Jumbo Enterprises Co. Ltd. v. Cheung Kan

FOR REFERENCE

DCCJ8465/2001

Headnote

Tenancy - Prohibition Order - Rent Arrears - Surrender - Forfeiture - Damages for Consequential Loss.

The Plaintiff let a shop to the Defendant for two years commencing 19 September 2000. The Defendant stopped paying rent from 19 April 2001 and surrendered the keys to and possession of the shop to the Plaintiff on 19 June 2001. The Plaintiff subsequently issued writ for possession, rent arrears, mesne profits and damages for consequential loss being rent payable for the remainder of the term of tenancy. The Defendant did not file or serve defence within time. The Plaintiff obtained a pre-judgment prohibition order against the Defendant. The Defendant applied for the prohibition order to be discharged and for leave to file defence out of time. The draft defence and submission contend that there is good and complete defence to the claim by the Plaintiff in that as a matter of law a landlord is not entitled to damages for consequential loss following forfeiture of tenancy.

Held:- Notwithstanding authorities and dicta supporting the Defendant's contention, applying the rationale in National Carriers Ltd. v. Panalpina, a landlord is entitled to damages for consequential losses just as an innocent party to an ordinary contract is entitled to damages for loss of bargain after terminating the contract for breach by the defaulting party.

FOR REFERENCE

DCCJ8465/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 8465 OF 2001

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Judgment

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1. This is an application by the Defendant to discharge a prohibition order made by Master Au-yeung on 22 June 2001 and for leave to file defence out of time.

2. According to the Statement of Claim, the parties entered into a tenancy agreement on 18 September 2000 for the Defendant to rent from the Plaintiff a shop ("the Property") in Tsimshatsui. The term of the tenancy was for two years commencing 19 September 2000. The rent was $147,000 per month and a rental deposit of $294,000 is held by the Plaintiff as landlord. All these facts are not disputed. In an affirmation by the Defendant filed on 10 July 2001, the Defendant admitted that he stopped paying rent as from 19 April 2001. It is common ground that the Defendant vacated the Property on 19 June 2001.

3. The Plaintiff in the action claims rent arrears, mesne profits, damages and possession. The accumulated rent arrears and mesne profits or damages conceivably exceed the jurisdiction of the District Court but the Plaintiff presently limits its claim to the ceiling of the District Court jurisdiction. On 22 June 2001, the Plaintiff obtained a prohibition order (before judgment) preventing the Plaintiff from leaving Hong Kong.

4. The Defendant now seeks to have the prohibition order lifted and leave to file defence out of time. He relies on "substantial defence" to the action as basis for lifting the prohibition order and leave to file defence. In essence, the Defendant asserts that he has a complete defence. So far as the rent arrears are concerned, the Defendant says that they are covered by the rental deposit already held by the Plaintiff. So far as mesne profits or damages after pre-mature termination of the tenancy based on loss of bargain are concerned, the Defendant contends that since the Plaintiff (landlord) claims to have forfeited and indeed forfeited the tenancy, as a matter of law, the Plaintiff is only entitled to recover rent arrears but not damages for consequential losses.

5. Miss Wong, counsel for the Defendant, prayed in aid a long line of authorities clearly in her client's favour. But I think one should go straight to Barnes J. in Hop Woo Cheung Enterprises Ltd. v. Intergroup Industries Ltd. [1982] HKC 436 where the learned judge summed up the jurisprudence:-

A lease does, however, come to an end where a tenant repudiates by failing to pay the rent and quitting the premises, and the landlord accepts that repudiation by reletting to another tenant without notifying the defaulting tenant that the reletting is on the default terms account. (Hill and Redman's Law of Landlord and Tenant (17th Ed) pp 433-434). Although the lease is said, in those circumstances, to be terminated by an implied surrender or a surrender by operation of lab, the conduct which produces that legal result is indistinguishable from acceptance of wrongful repudiation. Thus, in saying what he did , Lord Denning must have had in mind that the legal result of such conduct in relation to leases is not to be found by applying the principles applicable to acceptance of repudiation in 'ordinary contracts'. That was also the view once held in Canada. In 1962, the Ontario Court of Appeal in Goldhar v. Universal Sections and Mouldings Ltd. 36 DLR (2d) held that:

Where a tenant wrongly repudiates a lease for a term of years and vacates possession, it is the law of property that governs the landlord's remedial rights and not the law of contract.

That decision was, however, overruled in 1971 by the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. 17 DLR (3d). In delivering the judgment of the five member court, Laskin J, in addition to saying specifically that Goldhar was overruled, said at p. 721:

Although it is correct to say that repudiation by the tenant gives the landlord at that time a choice between holding the tenant to the lease or terminating it, yet at the same time, a right of action for damages than arises; and the election to insist on the lease or to refuse further performance (and thus bring it to an end) goes simply to the measure and range of damages. I see no logic in a conclusion that by electing to terminate, the landlord has limited the damages that he may then claim to the same scale that would result if he had elected to keep the lease alive.

What is apparently the majority American view is to the same effect as the view taken in Australia and that I should take: see 4 Corbin on Contracts (1951) p. 955 & 986. The American Law of Property (1952) Vol. 1 pp 203-204, states that 'if the lessee abandons the premises and refuses to pay rent, the cases quite generally hold, in accordance with the doctrine of anticipatory breach, that the lessor may sue for complete damages without waiting until the end of the term'; and I may add that, under the case law, this is so, at least, where the suit is for damages and not for rent as such.

There are some general considerations that support the view I should take. It is no longer sensible to pretend that a commercial lease, such as the one before this court is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants merely because the covenants may he associated with an estate in land.

That judgment and, in particular, the last two sentences from the above passage were the subject of comment in the House of Lords in National Carriers Ltd. v. Panalpina Ltd. [1981] 1 All ER 161. Lord Wilberforce in his speech quoted the two sentences as an extract from 'an instructive judgment' (p. 172). Lord Simon of Glaisdale said that the judgment itself was 'important and relevant for its general reasoning' in 'holding that the contractual doctrine of repudiation, with its remedies independent of the landlord/tenant relationship is applicable to a lease' (p. 177). Lord Roskill said that it was a helpful judgment (p. 187).

In that case, the House of Lords was concerned with the question whether the doctrine of frustration was capable of applying to an executed lease of land so as to bring the lease to an end if a frustrating event occurred during the currency of the term. The determination of this question involved a consideration of the Cricklewood case referred to by Lord Denning in the Total Oil case. In Cricklewood, the House had been divided on the 'frustration' question. Viscount Simon LC and Lord Wright were of the opinion that the doctrine did apply while Lord Russell and Lord Goddard were of the opinion that it did not. In the National Carriers case, the House of Lords came to the conclusion that the doctrine does apply. There is, therefore, a House of Lords decision expressing a contrary opinion to that expressed by Lord Russell and Lord Goddard in Cricklewood. There was no authority on the point about which Lord Denning expressed his view and the House of Lords now disagrees with the opinions 'which pointed the way' and partly influenced him in forming it. In accordance with this trend of current authority, I would, therefore, hold that the acceptance of repudiation principles applicable to 'ordinary contracts' apply to the agreement here.

The next question then is: Was the tenant guilty of wrongful repudiation?

A renunciation of a contract occurs where one party, by words or conduct, evinces an intention not to continue to perform his part of the contract. But not every refusal to perform some part of a contract will amount to a renunciation. (Chitty Contracts (24th Ed) Vol. 1 p. 697 para. 1479).

A repudiation has been defined in different terms - by Lord Selborne as an absolute refusal to perform a contract; by Lord Esher as a total refusal to perform it; by Bowen LJ in Johnston v. Milling (1886) 16 QBD 460 as a declaration of an intention not to carry out a contract when the time arrives and by Lord Haldane in Bradley v. H. Newsome Sons & Co. [1919] AC 16 as an intention to treat the obligation as altogether at an end. They all come to the same thing and they all amount to this, that it must be shown that the party to the contract made quite plain his own intention not to perform the contract. (Spettabile ... v. Northumberland Shipbuilding Co. Ltd. (1919) 121 LT 628 per Atkin LJ at 634 - 635: cited by Lord Salmon in Woodar v. Wimpey Ltd. [1980] 1 WLR 277, 287-288).

In this case, no evidence has been given. The material before the court consists of the pleadings and an agreed bundle of documents. The only wrongful conduct alleged against the tenant before the tenancy was forfeited is the failure to pay two instalments of rent. Did that failure following 24 punctual payments evince an intention not to continue to perform its part of the contract? The failure was not accompanied by an abandonment of possession nor by a breach of any other of the tenant's covenants. I do not mean to suggest that a failure to comply with the terms of a covenant to pay rent could never be indicative of an intention 'not to perform the contract'. The modern approach to leases emphasizes the contractual rather than the 'estate' element of the arrangement. Rent is not now seen as 'something issuing out of the land' but as a contractual obligation assumed by the tenant. If, viewed as a contract, the arrangement showed that the only benefit the landlord would receive was the rent the tenant agreed to pay, then, failure to pay even though unaccompanied by an abandonment of possession might be indicative of a repudiatory intention on the part of the tenant. But, in this case, even if one takes the view that the receipt of rent was the only benefit the landlord received under the agreement and that the payment of it was the basic obligation undertaken by the tenant, the failure to pay punctually the two instalments of rent did not amount to a repudiation. The tenant was in breach but the principles of the law of contract which indicate the landlord's rights are set out in the following extract from the judgment of Diplock LJ (as he then was) in Financings Ltd. v. Baldock [1963] 2 QB 104, 123:

Where one party has done something which the law ... regards as a wrongful repudiation of the contract and the other party has thereupon determined the contract, whether under an express power contained in the contract or in the exercise of his right to do so under the common law, he is entitled to damages for non-performance of the contract during the period that it has still to run: but that if that party has not done something which the law regards as a wrongful repudiation of the contract, the other party, although he may be entitled under an express power to determine the contract, is not entitled to damage for non-performance of the contract during the period for which it would have continued to run but for such determination. (Emphasis added.)

Here, the tenant did something which the law does not regard as a wrongful repudiation and the landlord exercised an express power to determine the contract. The landlord is, therefore, not entitled to damages for non-performance of the contract during the period for which it would have continued to run but for such determination. (pp 439-442)

6. Hop Woo Cheung Enterprises Ltd. v. Intergroup Industries Ltd. has been endorsed and/or applied in many cases in Hong Kong, notably Chan Annie v. Lau Wai Kwong and others [1984] HKC 231, Silver Source Development Ltd. v. Time Century Ltd. [1992] 1 HKC 366 and Sano Screen Manufacturers Ltd. and another v. J&R Bossini Trading Ltd. [2000] 3 HKC 216. In all these cases, all the learned judges held that a landlord, having accepted a tenant's wrongful repudiation, is entitled to damages for consequential losses.

7. To re-inforce the point, Mantell J (as he then was) in Chan Annie v. Lau Wai Kwong & others observed that,

"There is authority for the proposition that a lease, being a transaction in land, is to be treated differently from other classes of contract. I was referred in particular to Total Oil Great Britain Ltd. v. Thompson Garages (Biggin Hill) Ltd. [1972] 1 QB 318 at 323 in which the distinction was drawn by Lord Denning. That was a case where on the facts it was found that there had been a repudiation of a lease by an oil company which had been accepted by the dealer and Lord Denning said:

Does it put an end to the lease? I think not. It, meaning the lease, conveys an interest in land. It does not come to an end like an ordinary contract on repudiation and acceptance.

And he then referred to Cricklewood Property and Investment Trust Ltd. v. Leighton's Investment Trust Ltd. [1945] AC 221, and in particular to the opinions of Lord Russell and Lord Goddard to the effect that frustration did not bring a lease to an end and so, he continued:

Nor do I think, does repudiation and acceptance.

However, point very similar to the one which arises in this case fell to be considered by the Supreme Court of Canada in the case of Highways Properties Ltd. v. Kelly Douglas &Co. Ltd. (1971) 17 DLR (3d) 710, the judgment of the court of five being given by Laskin J. After reviewing the facts of the case, Laskin J. considered a submission that upon repudiation and acceptance of a tenancy agreement a landlord might, nonetheless, claim damages from the defaulting tenant upon notice being given that the acceptance of repudiation was on that basis. This is how he put it:

Counsel for the appellant, in effect, suggests a fourth alternative, namely, that the landlord may elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the footing of a present recovery of damages for losing the benefit of the lease over its unexpired term.

And his conclusion was as follows:

It is no longer sensible to pretend that a commercial lease, such as the one before this court, is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land. Finally, there is merit here as in other situations in avoiding multiplicity of actions that may otherwise be a concomitant of insistence that a landlord engage in instalment litigation against a repudiating tenant.

Well, I accept that had there been a surrender here, and possibly if there had been forfeiture, on the authorities there could be no claim by the landlord in relation to the unexpired portion of the tenancy. But as I find, the facts here fell within the ambit of the principle set out so clearly by Laskin J. and I am disposed to apply that principle in the present case notwithstanding the decision of the English Court of Appeal. I am fortified in doing so because more recently, the House of Lords in dealing with the question of frustration as it applies to leases has held that the doctrine of frustration albeit in rare circumstances will supply, thus to a degree, or perhaps altogether, destroying the basis for the decision in the Total Oil case. I am further fortified by the knowledge that this very point has been considered by Barnes J. in A4760/81 (unreported) who came to a similar view to that which I propose to adopt.

Consequently, I find that the plaintiff is entitled to recover damages equal to the rent of the unexpired portion of lease and in doing so, I take into account Mr. Wei's highly persuasive submissions that all has not been done that might have been done to mitigate loss. The burden rests upon the defendants to show that damage has not been mitigated. They have not discharged that burden. I entirely accept Mdm. Chan's evidence on the point." (pp 234 - 235)

Thus, there is categorical statement of principle by Mantell J. to the effect that damages are not recoverable for consequential losses upon forfeiture of tenancy. The House of Lords decision mentioned by the learned judge is in fact National Carriers Ltd. v. Panalpina Ltd. [1981] 1 All ER 161 considered by Barnes J. in A4760/81 which has since been reported as Hop Woo Cheung Enterprises Ltd. v. Intergroup Industries Ltd. [1982] HKC 436.

8. The problem, which is a very fine point, in this case is that the Plaintiff landlord did not accept repudiation by the Defendant tenant. Instead the Plaintiff forfeited the tenancy. It is common ground that service of the writ herein on the Defendant was forfeiture. Is there a right to damages following forfeiture of tenancy? Miss Wong for the Defendant further drew my attention to Colgan Co. Ltd. v. Ethitrade Ltd. [1983-85] CPR 87. That was a Hong Kong Lands Tribunal decision. There, Cruden J said,

' ...... In addition to the particulars of such damages not having been pleaded, it was submitted that as the applicant had elected to forfeit the tenancy, no uch damages were recoverable in accordance with Hop Woo Cheung Enterprises v. Intergroup Industries [1982] HKC 436.

The respondent submitted that on the present pleadings, the applicant has forfeited the tenancy pursuant to a contractual provision of the tenancy and not invoked the common law doctrine of repudiation. I accept that on this view the applicant would only be entitled to mesne profits from the date of termination and not in addition to general damages." (p. 104)

9. On this question of damages after forfeiture of tenancy, what baffles me is why the distinction between acceptance of repudiation and forfeiture on the question of right to recover damages for consequential loss after termination of tenancy. The Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. tore down the artificial barrier to application of ordinary contract law principles and allowed damages after acceptance of repudiation of a lease or tenancy agreement. The fundamental rationale to that decision was that the same principles ought to apply to different types of contracts even though certain kind of contracts (such as lease or tenancy agreement) carry with them additional characteristics. This change in fundamental jurisprudence was expressly adopted by the House of Lords in National Carriers Ltd. v. Panalpina where four of the five Law Lords (Lord Russell expressing doubt but not actually dissenting) held that the doctrine of frustration should apply to leases.

10. Here I must apologize to Miss Wong for misleading her. During the course of the hearing I told her to look in the speech of Lord Hailsham dicta by his lordship against compartmentalization of the law. Well, I read the report of the House of Lords decision just under 20 years ago. My memory failed me. In fact, it is in the speech of Lord Simon that one finds very instructive observation:-

"Thirdly, the law should if possible be founded on comprehensive principles: compartmentalism, particularly if producing anomaly, leads to the injustice of different results in fundamentally analogous circumstances. To deny the extension of the doctrine of frustration to leaseholds produces a number of undesirable anomalies. It is true that theoretically it would create an anomalous distinction between the conveyance of a freehold interest and of a leasehold of, say, 999 years. But it would be only in exceptional circumstances that a lease for as long as 999 years would in fact be susceptible of frustration. On the other hand, to deny the application of the doctrine would create an anomalous distinction between the charter of a ship by demise (see Blane Steamships Ltd. v. Minister of Transport [1951] 2 KB 965; the Law Reform (Frustrated Contracts) Act 1943, S. 2 (5) (a)) and a demise of land; compare, for example, a short lease of an oil storage tank and a demise charter for the same term of an oil tanker of a peculiar class to serve such a storage tank, and a supervening event then frustrating the demise charter and equally affecting the use of the oil storage tank. Again, a time charter much in common with a service tenancy of furnished accommodation. Then there would be the distinction between a lease and other chattel interests, say, under a hire-purchase agreement. But most striking of all is the fact that the doctrine of frustration undoubtedly applies to a licence to occupy land: see, e.g., Krell v. Henry [1903] 2 KB 740, [1900-3] All ER Rep. 20 and the other Coronation cases. However, the distinction between a licence and a lease is notoriously difficult to draw, and, when it comes to the application of a doctrine imported to secure justice, even more difficult to justify. The point is well put by Treitel, Law of Contract (5th Edn, 1979, pp 669-670). I am clearly of opinion that the balance of anomaly indicates that the doctrine of frustration should be applied to a lease. Moreover, I shall venture to refer later to the effect of an agreement to grant a lease operating to create an equitable term of years; if, as would seem to be the case, the doctrine of frustration applies to such an agreement, there would be yet another anomaly.

Fourthly, a number of theories have been advanced to clothe the doctrine of frustration in juristic respectability, the two most in favour being the 'implied term theory' (which was potent in the development of the doctrine and which still provides a satisfactory explanation of many cases) and the 'theory of a radical change in obligation' or 'construction theory' (which appears to be the one most generally accepted today). My noble and learned friends who have preceded me have enumerated the various theories; and the matter is discussed in Chitty on Contracts (23rd Edn, 1968, vol. 1, pp 585-592). Of all the theories put forward the only one, I think, incompatible with the application of the doctrine to a lease is that which explains it as based on a total failure of consideration. Though such may be a feature of some cases of frustration, it is plainly inadequate as an exhaustive explanation: there are many cases of frustration where the contract has been partly executed. (I shall deal later with the argument that 'the foundation of the contract' in a lease is the conveyance of the term of years, which is accomplished once for all and can never be destroyed.)

Fifthly, a lease may be prematurely determined in a considerable variety of circumstances. Perhaps forfeiture by denial of title is the most relevant (though now largely of historical interest), since it depended on a rule of law extraneous to any term of the lease or to agreement of the parties whereby the lease was prematurely discharged. I can see no reason why a rule of law should not similarly declare that a lease is automatically discharged on the happening of a frustrating event.

Sixthly, it seems that authorities in some other common law jurisdictions have felt no inherent difficulty in applying the doctrine of frustration to a lease. This appears especially in the American cases on the frustration of leases of premises to sell liquor by the advent of constitutional Prohibition (see Corbin on Contracts (1951, vol. 6, p. 338ff) for a general discussion and pp 388-390 for a discussion of the Prohibition cases in particular). Corbin's summary (p. 391) has relevance to such a lease as is under your Lordships' instant consideration:

'If there was one principal use contemplated by the lessee, known to the lessor, and one part played a large part in fixing rental value, a governmental prohibition or prevention of that use has been held to discharge the lessee from his duty to pay the rent. It is otherwise if other substantial uses, permitted by the lease and in the contemplation of the parties, remain possible to the lessee.'

(See also the passage quoted by my noble and learned friend Lord Wilberforce.) Then there is the judgment of Isaacs J. in Firth v. Halloran (1926) 38 CLR 261 at 269. Less directly in point, but important and relevant for its general reasoning, is the judgment of the Canadian Supreme Court delivered by Laskin J. in Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (1971) 17 DLR (3d) 710, holding that the contractual doctrine of repudiation, with its remedies independent of the landlord/tenant relationship, is applicable to a lease.

Lastly, then, from Laskin J.'s judgment (at 721): 'It is no longer sensible to pretend that a commercial lease ... is simply a conveyance and not also a contract.' The doctrine of frustration, no less than the doctrine of repudiation, is applicable to a contract. It must therefore be determined whether there is anything in a lease-as-conveyance which repels the doctrine of frustration inherent in the lease-as-contract, outweighing the demands of justice, of consistency, of juristic theory accounting for the doctrine, of analogy and of authoritative opinion in other common law jurisdictions." (pp 176-177)

11 Forfeiture is the term used for one way of terminating a tenancy. But, apart from it being a term specially adopted for use in relation to tenancy matters, its nature is no different from acceptance of wrongful repudiation of ordinary (or other) contracts. In wrongful repudiation, a party to a contract behaved in such a way as to evince the intention not to be bound by the contract. Usually, it was a serious breach of contractual condition. For wrongful repudiation, the innocent party has the right (and option) to accept the repudiation thereby terminating the contract and recover damages. In the case of forfeiture, invariably the right to forfeit is grounded upon breach by the tenant of certain condition or covenant. The landlord in view of such breach may opt to forfeit thereby terminating the tenancy. Why, then, the landlord is not entitled like the innocent party in an ordinary contract to recover damages for loss of bargain? The courts have allowed the right to recover damages after acceptance of wrongful repudiation of tenancies because general principles of contract law should apply to tenancies. The courts have also held that the doctrine of frustration applies to tenancies. If there should be no compartalization of the common law there should be complete parity in application for different principles too. To still maintain that forfeiture should be treated differently when compartmentalism has been abolished is, metaphorically, failing to see the wood for the trees. So although I have the greatest respect for the Hong Kong judges whose judgments I have referred to and I am normally bound by their decisions, since they did not resonate with the rationale expounded in National Carriers Ltd. v. Panalpina, I do not think I should follow them.

12. There is some truth in saying that notice has to be given before damages can be claimed upon forfeiture of tenancy. This is due to section 58 of the Conveyancing and Property Ordinance, Cap. 219 and its equivalent in English and Canadian statutes. However, where forfeiture is grounded on failure to pay rent, section 58(10) in effect provides that no notice needs to be given. So the requirement of notice does not apply to the instant case. With this minor point out of the way too, I arrive at the conclusion that, applying ordinary principles of the law of contract, damages for consequential loss naturally follows upon forfeiture of tenancy for failure to pay rent.

13. Miss Wong, in her final written submission, suggested that there had been surrender. Surrender of possession would be an answer to a claim for mesne profits but not to a claim for damages. Where a tenant is unable to pay rent and wants to surrender possession, the landlord is bound to accept the surrender and endeavour to re-let to fulfill his duty to mitigate loss. The Plaintiff's witness deposed that keys and possession were accepted from the Defendant to mitigate loss. So surrender accepted in this case does not assist the Defendant at all.

14. Assuming that I have been correct so far, the Defendant having accepted that this is a case of forfeiture on account of failure to pay rent, it is foregone conclusion that the Plaintiff landlord would be entitled to judgment against the Defendant on liability, the quantum of damages to be determined. On the basis that the Defendant has no meritorious defence on the issue of liability, meritorious defence being the only ground to resist the prohibition order and for leave to defend, the Defendant's application to uplift the prohibition order and for leave to defend (on liability) must fail.

15. Accordingly, the Defendant's application is dismissed with costs.