STEPHEN INVESTMENT LTD v. WONG SIU FAI

DCCJ 2177/2019

[2020] HKDC 93

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.2177 OF 2019

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BETWEEN

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ASSESSMENT OF DAMAGES

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1.  On 3 May 2019, the plaintiff began this action to recover from the defendant, inter alia, damages for breach of a written tenancy agreement dated 1 Nov 2017 (the Agreement) regarding Shop Nos.1 & 2 on Lower Ground Floor (the Shops), Kwai Po Building, Nos.102-116 Lei Muk Road and Nos.135-147 Shek Yam Road, Kwai Chung, New Territories (the Building).

2.  As the defendant gave no notice of intention to defend, final and interlocutory judgment was entered against him on 25 June 2019 (the Judgment).

3.  By the Judgment, the defendant was ordered to pay to the plaintiff: -

(1) the sum of $232,922.87;

(2) interest on the sum of $138,462.54 at the rate of 3.5% per month from 1 Apr 2019 to 25 June 2019 and thereafter at judgment rate until payment;

(3) damages to be assessed; and

(4) costs.

4.  The 2 awards at para (1) & (2) of the Judgment represent plaintiff’s claim at prayer (a) & (b) of its statement of claim (SOC), after giving credit for security deposit of $154,680 and fitting-out deposit of $25,250 paid by the defendant to the plaintiff.

5.  By notice of appointment of assessment of damages (AOD) taken out on 19 July 2019, the plaintiff asked this court to assess damages, if any, payable by the defendant pursuant to para (3) of the Judgment (or prayers (c) to (g) of the SOC).

6.  The plaintiff now makes 3 heads of claim in this AOD: -

(1) Costs of reinstating the Shops in the sum of $54,000;

(2) Costs of cleaning and removal in the sum of $14,850;

(3) Damages representing loss of rent, management fee and rates for the period from 29 Jan 2019 to 30 Nov 2019; and

(4) Interest on (1) to (3) above.

7.  On 6 Nov 2019, this action was set down for AOD on 2 Jan 2020. At this AOD hearing, the defendant failed to turn up. I am, however, satisfied[1] that the defendant has been duly notified of this hearing and served with the hearing bundle and plaintiff’s opening that I decided to proceed with this hearing in his absence as requested by Ms Pang appearing for the plaintiff (Ms Pang).

8.  The plaintiff called only one factual witness, namely, Ms Au Wing Yee, the leasing manager of the Chinachem Group (Ms Au), who adopted as her evidence-in-chief the contents of her witness statement dated 24 Sept 2019. She was also given leave to give further evidence-in-chief to update the progress and result, if any, of the re-letting of the Shops after 24 Sept 2019 and to identify in the assessment bundle some photos referred to in her witness statement.

Assessment of evidence

9.  All things considered, this court accepts the contents of the documents produced in the assessment bundle and give them full weight.

10.  Having considered Ms Au’s evidence against the rest of the evidence and her answers to questions from this court, I also accept such of her evidence set out below.

Findings of facts

11.  I find the material facts as follows.

12.  The plaintiff was at all material times a company within the Chinachem Group and the owner of the Shops. The Shops are 1,670 square feet in terms of area. A lower ground floor plan with the Shops marked in pink was annexed to the Agreement.

13.  By the Agreement, the plaintiff let the Shops to the defendant for commercial use for the purpose of carrying on a catering business (or a restaurant) in name of “Toscana” for a term of 2 years from 1 Dec 2017 to 30 Nov 2019 (the Tenancy) at a monthly rental of $50,500[2].

14.  In addition, the defendant agreed in the Agreement to pay the plaintiff 1) monthly management fees of $1,060[3]; and 2) rates on a quarterly basis[4] for the Shops.

15.  The Agreement has the usual re-entry clause for failure to pay rent for the Shops or for other breaches of the Agreement[5].

16.  Moreover, at sooner termination of the Tenancy, the defendant agreed in the Agreement to reinstate the Shops to “bare-shell” condition to plaintiff’s satisfaction and, at plaintiff’s request, reinstate such part thereof to their conditions when possession was first handed over to the defendant in good, clean, tenantable and substantial repair and condition to plaintiff’s satisfaction, and, if the defendant fails to leave the Shops in such conditions, to pay to the plaintiff the cost of taking such steps to remedy such default[6].

17.  Furthermore, at sooner termination of the Tenancy, the defendant agreed in the Agreement that it shall, at plaintiff’s request, remove such fixtures, fittings or installations installed in the Shops and shall reinstate such parts thereof to its original conditions, and make good and repair any damage to the Shops as a result thereof[7].

18.  For detailed and exact wordings of the provisions above, the Agreement should be consulted.

19.  In breach of the Agreement, the defendant has failed to pay the plaintiff management fee, rate and rent of the Shops as from 1 June, 1 July and 1 Aug 2018 respectively.

20.  On or about 28 Jan 2019, without plaintiff’s consent and in breach of the Agreement, the defendant handed the keys of the Shops to Mr. Billy Cheng, Assistant Manager of Sources Fame Management Limited, a subsidiary of the Chinachem Group, when Mr Cheng visited the Shops.

21.  On or about 30 Jan 2019, Mr Mark Leung, a Leasing Officer of the Chinachem Group, called the defendant asking him to pick back up the keys of the Shops as the Tenancy had not yet expired and that the plaintiff had never agreed to its earlier surrender. But, in wrongful repudiation of the Agreement, the defendant refused and informed Mr Leung that the defendant would no longer rent the Shops and hanged up the phone.

22.  On or about 30 Jan 2019, the plaintiff had no choice but to re-enter and recover possession of the Shops. It was then discovered that, in breach of the Agreement, the Shops were not kept in good repair and condition, and that the defendant has failed to remove all fittings, partitions, ceilings and decorations and to restore and reinstate the Shops into a good, clean, tenantable and substantial repair and “bare-shell” condition to plaintiff’s satisfaction.

23.  Among others, the defendant has not removed shopfront’s sign, awning, air-ducts installed at the entrance of the Shops facing pavement nor removed air-conditioner rack from the wall of the Shops at its side lane. Neither was wooden flooring, fitted cupboards, lighting, air-ducts, air-conditioner rack, kitchen water pipes, wall and floor tiles installed within the Shops removed (collectively the said installation and additions). After removal of such of these installations and additions, the ceiling and walls of the Shops are required to be re-plastered and repainted (the repainting works).

24.  Furniture, stock, metal racks, rubbish, sewage and decayed food were also found to have been left behind by the defendant. So was grease trap used for his catering business at the Shops (collectively the said furniture and chattels).

25.  Moreover, the toilets of the Shops were found not working properly and required to be repaired (the said toilet repair).

26.  As a result, the plaintiff through Chinachem Agencies Limited (CCA) sought quotation for 1) removal of the said furniture and chattels, and cleaning and sterilization of the Shops (collectively the said removal and cleaning works) and for 2) the said toilet repair, the repainting works and works to remove the said installations and additions and reinstate the Shop to its original “bare-shell” conditions (collectively the said reinstatement works) respectively.

27.  On 14 Feb 2019, Wylie Maintenance and Services Limited (Wylie) submitted its quotation for the said removal and cleaning works at the sum of $14,850, which was accepted by CCA on behalf of the plaintiff.

28.  Wylie completed the said removal and cleaning works by 21 Feb 2019 (photos of such completion are produced before me), issued its completion notice and invoice both date 26 Apr 2019 to the plaintiff. And CCA had, on behalf of the plaintiff, paid the said sum of $14,850 to Wylie and Wylie had acknowledged receipt of the same by its receipt dated 28 June 2019.

29.  East Centre Limited (East Centre) also submitted its quotation for the said reinstatement works on 20 Feb 2019 at a sum of $54,000, which was accepted by CCA on behalf of the plaintiff.

30.  Before submitting its quotation, East Centre had in early Feb 2019 visited the Shops and took photos inside and outside of it. These photos are produced before me. They captured, inter alia, the said installation and additions, and illustrated the scope of the said reinstatement works. And the plaintiff had informed East Centre which of the fittings and fixtures installed by the defendant were to be retained at the Shops.

31.  Save for these fittings and fixtures the plaintiff agreed to retain at the Shops, East Centre has carried out and completed the said reinstatement works by 10 June 2019 (photos of such completion are produced before me) as evidenced by its completion notice dated 20 June 2019.

32.  On 30 June 2019, East Centre issued its invoice of the said reinstatement works to CCA. In line with the terms of the quotation, CCA only settled 95% of the sum of $54,000 i.e. $51,300 (and East Centre issued its receipt dated 19 Sept 2019 for that) with the remaining 5% by way of retention sum i.e. $2,700 payable by plaintiff after 12 months of the completion of the said works.

33.  In the meantime, by letter dated 7^th March 2019, the plaintiff’s solicitors accepted defendant’s wrongful repudiation of the Agreement and demanded him to pay all outstanding rent, rates, management fees, loss and damages and interest.

34.  And, since 14 Feb 2019, Ms Au on behalf of the plaintiff has sent out various emails until June 2019 to, and followed up thereafter by phone from time to time with, divers staff of 7 estate agents to re-let the Shops for 2-year term at the monthly rent of $50,500 (i.e. equal to the monthly rent of the Agreement) and, as from about July 2019, at the reduced monthly rent of $50,000.

35.  In addition, the plaintiff had placed various advertisement notices at 1) Oriental Daily News on 16 May 2019 and 23 May 2019; 2) Hong Kong Economic Journal on 20 May 2019; 3) Hong Kong Economic Times on 22 May 2019 and 4) on other dates thereafter for leasing of the Shops.

36.  Nevertheless, by 30 Nov 2019, the original expiry date of the Tenancy, the plaintiff still could not re-let the Shops to any new tenant.

37.  Had the defendant not repudiated and honored his obligations under the Agreement, the plaintiff should have received from him by 30 Nov 2019 a total sum of $534,798.39, comprising of: -

1) rent in the total sum of $509,887.10 for the period from 29 Jan 2019 to 30 Nov 2019 i.e. $50,500/month x [3/31 + 10] months;

2) management fee in the total sum of $10,702.58 for the period from 29 Jan 2019 to 30 Nov 2019 i.e. $1,060/month x [3/31 + 10] months;

3) rates in the total sum of $1,825.56 for the period from 29 Jan 2019 to 31 Mar 2019 i.e. [$7,650/quarter - $5,000 (rates concession)] x (62/90) quarter; and

4) rates in the total sum of $12,383.15 for the period from 1 Apr 2019 to 30 Nov 2019 i.e. [$7,650/quarter - $3,000 (rates concession)] x (2 + 61/92) quarters.

Legal principles

38.  The applicable legal principles are trite and they are, I hold, as follows.

39.  An aggrieved landlord's entitlement to damages for wrongful repudiation of a tenancy agreement following generally contractual principles is well established. He can legitimately anticipate in the measure of damages to be awarded, such damages as reflecting the rental, service charges, rates and reinstatement cost stipulated in the tenancy and therefore payable were the agreement to be permitted to run its full course, subject always to a duty to minimize his loss. He is, accordingly, expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at a market rent. However, it falls upon the errant party to establish that mitigation has not taken place: Wing Siu Co Ltd Goldquest International Ltd [2006] HKCU 1396, para 7.

40.  A party cannot recover for loss which he ought reasonably to have avoided. The standard of reasonable behavior expected of the plaintiff is not high, given that the defendant is the wrongdoer. The plaintiff does not have to take extreme steps outside the ordinary course of business, or nurse the defendant's interests: Chitty on Contracts, Hong Kong Specific Contracts, 5^th (2016) Ed, para 10-047.

Plaintiff’s 3 heads of claim

41.  Applying the above principles, the 3 heads of claim made by the plaintiff in this AOD are, I think, recoverable at law, subject to the duty of mitigation whose burden rests with the defendant.

42.  There is nothing before me to suggest that the engagement of Wylie and East Centre by and on behalf of the plaintiff (and the amounts they charged the plaintiff for their works) was anything other than reasonable and I therefore allow the sums of $14,850 already fully paid to Wylie and the whole sum of $54,000 which the plaintiff was legally obliged to pay East Centre (5% thereof shall only be due and payable by the plaintiff in about June 2020).

43.  Moving to plaintiff’s 3^rd claim of damages for the unexpired portion of the Tenancy, I am mindful that the plaintiff has not: -

1) re-let the Shops for as long as 10 months from Feb to Nov 2019;

2) further reduced the monthly rental of the Shops below the monthly sum of $50,000 (i.e. about $30 per square feet) it gave to estate agents for re-letting the Shops (the plaintiff was then, said Ms Au, charging a lower sum of $20 odd per square feet for renting out other 4 to 5 smaller shops, of area ranging from 200 to 400 square feet, it owned at ground floor and lower ground floor of the Building);

3) let out the Shops on short-term tenancy in lieu of a fixed-term long tenancy (it was, said Ms Au, not plaintiff’s policy to grant short-term tenancy of its shop premises);

4) advised estate agents instructed by it to offer long or longer rent-free period for the Shops (thus making de facto reduction of rent) to attract potential tenants to them; and

5) partitioned the Shops (as they were originally 2 shops on Land Registry records but were converted into one single shop by the defendant for his use) to let out part of them.

44.  However, one cannot lose sight at the same time of the following evidence given by Ms Au which I also accept, namely that: -

1) The Building is not located in prime location, or prime retail location, in its district;

2) It took from Feb to June 2019 for the said reinstatement works to be completed, during which the Shops could not have been let out;

3) The plaintiff has already started looking for new tenant through estate agents as early as from 14 Feb 2019, even before completion of the said reinstatement works;

4) The monthly rentals of $50,500 and $50,000 Ms Au gave to estate agents for re-letting were mere “asking rent” and “subject to negotiation”;

5) Even after inspection of the Shops, not a single potential tenant came forward to the plaintiff until 30 Nov 2019 to express interest at the Shops (or part thereof) for negotiation to be started though so many estate agents had been instructed by plaintiff and advertisements had been placed in newspapers on several occasions;

6) The plaintiff has to incur expenses around $30,000 to $40,000 to partition the Shops again, not to mention that nobody has come forward to plaintiff to express interest in part of the Shops requiring decision to be made to incur such expenses or not;

7) Nobody came forward to the plaintiff either to express interest to be granted short-term tenancy to the Shops, if ever they were suitable for such use for their location;

8) The plaintiff could adjust the length of rent-free period for the Shops if they are rented out but the problem remains that nobody came forward to start negotiation with it; and

9) Social unrest started to erupt in Hong Kong as from June 2019, making the re-letting of the Shops even more difficult.

45.  All evidence before me considered, I accept Ms Pang’s submissions, and I am satisfied, that the plaintiff has already taken reasonable steps soon after its re-entry of the Shops to re-let them to reduce its losses but failed.

46.  I therefore allow plaintiff’s 3^rd claim for damages in the total sum of $534,798.39 particularized in para 37 above in full.

Summary

47.  The total amount of damages the defendant is liable to pay the plaintiff pursuant to para 3 of the Judgment is therefore $603,648.39 on my assessment i.e. $534,798.39 + $54,000 + $14,850.

Interest

48.  Before me, Ms Pang sought pre-judgment interest at the rate of 1% above HSBC best lending rate instead of judgment rate sought in the SOC. I find such suggestion reasonable in all the circumstances of this commercial case and adopt that.

49.  Ms Pang was also fair to concede that, as plaintiff was only obliged to pay East Centre 5% retention money in the sum of $2,700 in future, no interest should accrue on this sum.

Disposition

50.  Accordingly, final judgment is entered in plaintiff’s favour against the defendant pursuant to para 3 of the Judgment in the sum of $603,648.39, together with interest on the sum of $600,948.39 at prevailing HSBC best lending rate(s) plus 1% p.a. from 3 May 2019 to the date of the Judgment i.e. 25 June 2019 and thereafter at judgment rate until full payment.

Costs of AOD

51.  Costs normally follow the event. I see nothing to depart from this general rule and I would so order below.

52.  I also agree to Ms Pang’s suggestion of making summary assessment. Having regard to plaintiff’s statement of costs for summary assessment dated 2 Jan 2020, I assess the costs of AOD payable to the plaintiff at $50,850.

53.  I therefore make a costs order that the defendant shall pay the plaintiff the costs of AOD (including all reserved costs and the costs of this AOD hearing on 2 Jan 2020) summarily assessed at the sum of $50,850.

54.  Finally, I thank Ms Pang for her submissions.