SURPLUS KING CENTRE LTD v. GS LTD

LDPE 80/2018

[2018] HKLdT 71

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 80 OF 2018

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J U D G M E N T

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1.  This is the applicant’s application for arrears of rent, management charges, additional air-conditioning services charges, government rates, electricity charges and interest amounting to a total of $4,936,856.56 (as at 15 June 2018).

A. BACKGROUND

2.  The applicant is the landlord of the premises situated at Shop G05A on G/F and Portion of UG/F, Nathan Square, No. 348 Nathan Road, Kowloon, Hong Kong (“the Premises”). 

3.  On 20 April 2015, the respondent and the applicant signed a tenancy agreement (“the Tenancy Agreement”) whereby the Premises would be let to the respondent for a fixed term of 3 years commencing from 16 June 2015 at a rental sum of $378,000 per month with 2 further options to renew; the first renewal of a further 3 years and the second renewal at a further renewal of 2 years. The total period of renewal could be up to 5 years.

4.  The respondent commenced business in early August 2015. Soon after the respondent commenced its business in the Premises, the respondent started to make complaints to the applicant about the provision of insufficient air-conditioning, more particularly, the provision of insufficiently chilled water for the air-conditioning system.

5.  Since 2017, the respondent has failed to pay the arrears of rent, management charges, additional air-conditioning services charges, rates, electricity charges and interest various sums due under the Tenancy Agreement.

6.  The respondent does not dispute it has failed to pay the said sums claimed but denies it is liable to pay the aforesaid sums by reason of the applicant’s breach of various implied terms and misrepresentation. The respondent alleges:

1) There is an implied term in the Tenancy Agreement that the air-conditioning of the Premises would be in proper and working order;

2) There is an implied term and/or warranty in the Tenancy Agreement that the Premises is fit for use as a Chinese restaurant; and

3) The applicant via Mr Kyle Leung made misrepresentations that the Premises is fit to be used as a Chinese restaurant.

7.  On 22 January 2018, the respondent issued a writ in the High Court (HCA 191/2018) (“the CFI proceedings”) against the applicant for, inter alia, unliquidated damages, return of rent and other consequential loss.

8.  On 23 January 2018, the applicant filed its Notice of Application in the Lands Tribunal for vacant possession, arrears of rent and other charges.

9.  On 4 May 2018, Deputy District Judge Eric Tam ordered the respondent to pay “the amount of rent from 1^st November 2017 to 15^th June 2018 in the sum of HK$2,835,000 into Court as security for the rent on or before 1^st June 2018, such sum shall be kept in the Lands Tribunal until further order.” The respondent failed and continues to fail to comply with the said order.

10.  On 13 July 2018, the respondent took out an interlocutory application to transfer the case to the Court of First Instance. The application was fixed to be heard on the day of the trial.

11.  The trial and the application for transfer were heard and concluded on 30 July 2018. I refused the application for transfer with reasons and costs reserved. Judgment was reserved after the conclusion of the trial hearing.

12.  On 1 August 2018 (the second day after the conclusion of the trial hearing), the applicant’s solicitors sent a letter stating, inter alia, the following:

“Meanwhile as the landlord in a recovery of possession case, the applicant continues to incur substantial loss and damage as time goes by.

As such, in the event that it is minded to rule in favour of the applicant, we respectfully invite this Honorable Court, if it thinks appropriate, to separately grant an order for possession in favour of the applicant at an early time, and subsequently grant the other relief as sought by the applicant. In this way, the applicant’s loss and damage can be, to a large extent, minimized.”

13.  A hearing was fixed for 10 August 2018 for the applicant to clarify the meaning and purpose of the letter dated 1 August 2018 and for the respondent to respond to the said letter. I expressed my dissatisfaction and the inappropriateness of the letter, of which I shall not repeat here. I ordered the applicant to pay the costs of that hearing and that the judgment continued to be reserved.

14.  The respondent continues to be in occupation of the Premises and clearly indicated, during the trial hearing, that it has no intention of vacating the Premises before the conclusion of the CFI proceedings.

B. Issues

15.  The issues raised in this case are as follows:

1) Whether the case should be transferred to the Court of First Instance;

2) Whether the respondent has a valid defence under law against the applicant’s application for arrears of rent and other outgoings; and

3) Whether the applicant has proved its claim on liability and quantum, in particular on the management charges and additional air-conditioning services charges.

C. Whether the case should be transferred to the Court of First Instance to be heard together with HCA 191/2018

16.  The application for transfer was heard on the first day of trial. After hearing the submissions of the parties, I dismissed the application with reasons reserved. I now set out the reasons for my decision below.

17.  Pursuant to s.8A(1) Lands Tribunal Ordinance (Cap 17), the Tribunal may transfer the case on either of 2 grounds:

1) The proceedings are not within the jurisdiction of the Tribunal; or

2) The proceedings should be transferred in the interests of justice.

18.  The respondent submitted the case should be transferred for the following reasons:

1) The transfer of the case to the Court of First Instance would save the parties’ costs and time; and

2) The Tribunal has no jurisdiction to deal with the matters raised in the CFI proceedings which would amount to a defence of equitable set-off to the applicant’s claims. 

19.  It is trite law that the obligation to pay rent is independent of other covenants in a tenancy agreement. If a tenancy agreement does not expressly stipulate the tenant has a right to set-off the rent against any damages suffered, then the obligation to pay rent is independent from other contractual obligations the landlord may have: see Charmway Development Ltd v Long China Engineering Ltd [2001] 3 HKC 515.

20.  As for an equitable set-off, the principles are summarized succinctly in the case of Charmway at page 520C, where it states as follows:

“Generally speaking, where the claim and counterclaim are sufficiently closely connected so that it would be manifestly unjust to enforce one without regard to the other, a right to an equitable set-off may arise: Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938, at 950D and Dole Dried Fruit & Nut Co v Trustin Kerwood Ltd [1990] 2 Lloyd’s Rep 309, 311.”

21.  In Chan Yin Kwan陳燕群 v Wong Kam Hoi 黃金海[2008] 1HKCLRT 38, the Court of Appeal opined it was incorrect to order the claim for arrears of rent started in the Lands Tribunal be transferred to the District Court. The Hon Chu J (as she then was) clearly stated that as a matter of general legal principle, a tenant is obliged to pay rent or mesne profits once they have leased or occupied the property. Although the Court of Appeal recognized there may be compensation to be paid by the landlord if a counterclaim relating to damages caused by water seepage succeeded, this is not a defence to a claim for arrears of rent. The tenant is still obliged to pay for arrears of rent and mesne profits in such circumstances.

22.  In the present case, there is nothing in the Tenancy Agreement that permits a legal set-off of rent or other charges by reason of air-conditioning problems and the obligation to pay rent and other charges have not been made conditional on the performance or observance of any covenants.

23.  As to whether the purported inadequacy of the chilled water could amount to a defence of equitable set-off against the claim for arrears of rent or additional air-conditioning service charges, I am of the view it cannot for the reasons set out below: 

1) The additional air-conditioning service charges are to cover the provision of air-conditioning services outside the designated hours from 6:00 a.m. to 6:00 p.m. (see the Tenancy Agreement, First Schedule, Part V). There is no dispute the applicant did provide chilled water upon the request of the respondent. The complaint of the respondent was that the chilled water was not cold enough to provide sufficient air-conditioning to the Premises. However, there is nothing in the Tenancy Agreement which makes the payment of the additional air-conditioning service charges conditional upon the provision of chilled water at 7.2 degrees Celsius, or at any temperature for that matter.   

2) There is nothing in the evidence before me to prove the applicant is obligated under the Tenancy Agreement to provide chilled water at 7.2 degrees Celsius, or at any specific temperature.

24.  There being no sufficient connection between the respondent’s allegations and the applicant’s claim, I find the matters raised in the CFI proceedings do not amount to an equitable set-off to the applicant’s claim.

25.  Furthermore, I do not see there to be any other reason why, in the interests of justice, the applicant’s claim should be transferred to the Court of First Instance.

26.  Hence I refused the application for transfer of the present case to the Court of First Instance.

D. WHETHER THE RESPONDENT HAS RAISED A VALID DEFENCE UNDER LAW

27.  In addition to the matters relating to the purported implied terms of the tenancy and the purported misrepresentations made by the applicant, the respondent raised the following further matters during his closing submissions:

1) Mr Tsoi of the respondent claims he did not understand fully the terms of the Tenancy Agreement when questioned about the effect of the “User Disclaimer Clause”;

2) The respondent never agreed to an increase in additional air-conditioning service charges;

3) The “enjoyment” of the Premises was disrupted by the applicant by reason of the failure to provide sufficient air-conditioning to the Premises; and

4) The respondent believes that but for the applicant’s failure to provide adequately chilled cold water, the tenancy would not expire until 2023.

28.  I shall deal with the matters raised by the respondent in turn. 

(I) Misrepresentations / Warranties / Implied Terms

29.  For reasons of which I have already set out hereinabove at paragraphs 19 – 23 and applying the principles enunciated in Charmway and Chan Yin Kwan陳燕群, I do not find the respondent’s allegations of misrepresentations, warranties, and/or implied terms regarding chilled water to amount to a valid defence to the applicant’s claim for arrears of rent and other charges. At most, such allegations would amount to a counterclaim against the applicant, of which the Lands Tribunal does not have jurisdiction to adjudicate on.

(II) Mr Tsoi’s purported failure to appreciate the terms of the Tenancy Agreement, in particular the “User Disclaimer Clause”

30.  I understand Mr Tsoi’s assertion in this regard to be equivalent to pleading non est factum. I will say at the outset that I find the respondent’s assertion to be disingenuous and unbelievable for the following reasons:

1) Firstly, Mr Tsoi does not deny he did read the Tenancy Agreement and was aware of the User Disclaimer Clause in the Tenancy Agreement. This is echoed in paragraphs 11 to 13 of his witness statement. However, nowhere in his witness statement or his opening submissions did Mr Tsoi mention he failed to understand the User Disclaimer Clause (Clause 18, Section XI of the Tenancy Agreement) or any other terms in the Tenancy Agreement. It was only until he was cross-examined did Mr Tsoi suddenly make a vague allegation that he did not entirely understand the terms of the Tenancy Agreement.   

2) Secondly, the documents show that Mr Tsoi had sent 2 drafts of the offer letter to the applicant and the applicant sent 3 further drafts before the parties eventually signed the final version of the offer letter dated 2 April 2015 (“the Offer Letter”). In total there were 5 drafts of the Offer Letter circulated between the parties. Clearly there were extensive discussions between the parties on the exact terms to be agreed upon. There was never any suggestion in any of the correspondences between the parties that Mr Tsoi or anyone from the respondent did not understand the terms contained in the draft offer letters, the Offer Letter signed, or the Tenancy Agreement.

3) Thirdly, there are no particulars given by Mr Tsoi on how and why he came to sign the Tenancy Agreement without properly understanding the terms, despite 5 revised draft offer letters having been circulated between the parties prior to the signing of the Offer Letter. 

31.  I do not accept Mr Tsoi had failed to appreciate or understand the terms of the Tenancy Agreement, in particular, the User Disclaimer Clause. 

32.  Furthermore, the general rule is that a literate adult is bound by a document he signs whether he chooses to read and/or understands the document or not: See paragraph 3-049 of Chitty on Contracts: General Principles (32^nd Ed.). In absence of any credible reason explaining why or how Mr Tsoi came to sign the Tenancy Agreement without understanding the contents therein, I do not accept the respondent has raised any credible defence, much less a valid one, based on the said assertions.

(III) Interference with “enjoyment” of the Premises

33.  Mr Tsoi alleges the respondent’s “enjoyment” of the Premises was disturbed because there were many complaints from customers about the air-conditioning. Mr Tsoi said he felt that it was the applicant’s responsibility to ensure the respondent’s business could run peacefully and smoothly in serving their customers. Hence by failing to provide sufficiently cool chilled water thereby causing the respondent’s business to be disrupted, the applicant has disturbed the respondent’s “enjoyment” of the Premises. I understood Mr Tsoi to be referring to the respondent’s right to quiet enjoyment of the Premises.

34.  In short, I find no substance in Mr Tsoi’s assertion. The covenant of quiet enjoyment is made an express term in the Tenancy Agreement at Clause 1 of Section IV which guarantees the respondent “shall peacefully hold and enjoy the Premises during the Term without any interruption by the Landlord or any person lawfully claiming under or in trust for the Landlord.”

35.  The covenant merely obliges the landlord to allow the tenant to use the premises without interfering with the tenant’s exclusive possession of the premises during the time of the tenancy. The covenant for quiet enjoyment of any premises cannot be taken to mean a landlord guarantees a smooth and peaceful operation of a business. 

36.  Furthermore, the covenant to pay rent is independent of other covenants, including the covenant to provide quiet enjoyment: see Chong Lap Fu George v Hydra Shipping Services Ltd and ors [2009] 4 HKC 445 at paragraph 26(2) of the judgement. 

37.  I therefore do not accept the respondent has raised a valid defence based on the aforesaid assertions relating to “enjoyment” of the Premises.

(IV) Expiration of the Tenancy

38.  Mr Tsoi claims it is the respondent’s view that the tenancy is for 8 years and shall not expire until 2023. He argues that had the applicant provided sufficient air-conditioning, the respondent would have served a notice of renewal. Hence the respondent is of the view that the tenancy should not expire until 2023. 

39.  I fail to see the logic in the respondent’s argument.  The procedure for renewing the tenancy is set out in detail in the Second Schedule of the Tenancy Agreement. In addition to requiring the respondent to serve a notice of renewal 6 months before the first expiry date set in the Tenancy Agreement, the Second Schedule clearly states that once a renewal of the tenancy has been agreed, the parties would enter into a new tenancy agreement: see Clause 3(e), Second Schedule of the Tenancy Agreement.

40.  Mr Tsoi admitted he knew that in order to renew the Tenancy Agreement, the respondent was required to serve a notice of renewal 6 months prior to the expiry date set out in the Tenancy Agreement. He also admitted the respondent did not serve a notice of renewal on the applicant and no new tenancy agreement was ever signed by the parties. Furthermore, he did not dispute the respondent had received letters from the applicant clearly setting out the expiry date of the Tenancy Agreement to be on 15 June 2018.

41.  In absence of any notice of renewal being served on the applicant and a new tenancy agreement being signed, I fail to comprehend how the respondent could genuinely believe the Tenancy Agreement does not expire until 2023. I therefore reject the respondent’s assertion and I find there to be no valid defence raised by the respondent in this regard. 

E. The Applicant’s claims on additional air-conditioning service charges and management charges

42.  Section II of the Tenancy Agreement stipulates the respondent shall be responsible for paying rent, electricity charges and government rates. The applicant has provided the supporting documents relating to the quantum of electricity charges and government rates. The respondent has not raised any dispute on the quantum of the said sums and does not dispute the sums have not been paid. I therefore find the applicant’s claim on the three said charges (arrears of rent, electricity charges and government rates) to be made out. 

43.  In respect of management charges and additional air-conditioning service charges, Part V of the First Schedule of the Tenancy Agreement sets out the management charges to be charged at HK$97,171.50 per calendar month and the additional air-conditioning charges at $250 per hour. 

44.  However, the applicant currently seeks the following:

1) Additional air-conditioning service charges at $262.5 from 1 April 2017 until delivery of vacant possession, and

2) Management charges at HK$102,007 (from 1 May 2017 to 30 June 2017) and subsequently at $106,034 (from 1 July 2017 until delivery of vacant possession) per month.

45.  Clause 2 of Section II of the Tenancy Agreement states:

“. . .the Landlord shall be entitled to serve a notice in writing upon the Tenant increasing the Management Charges at that time payable by an appropriate amount and thereafter such increased Management Charges shall be payable in lieu of the Management Charges provided for herein and in Part V of the First Schedule hereto. Further increases in the Management Charges may be made in the event of such operating costs rising after an earlier notice of increase under the above proviso shall have become operative.” (own emphasis added)

46.  “Management Charges” as stipulated in the heading of the same clause refers to both air-conditioning and management charges.

47.  Clause 4 of Section XI states:

“Any notice required to be served hereunder shall if to be served on the Tenant be sufficiently served if addressed to the Tenant and sent by pre-paid post to or delivered at the Premises or the Tenant’s last known place of business or residence in Hong Kong . . .”

48.  From a reading of the Tenancy Agreement, it is clear the Tenancy Agreement requires the applicant to serve a notice of increase before the additional air-conditioning service charges and the management charges (collectively referred to as “the said charges”) would be increased.

49.  I note that during cross-examination Mr Wong generally put to Mr Tsoi that he actually did not dispute the quantum of the applicant’s claim and Mr Tsoi agreed he did not. However, Mr Wong did not specifically ask Mr Tsoi about the quantum and the increase in the said charges.   

50.  During closing submissions, Mr Tsoi insisted the respondent had never agreed to the increase in the said charges. I asked Mr Wong for the applicant whether there was any agreement on the increase of the said charges between the parties and whether the notice of increase required by the Tenancy Agreement was evidenced in the trial bundles. Mr Wong acknowledged they have not filed the necessary evidence relating to the relevant notices and further submitted they were of the view there was no need to seek the respondent’s consent before such charges were increased.

51.  In absence of any evidence of any notice of increase to support the increased rates of the said charges as claimed by the applicant, I find the applicant’s claim on the increased rates for the said charges to be unsupported by the evidence before me. Furthermore, given there is a specific requirement for a notice of increase in the Tenancy Agreement before the applicant is entitled to charge the increased rates as claimed, I am not prepared to accept the applicant’s case on the said charges is “saved” by the general admission on quantum made by Mr Tsoi under cross-examination. 

52.  Hence I am only prepared to allow the applicant’s claim on the additional air-conditioning service charges and management charges on the rates as set out in the Tenancy Agreement.

F. Summary

53.  By reason of the matters set out above, I allow the applicant’s application and make the following orders:

1) The respondent shall deliver vacant possession of the Premises to the applicant;

2) The respondent do pay the applicant the arrears of rent and mesne profits as follows:

a) Arrears of rent from 1 November 2017 to 31 January 2018 in the sum of $1,134,000;

b) 4 months’ rent for the period from 16 June 2015 to 15 August 2015 and from 16 June 2016 to 15 August 2016 in the sum of $1,512,000 pursuant to Part IV, First Schedule of the Tenancy Agreement; and

c) Mesne profits in the sum of $378,000 per month calculated from 1 February 2018 until the time of delivery of vacant possession of the Premises.

3) The respondent do pay the applicant the following sums due under the Tenancy Agreement:

a) Arrears of government rates for the period 1 April 2017 to 31 March 2018 in the sum of $124,119.85;

b) Government rates at the rate of $35,535.86 per quarter from 1 April 2018 until the time of delivery of vacant possession of the Premises;

c) Arrears of electricity charges from 1 April 2017 to 31 December 2017 in the sum of $3,649.58;

d) Electricity charges calculated on a reimbursement basis from 1 January 2018 until the time of delivery of vacant possession of the Premises;

e) Arrears of management charges from 1 May 2017 until the time of delivery of vacant possession of the Premises at $97,171.50 per month; and

f) Arrears of additional air-conditioning service charges from 1 April 2017 until the time of delivery of vacant possession of the Premises calculated at $250 per hour.

4) The respondent do pay to the applicant interest on the sums set out at paragraphs 53(2) and (3) hereinabove at 3% per annum over the prime rate from time to time specified by HSBC (pursuant to Clause 5, Section II of the Tenancy Agreement), calculated from the date of arrears up to the date of this order, and thereafter at judgment rate; and

5) Pursuant to s.21F of the High Court Ordinance (Cap 4), if the respondent should pay into the Tribunal all the arrears of rent and mesne profits as stated in paragraph 53(2) above (including all arrears of rent and mesne profits due on or before the date of payment) within 7 days of this order, the respondent be relieved from the forfeiture incurred herein, and the lease of the Premises be reinstated.

G. Costs

54.  I see no reason why the costs of the application dated 13 July 2018 and the costs of this action should not follow the event. I make a costs order nisi that the respondent shall pay the applicant’s costs of this action and the costs of the application dated 13 July 2018 to be summarily assessed on the District Court scale. Unless any party applies to vary the costs order within 14 days hereof, the costs order shall become an order absolute.

55.  I give the following directions for the summary assessment on costs:

1) Upon the order nisi becoming absolute, and in the event the amount of costs cannot be agreed between the parties, the applicant shall prepare a statement of costs in the format of Appendix A of Practice Direction 14.3, to be lodged and served on the respondent together with the skeleton arguments;

2) The respondent shall within 14 days thereafter lodge and serve its statement on the grounds of opposition to the applicant’s statement of costs;

3) The applicant shall file and serve its submissions in reply within 14 days thereafter, if any; and

4) Unless otherwise directed by the Tribunal, the applicant’s costs shall be assessed by way of paper disposal without an oral hearing.