WAN’S INVESTMENT LTD v. SUN, DI

DCCJ 5970/2020

[2023] HKDC 832

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5970 OF 2020

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ASSESSMENT OF DAMAGES

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I.   Overview

1.  This is the trial for the assessment of damages suffered by the plaintiff as a result of the defendant’s breach of a tenancy agreement dated 21 September 2015 (the “Tenancy Agreement”).

2.  The plaintiff was and is the landlord, while the defendant was the tenant.

3.  In absence of notice of intention to defend, the plaintiff obtained a final and interlocutory judgment against the defendant on 20 May 2021, whereby it was adjudged that the defendant do pay the plaintiff damages to be assessed, and costs. In pursuance of this, this trial was held.

II.   Proceeding in the defendant’s absence

4.  The defendant was not represented and was absent at the hearing. By order of Master Maurice Lam dated 1 September 2022, the plaintiff was directed to effect service of Notice of Trial by inserting an advertisement in a Chinese newspaper published and widely circulating in Hong Kong no less than 28 days prior to the hearing of assessment of damages, and the service effected in such a manner shall be deemed to be good and sufficient service of the said notice.

5.  By the 5^th Affirmation of Yeung Hoi Pan filed on behalf of the plaintiff, it was affirmed that an advertisement of Notice of Trial was inserted in the Hong Kong Commercial Daily (“Commercial Daily”) on 21 April 2023. As accepted by the plaintiff at trial, this however was just 27 days prior to the hearing of assessment of damages, 1 day short of the 28 days required.

6.  Nevertheless, having considered all the circumstances and all the evidence before me, in my view it is appropriate to proceed in the absence of the defendant:

6.1.  The starting point is that a trial date is a milestone date: O 25, r 3(8) of the Rules of the District Court, Cap 336H (“RDC”). Under O 25, r 3(3), the court shall not vary a milestone date, unless there are exceptional circumstances justifying the variation.

6.2.  The court has a wide power and discretion under RDC O 2 r 1 to cure non-compliance with the requirements under the RDC to do justice. As observed by the learned editors of the Hong Kong White Book (2023) Vol 1 at §2/1/2, “Defective service of proceedings, however gross the defect, and even a total failure to serve, where the existence of the proceedings is nevertheless known to the defendant, is an irregularity which can be cured by the court by the exercise of discretion under O 2, r 1”.

6.3.  Based on the authorities^[1], in considering whether to exercise the court’s discretion under O 2 r 1 to cure defects or irregularities in effecting service, 3 main factors, amongst others, are relevant, namely (i) whether the defect, non-compliance or irregularity was deliberately caused; (ii) whether the proceedings came to or would have come to the notice or attention of the party being served; (iii) whether and if so what prejudice would be caused to the party being served.

6.4.  In the present case, the explanation of the plaintiff as set out in the Affirmation of Lee Shin Nam was that the plaintiff had on 13 April 2023 already attempted to contact Commercial Daily to place the advertisement of service, but no response was received until 20 April 2023, and the plaintiff was told that this was because the person responsible at Commercial Daily had fallen ill during the relevant period. Having considered the evidence, I accept that the defect or irregularity in service was inadvertent and was not deliberate.

6.5.  Further, the irregularity in the present case was just a difference of 1 day in the time interval between the advertisement and trial. The defendant would still have no less than 27 days of prior notice pursuant to the advertisement. Further, the Writ, Notice of Appointment of Assessment of Damages, and notice of the previous directions hearing have been validly service on the defendant either by way of regular service or substituted service, but the defendant has failed to participate in these proceedings completely. As such, I am of the view that a further adjournment of the present trial will serve no useful purpose, and that no real prejudice will be caused to the defendant by curing the defect or irregularity. I therefore exercise my discretion to cure the defect in effecting service.

7.  Having considered all the relevant circumstances and in light of the above, I am of the view that it is proper to exercise my discretion under RDC O 35 r 1 to direct that the present trial proceed in the absence of the defendant. I shall therefore proceed with the hearing in the defendant’s absence.

III.   Background

8.  The plaintiff was and is the registered owner of the premises located at Ground Floor, Y Centre (formerly known as the Lamma Centre), 15 Parkes Street, Yaumatei, Kowloon, Hong Kong (the “Premises”).

9.  By the Tenancy Agreement dated 21 September 2015, the plaintiff as the landlord agreed to lease the Premises to the defendant as tenant for a fixed term of 4 years commencing from 21 September 2015 and expiring on 20 September 2019 (both days inclusive). The rent under the Tenancy Agreement was HK$138,000 per month (exclusive of management fees, rates, and government rent) payable in advance on the first day of each calendar month.

10.  Under Clause 3.1(a) of the Tenancy Agreement, the defendant was obliged to “pay the said rent on the days and in the manner hereinbefore provided for payment thereof without any deduction and set‑off whatsoever nature, whether legal or equitable or otherwise in accordance with the provision set out in the Fourth Schedule hereto.”

11.  Under Clause 3.1(b) of the Tenancy Agreement, the defendant was obliged to “pay or discharge all air-conditioning (if any), maintenance or management fee or charges as may from time to time be charged in respect of the premises … otherwise become payable or become payable in respect of the premises fixed or to be fixed reasonably by the landlord for the premises relating to the Building”.

12.  Under Clause 3.l(c) of the Tenancy Agreement, the defendant was obliged to “pay and discharge all rates … of an annual or recurring nature now or hereinafter to be assessed, imposed or charged by the Government of Hong Kong Special Administrative Region or other lawful authority upon the Premises or upon the owner or occupier thereof”.

13.  Clause 5.l(a) of the Tenancy Agreement provided that “If the rent … and/or management fees … and/or rates … hereby agreed to be paid or any part thereof shall be unpaid for 7 days after the same shall become payable (whether legally or formally demanded or not) or if the Tenant shall fail or neglect to observe or perform any of the agreement stipulations or conditions herein contained … then and in any such case it shall be lawful for the landlord at any time thereafter to re-enter the premises or any part thereof in the name of the whole whereupon this Agreement shall absolutely cease and determine but without prejudice to any right of action by the Landlord in respect of any outstanding breach of non-observance or non-performance of any of the agreement, stipulation and conditions herein contained and on the Tenant’s part to be observed and performed and to the Landlord’s right to deduct all loss and damage thereby incurred from the deposit paid by the Tenant in accordance with Clause 5 hereof.”

14.  Clause 5.l(g) of the Tenancy Agreement provided that “… the rent and management fee and other charges payable in respect of the Premises shall be and be deemed to be in arrears if not paid in advance at the times and in the manner hereinbefore provided for payment thereof. All costs and expenses for and incidental to any distraint shall be paid by the Tenant and is recoverable from him as a debt. For the purpose of distraint and these presents, any outstanding management fees, and/or rates and/or air-conditioning charges and/or other charges hereby agreed to be paid and/or payable in respect of the premises shall be deemed to be arrears of rent notwithstanding any rule of law or equity to the contrary.”

15.  The defendant had defaulted on payment of rent, management fees and government rate since 1 August 2017. The Tenancy Agreement was repudiated by the defendant on 15 October 2017, when the defendant prematurely delivered vacant possession together with key of the Premises to the plaintiff.

16.  The plaintiff accepted the defendant’s repudiation. In order to mitigate its loss, the plaintiff entered into a new tenancy agreement with a new tenant, Vast Year Limited (“Vast Year”) for a monthly rent of $130,000.00 commencing from 17 December 2017 (the “New Tenancy”). The new tenant enjoyed a rent-free period from 17 December 2017 to 31 December 2017 (both days inclusive).

IV.   The issue in the present case

17.  In the present case, the issue to be determined at this hearing is what and how much damages may be recovered by the plaintiff against the defendant under the Tenancy Agreement.

V.   The plaintiff’s case

18.  In the present proceedings, the plaintiff claims for the following:

18.1.  Outstanding rents, management fee and government rates, up to the end of the term of the lease under the Tenancy Agreement;

18.2.  Costs of transferring the “restaurant license” back to the plaintiff.

VI.   Legal Principles

19.  It is well established that where a landlord accepts a tenant’s repudiation of the tenancy agreement, the landlord is entitled to recover damages reflecting the rent of the unexpired portion of the tenancy agreement, service charges, rates and reinstatement costs: see Roco Investment Ltd v Guschlbauer (Hong Kong) Ltd [2019] HKCFI 2272 at [22], Foxhill Investments Ltd v Sino Golden International Group Holdings Ltd [2021] HKCFI 3662 at [14].

20.  This is subject to a duty on the landlord to mitigate its loss by acting reasonably and take such steps as are necessary to re-let the vacant premises at market rent. The duty to mitigate is not onerous, the landlord is not required to do anything other than in the ordinary course of business. The burden is on the tenant to show that damages has not been mitigated: see Roco Investment Ltd (supra) at [23], Foxhill Investments Ltd (supra) at [14].

21.  If a defendant wishes to set up a positive case that the plaintiff has failed to mitigate his loss, he must plead the allegation with particulars specifically in its defence: see Hong Kong Civil Procedure 2023 §18/8/23.

22.  The general principle for the assessment of damages is compensatory, ie, that the innocent party is to be placed, so far as money can do, in the same position as if the contract had been performed. If the plaintiff can establish that his loss consists of or includes the costs of doing work which in breach of contract the defendant has failed to do, then he can recover as damages a sum equivalent to that cost. It is for the plaintiff to establish this: the essential question is, what is his loss. See Luckyroad Trading Ltd v Sanchez, Benjamin F Jr [2021] HKDC 91 at [19] to [21].

VII.   Evidence

23.  At trial, the plaintiff called its director, Madam Wan Kwok Ling Bonnie, as factual witness. Madam Wan adopted her witness statement filed on 4 July 2022 as examination in chief and confirmed the accuracy of the contents. Madam Wan also answered questions raised by me.

24.  I accept that Madam Wan’s oral evidence was supported by the documentary evidence and inherently plausible. Having observed her testifying in the witness box, I find her to be a credible witness. I accept her evidence in support of the plaintiff’s case.

VIII.   Analysis

25.  The plaintiff claims damages for 2 periods:

25.1.  from 1 August 2017 to 31 December 2017 (the “Pre-New Tenancy Period”), and

25.2.  from 1 January 2018 to 20 September 2019 (the “Remaining Period”).

A.   Unpaid rent, management fees and rates for the Pre-New Tenancy Period

26.  For the period from 1 August 2017 to 15 October 2017, the defendant was still in possession and occupation of the Premises, and should be liable for the rent, management fees and rates as agreed under the Tenancy Agreement.

27.  For the period from 16 October 2017 to 31 December 2017, which is after the plaintiff has accepted the defendant’s repudiation of the Tenancy Agreement by prematurely vacating the Premises, the plaintiff is prima facie entitled to the rent, management fees and rates which it would otherwise have received from the defendant, subject to the duty to mitigate.

28.  Insofar as the duty to mitigate loss is concerned, in the present case, the defendant has not filed any defence and has not adduced any evidence. It is not open for the defendant to say that the plaintiff has not mitigated its loss.

29.  In any event, the unchallenged evidence adduced by the plaintiff does show that the plaintiff has taken reasonable steps to mitigate its loss:

29.1.  I accept Madam Wan’s evidence that the plaintiff had actively engaged real estate agents to lease out the Premises in the market after it has accepted the defendant’s repudiation of the Tenancy Agreement.

29.2.  As far as the provision of a rent-free period for 1.5 months to Vast Year is concerned, Madam Wan testified that given the nature of the business of the tenants for the Premises, it was always the case that rent-free period would be granted for tenants of the Premises, although the duration of the length-free period would vary. For the particular lease with Vast Year, Madam Ng said that the agreement in respect of the rent-free period was reached after negotiation between the parties, and that if the plaintiff did not allow Vast Year to have this 1.5 months’ rent-free period, the premise might not be let out so soon. I accept Madam Wan’s evidence. In this regard, I note that the 1^st defendant had also been given a rent-free period of 1.5 month under the Tenancy Agreement. In light of the aforementioned, I find that the provision of a rent-free period for 1.5 months to Vast Year under the New Tenancy was a reasonable step to take for mitigating the loss, and that but for the defendant’s breach of the Tenancy Agreement, the loss of rent for the rent-free period under the New Tenancy would not have been incurred.

29.3.  Eventually, the plaintiff managed to enter into the New Tenancy with Vast Year at a monthly rent of $130,000, which was just slightly lower than under the original Tenancy Agreement with the defendant (being a difference of $8,000). I accept Madam Wan’s evidence that this was the best market rent obtainable by the plaintiff for the Premises at the material time, and that the plaintiff has every incentive to obtain the highest possible rent from the new tenant, Vast Year, as possible.

30.  The plaintiff is therefore entitled to recover the unpaid rent, management fees and government rates from 1 August 2017 to 31 December 2017, less the amount it had received from Vast Year during the same period, in the total sum of $721,519.

B.   Rent for the Remaining Period

31.  As for the Remaining Period, the plaintiff claims for the difference between the rent under (i) the Tenancy Agreement; and (ii) the New Tenancy, in the amount of $8,000 per month.

32.  Having considered Madam Wan’s evidence, I am satisfied that the rent at which the Premises was let to Vast Year was the highest market rent that could be reasonably obtained at that time.

33.  The plaintiff is therefore entitled to recover the loss of rent between 1 January 2018 and 22 September 2018, less the amount it had received from Vast Year during the same period, in the total sum of $165,333.

C.   Costs of restaurant license transfer

34.  In the Statement of Claim and in the opening submissions filed by the plaintiff, the plaintiff sought to recover a sum of $10,000 as “License Transferral Fee”. In her witness statement, Madam Wan explained that this was incurred due to the failure of the defendant to transfer a “restaurant license” to the plaintiff before delivery of vacant possession.

35.  However, nowhere in the Tenancy Agreement was it stipulated that there was any obligation on the defendant to transfer any “restaurant license” back to the plaintiff upon the conclusion of the Tenancy Agreement. No legal basis was provided by the plaintiff either in its written or oral submissions as to why the plaintiff was entitled to claim for this. There is also no evidence concerning how the “restaurant license” came into being in the first place or how it could be considered to be related to the reinstatement costs of the Premises: for example, there was no evidence of any transfer of license from the plaintiff to the defendant, and no evidence as to who or how the license was applied for, or its connection with the Premises.

36.  Having raised such enquiries with the plaintiff’s solicitor, Ms Chan, during trial, the plaintiff withdrew its claim for this amount of $10,000, and confirmed that it shall no longer seek to recover this sum against the defendant. I therefore make no award under this claim.

D.   Deduction of Deposit

37.  Clause 6.1 of the Tenancy Agreement provided as follows:

“The Tenant shall on the signing hereof deposit and maintain with the Landlord a deposit of the amount as set out in the Fourth Schedule hereto to secure the due observance and performance of the Tenant of the agreements, stipulations and conditions herein contained and on the Tenant’s part to be observed and performed. The said deposit shall be retained by the Landlord throughout the said term free of any interest to the Tenant and in the event of any breach or non-observance or nonperformance by the Tenant of any of the said agreement, stipulations or conditions aforesaid, the Landlord shall be entitled to terminate this Agreement and to forfeit the said deposit (for fundamental breach only) by way of liquidated damages but without prejudice to the Landlord’s rights to claim against the Tenant all loss or damages suffered by the Landlord as a result of the Tenant’s breach or non-performance as aforesaid. …”

38.  During submissions, the plaintiff’s representative submitted that it has exercised its right to forfeit the deposit paid by the defendant in light of the defendant’s breach of the Tenancy Agreement. Madam Wan gave evidence that the amount of $446,708 was received from the defendant as deposit when the Tenancy Agreement was signed, and is retained by the plaintiff.

39.  Such deposit ought to be accounted for and deducted from the amount of damages awarded to the plaintiff: see Kin Tong Land Investment Co Ltd v Capella Ltd [2019] HKDC 65 at [30] to [31], applying Polyset Ltd v Panhandat Ltd [2002] 5 HKCFAR 234. Ms Chan for the plaintiff confirmed at trial that it is the plaintiff’s position that such deposit ought to be deducted from any award of damages made in favour of the plaintiff, and I shall take this into account accordingly.

E.   Summary

40.  Accordingly, I assess the total amount of the plaintiff’s damages in the total sum of $440,114 (ie $721,519 plus $165,333 minus $446,708).

IX.   Interests

41.  The plaintiff submitted that the plaintiff should be entitled to the pre-judgment interests calculated from the date of the writ (ie 6 November 2020). No interest rate was stipulated in its written submissions, but at trial Ms Chan suggested that pre-judgment interest be awarded at 2% above the prime rate, although no basis for adopting such rate was provided.

42.  In considering the award of pre-judgment interest, I bear in mind the basic principle that interests are awarded to the plaintiff to compensate for being kept out of the money which ought to have been paid by the defendant: see Hong Kong Civil Procedure 2023 §6/L/10. In light of this, bearing in mind that the standard commercial rate is 1% above the prime rate (see Hong Kong Civil Procedure 2023 §6/L/11), I would award pre-judgment interests from 6 November 2020 at 1% above the prime rate until the date of this assessment, bearing in mind the discussion in Hong Kong Civil Procedure 2023 §6/L/21 regarding the determination of the date to which pre-judgment interest is awarded.

43.  The plaintiff shall also be entitled to interests thereafter at the judgment rate until full payment.

X.   Costs

44.  Costs should follow the event. The plaintiff has submitted a Statement of Costs dated 17 May 2023 for the purposes of summary assessment of the costs of the Action.

45.  I find that the items set out in the plaintiff’s Statement of Costs are generally reasonable. Adopting a broad brush approach, I will summarily assess the costs of the Action to be $85,000.

XI.   Disposition and Orders

46.  I make the following orders:

46.1.  The defendant do pay to the plaintiff damages in the sum of HK$440,114 together with interests accrued thereon at 1% above the prime rate of HSBC from 6 November 2020 to the date of this Decision, and thereafter at judgment rate until full payment.

46.2.  Costs of this Action, including costs of this assessment of damages, be summarily assessed at HK$85,000 and be paid by the defendant to the plaintiff forthwith.

46.3.  The plaintiff do effect service of this Assessment of Damages by inserting an advertisement in a Chinese newspaper published and widely circulating in Hong Kong within 28 days hereof, and the service effected in such a manner shall be deemed to be good and sufficient service, and the plaintiff do file an affirmation of service within 28 days of such publication.