PAKON INDUSTRIAL LTD v. DONNY INTERNATIONAL LTD

HCA 491/2017

[2019] HKCFI 654

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 491 OF 2017

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J U D G M E N T

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Undisputed Background

1.  By a written tenancy agreement dated 27 February 2006 (“Tenancy Agreement”) (“T/A”) (B/263-273) entered into between the plaintiff (“P”) as the landlord and the Defendant (“D”) as the tenant, the P let to the D the shop premises known as Ground Floor, 1^st Floor, 2^nd Floor and Roof of No. 6 San Fat Street, Shek Wu Hui, New Territories, Hong Kong and all the Ground Floors of Block C & D, No. 10 San Fat Street and No. 60 Fu Hing Street North, New Territories (“the Premises”) for a fixed term tenancy of 11 years commencing from 1 March 2006 to 28 February 2017 (both days inclusive). 

2.  The D covenanted to quietly yield up and deliver vacant possession of the Premises at the expiration or sooner determination of the said term in clean and tenantable repair and condition (Clause 2(u) of the T/A) (B/267). 

3.  By a letter dated 17 August 2016 from the P’s solicitors, the P gave notice to the D that the T/A was due to expire on 28 February 2017 (“the Termination Date”) and requested the D to deliver up vacant possession of the Premises in accordance with the provisions of the T/A on the Termination Date.  It was also stated in the said letter that no request for renewal or extension of the T/A will be considered or accepted by the P. 

4.  By a new tenancy agreement dated 9 February 2017 (“New T/A”) (“B/147-233) entered into between the P and the occupier of the Premises who is the sub-tenant of the D, the Premises was let for a term of 5 years from 1 March 2017 at the monthly rent of HK$780,000 for the 1^st 36 months and at the monthly rent of HK$897,000 from the 37^th month onwards. 

5.  In breach of Clause 2(u) of the T/A, the D failed to deliver up vacant possession of the Premises to the P on the Termination Date. 

6.  By reason of the D’s refusal to give up vacant possession of the Premises, the P instituted these proceedings by Writ of Summons dated 1 March 2017 (B/1-6) for: -

a.  Vacant possession of the Premises;

b.  Mesne profits of the Premises at the monthly rate of HK$780,000 from 1^st March 2017 until delivery of vacant possession of the Premises; 

c.  Damages for trespass and nuisance to be assessed; 

d.  Interest; and 

e.  Costs of the action. 

7.  By the order dated 4 May 2017, it is ordered that the D do make provisional interim payment to the plaintiff by way of a cheque in the sum of HK$991,875.00 as provisional mesne profits for the period from 1 March 2017 to 31 May 2017 (“Provisional Interim Payment”) within 14 days from the date of the order.  Further Provisional Interim Payment shall be paid by the D to the P on a monthly basis on or before the 1^st day of each calendar month starting from 1 June 2017 until determination of the summons taken out by the P for interim payment (B/39).  A total of HK$4,331,187.50 had been paid by the D to P by way of Provisional Interim Payment. 

8.  On 1 June 2017, the P issued the summons for final judgment against the D (B/42-43) and on 2 February 2018, judgment was entered against the D (“the Judgment”) (B/59) and it is adjudged that: - 

a.  The D do deliver vacant possession of the Premises to the P within 14 days from the day of the Judgment; 

b.  The D do pay the P mesne profits and/or damages to be assessed; and 

c.  The D do pay costs of the proceedings up to the day of the Judgment and the costs for the application for summary judgment. 

9.  Vacant possession of the Premises was being handed over to the P on 3 April 2018 by the delivery of the key to the Premises from the D’s then solicitors to the P’s solicitors. 

10.  This is the hearing for assessment of damages. 

11.  The D is unrepresented and absent at this hearing.  However, the D was all along represented by solicitors until 25 October 2018.  According to the court record, both parties were present before the Listing Officer on 21 May 2018 when the assessment of damages hearing was being fixed to be heard on 21 January 2019.  Given the fact that representative of the then solicitors acting for the D was present, the D should have been informed of the hearing date fixed for today. Furthermore, I am also satisfied that the hearing bundle and written submissions for this hearing had been duly served on the D.  Hence, I am satisfied that the D should have sufficient notice of this assessment hearing and it is appropriate to proceed with the hearing notwithstanding the D’s absence. 

Mesne Profits

12.  The P is claiming mesne profits of the Premises from 1 March 2017 to 3 April 2018.  The issue turns on the quantum of the mesne profits.  The P relied on the evidence of Mr Paul Varty (“Mr Varty”), Chartered Surveyor who had prepared an expert report on the monthly market rent of the Premises (B/550-740) and assessed the rental of the Premises as at 1 March 2017 to be HK$935,000 which was higher than the rate of the New T/A since Mr Varty opined that there should be a discount of 10-15% of the market rent in the New T/A given the special feature of the tenant, namely: 

a.  The tenant was the sub-tenant of the D and the New T/A commenced immediately following the expiry date of the T/A so the P suffer no void period with loss of income; 

b.  The P would not have to pay an agency fee since no estate agent was involved; 

c.  The tenant agreed to take over the Premises on an as-is basis and there would have been no renovation works undertaken by the P; and 

d.  Since the tenant was someone known to the P, there was limited risk as compared to an agreement with a new third party tenant. 

13.  The P invited this court to adopt this figure in the assessment of mesne profits for the relevant period. Alternatively, the P asked this court to adopt the average monthly rent for the whole term of the New T/A at HK$827,628 as the quantum of mesne profits. 

14.  It is beyond argument that the P is entitled to claim for mesne profits, ie damages for wrongful occupancy of the Premises by the D, from the expiry of the T/A till possession is surrendered.  Mesne profits are assessed by reference to the value of the land for that is the value which the landlord loses during the period of illegal occupation.  Mesne profits are therefore usually the equivalent of the market rent of the premises.  

15.  Mr Varty’s expert opinion was not challenged since the D did not appear nor did the D adduce any expert evidence for the purpose of this assessment hearing.  I accept Mr Varty’s evidence in full and accept that the prevailing market rent in March 2017 should be $935,000.  However, mesne profits are to compensate the landlord for losses suffered during the period of illegal occupation.  In view of the fact that the P had entered into the New T/A under which the monthly rental to be received by P was being specified, the monthly rental stipulated in the New T/A should be the losses P would suffer as a result of D’s breach in failing to hand over the Premises to the P upon expiry of the T/A.  I fail to see why the P should be entitled to receive more as mesne profits as a result of the breach on the part of D.  The fact that the P had entered into the New T/A with special consideration and resulted in a discount of the monthly rent is neither here nor there. 

16.  I found the mesne profits should be fixed at HK$780,000 for the period from 1 March 2017 to 28 February 2018 and at HK$897,000 from 1 March 2018 to 3 April 2018. 

Set Off

17.  The P agreed to have the Provisional Interim Payment in the total of HK$4,331,187.50 paid by the D to be set off against the mesne profits.  And the P also agreed that a security deposit of HK$750,000 is still kept by it.  However, the P reiterated that since intentional damage to the Premises was discovered upon delivery up of vacant possession, the P had exercised its right under Clause 4 of the T/A, ie “if there shall be any breach…on the part of the Tenant…the Landlord shall be entitled to apply the said deposit or any part thereof towards…remedying such breach in so far as this may be possible” (B/268-269), and used the security deposit to pay off the repair costs for the D’s breach of Clause 2(k) and 2(u) of the T/A by injuring the beams or structural members of the Premises as well as failed to yield up the Premises in good and tenantable condition (B/266-267).  The P had produced the quotations for the repair work done (B/525) and the director of the P, Ms Lau, confirmed at trial that the P did spent HK$519,000 in the repair of the Premises in order to reinstate it to its original condition.  Having deducted the repair cost of HK$519,000 from the security deposit, there is a balance of $231,000 to be set off against the mesne profits. 

18.  The P’s right to retain the rental deposit as security for the damage that it may suffer because of the D’s breach of the lease is an accrued right under the lease, which will survive after the termination of the lease.  Clause 4 of the T/A did allow the deduction of security deposit for the remedy of any breach committed by the D. I accept that the P is entitled to deduct the repair costs from the security deposit and the balance of $231,000 to be set off against the award of mesne profits. 

Conclusion

19.  Therefore, the total amount of loss and damages awarded to the P should be HK$5,783,283.73 [($780,000 x 12 months) + ($897,000 x 1 month and 3 days) - $4,331,187.50 - $231,000].  I so ordered. 

Interest

20.  The P asks for interest on the damages awarded. 

21.  I find prime rate plus 1% has been well-established by authorities to be the applicable pre-judgment rate from the date when the loss has accrued to the date of judgment (Tadjudin Sunny v Bank of America, CACV 12/2015, unreported, 20 May 2016 at §179).  I order that there be pre-judgment interest rate at prime rate plus 1% on the sum awarded (ie HK$5,783,283.73) from the date of the Writ to the date of Judgment and thereafter at judgment rate till payment. 

Costs

22.  Costs should follow the event.  The P asked for costs to be taxed on indemnity basis since the D failed to beat the settlement offers made by the P by way of letter dated 8 February 2018 and 11 April 2018.  I agree that the P should be entitled to have its costs taxed on indemnity basis.  Costs of this action be to the P, with certificate for counsel to be taxed on indemnity basis. 

23.  A Statement of Costs for summary assessment is submitted at the end of this hearing.  In the Statement of Costs, the P claims the sum of HK$285,153 as costs in this action against the D.  The only item that raised my eyebrow is the involvement of more than 1 fee-earner and the total man hours spent for solicitors.  I find both to be excessive and not justified and I’ll only allow a total of 30 man hours of work for solicitors at $5,400/hour. 

24.  I therefore summarily assessed the amount of costs payable by the D to the P in the sum of HK$210,433.  This is a costs order nisi.  Unless any of the parties applies by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days from today.