HAW HONG INTERNATIONAL LTD. v. KEI OI WAH, LINIA AND OTHERS

1989 No. A3582

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF DAMAGES

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1. The Plaintiff issued a writ claiming rent, management fees and air-conditioning charges under a 3 year lease of new ground floor shop premises in Chathan Road to the Defendants. The rental under this lease was 68,000.00 per month and Defendants terminated the lease after 5 months by delivering up the keys and surrendering possession of the premises. The Plaintiff through its solicitors subsequently accepted the repudiation of the lease and claimed for loss of rental for the premises for the balance of the lease as the shop was relet at the lower rental of $48,000.00 per month.

2. Although the Defendants filed a Deferce, on 16th October 1989 interlocutory judgment under O.14 FSC was entered for the Plaintiff with damages to be assessed. The hearing of this assessment was fixed for 1st February 1990. At this assessment the Plaintiff called CHAN, Kam Tim, a witness from the management company which had control of the said shop premises. This witness produced the management agreement of his employer with the Plaintiff and a copy of the lease between the Plaintiff and the Defendant which provided for a monthly rental of $68,000.00 and management fee and air-conditioning charges of $725.00 per month. This witness confirmed that the Deferdants paid a deposit of $204,000.00 (being 3 months rent) prior to obtaining possession of the shop premises from 15th December 1988 being the 21 days free perice from 26th November 1988 in terms of the lease. This witness said that the management office received an undated Chinese letter from Defendants advising the cessation of the business and the keys to the shop premises on 13th May 1989 and receipt of same was acknowledged on 15th May 1989. This witness produced correspondence from Plaintiff's solicitors to Defendants being documents 5, 6 and 7 in the Court Burdle. The Plaintiff had eventually accepted the termination of the lease subject to the right to claim damages in its letter dated 10th June 1989 (Document 7).

3. As set out in the particulars to Paragraph 9 of the Statement of Claim the Plaintiff's witness calculated the total basic rent for the balance of the original lease under a 3 year tern (that is, from 13th June 1989 to 25th November 1991 at $68,000.00 per month) to be $2,001,466.67. The Defendants were given credit for the basic rent of $48,000.00 per month payable by the new tenant of the shop premises over the same period being $1,384,000.00 and also credit for the total deposits of rent, management fees and air-conditioning charges paid to the Plaintiff under the original lease being a sum of $206,175.00. The remaining balance claimed by the Plaintiff under this head was $411,291.67. Under Paragraph 10 of the Statement of Claim the Plaintiff also claimed basic rent for the period from 1st May 1989 to the 12th June 1989 at $68,000.00 per month being $95,200.00 and management fees and air-conditioning charges for the months of March through to 12th June 1989 at $725.00 per month being $2,465.00. The total sum claimed under this head was $97,665.00. The Plaintiff's witness produced as Exhibit P.1 the calculation sheet for these claims. This witness conceded that the Defendant were young and inexperienced when they entered into the lease of the shop premises and that they did not have independent legal representation. The witness confirmed that the Defendants had complained that the actual usable area of the shop premises at 110 square feet was much less than the gross area of 295 square feet which included a pro rata calculation of the common areas on the ground floor among the 9 shop premises there. Mr. Chan confirmed that the gross or net areas of the No.9 shop space was not included in the lease. Later evidence called by the Plaintiff confirmed the Defendant's allegation that the shop premises had been leased to then on the representation that the gross floor area of the shop was 295 square feet. The Defendants later gave evidence that they did not appreciate that 185 square feet of the gross floor area of the shop was calculated with reference to a proportion of the ground floor common areas, such as, the lift lobby are shaft, the staircase, transformer room, and lavatories. This case highlights the injustice of this common leasing practice in Hong Kong which was criticised by the Consumer Council in 1984 when it recommended that all future sales or leasing of commercial or domestic premises should be based or the usable or net floor area of the particular premises, rather than or some notional or fictional gross area including a proportion of the common area of the premises.

4. The only issue oper at this assessment was whether the Plaintiff had agreed to relet the shop premises at a reasonable market rental for the balance of the term of the original lease with the Defendants. In this respect the Plaintiff called a witness, YUEN Kwok Fun, from Dominion Surveyors Limited, a property leasing company, which acted in the reletting of the shop premises. This witness corfirmed that the lease of the shop premises had been advertised in two Chinese newspapers and by poster on the premises. Mr. Yuen said that there was not much response with about 10 inquiries begin received and only one firm offer to lease the premises at a rental of $48,000.00 per month. This witness confirmed that because of the everts in Beijing at that time, that is, in June 1989, the property market had dropped substantially by about 30% overall so that the Plaintiff after negotiation was prepared to accept a monthly rental of $48,000.00, which was $20,000.00 a month less that the rental being paid by the Defendants under the original lease. This witness disagreed in cross-examination that the small usable area of the shop premises at 110 square feet restricted the reletting of the shop for a monthly rental higher than $48,000.00. When asked by the 1st named Defendant that prospective tenarts found the rent unreasonable for shop No.9 after checking the limited size of the shop premises, Mr. Yuen replied that their company had also let out a similar shop space in the same building on the ground floor (Shop No.8) for rental of $248.00 per square foot on 18th January 1988 which compares with rate of $234.00 per square foot for Shop No.9 to Defendants by provisional agreement dated 5th July 1988 with possession in December 1988. The witness did concede that the gross area of Shop No.8 was 427 square feet as compared with the smaller gross area of 290 square feet for Shop No.9, the suit premises. It is noteworthy that no expert evidence was called by the Plaintiff as to the prevailing market rental value of the suit premises either before June 1989 or as to the effect on rental value arising from events in mainland China during early June 1989.

5. As the Plaintiff has elected to treat the lease agreement with the Defendants as terminated or discharged, it can pursue its remedy in damages being the contractual rent reserved by the lease less rental value of the premises at the time of the breach. Where, as in this case, the Plaintiff has relet the premises at a lower rent, which was all they could command at that date, the damages are to be assessed on the basis of the difference between the contractual rent under the terminated agreement are the new rent under the fresh lease. The decision in Marshall v. Mackintosh (1898) 78 L.T. 750, although concerned with a building lease, is clear authority on this point. As the Plaintiff has elected to claim damages for Deferdants' breach of the lease agreement, it is bound by the rules relating to repoteress and mitigation of damages. The burden of establishing causation of the alleged damages lies with the Plaintiff, while the burden of establishing a failure to mitigate lies with the Defendants.

6. On the evidence the Plaintiff has been able to establish that the damages claimed under Paragraph 9 of its Statement of Claim were caused by or flow naturally from the Defendants' termiration of the lease agreement. The Plaintiff's letter dated 10th June 1989 (Document 7 in the Burdle) accepted the Defendants' written repudiation of the lease agreement and thereby fixed the dated of the Defendants' breach of the lease as at that date. Prima facie, as the Plaintiff was only able to relet the shop premises for the unexpired term at a substantially lower rent, due to market conditions at that time, it is entitled to be compensated by the Defendants for such loss. However, if the difficulty in reletting the premises for the balance of the term at a comparable or higher rent was not due to prevailing market condition, but was as a result of a novus actus interveniers, the damages may be too remote unrecoverable and unrecoverable. Although this principle is more usually applied in actions based on tort, it also applied to actions in contract. Despite the shocked international reaction to the events which took place in Beijing in early June 1989, it was not totally unpredictable to the general public in Hong Kong that something similar to what transpired would be resorted to in dealing with the student demonstrations in China. If these events are to be relied on as a novus actus interveniens which adversely affected the rental market conditions when the shop premises were being relet, it would be necessary to show that such events were not of a kind which pay he likely to happen. In all the circumstances despite the unfortunate timing of the Defendants in terminating their Lease with the Plaintiff, these events cannot be relied on as an intervering act which affected the prevailing rental market. As such these damages are found not to be too remote. Furthermore, the Plaintiff on the evicence has been found to have taken appropriate and proper steps to mitigate its loss.

7. The Plaintiff will be awarded the damages claimed in Paragraphs 9 and 10 of its Statments of Claim, that is, the respective sums of $411,291.67 and $97,665.00. In terms of Clause 4.3 of the Lease Agreement (Document 2 of the Bundle) the Plaintiff claims interest for overdue rent, management fees and air-conditioning charges at 7% per annum above the prime leading rate of the Hong Kong Bank. This contractual rate of interest will be awarded will be allowed on the sum of $97,655.00 awarded under Paragraph 10 of the Statement of Claim. Interest has not been claimed on the damages of $411,291.67 awarded under Paragraph 9 of the Statement of Claim. The costs of this assessment are to be met by the Defendants, to be taxed if not agreed.