WIN GLORIES LTD v. MAJORLUCK LTD

LDPE 494/2018

[2018] HKLdT 80

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 494 OF 2018

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J U D G M E N T

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Background

1.  This is another dispute between the same parties on the same premises, ie Market on Ground Floor of Commercial/Car park Block (also known as Kam Ying Shopping Centre), Kam Ying Court, 9 Kam Ying Road, Shatin, New Territories, Hong Kong (“the Premises”) as in LDPE 824/2017.

2.  Again, notwithstanding that the hearing was conducted in Chinese and that the submissions by the parties are also in Chinese, I prefer to hand down this judgment in English because most of the important documents in the proceedings relied on by the parties and the legal authorities referred hereto are in English.

3.  The applicant is the owner of the Premises which comprise one of the retail and carpark properties developed by the Hong Kong Housing Authority in conjunction with public housing estates in Hong Kong. In April 2006, the Premises, among other similar retail and carpark properties, were assigned to Link Properties Limited (formerly known as The Link Properties Limited) for the floatation of the first real estate investment trust in Hong Kong, the Link REIT.  

4.  By a tenancy agreement dated 9 March 2016 (“the Tenancy Agreement”), the Premises “TOGETHER with the use in common with the Landlord and all others having the like right of the entrances, staircases, landings, passages and lavatories in the Building in so far as the same are necessary for the proper use and enjoyment of the Premises …”[1] were leased to the respondent for a term of 6 years from 1 October 2015 to 30 September 2021.

5.  Unlike a normal letting, according to the Fourth Schedule to the Tenancy Agreement (“the Fourth Schedule”)[2], the Premises shall be used for the operation of a traditional market (街市) under the trade name of “Ma On Terrance Market (馬鞍台街市)” with only the trades and professions or businesses set out in the Fourth Schedule. “If the Tenant fails to comply with this Fourth Schedule, the Landlord shall be entitled to terminate this Agreement without prejudice to the right of the Landlord to forfeit the Deposit and to claim damages for all loss and damage arising thereupon and/or call or demand for payment under the Bank Guarantee.”

6.  Whereas a copy of the Fourth Schedule is attached at the end of this judgment, para 4 of the Fourth Schedule states that:

“… Any single stall or adjoining combined stalls may only be used or occupied for the operation of a particular form of such essential trade[3]. The Tenant may not use or occupy or permit to be used or occupied any single stall or adjoining combined stalls for operation of different kinds of essential trade. Adjoining stalls may only be combined if such stalls are licenced to the same Licensee(s).”

7.  By clause 32 in Section II of the Tenancy Agreement (“Clause 32”), the Tenant agrees with the Landlord:

“To commence operation of the business specified in the Fourth Schedule hereto … For the purpose of this Clause, the operation of not less than 27 market stalls of different commodities, services and trades as specified in the Fourth Schedule hereto in the Premises shall be deemed to be compliance of the same.”

8.  Indeed, the Premises as part of Kam Ying Shopping Centre as well as the shopping centres of 8 other public housing estates, were put up for sale by tender by Link Properties Limited on 22 February 2016 with the tender closing date on 8 April 2016. The applicant was the successful tenderer of Kam Ying Shopping Centre and became the owner of the Premises on 31 May 2016.

9.  Meanwhile, the Tenancy Agreement was registered in the Land Registry on 23 March 2016 vide memorial 16032301930020.

10.  On 7 June 2018, the applicant applied to the Tribunal for recovery of possession of the Premises on the ground that the respondent has breached Clause 32. It is also revealed that on 12 March 2018, the applicant first sent a letter to the respondent alleging that the Premises “has been operating other than for the Permitted Use set out in the Trade Proposal in the Fourth Schedule…” reminding the latter to take steps to rectify the situation. This was followed by 3 similar letters dated 19 March 2018, 26 March 2018 and 6 April 2018 respectively. In the last sentence of the latest letter, the applicant wrote “to terminate the Tenancy Agreement on 20 April 2018 according to the Fourth Schedule of the Tenancy Agreement.”

11.  On 12 June 2018, the respondent filed a Notice of Opposition which referred to a letter of objection dated 20 April 2018 sent on its behalf by Messrs Stephenson Harwood. Inter alia, the letter stated that:

“… on day 1 when (the respondent) entered into the tenancy agreement with your predecessor-in-title Link Properties Limited, the market operation situation was exactly the same as it is today. (The respondent) merely inherited and took over as new tenant a de facto market in operation by the Housing Authority or Link Properties, or their servants or agents.

Despite the formality of the Fourth Schedule in the tenancy agreement, the factual operation of all the stalls identified in your site inspection photographs was the creation of the original landlords or was alternatively known to them at all material times and explicitly consented to or by conduct impliedly acquiesced in. The restrictive terms in the tenancy agreement were accordingly waived and in reliance thereon (the respondent) has entered into continuing legal relationship with all the relevant stall operators. (The respondent) is therefore protected in law by proprietary estoppel or promissory estoppel. (The applicant) bought the property subject to the existing tenancies and are in law bounded by the same equity operative against your predecessors.”

Applicant’s Submission

12.  The Property Manager, Ms Kwong Pui Suen (“Ms Kwong”), of the applicant prepared a submission dated 27 August 2018.

13.  Apart from reciting what I stated in §10 above, Ms Kwong referred to the “Entire Agreement Clause” at clause 23 in Section VI of the Tenancy Agreement and argued that the respondent should abide by the Tenancy Agreement no matter what the market operation situation was when the respondent took up the Tenancy Agreement. The “Entire Agreement Clause” reads as follows:

“This Agreement (including all its Schedules and Annexures) sets out the full agreement reached between the parties hereto and no other representations have been made or warranties given relating to this Agreement or the Building or the Premises and if any such representation or warranty had been given or implied the same is hereby waived.”

14.  More particularly, Ms Kwong referred to three changes of use not compatible with the Fourth Schedule, namely restaurants, private tuition centres and hair salon which had adversely affected the other businesses in Kam Ying Shopping Centre, leading to the early termination of tenancies for two restaurants thereat and thereby loss to the applicants.

15.  The two examples that Ms Kwong gave are as follows:

(i) As regards Shop No 1 on 1/F (also known as LG/2), there was a tenancy for restaurant use for 6 years from 1 October 2013 but the tenant surrendered the tenancy on 13 September 2016. The shop was subsequently let to another restaurant tenant for a term of 6 years from 1 December 2016 (subject to 30 days rent-free) and but this new tenant also surrendered the tenancy on 28 February 2018. This shop is currently let for restaurant use for a term of 3 years from 1 March 2018 (subject to a rent-free period of 45 days). Therefore, the total loss is as follows[4]:

Loss of rental, rates and management fees	From 14 Sep 2016 to 30 Nov 2016	$417,418.16
Loss of rental	From 1 Dec 2016 to 30 Dec 2016	$143,225.81
Loss of rental	From 1 Mar 2018 to 14 Apr 2018	$220,000.00
	Total:	$780,643.97

(ii)   As regards Shop No 11 on 2/F[5] (also known as LG1/F), the original tenant surrendered its tenancy on 31 October 2016 and the applicant has failed to re-let the whole of Shop No 11. Therefore, the total loss is as follows[6]:

Loss of rental	From 1 Nov 2016 to 30 Sep 2021	$4,644,464.57
Loss of management fees	From 1 Nov 2016 to 30 Sep 2021	$381,954.50
Loss of rates	From 1 Nov 2016 to 30 Sep 2021	$134,209.35
	Total:	$5,160,628.42

out of which:

Loss of rental	From 1 Nov 2016 to 31 Aug 2018	$1,826,651.51
Loss of management fees	From 1 Nov 2016 to 31 Aug 2018	$143,915.06
Loss of rates	From 1 Nov 2016 to 31 Aug 2018	$49,081.28
	Total:	$2,019,647.85

16.  The applicant also claims consequential loss in rental, rates and Joint Charges as ruled in LDPE 824/2017 when the Tenancy Agreement is forfeited for the breaches. This claim is premised on the ground that the respondent fails to honour its tenant’s obligation to pay the same until the end of the Tenancy Agreement on 30 September 2021[7].

Respondent’s Submission

17.  Mr Cheung Kwan Kwok (“Mr Cheung”), the Assistant General Manager of the respondent also prepared a submission dated 27 August 2018.

18.  According to Mr Cheung, as long ago as in 1997, there was a tenancy agreement between Hong Kong Housing Authority as the landlord and A S Watson Group (HK) Limited as the tenant in respect of the Premises for a term of 3 years from 1 July 1997. Then the respondent signed a licence agreement with A S Watson Group (HK) Limited whereby the respondent was given the right to run a conventional wet and dry market selling and providing a range of commodities and services for the same period.

19.  The respondent became the tenant of Hong Kong Housing Authority itself on 30 June 2000 for another term of 3 years which was renewed for a further term of 3 years. By April 2006, Kam Ying Shopping Centre which includes the Premises was assigned to The Link Properties Limited and the respondent continued to renew the tenancy until 30 September 2009. Since then The Link Properties Limited entered into another tenancy (“2009 Tenancy”) with the respondent for a term of 6 years which was renewed again for a term of 6 years from 1 October 2015 until 30 September 2021 (ie the Tenancy Agreement).

20.  All these renewals of tenancy were subject to a range of users similar to those stated in the Fourth Schedule.

21.  While the Premises being part of Kam Ying Shopping Centre was sold by Linked Properties Limited to the applicant on 11 April 2016 as the successful tenderer, according to the tender document, ie clause 23 of the Conditions of Sale:

“The Property in “as is” condition shall be delivered by the Vendor to the Purchaser on Completion. The Purchaser hereby declares and confirms that the Purchaser has inspected or is deemed to have inspected the Property (whether or not the Purchaser has inspected the same) prior to the submission of tender and is fully satisfied with and accepts in all respects the existing physical state, condition and finishes of the Property and the chattels, appliances, fittings, fixtures and furniture therein and is fully aware that the Purchaser is purchasing the Property in its present state and condition and shall not make any objection or requisition thereto or in connection therewith and that the Property will be sold on an “as is” basis. …”

22.  By then, the Tenancy Agreement had been registered in the Land Registry since 23 March 2016 and the applicant should have adequate time or opportunity to carry out the necessary due diligence and become aware of the discrepancies between the actual users of the Premises and the Fourth Schedule, if any.

23.  In any event, the applicant had not informed or warned the respondent against the alleged breaches of use until March 2018. Mr Cheung gave examples of the alleged breach as follows:

	Name of Tenant	User	Stall Unit No	Term
1	黃志光	Cooked Food	4A	From 1 Jul 2000 to 29 Jun 2006
2	黃志光	Cooked Food	4B	From 1 Jul 2000 to 29 Jun 2006
3	鄭小燕	Cooked Food	4A & 4B	From 30 Jun 2006 to 30 Sep 2015
4	黃志光	Cooked Food	4A & 4B	From 1 Oct 2015 to 4 Dec 2015
5	陳國裕	Cooked Food	3 + 4A & 4B	From 1 Apr 2016 to 30 Sep 2021
6	莫結珍	Stationery & Toys[8]	16	From 1 Oct 2017 to 30 Sep 2018

24.  Mr Cheung explained that the discrepancies, if any, had persisted since 2000 and the former landlords, ie Hong Kong Housing Authority or Linked Properties Limited, had not raised any objection, either orally or in writing.

25.  According to Mr Cheung, Hong Kong Housing Authority must be concerned about providing a self-contained community for the adjoining public housing particularly when Kam Ying Shopping Centre is situated at Ma On Shan which is a new development area. Therefore, when market conditions change, the change of users must have been acquiesced in or the needs of the residents cannot be catered for.

26.  Mr Cheung then referred to Attorney General of Hong Kong v Fairfax Limited [1996] UKPC (Hong Kong) 52, [1997] UKPC 55, [1997] 1 WLR 149 in which a lease had been granted containing a covenant that the tenant would build villa residences only on the land. In breach of that covenant many high rise properties had been erected over many years. The respondents had sought a declaration that it could likewise erect a multi-storey building, saying that the Crown, the landlord, had acquiesced in the breach over many years and could not now enforce it. The Privy Council held that “A man cannot acquiesce in conduct of which he is ignorant.  Whilst their Lordships accept that proof of such knowledge is essential, there is here overwhelming proof.” (at §9) and “the only possible inference from the fact that over a period of forty years multi-storey blocks have been built over virtually the whole of Lot 757 is that everyone, including the Crown, must have been aware of those facts.  An area of 22 acres has been transformed into an area of high-density high-rise buildings.  It would take compelling evidence, which is lacking, to rebut the inference that everyone concerned with that land was well aware that it was not being used for villas.” (at §10)

27.  Applying the same principle, Mr Cheung submitted, the applicant should have been made aware of the discrepancies by reference to clause 23 of the Conditions of Sale when it became the owner of the Premises in May/June 2016. The applicant made no complaint whatsoever until 12 March 2018 and should have acquiesced in the breaches, if any.

Cooked Food

28.  The meaning of “Cooked Food” is not defined in the Tenancy Agreement or in the Fourth Schedule. The applicant does not agree that the prevailing user for Stall Nos 3 + 4A & 4B is “cooked food” which is one of the optional trades permitted under the Fourth Schedule. Rather it is run as 佳佳茶餐廳 which, according to the applicant, is more or less like a restaurant.

29.  Ms Kwong submits that the operation of a restaurant requires a different licence from the Food and Environmental Hygiene Department. I presume Ms Kwong is referring to the general restaurant licence as opposed to a light refreshment restaurant licence which restricts the licensee to prepare and sell for consumption on the premises any one group of the food items listed in Appendix B of A Guide to Application for Restaurant Licence as published by the Director of Food and Environmental Hygiene under the Public Health and Municipal Services Ordinance (Cap 132).

30.  For instance, licensed light refreshment restaurants may include premises preparing and selling noodles / vermicelli in soup with meat, offal, fish or sea food together with tea, coffee, cocoa, any non-alcoholic drink or beverage made by adding water to prepared liquid or powder (under Group A), rice congee with meat, offal, poultry, fish, sea food or frog together with food together with tea, coffee, cocoa, any non-alcoholic drink or beverage made by adding water to prepared liquid or powder (under Group B) and so on.

31.  In the absence of further evidence from the applicant or Ms Kwong, and following our joint inspection on 5 September 2018, I am not persuaded that the operation of 佳佳茶餐廳 has breached the Fourth Schedule. In my opinion, 佳佳茶餐廳 is preparing and selling cooked food which is qualified for a light refreshment restaurant licence.

Hair Salon or Private Tuition Centre

32.  On the other hand, I agree that the hair salon at Stall No 17 or the private tuition centres at Stall No 6 and Stall No 16 respectively has breached the Fourth Schedule. But I accept the submission of the respondent that these breaches have been acquiesced in by the applicant.

Acquiescence

33.  During cross-examination, Ms Kwong rebutted any acquiescence. For instance, in the schedule known as Appendix I to the 2009 tenancy, the categories of optional items for Foodstuff (Wet/Dry) and Miscellaneous (Dry Goods) to be provided by the respondent,  included “Other Trades (Proposed by Tenant and subject to Landlord’s approval and compliance with licensing requirements)” and “Other Trades (Proposed by Tenant and subject to the approval at Landlord’s absolute discretion)” respectively[9] which are lacking in the Fourth Schedule. On the other hand, the Fourth Schedule includes in the category of optional item for Miscellaneous (Dry Goods) the provision of Tea & Accessories which was not found in Appendix I to the 2009 tenancy. Therefore, Ms Kwong submits and I agree, the respondent should be conscious of the changes and bound by them for better or for worse. See Arnold v Britton [2015] UKSC 36; [2015] EGLR 53. Any previous permission or acquiescence should have been lost when the Tenancy Agreement was signed.

34.  Moreover, Ms Kwong relied on the “Entire Agreement Clause” at clause 23 in Section VI of the Tenancy Agreement[10]. Entire agreement clauses are intended to identify the terms of a contract and exclude any evidence or argument to the effect that the terms of the contract are to include any mutual understanding that is not recorded in the contract. 

35.  This was explained by Cheung JA in Glory Gold Limited v Star Play Development Limited [2008] 2 HKLRD 416 (CA) at paragraphs 16 and 17.  Cheung JA made the point that any argument of mutual understanding not recorded in such a written contract is bad in law even if the assertion is believable. 

36.  However, I agree with the respondent that the respondent has acquiesced in the breaches otherwise it is unbelievable that the respondent could have taken no action whatsoever since it became the owner of the Premises in May/June 2016. While Ms Kwong tried to explain that she was new in the post when she joined the respondent only in January 2017, I agree with the respondent that either she or her predecessor should have been aware of the breaches long ago. That Ms Kwong only learned the breach when the 2^nd restaurant operator at Shop No 1 on LG/2 surrendered its tenancy in February 2018 is unbelievable. According to the copies of “temporary license agreements” provided by the respondent, the hair salon was in place in October 2015 or sometime later whereas the restaurant, ie 佳佳茶餐廳 (even if it were in breach) and the private tuition centre[11] in question were in place in April 2016, ie all before the respondent became the owner on 31 May 2016.

37.  Even if I am wrong on this issue of acquiescence (and the non-breach of 佳佳茶餐廳), I note the “temporary license agreements” for the hair salon and the private tuition centres as provided by the respondent would expire in the end of September 2018 and that for the restaurant has an early termination clause. I am prepared to grant to the respondent a one-month relief from the date of this judgment under section 58(2) of the the Conveyancing and Property Ordinance so as to remedy the breaches. Under this section, “the court may grant or refuse relief, as the court, having regard to the proceedings and conduct of the parties under the foregoing provisions of this section, and to all the other circumstances, thinks fit ...”

Damages

38.  Even if I am wrong on the issue of acquiescence (and the non-breach of 佳佳茶餐廳), I am not persuaded that the applicant has suffered more than nominal damages because of the breaches by the respondent.

39.  According to the tenancy agreements provided by the applicant for Shop No 1 on LG/2, the particulars of the restaurant lettings are as follows:

Name of Restaurant	Term	Monthly Base Rent	Date of Surrender of Tenancy
昇悅鮮廚[12]	6 years from 1 Oct 2013 to 30 September 2019	Year 1 – Year 3: $130,000 Year 4 – Year 6: $143,000	Sep 2016
滋味食堂	6 years from 1 Dec 2016 to 30 November 2022	Year 1 – Year 3: $148,000 Year 4 – Year 6: $170,200	Feb 2018
金苑小館	3 years from 1 Mar 2018 to 28 February 2021	Year 1 – Year 3: $150,000	N A

40.  From the table above, every time when the former tenants left or surrendered the tenancy, the applicant was successful in finding a replacement tenant in a reasonable short period of time and at a higher rent. What is more, I agree with the respondent that the location of Shop No 1 on LG/2 is much superior being at the entrance of Kam Ying Shopping Centre whereas the restaurant alleged in breach is situated at a recessed location inside the Premises and run like just a canteen.  In terms of the floor area, Shop No 1 on LG/2 is much larger and as submitted by the respondent, can be run as a better restaurant in terms of clientele and style. I do not agree with Ms Kwong that any restaurant at Shop No 1 on LG/2 would face direct competition with the restaurant alleged in breach. Upon my inspection accompanied by the parties on 5 September 2018, the competition, if any, comes from Café de Coral at Shop No 1A on LG1/F or Itamomo at Shop No 1A on LG1/F directly above Shop No 1 on LG/2.

41.  As regards Shop No 11 on LG1/F which is situated along the main pedestrian corridor beside Wellcome supermarket, Ms Kwong conceded during my inspection that the former tenant was Mannings, a popular brand selling health, beauty, pharmaceutical products etc. During cross-examination, Ms Kwong also conceded that Mannings left when its tenancy expired in September 2016 rather than facing any direct competition from the alleged breach users. I am advised that this shop unit is now subdivided into 5 smaller units, 3 of which have been let in January 2018, April 2018 and August 2018 respectively at nearly doubling rentals when compared for instance with the letting of Stall No 6 inside the Premises. In respect of the letting in August 2018, Ms Kwong conceded that it is just a removal from Shop 10 on LG1/F which has now become vacant. Although Shop 10 on LG1/F is a corner shop and slightly smaller than the new unit, ie Shop No 11A on LG1/F, the tenant is willing to pay an increase in rental about 32% upon expiry of the original tenancy at Shop 10 on LG1/F. This Shop No 11 on LG1/F or its sub-division caters for different trades or markets than those stalls inside the Premises.

42.  I consider any damages as may be suffered by the applicant being remote and in any event nominal. However, In Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] WLR 798; [1973] 229 EG 617, the court awarded damages in substitution for a mandatory injunction requiring the removal of house built in breach of a restrictive covenant. Damages were awarded at 5% of the anticipated profits from the development (which were taken to be the same as the actual profits) on the basis that the judge decided that in all the circumstances this was a fair figure.  Recently, the Supreme Court of the United Kingdom in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20; [2018] PLSCS 20 affirmed that damages on this basis are compensatory. Having reviewed the “temporary license agreements” for the stalls where breaches of use were alleged[13], should the respondent fail to remedy the breaches within the one-month relief period afore-mentioned, therefore, I shall order the respondent to pay the applicant damages equivalent to $10,000 per month per stall unit that has breached the Fourth Schedule.

Conclusion

43.  I am not persuaded that the letting to 佳佳茶餐廳 which occupied Stall Nos 3 + 4A & 4B is in breach of the Fourth Schedule. Even if it were, whereas my finding that the applicant has acquiesced in the respondent’s breaches (including but not limited to the letting to 佳佳茶餐廳) of the Tenancy Agreement it alleges, I dismiss the application for recovery of vacant possession of the Premises. No order for damages is made.

Costs

44.  As costs follow the event, I order the applicant do pay the respondent’s costs of this application.  I summarily assess the costs of this application to be payable to the respondent in the sum of $5,000.