YING FUNG DISTILLERY LTD v. HO HUNG SANG

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF DAMAGES

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1. The plaintiff and the defendant entered into a lease agreement of the suit premises for a 3-year term concluding on the last day of June 1988. The rental stipulated was $8,800 per month exclusive of rates and the premises were leased for commercial purposes.

2. The lease contained a provision for renewal for a further 2 years from 1st July 1988 on the exercise by the defendant of an option to that effect. The revised rental was to be $11,000 per month.

3. The defendant did not however exercise his option to renew, but held over on the expiry of the original term. The plaintiff then sued for possession and mesne profits and entered default judgment for the former on 30th August 1988, together with interlocutory judgment for mesne profits or damages to be assessed.

4. By the time of the hearing, possession had already been delivered to the plaintiff, and the parties agreed that the holding over period was from 1st July 1988 to 30th November 1988. The dispute therefore concerns the applicable rate of mesne profits for this five-month period.

5. The plaintiff contends for a rate of $19,000 per month and called as its only witness Mr. Chiu Kam Kuen, a Chartered Surveyor with Messrs. Jones Lang Wootton. Mr. Chiu produced as Exhibit P.1 his report and valuation and discussed this at length under cross-examination by the defendant.

6. The defendant's arguments centred on the poor condition of the premises which he maintained could not support a figure of $19,000 per month. He conceded that he would be liable for $11,000 per month, being the amount he would have paid if he had exercised the option to renew for a further 2 years. Nothing has however been paid by the defendant.

7. Mr. Chiu's valuation date was 1st July 1988 and in reaching his valuation he relied on two comparables. The first of these was a unit in the same block as the suit premises which, like the suit premises, was situated on the ground floor. This comparable attracted $7.42 per square foot per month for a 3-year lease from April 1988.

8. To this figure Mr. Chiu said he applied the usual factors of adjustment to realise a figure for the suit premises of $7.64 per square foot. Multiplying this figure by the leased area of 2,494 sguare feet produced the valuation of $19,000 per month.

9. Mr. Chiu explained that the first comparable related to a commencement period of April 1988. He therefore applied the Jones Lang Wootton rental index for the period April to July 1988 to give a 12% increase for the suit premises over the intervening period to the valuation date. Correspondingly, he made a downward adjustment to reflect that the comparable had a street frontage, whereas the suit premises did not. He made a further upward adjustment to reflect the greater headroom in the suit premises.

10. Turning to the second comparable, which was on the ground floor of another block, Mr. Chiu said it had a street frontage, better location and high ceilings. He made downward adjustments for these factors from the average rental of $11 per square foot, to reach $7.88 for the suit premises. From this result he adduced support for his conclusion in regard to the first comparable.

11. Questioned by the defendant, Mr. Chiu said he found no flooding or water penetration through the ground floor of the suit premises. He also maintained that comparable No.1 would be equally affected as the suit premises by exhaust fumes from the car park.

12. The defendant then raised the issue of the unlawful re-structuring of the suit premises and produced Exhibit D.1, a letter from the Commissioner for Labour, requiring missing walls and exit doors to be re-instated. The defendant's witness, Mr. Cheng Kwong Kui, was the signatory of this letter and he later confirmed that the walls and doors had been unlawfully demolished.

13. Mr. Chiu responded that this would not affect his valuation as the tenant would still enjoy the same area whether the missing doors and walls were re-instated or not. He suggested that it was anyway the owner's obligation to re-instate. I find that nothing turns on this point.

14. The defendant then showed Mr. Chiu some photographs which he himself later produced as Exhibit D.4. Mr. Chiu agreed that they depicted the suit premises, but pointed out that the condition shown was inferior to what he found on his own inspection. I note that the date on the photographs is 30th November 1988, the last day of the defendant's occupation.

15. In his own evidence the defendant expressed dissatisfaction that Mr. Chiu had not mentioned the obvious disadvantages of the suit premises. He discussed the photographs in Exhibit D.4 and explained that water would come into the premises when a waste pipe from the upstairs factory became blocked. He said that the pipe ran through the suit premises under the concrete and water flooded into the premises at holes in the concrete floor when the pipe was blocked.

16. It emerged from loss adjusters' reports produced by a later witness that the holes in question were manholes and that the problem was indeed caused by waste water from a dyeing factory upstairs.

17. The witness who produced these reports was Mr. Andrew Chan Wing Hing, the marketing manager of Gilman Insurance which had insured the defendant's company inter alia for flooding in the premises. He produced as Exhibits D.6, D.7, D.8 and D.9 four reports relating to claims by the defendant from 29th July 1987 to 14th October 1987. The losses concerned foodstuffs damaged by water on the floor where they were stored.

18. It appears from all four adjusters' reports that the damage was a recurring problem caused by foul water from the upstairs factory. I note from the reports that the problem remained unsolved at the time they were written despite the efforts of the owner of this factory. I have no doubt that these circumstances represented a considerable reduction in the amenities reasonably to be expected from the lease of the suit premises. Mr. Chan in fact said that his company finally warned the defendant that it would not renew its cover for water risks on the expiry of the policy as too many claims had been made.

19. On the evidence of the defendant and of Mr. Chan of the insurers, I find that the conditions described were not mere isolated incidents. They were a recurrent factor and as such were not considered by Mr. Chiu in reaching his valuation. To that extent they call into question the credibility of Mr. Chiu's valuation.

20. This conclusion does not necessarily amount to a criticism of Mr. Chiu, who reached his valuation apparently unaware of the conditions described by the defendant. I do not therefore accept the defendant's suggestion that Mr. Chiu's valuation was unfairly biassed towards the plaintiff. Nonetheless, I accept that these conditions existed much as described by the defendant, by Mr. Chan, and in the loss adjuster's reports. Hence I find that the valuation reached in apparent ignorance of these conditions should not be accepted.

21. I also find unusual Mr. Chiu's use of only two comparables in reaching his valuation figure. I have previously found the use of four or five comparables to be common in such cases, and the greater the available data the more persuasive the conclusion. The use of comparables and the adjustment of their data for factors of greater or less relevance is no doubt a matter of professional expertise. I have however noted that professional opinion in this context can differ greatly and I am wary of finding probabilities on such scant evidence, particularly with the addition of the flooding factor.

22. For these reasons I decline to find that the plaintiff has proved its entitlement to mesne profits at $19,000 per month. It is however entitled to re-imbursement at whatever rate I may find proved as the market rate for the premises at the time.

23. During the period of holding over, the defendant wrote to the plaintiff's managing director suggesting a new lease at $15,000 per month for 3 years. This, according to the defendant, was so that he could sell the business as a going concern, together with the remainder of the lease he hoped to obtain. This letter was produced in its Chinese original with translation as Exhibit P.2.

24. The defendant admitted in cross-examination that the conditions he complained of had by the date of this letter existed for years. Despite this, he was prepared to offer $15,000 per month for a new lease. I find this sufficiently persuasive to establish that figure as the correct level of mesne profits per month for the holding over period.

25. There will therefore be an award to the plaintiff of $75,000 for the five months in question. Interest is awarded at 1% over prime rate on the increasing amounts month by month to November 1988 and then on the full amount to the date of this judgment. Thereafter interest will be at the judgment rate. In calculating interest the monthly amounts shall be regarded as falling due in advance.

26. There will also be an award of $833, representing rates of $500 a quarter for which the defendant conceded liability. This will carry interest at 1% over prime rate from November 30th 1988 to the date of this judgment, and thereafter at the judgment rate.

27. I will hear the parties on costs.