ARDIS INTERNATIONAL KINDERGARTEN LTD v. TANG KAI MING, KENNETH AND OTHERS

DCCJ 4649/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4649 OF 2015

________________________

________________________

________________________

JUDGMENT

________________________

Background

1.  This case is about a tenancy dispute where the tenant (“P”) claims the landlords (“Ds”) for the return of rental deposits and damages and the landlords counterclaim for arrears of rent and damages.

2.  P is a limited company incorporated about one year before the commencement of the present action. Madam Allison Lee (“Lee”), P’s only witness, is the shareholder and sole director of P.  She is also the founder of Mulberry Tree Progressive Unschool Limited, which provides learning-through-playing programmes for children under 6 years old in Tai Po. 

3.  D1 to D3 are brothers and indigenous villagers.  They are at all material times the registered owner of the premises known as “all those second floor (2/F) and top roof of nos.157-159 Kwong Fuk Road, Tai Po, New Territories” situated at Lots Nos.1400 and 1399 in Demarcation District No.6 (“the 157 Property”), and the Tong (D4) of which D1 is the manager is the registered owner of the adjoining flat known as “all those second floor (2/F) and top roof of nos.161-163 Kwong Fuk Road, Tai Po, New Territories” situated at Lots Nos.1398 and 1397 in Demarcation District No.6 (“the 161 Property”) and they are collectively referred as “the Properties” hereinafter.  D1 to D3 authorised Kency Brothers Limited (“Kency”) to manage the Properties. The manager of Kency, Mr Clarence Chan (“Chan”), gave evidence in court for Ds.

4.  Since May 2015, the parties began to negotiate for the tenancy in respect of the Properties.  P intended to rent the Properties for education purpose. Eventually, P entered into two written tenancy agreements both dated 28 July 2015 (“Tenancy Agreements”) with D1-3 and D4 respectively to rent the Properties.  They were both 3-year tenancies from 1 September 2015 to 31 August 2018 (both days inclusive) and their terms were identical, save and except for Clause 5.1 which provided the amounts of deposits and relevant schedules.

5.  It is common ground that P paid HK$170,844 and HK$150,652 to D1-3 and D4 respectively with the following breakdowns:

	157 Property	161 Property
3-month Rental Deposit	HK$114,000	HK$99,000
First quarter Government Rates and Rents Deposit	HK$1,968      + HK$1,776	HK$1,776      + HK$1,776
3-month Management Fees Deposit	HK$4,500	HK$4,500
Water Bill Deposit	HK$400      + HK$400	HK$400     + HK$400
Electricity Deposit	HK$9,800	HK$9,800
Rent for September 2015	HK$38,000	HK$33,000
TOTAL:	HK$170,844	HK$150,652

6.  P then proceeded to instruct Mr Lam of Masters Engineering Limited to commence renovation work of the Properties.

7.  The whole block of the Properties was under renovation at the material time. Although D1 has applied to CLP Power Hong Kong Limited (“CLP”) for independent electricity supply for all 6 units of the whole block in 2014, Chan informed Lee on 20 August 2015 during a meeting that electricity supply was still not available at the commencement of the tenancy on 1 September 2015.  After the meeting, P wrote to Ds to complain about the lack of electricity supply.

8.  P then instructed its solicitors to write to Ds to reiterate the complaint about the lack of electricity supply and warned Ds if electricity supply remained unavailable on 1 September 2015, P would terminate the Tenancy Agreements and require the refund of deposits and rental paid to Ds.

9.  Electricity supply was still unavailable to the Properties at the commencement of the tenancy on 1^st September 2015. The next day, P through its solicitors gave notice to the Ds to terminate the Tenancy Agreements, whereas Ds held the view that they were not obliged to provide electricity to P.

10.  On 9 September 2015, the Ds’ solicitors wrote to the P’s solicitors and asked P to “reconsider its position” and reply by 5 p.m. on 14 September 2015, or else the Ds shall accept P’s repudiation of the agreements.

11.  P’s position remained unchanged.  On 11 September 2015, P’s solicitors wrote back to Ds and reiterated the demand for return of the deposits and pre-paid rental.

12.  On 12 October 2015, P commenced the present action claiming repayment of HK$170,844 against D1-3 and HK$150,652 against D4, on the ground that Ds were in breach of the implied covenants of non-derogation and/or quiet enjoyment because of their failure to supply electricity to the Properties at the commencement of the Tenancy Agreements.

Procedural History

13.  On the first day of the trial, I granted leave to P by consent of the parties to amend the writ of summons as per draft annexed to its summons filed on 31 May 2017 with no order as to costs of such application. 

14.  Upon hearing parties’ submissions, I granted leave to P to adduce a supplemental witness statement of Lee annexed to its summons filed on 18 May 2017 with costs of such application be in the cause.  Leave was given to Ds to give evidence-in-chief in response to the new matters arising from P’s supplemental witness statement.

Issues

15.  P’s counsel in his closing submissions summarised the live issues as follows:

(1) Did the Landlords breach their covenants of non-derogation or quiet enjoyment (“Primary Issue”)?

(2) If the answer to (1) is “yes”, it is common ground that the Landlords are liable to pay the sum claimed by the Tenant.  There is no dispute on quantum of the Tenant’s claim. It must also follow that the Landlords’ counterclaims, premised exclusively on the Tenant’s alleged wrongful termination and non-payment of rental for October 2015, be dismissed.

(3) If the answer to (1) is “no”, the following issues would fall to be considered:

(a) Do the Landlords prove to this Court that they suffered loss as a result of the Tenant’s termination of the Tenancy Agreements on 2.9.2015?  Even if the Landlords prove that they suffered loss, did the Landlords discharge the duty to mitigate loss?

(b) Did the Tenant breach Clause 2.1(a) for not paying rent since 1.10.2015?

16.  When I compare with paragraph 4 of the P’s opening submission, I find that P also submitted that “the Landlords, however, take issue on whether the Electricity Supply formed part and parcel of their covenants.  The Landlords denied, and still deny that they were under any express duty to install, connect and/or provide electricity supply to the properties by the Commencement Date, and during the term of the tenancy”.

17.  When I read the Statement of Claim (“SoC”), I find that in paragraph 9, P pleaded that the true meaning and the intent of the clauses of the tenancy agreement was that:

“The defendants were under an express duty to install, connect and/or provide independent electricity supply to the Properties by the Commencement Date and during the term of the tenancy for the Plaintiff’s proper use and enjoyment thereof, such time being of the essence.”

18.  Further, in paragraph 14 of the SoC, P pleaded breach of the tenancy agreements, as of the commencement date that the Ds still failed and/or refused to install, connect and/or provide adequate independent electricity supply or at all to the Properties.  Then it was followed by seven subparagraphs of particulars of breach.

19.  However, when P pleaded the repudiatory breach in paragraph 15 of the SoC, P stated that:

“15. By failing to install, connect and/or provide independent electricity supply for the Properties as of the Commencement Date, the 1^st, 2^nd and 3^rdDefendants acted in repudiatory breach of the 157-159 Agreement, and the 4^th Defendant acted in repudiatory of the 161-163 Agreement. In particular:

15.1 In breach of the Quiet Enjoyment Covenant, the Defendants’ omission caused substantial and material interference and disturbance to the Plaintiff’s full benefit and enjoyment of the Properties.

15.2 In breach of the Non-derogation Covenant, the Defendants’ omission rendered the Properties unfit or substantially less fit for the purpose for which they were let to the Plaintiff (i.e. for running a kindergarten), thereby depriving the Plaintiff of the enjoyment or the benefit of the Tenancy Agreements.”

20.  Although P pleaded that it was an express duty to install, connect and/or provide independent electricity supply to the Properties, P did not plead further that such duty was an independent implied covenant or implied condition of the contract and breach of which will lead to repudiation.  Therefore, breach of such duty should not be a repudiatory breach per se.  P must rely on his plea of breach of the implied covenants of quiet enjoyment and non‑derogation pursuant to paragraphs15.1 and 15.2 of the SoC, ie, as summarised by the live issues in the closing submissions of P’s counsel.

Legal Principles on Non-derogation / Quiet Enjoyment

21.  No doubt, non-derogation overlapped, to a large extent, with quiet enjoyment.  P’s counsel cited Platt & Ors v London Underground Ltd [2001] 2 EGLR 121.  There is no dispute as to the legal principles stipulated in this leading case on the implied covenant against non‑derogation.  Mr Lau for P has summarised the principles as decided in Platt, in paragraph 18 of his Opening Submissions:

“(1) It is well established that a landlord, like any grantor, cannot derogate from his grant.

(2) The exercise of determining the extent of the implied obligation not to derogate from grant involves identifying what obligations on the part of the grantor can fairly be regarded as necessarily implicit, having regard to the particular purpose of the transaction when considered in the light of the circumstances subsisting at the time the transaction was entered into.

(3) There is a close connection, indeed a very substantial degree of overlap, between the obligation not to derogate from grant, the covenant for quiet enjoyment, and a normal implied term in a contract.

(4) A covenant relied on by the landlord if construed as ousting the doctrine in its entirety is repugnant and should itself be rejected in its entirety.

(5) When considering a claim based on derogation from grant, one has to take into account not only the terms of the lease, but also the surrounding circumstances at the date of the grant as known to the parties.

(6) When assessing what the parties to a contract actually, or must have, contemplated, one should focus upon facts known to both parties, and statements and communications between them.”

22.  However, I wish to add, in the judgment on page 4, paragraph 2, it says:

“2. In order to determine whether a specific act or omission on the part of the landlord constitutes derogation from grant, it is self-evidently necessary to establish the nature and extent of the grant — see, for instance, Leech v. Schweder (1874) L.R. 9 Ch.App 463 at 467, per Mellish L.J.”

23.  I also drew the attention of the parties to the discussion in Woodfall: Landlord and Tenants, Volume 1 at paragraph 11.083:

“If one man agrees to confer a particular benefit on another, he must not do anything which substantially deprives the other of the enjoyment of that benefit: because that would be to take away with on hand what is given with the other. This is the principle of non-derogation from grant. It is a principle which merely embodies in a legal maxim a rule of common honesty. It was imposed in the interest of fair dealing. Thus if A lets a plot of land to B, he may not act so as to frustrate the purpose for which in the contemplation of both parties the land was hired.”

24.  Mr Lau further submitted two cases on non‑derogation to illustrate how a landlord breached such implied covenant.  The first one was McCall v Abelesz & Anor [1976] QB 585 in which the landlord was found liable for the tenants for breach of the covenant for quiet enjoyment.

25.  In the above case, the gas and electricity were cut off by the landlord.  The tenants sued the landlord breach of the implied term that the landlord would supply the gas and electricity through the meters, so long as the tenancy continued.

26.  On page 591 of the judgment, the second‑last paragraph, it stated that the subject property in that case was a furnished room.  There was a gas cooker for which the tenant had to put coins in the gas meter and similarly, electricity meter which required coins to be put in for electricity for light.

27.  In McCall the act of the landlord involved deliberate cutting off of the electricity.  Besides, the property was a furnished room.  But in the present case unlike McCall, the landlords have never cut off the electricity supply.  There were no complaints that Ds were guilty of taking any deliberate action to delay the installation of electricity meter for the P or delay the supply of electric power.

Omission

28.  So the question is, what act or deliberate act that the landlords have done to derogate from grant.  The issue is whether they have committed any omissions. In paragraph 11.286 of the Woodfall, it sets out what omissions constitute breach of the implied covenant:

“An omission may amount to a breach of covenant against quiet enjoyment, but the omission in question must be a breach of some duty owed to the tenant. Thus a breach has been held to have been committed where:

(a) the landlord owned a culvert adjoining the demised property and failed to keep it in repair, although he had a duty to do so, and as a result water escaped and did severe damage to the tenant’s building;

(b) the landlord was under an obligation to keep the exterior of a block of flats in repair, and in breach of that obligation failed to keep the building watertight, so that dry rot broke out in a particular flat.”

29.  In the present case, the question is whether the landlords owe the tenant a duty.  It is the P’s case that the landlords did owe such duty and that the exact omissions were stated in paragraph 85(3) of P’s closing submission:

“In breach of the implied non-derogation covenant, the Landlords’ omission to provide electricity rendered the Properties unfit or substantially less fit for the purpose for which they were let.”

30.  P’s counsel in his opening submissions, also cited another case in support.  It is Tat Ming Trading Company Ltd v Alpino Limited HCA 1659/2004.  In that case, electricity supply was badly affected by water seepage problems in a domestic property, and the High Court held that the landlord was liable for breach of the implied covenant not to derogate from his grants.

31.  I find that Tat Ming case should be distinguished from the present case for the following reasons.  Firstly, the property in Tat Ming case was a furnished property in which Part 4 of the Landlord and Tenant (Consolidation) Ordinance Cap 7 applies.  In that case, the landlord’s breach was his omission to investigate or to repair the water seepage problem[1].  It was not an omission to provide electricity, as pleaded by P in the present case. 

Correlative Implied Obligations

32.  Apart from paragraph 85(3) of the P’s closing submissions, P also mentioned the landlords have correlative implied obligations which are corresponding to a tenant’s covenants[2]. P refers to clause 2.1 of the Tenancy Agreement, including clauses 2.1(aa)(ad)(ak)(e)(f), in respect of the electricity charges, restriction on electrical installations, wiring, etc.

33.  Then Mr Lau cited two authorities in support of the correlative implied obligations on the landlords and summarised these cases in paragraph 22 of his opening submissions:

“(1) In Barnes v City of London Real Property Co (1918) 2 CH 18, the tenancy agreement imposed on the tenants the obligation to pay a stated additional rent specifically for the cleaning of rooms by a housekeeper. The agreements placed no express obligation on the landlords to provide for the cleaning of the rooms but Sargant J was of the clear opinion (at p.32-33) that such an obligation should be implied.

(2) In Barrett v Lounova (1982) Ltd [1990] 1 QB 348 the tenant covenanted to do all inside repairs, whereas the tenancy agreement was silent about external and structural repairs.  The English Court of Appeal held that since (i) the tenant’s covenant to keep the interior in good repair would eventually be impossible to perform in the absence of a correlative obligation to repair the exterior, and (ii) the tenant’s covenant was intended to be enforceable throughout the tenancy, it was necessary, in order to give business efficacy to the tenancy agreement, to impose an obligation to carry out exterior repairs on the landlord.”

34.  By citing these two cases to impose on the landlord such correlative implied obligation, it seems to be over‑simplifying such legal principles.  In fact, there are authorities decided otherwise, which could be found in Woodfall. For example, paragraph 7.184 provides that:

“The fact that a service charge is payable for a particular service does not automatically mean that the landlord is under a correlative obligation to provide that item. Conversely, the fact that the landlord covenants to provide a particular service does not automatically mean that he is entitled to recover the cost of that item under the service charge provisions of the lease.”

35.  Further down, in the second paragraph, the sixth line:

“But where a lease provided for the tenant to pay a fair proportion of the expenses of repairing drains, no correlative obligation on the part of the landlord to repair the drain was implied because the tenant had the right to repair the drain himself, and accordingly no such implication was necessary.⁶ Similarly, where a lease entitled the landlord to recover the cost of providing porterage services and maintenance staff, and of providing maintaining and repairing a flat or other suitable residence for such staff as might from time to time be employed within the premises, the landlord was under no obligation to provide a resident porter, and its covenant to provide and use its best endeavours to maintain the services of such maintenance staff as it should consider necessary for the performance of certain matters did not oblige it so to do.”

36.  Secondly, in paragraph 11.314, the last sentence of the first paragraph:

“Similarly, where the tenant was obliged to pay the landlord the cost of external decoration in every third year of the term, the landlord was under an implied obligation to decorate in those years.

However, such obligations will not lightly be implied. Thus where an advertisement stated “Flats to let. Central heating, hot water” and the flats were equipped with central heating radiators and hot water taps, but no means of heating water, it was held that the landlord was under no implied obligation to provide heating or hot water, nor was there any collateral agreement to that effect.”

37.  Then in paragraph 13.007.2, the fifth line:

“The mere fact that the tenant covenanted to use a dwelling as a residence does not carry with it a correlative obligation on the part of the landlord to keep it fit for that purpose or to do remedy design defects.”

38.  The way that such obligations could be implied depends on facts of each case.  In paragraph 11.079 of Woodfall, it sets out a list of guidelines for implied terms.  I must say that they are the general principles of implied terms.

“The proposed term

(1)must be reasonable and equitable;

(2)must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3)must be so obvious it goes without saying;

(4)must be capable of clear expression;

(5)must not contradict any express term of the contract.”

39.  In paragraph 23 of P’s opening submission, it was submitted that where the premises leased to the tenant were materially less fit for the intended purpose, the landlord was in repudiatory breach of the tenancy agreement and cited Smith v Marrable 152 ER 693N, Hussein & Ors v Mehlman [1992] 2 EGLR 87.

40.  We must read these cases in the context of the general implied obligations of the landlord.  In paragraph 13.001 of Woodfall, it says:

“In general, there is no implied covenant by the lessor of an unfurnished house or flat, or of land, that it is or shall be reasonably fit for habitation, occupation, or cultivation, or for any other purpose for which it is let.”

41.  An exception to this general rule could be found in the following paragraph in Woodfall, 13.002:

“The strict position at common law has, over the years, become subject to a number of exceptions. Some of these exceptions are themselves the product of development in the common law, while others are the result of intervention by statute. The exceptions to the general rule may be summarized as follows:…”

42.  I just highlight two exceptions applicable to the authorities cited by P.  The first one is:

“Where the letting is of furnished accommodation, there is an implied covenant that the accommodation is fit for occupation at the beginning of the tenancy;”

43.  The second relevant exception is:

“Where the landlord is subject to the repairing obligations implied by section 11 of the Landlord and Tenants Act 1985;”

44.  In Smith v Marrable, the property was a furnished house, an exception to the general rule.  In Hussein & Ors, the landlord’s covenant to repair was implied by section 11 of the Landlord and Tenant Act 1985.  The landlord was in breach of such implied covenant by refusal to repair.  As such, P’s summary of these two cases is not quite correct to say that the landlord was in repudiatory breach because the premises were materially less fit for the intended purpose.  At least, it does not apply to the case of Hussein.

45.  But in the present case, no doubt it is not a furnished property and we do not have a similar provision of section 11 of the Landlord and Tenant Act 1985. Therefore, I do not think that Smith v Marrable and Hussein v Mehlman could assist me in deciding this case.

46.  P also relies on Howard‑Jones v Tate [2012] 2 ALL ER 369.  It is a sale of land case.  The purchaser contracted to purchase a warehouse from the vendor.  The vendor agreed to provide the warehouse with a new, directly metered single‑base electricity supply.  The court found that the vendor had failed to do so.

47.  I do not think that P could rely on this case as there is a distinguishing feature in that case which Mr Lau seemed to have missed out.  In that case, the duty of the vendor to provide electricity was stated in the written contract of sale, a special condition 12, as per page 371 of the judgment.  In the present case, P is not suggesting any breach of express written condition. 

48.  Therefore, I think it is necessary to look at the general principles when it comes to implying any obligation on the landlords.  In this case, there is no doubt that the landlords have made the application to CLP for independent electricity meter for the P’s future use.  Under such circumstances, there is no dispute that the electricity should be provided by CLP, not by the Ds or to be shared with Ds.

49.  It should be in the contemplation of the parties that P would become an independent electricity user of CLP.  So the question is, why there is an implied duty on the landlords to install or connect electricity as pleaded.  We have to bear in mind that any such implied term must be reasonable and equitable.

50.  No doubt the construction work of connecting the electricity, wiring and to provide the electricity power would be done by the CLP and might involve other parties as well, but not by the Ds.  I cannot see how the Ds could control the work of CLP.

51.  In the circumstances, would it be too onerous to impose such a correlative obligation on the landlord?  In my view, a fair, reasonable or equitable implied duty would be a duty to facilitate the connection of electricity, but not to provide, install or connect electricity by the commencement date of the tenancy agreement, as pleaded by the P.

52.  As there is no dispute that the Ds have made the application to the CLP before the tenancy agreement, what else can Ds do to ensure that CLP would complete the work and to supply electricity by 1 September 2015.  Therefore, I find that there was no omission on the part of Ds when electricity supply was still not available to the Properties at the commencement of the tenancies.

Conclusion of P’s Claim

53.  As I have found that there was no omission on the part of Ds for the lack of electricity supply to the Properties at the commencement of the tenancies, it follows that Ds are not liable for causing if any substantial and material interference and disturbance to P’s full benefit and enjoyment of the Properties[3], and thus there is no breach of the quiet enjoyment covenant as alleged.

54.  By the same token, I also find that Ds are not liable for rendering the Properties unfit or substantially less fit for the purpose for which they were let to P (ie for running a kindergarten), thereby depriving P of the enjoyment of the benefit of the Tenancy Agreement[4] (if that was the case), and thus there is no breach of the non-derogation covenant as alleged.

55.  For the above reasons, P’s claim is dismissed.

Counterclaim

56.  Since it was found that Ds were not in breach of the Tenancy Agreements and P’s claim be dismissed, there is little dispute that P’s termination of the Tenancy Agreements must be wrongful repudiation and P should be liable to Ds for their consequential loss and damage. 

57.  Ds counterclaimed the following items[5]:

(a) Loss of rentals from 1 September 2015 to 31 August 2018 (the original expiry date of the Tenancy Agreements);

(b) Government rates and rent for the same period;

(c) Management fees for the same period;

(d) Water, electricity and other outgoings up to 14 October 2015 (date of re-entry);

(e) Reinstatement costs of the Properties to “bare-shell” condition; and

(f) Estate agents’ fees for leasing the Properties.

58.  P denied Ds’ counterclaim.  In particular, it did not admit Ds had put the Properties to open market for lease and if Ds suffered any loss and damage which was not admitted by P, it was caused by their failure to mitigate their loss[6].

59.  Ds adduced various emails correspondence with estate agents from 6 February 2016 to 4 August 2016 in support of Ds’ effort to seek estate agents’ assistance to lease the Properties in open market and in particular, the email to Michael Lin sent on 6 February 2016 and the email from Wu to Chan Chun Keung sent on 13 May 2016.  Such emails were not in serious dispute.

60.  In view of the evidence before the court, I find on balance of probabilities that Ds have sought assistance from various estate agents to lease the Properties at least for the period covered by the emails and thus Ds partly succeeded in establishing their attempt to mitigate their loss.  I reject P’s defence to counterclaim of Ds’ total failure to mitigate their loss at all.   The outstanding issue is the amount to be discounted from Ds’ counterclaim for the partial failure to mitigate their loss.

61.  Mr Lau for P submitted that as Ds have abandoned the allegation of reinstatement during the trial[7], they should be debarred from pursuing the claim of damages caused by any breach of reinstatement obligation.  I agree with Mr Lau.  Therefore, save and except for item (e) of the paragraph 57 above which I disallow, I allow the other heads of Ds’ counterclaim subject to the issue of mitigation of loss.

Quantum

62.  After setting off the first month of rent and deposit paid by P, the counterclaims in respect of the 157 Property and 161 Property amounted to HK$494,427.48 and HK$599,309.77 as per the statement of damages lodged with court on 29 May 2017.

63.  Mr Chan for Ds eventually conceded that Ds have failed to mitigate loss for the period from 14 September 2015 to 6 February 2016, ie, 4.8 months.  As a result, Ds revised their calculations of damages by deducting: (i) rent; (ii) government rates; and (iii) management fees for 4.8 months as follows:

(1)   157 Property:

HK$494,427.48 - HK$195,110.47 (deductions) = HK$299,317.01

(2)   161 Property:

HK$599,309.77 - HK$170,827.88 (deductions) = HK$428,481.89

64.  I find the above concessions reasonable.

65.  As I disallow the claim of damages caused by any breach of reinstatement obligation, a sum of HK$16,750 representing half of reinstatement cost shall be further deducted from each property:

(1) 157 Property:

HK$299,317.01 - HK$16,750 » HK$282,567 (rounded up)

(2) 161 Property:

HK$428,481.89 - HK$16,750  » HK$411,732 (rounded up)

66.  For the above reasons, I enter judgment against P on the counterclaim as follows:

(i)    In favour of D1, D2 & D3:	HK$282,567
(ii)   In favour of D4:	HK$411,732

Interest

67.  Interest is awarded on the judgment sums at judgment rate from the date of writ, ie 12 October 2015, until full payment.

Costs

68.  Costs should follow the event. I therefore make an order nisi that costs of the whole action be to Ds, save and except that there be no order as to costs of P’s summons for amendment of writ filed on 31 May 2017.

69.  Such costs shall be taxed if not agreed and this order nisi shall become absolute after 14 days from the date hereof, unless parties make any applications to vary it within such time.