depredations, or failure to reinstate, and what work the Plaintiff was having done apart from reinstatement. The only matter on which there was cogent evidence related to the water heater and baths.

58. Having considered that evidence I was not satisfied that the Defendant was telling the truth about the alleged agreement that she need not replace those items. Given the urgency with which the tenancy was negotiated, first by Madam Cheung and then by the Defendant, it seems highly unlikely that such an agreement was reached, particularly because of the Plaintiff's misgivings about the Defendant's plans to turn the 3 flats into one unit.

59. Mrs Chan admitted agreeing to the removal of the baths, but there does not seem to be any reason why she would have agreed that they need not be replaced. As to whether or not the water heater and baths were functioning, it is noteworthy that the Defendant was so keen to obtain the tenancy that she made only one inspection of the property and that, apparently, a cursory one.

60. Mrs Chan's evidence was that the Defendant did not check to see if the water heater was functioning during that inspection and that it was because the Defendant wanted to replace the baths with showers that they were to be removed, not because they were not working.

61. I am satisfied having considered the evidence that the Plaintiff did agree that the water heater and baths could be removed, but do not find that there was any agreement that they need not be replaced. I find that the Plaintiff has established its claim in respect of those items.

62. The cost of replacement for each of three baths is set out in the quotation as being $6,200.00. The quotation does not include a price for replacement of a water heater, whether in the kitchen or elsewhere. Because of the Plaintiff's failure to provide evidence to substantiate the claim for replacement of the heater I order only that the Defendant pay the sum of $18,600.00 being a reasonable sum to replace three baths.

63. I dismiss the Plaintiff's claim for reinstating the toilet and kitchen for the premises as that claim has not been established.

64. I enter judgment for the Plaintiff as follows:

Arrears of rent for the period from 28-02-99 to 27-11-99 at HK$138,000.00 per month	HK$1,242,000.00
Interest thereon at 2% per month from 28-02-99 to 27.11.99	HK$173,880.00
	HK$1,415,880.00
LESS rental Deposit $690,000.00	HK$725,880.00
LESS Government rental of $40,000.00 paid by Defendant	HK$685,880.00
TOGETHER WITH:
Interest at 2% on the sum of HK$685,880.00 from 28-11-99 to date of judgment and thereafter at judgment rate until payment in full
TOGETHER WITH:
Cost of replacing 3 baths tubs	HK$18,600.00
Arrears of rates for the period 01-10-99 to 30-11-99	HK$4,396.00
	HK$22,996.00

65. There shall be an order nisi that costs of the action be to the Plaintiff, such costs to be taxed if not agreed.

66. The Defendant's counterclaim stands dismissed.

67. Liberty to apply.