CHUN HING TIMBER CO LTD AND ANOTHER v. JOYCE EMPIRE LTD

DCCJ 4045/2019

[2023] HKDC 235

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4045 OF 2019

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JUDGMENT

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Introduction

1.  By this action, the plaintiffs claim for unpaid rent in respect of Lot No 924 in DD 92, Kwu Tung Village, New Territories, Hong Kong (“the plaintiffs’ land”).

The plaintiffs’ case

2.  The plaintiffs are the registered owners of the plaintiffs’ land. The defendant is the registered owner of the adjacent lands, namely, Lot Nos 916, 917, 918, 919 and 923 in DD 92 (“the defendant’s land”).

3.  A godown was erected on and across the plaintiffs’ land and the defendant’s land for over 10 years.

4.  In late 2018, Miss Lo Yi Ling Sophia (“Miss Lo”), a director of Landmark Asia Property Ltd, approached the 2^nd plaintiff on behalf of the defendant, conveyed the defendant’s intention to rent the plaintiffs’ land.

5.  During the negotiation, Miss Lo informed the 2^nd plaintiff that the defendant intended to demolish the godown and to rebuild a new structure across the plaintiffs’ land and the defendant’s land. Neither plaintiffs objected to the defendant’s plan.

6.  A lease was entered into on 1 March 2019 (“the lease”) for a term of 10 years from 19 February 2019 to 18 February 2029 at the monthly rent of $40,000.

7.  The defendant started the demolition and re-construction works after taking possession of the plaintiffs’ land.

8.  On 21 March 2019, Miss Lo informed the 2^nd plaintiff that some officers from the government had inspected the plaintiffs’ land and demanded cessation of the re-construction works because no waiver in respect of the re-construction works was granted by the government.

9.  On 1 April 2019, a letter was sent by to Messrs T K Tsui & Co (“TK Tsui”), the solicitors preparing the lease, purporting to determine the lease pursuant to clause 15 of the lease.

10.  Out of good faith and with a view to voluntarily assist the defendant’s intended application for waiver, the 2^nd plaintiff took steps to help the defendant in the application. The defendant had however failed to provide the plaintiffs with the requisite information and documents required of by the Planning Department.

11.  The defendant has since 19 June 2019 failed to pay rent to the plaintiffs.

The defendant’s case

12.  The defendant said that in the end of 2006, a building for office and godown (“the old structure”) was built on the plaintiffs’ land and the defendant’s land by Sky One International Freight Ltd (“Sky One”), which was the then tenant of the plaintiffs’ land and the defendant’s land.

13.  Sky One ceased to be the tenant in December 2017 and the plaintiffs’ land and the defendant’s land were let to Hong Kong SYC Logistic Company (“SYC”) on 31 January 2018.

14.  However, in June 2018, SYC requested to terminate the tenancy due to severe water leakage in the old structures. Both the plaintiffs and the defendant recovered possession from SYC in October 2018.

15.  In November 2018, the defendant planned to demolish the old structures and to reconstruct a new one.

16.  The defendant negotiated with the plaintiffs whereby it was agreed that the plaintiffs would let the plaintiffs’ land (together with the building erected thereon) to the defendant. During the course of negotiation, the defendant requested the plaintiffs to apply for a licence or waiver from the government in respect of the rebuilding on the plaintiffs’ land. The 2^nd plaintiff represented that as the old structures were there for the past 10 years without any licence or waiver, it would not be necessary.

17.  It was against this background that clause 15 was added to the lease, which provides that:

“Notwithstanding to the Clause 2(r) of the Lease, at any time during the said term if the structures on the said property shall be demolished at the request or by the order of the Buildings Department or other competent government department the Lessee shall have the liberty to early determine the Lease without any compensation to the Lessor. Upon delivery of vacant possession of the said property to the Lessor, the Lessor shall return the deposit money paid hereunder to the Lessee without interest and thereupon neither party hereto shall have any claim against the other of them.”

18.  The defendant demolished the old structures and started the re-construction of a new structure. On 21 March 2019, the defendant’s contractor received a verbal warning from the Lands Department restraining the defendant from rebuilding a new structure on the plaintiffs’ land. A warning notice from the Lands Department was issued to the defendant on 25 March 2019 requesting the defendant to revert any unauthorised building works on the plaintiff’s land within 28 days.

19.  On 1 April 2019, in exercise of the rights under clause 15 of the lease, the defendant served a notice of termination on the plaintiffs.

Whether the defendant is entitled to invoke clause 15 of the lease?

20.  The central issue is whether the defendant is entitled to invoke clause 15 of the lease.

21.  Mr Stephen Siu, counsel for the plaintiffs, submitted that clause 15 provides that the defendant could early determine the lease if the structures on the said property shall be demolished at the request or by the order of the Building Department or other competent government department. The warning letters from the Lands Department were issued to the defendant in relation to the Waiver of the defendant’s land only. The warning letters did not identify the exact location of the “adjoining land” and did not request the demolition of any structure thereon. As the person who received the verbal warning was not called, the evidence from the mouth of Miss Lo is unsatisfactory. Therefore, clause 15 of the lease is not triggered.

22.  On the other hand, Mr Keith Tam, counsel for the defendant, submitted that on 21 March 2019, the defendant’s contractor was verbally warned by the Lands Department requiring the removal of the structure on the plaintiffs’ land. A warning notice was issued by the Lands Department on 25 March 2019 requesting the defendant to revert any unauthorised building works on the plaintiffs’ land and the defendant’s land. A Short Term Waiver No 1256 (“the Waiver”) was granted by the Lands Department on 3 March 2003 in respect of the defendant’s land. There is no dispute that the defendant was to construct a new single structure spanning over the plaintiffs’ land and the defendant’s land. Despite the Waiver, however, the Lands Department still requested the defendant to demolish the structure on the defendant’s land. Such request must extend to the structure on the plaintiffs’ land particularly the plaintiffs had not applied for any waiver before. Clause 15 was included in the lease for the purpose of allocating risk. That is to say, the defendant bears the risk of paying for the removal of the structure whereas the plaintiffs bear the risk of having the lease terminated early. The very purpose of the lease was for the defendant to reconstruct the godown. If the government authorities prevented the defendant from doing so, the essence of the lease would fall away. Catering for such an event, the defendant would need an exit option from the lease. Therefore, the defendant is entitled to invoke clause 15 of the lease.

23.  It is necessary to examine the warning letter of the Lands Department dated 25 March 2019 (“the warning letter”).

24.  In the warning letter, it was stated that the officers of the District Lands Office, North discovered breaches of the Waiver that:

(a)  the area and height of the existing structure were inconsistent with what were approved under the Waiver; and

(b)  there was a change of user of the defendant’s land without approval.

Further, it was discovered that the defendant was constructing or extending a structure to the adjoining land without approval. The defendant was requested to rectify the said breaches within 28 days. Failing which, the Lands Department would take action including the termination of the Waiver. In the event that the Waiver is terminated, the defendant is required to remove all the structures on the land covered by the Waiver, ie the defendant’s land.

25.  It seems clear that by reason of the act of breaches of the defendant, the defendant was required by the Lands Department to rectify such breaches. In order to rectify such breaches, the defendant must ensure that the dimension of the structure on the defendant’s land conforms with the approval under the Waiver; the user of the defendant’s land is approved by the Waiver; and the structure on the defendant’s land is not extending to the adjoining land.

26.  It is not in dispute that the defendant was intending to rebuild the godown which was on and across the plaintiffs’ land and the defendant’s land. There is no doubt that the plaintiffs’ land is the “adjoining land” referred to in the warning letter.

27.  In order to comply with the requirement of the warning letter, the defendant must, inter alia, demolish the structure extending to the plaintiffs’ land. Such demolition is caught by clause 15 of the lease.

28.  In my view, the warning letter, which contained all the material facts, is the formal notice of the Lands Department to the defendant. The verbal warning that was given by the department’s officers was superseded by the warning letter. The oral evidence of the person who received the verbal warning at the scene is therefore immaterial.

29.  By reasons of the aforesaid, I am driven to the conclusion that the defendant is entitled to invoke clause 15 to terminate the lease.

Whether the notice of termination was validly served on the plaintiffs?

30.  On 1 April 2019, the defendant’s solicitors, Messrs Chan, Wong & Lam (“CWL”), sent a letter to TK Tsui, as the solicitors for the plaintiffs, giving the plaintiffs notice to terminate the lease pursuant to clause 15 (“the termination notice”).

31.  The plaintiffs say that the mode of service was not in accordance with clause 4(d) of the lease and is therefore invalid.

32.  On behalf of the plaintiffs, Mr Siu submitted that it is the express term of clause 4(d) that service shall sufficiently be served on the parties’ own addresses. Express written authorization by the plaintiffs to TK Tsui is required for matters other than the drafting and execution of the lease. The letter of TK Tsui dated 15 July 2019 to CWL was for the purpose of sending the registered lease, the 1^st plaintiff’s minutes and the receipt for the rental deposit and nothing else. In fact, Messrs SK Wong & Co was engaged by the plaintiffs to send the defendant a pre-action letter on 21 June 2019. There is no evidence to show that TK Tsui was engaged by the plaintiffs to deal with all matters in relation to the lease. Therefore, it is submitted, that the service of the termination notice was invalid.

33.  Mr Tam submitted that clause 4(d) did not impose mandatory forms of service, nor does it exclude other modes of services, citing 新一章有限公司 訴 梁成基, CACV 77/2004, 3/6/2004 (unreported) and Micro Power Ltd v Master Profit Corporation Ltd, HCA 1764/2006, 20/4/2007 (unreported).

34.  Clause 4(d) of the lease provides:

“Any notice reqited (sic) to be served on the parties hereto shall be sufficiently saved (sic, served) if delivered by band (sic) to or dispatched by ordinary post or at the last known addresses or registered offices of the parties hereto respectively. A notice sent by post shall be deemed to be given at the time when in due course of post it would be delivered at the address of which it is sent.”

35.  Despite the typographical errors, there is no doubt that the clause does not exclude other mode of service. Applying the principle in 新一章有限公司 (supra), the term “sufficiently served” used in the clause is to specify the mode of service that is regarded as sufficient. But if the landlord had actually received the notice, the way by which it was served would not affect the legal effect of the notice.

36.  In any event, although the termination notice sent to TK Tsui was met with silence, they did not inform the CWL that they did not have instructions to act for the plaintiffs in the matter either. As they were the solicitors acting for both parties to the lease, I cannot think of any reason that they would not convey the termination notice to the plaintiffs upon its receipt.

37.  When cross-examined, the 2^nd plaintiff said she had no knowledge of the termination notice. She was only informed of the termination when she chased Miss Lo for rent after the expiration of the 3-month rent free period on 18 June 2019. This is inconsistent with what she said in her witness statement. In para 19 of her witness statement, she said after she came to know that the defendant wanted to determine the lease, she contacted Miss Lo to see what happened. That is to say, she learnt about the defendant’s intention to terminate the lease before she communicated with Miss Lo rather than she was informed by Miss Lo when she chased her for the rent.

38.  In my judgment, Miss Lo purposely denied any knowledge of the termination notice so that the plaintiffs would be in a position to sustain the argument that it was not served in accordance with clause 4(d). I find the 2^nd plaintiff is less than frank in relation to the time when she came to know the termination notice. I believe that she had been informed by TK Tsui of the termination notice as soon as they had received it.

39.  Therefore, I hold that the termination notice was validly served on the plaintiffs.

The plaintiff’s claim

40.  As I find in favour of the defendant on the issues on clause 15 and clause 4(d) of the lease, the plaintiffs’ claim is dismissed.

The defendant’s counterclaim

41.  The defendant counterclaims for the return of rental deposit in the sum of $120,000 and rent paid in advance for the period from 19 May 2019 to 18 June 2019 in the sum of $40,000.

42.  Mr Tam submitted that by reason of the service of the termination notice dated 1 April 2019, the lease came to an end on that day and the defendant was no longer contractually obliged to pay further rent to the plaintiffs.

43.  Mr Siu submitted that under clause 15, the plaintiffs are obliged to return the rental deposit. However, there is no evidence as to when (or whether) vacant possession was delivered to the plaintiffs. It is Miss Lo’s evidence that the structure on the plaintiffs’ land was demolished in late 2019. Therefore, the defendant is not entitled to the return of the rent paid in advance.

44.  The defendant has led no evidence that they have ever delivered vacant possession of the plaintiffs’ land to the plaintiffs. Under cross-examination, Miss Lo said Mr Lee Sheng-pu, the director and sole shareholder of the defendant, had decided only to demolish the structure on the defendant’s land so as to conform with the approval under the Waiver. The structure on the plaintiffs’ land was demolished sometime between October and the end of 2019 after negotiation with the plaintiffs had failed. There is no evidence before me that possession of the plaintiffs’ land has ever been delivered to the plaintiffs.

45.  That being the case, the defendant had been in occupation of the plaintiffs’ land at least up to the end of 2019. I do not accept that the defendant is entitled to the return of the rent paid in advance aforesaid.

46.  Accordingly, I find that the defendant is only entitled to the return of the rental deposit in the sum of $120,000.

The defendant’s complaint

47.  Mr Tam complained that the plaintiffs have attempted to go beyond the scope of the pleadings and reliefs under the prayer. Further, Mr Tam criticized the plaintiff not deducting the alleged outstanding rent from the rental deposit so as to avoid the present action. Mr Tam also complained about the plaintiffs’ repeated breaches of the court’s directions. Mr Tam asked that the plaintiffs should be deprived of their costs or should be ordered to pay costs on an indemnity basis and/or the plaintiffs’ legal representatives should bear costs personally.

48.  By reason of my findings, the defendant is entitled to have the costs of this action on party and party basis. The question is whether the complaints and criticism of Mr Tam would enhance the defendant’s entitlement.

49.  The complaints of Mr Tam mainly laid against the conduct of the plaintiffs’ legal representatives rather than the plaintiffs.

50.  When the plaintiffs commenced the present action in August 2019, the defendant was still in occupation of the plaintiffs’ land with the new structure undemolished without paying rent. The plaintiffs were perfectly entitled to sue the defendant for rent as they did. The criticism of Mr Tam is unduely harsh and uncalled for.

51.  The conduct of the legal representatives may have been unsatisfactory. Having said that, however, they do not entitle the defendant to have higher costs or make the legal representatives to bear the costs personally.

Interest

52.  Interest shall be calculated at 1% above the best lending rate of HSBC from the date of the counterclaim (ie 10 September 2019) to the date of judgment and thereafter at judgment rate until payment.

Costs

53.  Costs to follow event. I make a costs order nisi that the plaintiffs shall pay the defendant the costs of this action on party and party basis with certificate for counsel, to be taxed if not agreed.

54.  In the absence of any application by summons for variation within 14 days from the date of this judgment, the costs order nisi shall become absolute.