CENTURY STAR (ASIA) LTD v. FORTUNE GOLDMAN LTD

DCCJ3380/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3380 OF 2011

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JUDGMENT
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INTRODUCTION

1. This case is about the disputes between the tenant and the landlord of the premises known as Ground Floor, Capital Building, Nos. 175, 177, 179, 181, 183, 185, 187, 189A & 191, Lockhart Road, Wan Chai, Hong Kong (“the Premises”).

2. By a tenancy agreement dated 24 August 2007 (“the Tenancy Agreement”), the plaintiff entered into a 3-year lease with the Premises’ former landlord Rich Venture International Limited (“Rich Venture”).  The plaintiff paid HK$450,120 as deposit to Rich Venture (“the Deposit”) pursuant to the Tenancy Agreement.  The Deposit would be returned to the plaintiff by the landlord of the Premises at the end of the lease subject to the plaintiff’s compliance with the terms of the Tenancy Agreement.

3. On 8 April 2010, Rich Venture assigned the title of the Premises and transferred the Deposit to the defendant. The defendant undertook to repay the Deposit at the end of the Tenancy Agreement.

4. The tenancy expired on 14 August 2010.  During the yielding up procedure, the defendant discovered the entire cockloft and the shop front including the roller shutter of the Premises were removed by the plaintiff. The defendant failed or refused to return the Deposit to the plaintiff despite demands.

5. On 30 August 2011, the plaintiff brought this action against the defendant to recover the Deposit.

THE TENANCY AGREEMENT

6. The Tenancy Agreement contained the following relevant clauses. Clause 2(s) provides the tenant’s duty at the expiration of the Agreement :-

“To yield up the Premises and the Landlord’s fixtures and fittings therein together with in “bare shell” condition (irrespective whether the Premises are to be delivered to the Tenant at the commencement of the Term in “bare shell” condition or not) at the expiration or sooner determination of this Agreement in reasonably good clean and tenantable state and in proper repair and condition in accordance with the stipulations herein contained (fair wear and tear and inherent structural defects excepted) together with all keys giving access to the Premises, PROVIDED THAT where the Tenant has made any alterations or installed any fixtures fittings improvements or additions in or to the Premises and notwithstanding that the Landlord’s consent for so doing may have been obtained to have been given or be deemed to have been given, the Tenant shall at his own costs and expense remove and do away with all or any such alternations fixtures fittings or additions and make good and repair in a proper and workmanlike manner any damage to the Premises and the Building and the Landlord’s fixtures and fittings therein as a result thereof to the satisfaction of the Landlord before delivering up the Premises to the Landlord and before the expiration or sooner determination of this Agreement the Tenant shall reinstate the Premises in all respects into “bare shell” condition, PROVIDED THAT if the Tenant fails to do so, the Landlord shall be entitled to do such repair or work as the Landlord shall in its absolute discretion deem fit and all costs and expenses incurred by the Landlord in relation thereto shall be paid by the Tenant and shall be recovered from the Tenant as a debt (or, if the Landlord so selects, be deducted from the said Deposit (hereinafter defined in Clause 4(a))) and PROVIDED FURTHER THAT the Tenant’s obligations to reinstate the Premises into “bare shell” condition under this Clause may be modified or varied by the Landlord notifying the Tenant in writing that the Landlord proposes without payment of any compensation to retain all or any of the said alternations, fixtures, fittings improvements or additions in the nature of the Landlord’s fixtures and fittings which the Tenant is otherwise liable hereunder to remove and do away with.” (Emphasis added).

7. Clause 4(b)(i) empowers the Landlord to make deductions from the deposit.  It reads as follows:-

“That if and whenever any part of the rent hereby reserved or any other payments by the Tenant hereunder shall be in arrears for fifteen days (whether the same shall have been formally demanded or not) or if and whenever there shall be a breach of any of the agreements by the Tenant herein contained or if the Tenant (being an individual or sole proprietor or partnership) shall commit any act of bankruptcy or shall have its Business Registration cancelled or (being a corporation) shall go into liquidation (either voluntary or otherwise) or shall have any order made or resolution passed for winding up or if the Tenant shall enter into any composition or arrangements with his creditors or shall suffer execution to be levied upon any of his goods or effects the Landlord shall upon the happening of any such event be entitled to re-enter upon the Premises or any part thereof in the name of the whole and thereupon this Agreement shall absolutely determine but without prejudice to any rights which may have accrued to the Landlord by reason of any antecedent breach of any of the obligations on the part of the Tenant herein contained AND the said Deposit paid hereunder shall be forfeited to the Landlord as and for liquidated damages and not as penalty but without prejudice to the Landlord’s right to claim any further damages which the Landlord shall have sustained or may sustain AND a written notice served by the Landlord on the Tenant or left at the Premises to the effect that the Landlord thereby exercises the power to re-enter shall be a full and sufficient exercise of such power without actual entry on the part of the Landlord. Notwithstanding the foregoing, the Landlord may in any such event at its option elect not to terminate this Agreement but to deduct from the said Deposit the amount of any monetary loss incurred by the Landlord in consequence of the breach, non-observance or non-performance by the Tenant in which event the Tenant shall, as a condition precedent to the continuation of the tenancy, deposit with the Landlord the amount so deducted and, if the Tenant shall fail to do, the Landlord shall forthwith be entitled to re-enter on the Premises and to determine this Agreement in which event the said Deposit may be forfeited to the Landlord as hereinbefore provided.” (Emphasis added).

THE PARTIES’ CASE

8. The plaintiff says that, during the term of the tenancy, the defendant being the landlord of the Premises never exercised its power to re-enter upon serving a written notice to plaintiff (as required by section 58 of the Conveyancing and Property Ordinance Cap.219), nor did it determine the Tenancy Agreement. Accordingly, the defendant had no right to forfeit the Deposit before or after the expiration of the tenancy pursuant to Clause 4(b)(i) of the Tenancy Agreement. The plaintiff was entitled to the re-payment of the Deposit when the Tenancy Agreement came to an end. 

9. The defendant says that, the plaintiff failed to yield up the Premises in accordance with clause 2(s) of the Tenancy Agreement.  Hence the defendant is entitled to forfeit the Deposit in accordance with Clause 4(b)(i) of the Tenancy Agreement.  Here are the details:-

(i) the plaintiff had demolished the roller shutter and failed to reinstate the shop front of the Premises;

(ii) the plaintiff without the defendant’s consent had demolished the cockloft;

(iii) the plaintiff had caused damage to the iron back door; and

(iv) the plaintiff had caused damage to the staff toilet.

10. The defendant counterclaims that, as a result of the plaintiff’s breach, it had to bear the cost of reinstating the cockloft, the roller shutter and the shop front.  The plaintiff is therefore liable to pay damages to the defendant. The defendant is entitled to “deduct” the damages from the Deposit pursuant to Clause 2(s) and 4(b)(i) of the Tenancy Agreement.

11. In reply, the plaintiff says that the defendant had no right to forfeit the Deposit. Even if the defendant had the right, the plaintiff was entitled to seek relief against forfeiture. It is the plaintiff’s case that the Deposit is not forfeitable as the amount is excessive and disproportionate.  Alternatively, it does not amount to a genuine pre-estimation of damages. It is a penalty clause and is unenforceable.

12. The plaintiff denies that it was in breach of the Tenancy Agreement. It reinstated the Premises to “bare shell” condition in accordance with clause 2(s) of the Tenancy Agreement. Therefore, no consent from the defendant was necessary and no damage was caused.  There was no notice in writing from the defendant to retain the cockloft, which was in any event an illegal structure.

13. The plaintiff further avers that the original state of the cockloft, roller shutter and the shop front of the Premises were old, torn and unsafe. The plaintiff was only responsible for reinstating the Premises to its original state and no further. The decoration work carried out subsequently by the defendant was not relevant to the reinstatement of the Premises’ original state and was not caused by the plaintiff.

ISSUES

14. The issues of the trial are essentially as follows:-

(i) what is the meaning of “bare shell” condition under clause 2(s);

(ii) whether prior written consent of the defendant is required under clause 2(s) if the defendant proposed to retain the Landlord’s fixtures;

(iii) whether the plaintiff breached the terms of the Tenancy Agreement on yielding up possession of the Premises;

(iv) whether the defendant is entitled to forfeit the Deposit;

(v) whether the reinstatement was incidental to any damage caused by the plaintiff; and

(vi) the amount of damages the defendant is entitled to if it is able to establish the counterclaim.

THE PLAINTIFF’S EVIDENCE

15. The manager of the plaintiff, Ho Nang (何能) (“Ho”), testified that in or about mid-2007, the plaintiff decided to set up a new shop for its retail sales of ceramic tiles and sanitary ware. Through the estate agent, the plaintiff rented the Premises from the registered owner, Rich Venture, for its business.

16. Both the plaintiff and Rich Venture had instructed lawyers to deal with the tenancy.  In the course, the lawyer for the plaintiff proposed to make amendment to the tenancy agreement drafted by Rich Venture.  Ho recollected that he personally asked in the solicitor firm if the original state of the Premises at the expiration of the lease be returned to Rich Venture. He explained that it would save the plaintiff from incurring expenses to remove any of the fixtures.  However, Rich Venture insisted a bare shell condition should be returned.  Eventually they agreed on the terms and conditions and executed the Tenancy Agreement.

17. The plaintiff rented the Premises for a term of three years from 15 August 2007 to 14 August 2010.  The plaintiff paid to Rich Venture the Deposit to secure the due payment of rent and other relevant expenses.

18. At the time when the plaintiff obtained possession of the Premises from Rich Venture, the shop front of the Premises was old and without any decorations and fittings. There was a cockloft erected inside the Premises.  It was very old and torn and even dangerous to step onto it.  Ho learnt from the estate agent that the cockloft was an illegal structure.  There was also an old-fashioned roller shutter installed at the shop front.

19. The plaintiff arranged Hung Mau Decoration Company Limited (鴻茂裝飾有限公司) (“Hung Mau”) to do the decoration works in 2007. They included the demolition of the roller shutter and strengthening works to the cockloft.

20. Ho learnt that Rich Venture assigned the Premises to the defendant on 8 April 2010.  The Deposit was transferred to the defendant on the same date.

21. The plaintiff had never received any notice from the defendant to retain any of the alternations, fixtures and fittings before the plaintiff surrendered the Premises to the defendant.  Then the plaintiff instructed the contractor to make the necessary demolition including the cockloft so as to deliver the Premises to the defendant on a “bare shell” condition. Ho accepted that no written permission had ever been obtained from the defendant.

22. On 14 August 2010, the plaintiff delivered the vacant possession of the Premises to the defendant.  Upon inspection, the defendant alleged reservation of rights against the plaintiff on the roller shutter and cockloft.

23. On 24 August 2010, the defendant, through the solicitors, claimed that the plaintiff was in breach of the Tenancy Agreement.

24. Ho testified that the plaintiff had a few retail shops on Lockhart Road.  Prior to entering into the Tenancy Agreement for the Premises, the plaintiff had already been renting Shop No. 7 which is situated next to the Premises.  The tenancy for Shop No.7 ended in 2012 or 2013. The plaintiff has also rented Shop No. 1 on Lockhart Road from about 2005 to the present.  Hence, even subsequent to the expiration to the Tenancy Agreement, Ho would occasionally walk past and observe the Premises.  From his observation, no roller shutter had ever been reinstalled at the Premises since the delivery of vacant possession on 14 August 2010.

25. Ho said some of the shops in Lockhart Road are installed with cockloft but some are not. He agreed that the cockloft in the Premises was at least 80% as large as the area on the ground floor.  He accepted that the cockloft would increase the usable area for the shop.

THE DEFENDANT’S EVIDENCE

26. The defendant called its accountant Tam Chi Wai (譚志偉)(“Tam”) to give evidence.

27. Tam testified that subsequent to the plaintiff’s letter dated 14 June 2010 which expressed the plaintiff’s interest to renew the lease, Tam called up Madam Lee of the plaintiff and informed the same that the defendant would not be extending the lease after its expiry on 14 August 2010.

28. On 14 August 2010, Tam obtained possession of the Premises from the plaintiff.  He immediately noticed that the cockloft and the roller shutter had been demolished.  He took some photos showing the state of the Premises.  He further discovered damage to the iron back-door, the removal of the staff toilet and blockage of sewage drainage with cement.

29. Tam said vacant possession of the Premises was given to the new tenant, Regent Building Material Supplies Company Limited (“Regent”), on the following day, namely 15 August 2010 after the expiration of the Tenancy Agreement. Regent has since then operated its building materials retail business at the Premises in the name of “La Maison” up to the present.  

30. The total contract sum for the reinstatement of the Premises was HK$450,000. It was Regent which engaged TRA Services Limited (“TRA”) to carry out the reinstatement works suitable for its own use.  Regent made the payments to TRA.  Hence, the relevant invoices were also addressed to Regent. 

31. Tam explained that as Regent had paid for the reinstatement costs of HK$450,000, Regent was then released from paying the rental deposit under the tenancy agreement.  Upon the expiration of the tenancy agreement in about 2013, the defendant was not required to refund the said rental deposit of HK$450,000 or any sum to Regent.  Tam agreed that the actual payment of HK$450,000 was made by Regent.  Thereafter a new tenancy agreement was made to Regent in 2013. Pursuant to the new tenancy agreement, Regent was requested to pay a deposit of six months’ rental (HK$170,000 x 6 months) to the defendant.

32. Tam denied that defendant and Regent are in fact associated companies. It was put to Tam under cross-examination that the Electronic Extract of Information on the Business Register shows that Regent Building Limited operates its business at the Premises in the name of “La Maison”.  According to the Annual Return dated 22 February 2013, Simon Tso is the sole director and shareholder of Regent Building Limited.  At the same time, both the Agreement for Sale and Purchase (“the S&P Agreement”) between Rich Venture and the defendant dated 22 December 2009 and the Assignment (“the Assignment”)dated 8 April 2010 were signed by Simon Tso as the authorised person for and on behalf of the defendant in the presence of a solicitor in Hong Kong.

33. Tam denied any acquaintance with Simon Tso and asserted that his “boss” was an old lady residing in Sweden.  The decision-making of the defendant including the handling of the present proceedings was made by this old lady whose instructions Tam would act upon in Hong Kong.  Tam even said that the S&P Agreement and the Assignment between Rich Venture and the defendant were sent to Sweden for endorsement.  When shown the said two documents with Simon Tso’s signature for and on behalf of the defendant in Hong Kong, Tam simply replied that he had sent the documents to Sweden and was unsure how those documents were endorsed.

34. Tam said the roller shutter was reinstalled by the defendant in 2010. Due to the needs of the Regent, it was removed with the consent of the defendant one month after the installation.

35. The defendant had obtained three quotations from TRA, namely 16 August 2010, 2 September 2010 and 3 September 2010.  The defendant adopted the last quotation on 3 September 2010.

36. Under the first quotation dated 16 August 2010, the total sum was around HK$280,000.  Tam said this quotation was “inappropriate” (“唔妥當”) and was hence rejected immediately.  He explained that the works quoted for the cockloft did not involve the use of heavy metal (重鐵). It did not satisfy the requirements for seeking approval from the Buildings Department.  The cost of the cockloft under this quotation was about HK$150,000. 

37. Under the second quotation dated 2 September 2010, the total sum was HK$385,550.  The cost for installing the cockloft and staircase had already been increased to HK$224,000. But this quotation did not include electrical works.  Hence, the defendant obtained the third quotation on the following day on 3 September 2010. 

38. The defendant finally relied upon the third quotation dated 3 September 2010. The total sum was HK$450,000, almost the same as that of the Deposit.

DISCUSSION

39. The facts which give rise to the action are uncomplicated.  It turns on the credibility of the witnesses and proper construction of the Tenancy Agreement.

40. The plaintiff has rightly pointed out at the commencement of his final written submission that the defendant has no basis to forfeit the Deposit as it has failed to prove that the defendant had incurred any costs and expenses.

THE DEFENDANT HAD INCURRED NO COSTS AND EXPENSES

41. According to the oral evidence of Tam, he testified that Regent engaged TRA to carry out the reinstatement works. It was Regent who had paid for the reinstatement costs of HK$450,000.  The defendant as landlord benefitted from the reinstatement works without having to incur any expenses.  The plaintiff submits that it has concluded the issues regarding reinstatement as there was no loss to the defendant and the costs had been absorbed by the new tenant in establishing its shop “La Maison”.

42. The plaintiff relies on Chou Kou Pim and Another v The Prudential Mall Ltd,CACV No 72 /1990 (unrep, 29.11.1990) where shop premises in Nathan Road were leased to the respondents by the appellant.  On signing the lease agreement, the respondents paid a deposit to the appellant.  The relevant clause provided that the deposit “shall be refunded to the tenant by the landlord without interest within 30 days after the termination of this lease and the delivery of vacant possession of the said premises to the landlord or within 30 days of the settlement of the last outstanding claim which the landlord may have against the tenant in respect of any breach…”  When the respondents demanded the return of the deposit, the appellant refused.  There was a dispute on the cost of necessary repairs to the premises upon vacant possession being given.  It was common ground that the alleged defects were in fact not remedied. The premises was immediately re-let to other tenants who completely re-decorated the shop and then proceeded to carry on their own different retail business.

43. The Court of Appeal agreed with Kempster, JA, who heard the appeal of the summary judgment in the High Court, that the words “last outstanding claim” must be construed as “last outstanding valid claim”.  Since no reinstatement had taken place, no valid claim to damages had arisen in favour of the landlord:-

“It is conceded that no reinstatement took place. I think it is also conceded, implicitly, that no reinstatement could have taken place because new tenants had come in and I think I can take judicial notice of the fact that in shop-premises new tenants have their own ideas of fittings and decor and would immediately be concerned to put the shop into an appropriate state for the selling of their particular retail goods.

In the circumstances no valid claim to damages arose in favour of the landlords…”

44. A similar view was expressed in First Oriental Holdings Ltd v Longluxe Investment Ltd, HCA 10294/1999 (unrep, 27.8.1999). The plaintiff as tenant and the defendant as landlord entered into a tenancy agreement for an office unit subject to a mortgage.  The plaintiff paid a deposit to the defendant.  It was common ground that upon entering into possession, the plaintiff caused the existing internal partitioning to be demolished.  Upon termination of the tenancy, the defendant refused to return the deposit to the plaintiff on the basis that it would incur cost to reinstate the office unit to its original state.  The defendant acknowledged that it had not incurred any costs of reinstatement and had no intention of doing so, because the mortgagee had taken possession of the office unit.  Accordingly, Madam Justice Yuen held that:-

“Since it has not incurred any costs of reinstatement and has no intention of doing so, it has suffered no loss and it has no real claim against the plaintiff such that it could make any deductions against the deposit.

It is now clear law that the proper application of the general principle governing damages for breach of contract (that where a party sustains loss by virtue of breach of contract he is so far as money can do it to be placed in the same situation in respect of damages as if the contract had been performed) required the court to ascertain the loss the defendant here had in fact suffered by reason of the breach - it was not the monetary equivalent of specific performance.”

45. The plaintiff argues that as in Chou Kou Pim and First Oriental Holdings Ltd, the Premises were immediately re-let to Regent on 15August 2010.  It was Regent which paid to TRA the sum of HK$450,000, which, it is submitted, also included the costs for the redecoration of the whole Premises.  As the defendant did not incur any costs or expenses which could be deducted from the Deposit under clause 2(s), it had no valid claim against the plaintiff and was thus obliged to return the Deposit under clause 4(a).

46. The defendant, in reply, submits that the above two cases turned on their own peculiar facts. They are distinguishable from our present case.  However, I am not persuaded by the defendant’s submission.  In my view, each case must be different on its own facts.  It is the legal principles that count.  I find the principles elicited in the two authorities apply squarely in the present situation.

47. As regards to Regent paid for the reinstatement expenses, the defendant argues that it can be viewed that the monies being the rental deposit paid by Regent to the defendant.  Then Regent paid directly to the contractor on the behalf of the defendant.  With respect, I have difficulties with this submission. Tam explained clearly as Regent had paid for the cost on reinstatement; it was so released from paying the deposit to the defendant.  He confirmed that the defendant had never refunded the deposit to Regent at the end of the first lease in 2010.  I then raised query that if that was the case, the defendant was put at a disadvantage position because it had no deposit to secure the observance and performance by Regent of the conditions in the tenancy agreement. The defendant had no deposit in its custody.  Then Tam tried to salvage his case by saying that the defendant asked Regent to pay a rental deposit of 6 months at the commencement of the second lease in 2013.  Be that as it may, the defendant’s position remained unprotected during the first lease with Regent.  More importantly, it did not assist the defendant’s case because the said 6 months deposit would have to be returned to Regent on the expiration of the second lease.  The fact that Regent paid for the reinstatement costs had never changed. As a result, the defendant incurred no costs and expenses on the reinstatement.  It is fatal to the defendant’s case.

48. Regent had already paid for the reinstatement of HK$450,000 in 2010. In my view, it is inexplicable Regent would have agreed to pay a huge sum of rental deposit of 1.02 million (HK$170,000 x 6 months) to the defendant in 2013 for the second lease. It makes no business sense for Regent at all. If the reinstatement sum of HK$450,000 should be treated as the deposit paid by Regent, then the defendant should not have asked Regent to pay for an extra rental deposit of 6 months.  I find this part of Tam’s evidence in relation to the 6 months deposit to be untrue.  He is totally untrustworthy.

49. In this connection, I accept the plaintiff’s aforesaid submission in its entirety.  The defendant has not incurred any costs of reinstatement.  It had suffered no loss.  I find that the defendant had no valid claim against the plaintiff.

50. Given that the issues have been fully argued before me, I go on to consider the issues of the case for completeness.

THE PROPER CONSTRUCTION OF CLAUSE 2(s)

51. The outcome of this case depends very much on the true and proper construction of the Tenancy Agreement.

52. The general principle in construction of a contract, as laid down by Lord Hoffmann in Investor's Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 897  at 912 to 913 as follows:-

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 WLR. 1381, 1384‑1386 and Reardon Smith Line Ltd. v. Yngvar Hansen‑Tangen [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201 :

‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ ”

53. These principles have also been affirmed by Lord Hoffmann sitting as  a Non Permanent Judge of the Hong Kong Court of Final Appeal in  Jumbo King Ltd v Faithful Properties Ltd & Ors (1999) 2 HKCFAR 279.  There, in delivering judgment of the Court of Final Appeal, Lord Hoffmann NPJ said at 296 :

“ The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain. The only escape from the language is an action for rectification, in which the previous negotiations can be examined. But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”(emphasis added)

54. For the purpose of considering the interpretation of the Tenancy Agreement, the plaintiff submits that the rule against the admissibility of pre-contractual negotiations is not a hard and fast rule.  He relies on Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523 at § 76 and Nicholas Timothy Cornforth Hill v Alvarez & Marsal Asia Ltd, HCA 56/2007 at §§59 & 60. 

55. The plaintiff draws to the court’s attention that clause 2(s) under the first draft of the Tenancy Agreement as produced by Rich Venture provided the same as the present clause 2(s), namely, “to yield up the Premises and the Landlord’s fixtures and fittings therein together with in “bare shell” condition (irrespective whether the Premises are to be delivered to the Tenant at the commencement of the Term in “bare shell” condition or not)”.  Subsequently, the plaintiff’s proposed amendment to clause 2(s), namely, “to yield up the Premises and the Landlord’s fixtures and fittings therein together with in the original physical state and condition of the Premises as at the commencement of the term hereby granted”.  It was rejected by Rich Venture, and hence the first draft of clause 2(s) was ultimately adopted.

56. Based on Yoshimotoand Nicholas Timothy Cornforth Hill, the plaintiff submits that such evidence of negotiations and drafting of the clause should be admissible to assist the court in ascertaining the true meaning of clause 2(s). Together with the words in brackets, namely, “irrespective whether the Premises are to be delivered to the Tenant at the commencement of the Term in “bare shell” condition or not”, it is clear from the above correspondence that the Premises may not have been in “bare shell” condition when it was handed over to the plaintiff at the commencement of the tenancy. Nonetheless, the plaintiff was to yield up the Premises in “bare shell” condition.  The plaintiff submits that clause 2(s) clearly did not require the plaintiff to reinstate the Premises to its original state with the cockloft and roller shutter in place.

57. In my view, the proposed tenancy agreement forwarded by the plaintiff to Rich Venture’s lawyer during the course of the negotiation stage provides a reliable source of evidence in writing.  The content of the negotiation is stated precisely on the document itself. However, having considered the powerful dicta from the Court of Final Appeal in the case of Jumbo King Ltd (supra), I must ignore the previous negotiation of the parties and extrinsic evidence as to their subjective intention leading to the formation of the Tenancy Agreement. They are inadmissible.

(i) Meaning of “bare shell” condition

58. Both counsel in the present case have referred to the court the authorities involving “bare shell” condition.  They include the followings: China Resources Property Management Ltd v Max Merit Ltd, DCCJ 2012/2010 (unrep, 18.7.2012, Deputy District Judge Joseph Chung); Modern Beauty Saloon Ltd v Hing Yip Investment Co Ltd and Another, DCCJ 5634 /2003 (unrep, 29.8.2006, Chow J); Wilson Communications Ltd v Fordease Ltd, CACV 143//2003 (unrep, 26.2.2004, Court of Appeal);and Hang Lung Real Estate Agency Ltd v Matimak Textiles Ltd, HCA No 157 of 2000 (unrep, 14.9.2000 , Master Lam).

59. I find the above authorities have been helpful in the sense that they enabled me to see how matters were approached by the courts in other cases.  However, in my view, each case must be decided upon its own facts. The court will construe the true meaning of “bare shell” condition in accordance with the context and circumstances surrounding the present case.

60. It is clear that the meaning of the words “bare shell” condition has to be ascertained from the Tenancy Agreement. It is that meaning that would convey to a reasonable person having all the background knowledge which would reasonably have been available to Rich Venture and the plaintiff when they were at the time of the contract. The background or factual matrix includes practically anything which would have affected the way in which the language of the document would have been understood by a reasonable man. 

61. The defendant submits that the cockloft is a prominent and salient feature of retail shops in Lockhart Road. It enlarges the area of the showroom and display of the retail shop. The defendant submits that it forms part of the factual matrix in the interpretation of the Tenancy Agreement.

62. I disagree.  It was Ho’s evidence that not all the retail shops in Lockhart Road are installed with cockloft. Some of them do have the cockloft but some do not.  Evidence of background that is admissible is limited to objective facts. I find that the parties would not have had this fact in mind at the time when the Tenancy Agreement was made. 

63. It is common ground that the cockloft was an unauthorized structure without the prior approval of the Buildings Department. As regards the state and condition of the Premises when the plaintiff obtained possession of the Premises from Rich Venture, Ho said the shop front and the roller shutter were very old and torn. The cockloft was unsafe for use.  I find this part of Ho’s evidence is cogent, true and correct.  It was supported by the contemporaneous document of Hung Mau’s quotation in 2007. They included the demolition of the roller shutter and strengthening works made to the cockloft.

64. I find the facts stated in the above paragraph being the background or factual matrix which assists me in the interpretation of the Tenancy Agreement.

65. As was said by Lord Hoffman NPJ in Jumbo King, if that ordinary meaning makes sense in relation to the rest of the documents and the factual background, the court will give effect to that meaning no matter how harsh the consequence may be to one of the parties.  According to the Oxford Shorter Dictionary, one of the meanings of “bare” means “unfurnished and undecorated”. There is nothing to suggest that the term “bare shell” condition bears any meaning other than their natural and ordinary meaning. 

66. I now turn to the factual matrix. Having considered the state of the cockloft, shop front and the roller shutter were all very old and torn; one can anticipate that these items would be in even worse condition after the fair wear and tear at the end of the three year lease. It seems to me that the Premises to be returned in bare shell condition was for the benefit for Rich Venture as well as for the benefit of the plaintiff. I find that under this factual matrix, “bare shell” condition must follow the ordinary meaning.  It means that the plaintiff is obliged to yield up the Premises in its unfurnished and undecorated state, without decorations or fittings in a bare shell condition.

(ii) Whether prior written consent of the defendant is required under clause 2(s) if the defendant proposed to retain the Landlord’s fixtures

67. Pursuant to “PROVIDED FURTHER THAT” proviso of clause 2(s), it is the Tenant’s obligations to reinstate the Premises into “bare shell” condition.  The Landlord is required to notify the Tenant in writing if the Landlord proposed to retain all or any of the alternations, fixtures, fittings improvements or additions in the nature of the Landlord’s fixtures and fittings.

68. The defendant argues that the above mentioned proviso only applies where the Landlord wished to retain any of the Tenant’s fixtures and fittings.  He further submits that “in the nature of the Landlord’s fixtures and fittings” under this proviso is clearly a linguistic mistake or wrong words used carelessly. It should read “Tenant’s fixtures and fittings” instead of “Landlord’s fixtures and fittings”.  The defendant supports its contention by drawing analogy with clause 2(q)(vii) and reading in conjunction with clause 4(B) and clause 6 of the Tenancy Agreement.

69. It has been held in Jumbo King (supra) that the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. With respect, in construing the clause 2(s) as the way the defendant does, it is attempting to re-write the same to suit its own case. 

70. As Lord Hoffmann NPJ said in Jumbo King at page 296, in serious utterances such as legal document, people was supposed to have chosen their words with care.  One does not readily accept that they have used the wrong words.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, the court will give effect to that language even though the consequences may appear hard for one side or the other.  If on the true construction, a party had made a bad bargain, it is his misfortune.  It may be due to his lack of care or prudence.  He is nevertheless bound by it.

71. In my view, the Tenancy Agreement was a formal document entered into between the plaintiff and Rich Venture.  It was drafted by Rich Venture’s solicitor and adopted by the plaintiff’s solicitor.  They would not have made linguistic mistakes in their choice of words. There is nothing to suggest that the words “Landlord notifying the Tenant in writing that the Landlord proposes without payment of any compensation to retain all or any of the said alternations, fixtures, fittings improvements or additions in the nature of the Landlord’s fixtures and fittings which the Tenant is otherwise liable hereunder to remove and do away with” in clause 2(s) bear any meaning other than their natural and ordinary meaning.

72. I find that the meaning of clause 2(s) is clear and unequivocal.  In my view, the condition of a written notice under Clause 2(s) must be fulfilled if the defendant proposed to retain the Landlord’s fixtures before the plaintiff will be liable.  It seems to me and I find that the said proviso was to enable the landlord to choose which of the landlord’s fixtures to be kept in the Premises and which are to be removed on the termination of the tenancy. 

73. It is the defendant’s case that an oral notice had been given.  Tam claimed that he had made a telephone call to the plaintiffrepeatedly asking the plaintiff to retain the cockloft of the Premises. 

74. I reject this part of Tam’s evidence.  I find it totally improbable that if the defendant had great concern about the cockloft would just make a phone call to the plaintiff without formally lodging a formal written notice.  Further, it would be illogical for the plaintiff to disregard such notice and proceed to demolish the cockloft, incurring unnecessary expenses.  On balance, I accept Ho’s evidence that no oral notice had been given by the defendant.  

75. It is stipulated under clause 2(s) that written notice from the defendant as the landlord is required if the defendant wished to retain any of the Landlord’s fixtures.  Oral notice, even if accepted by the court, is obviously insufficient.  The defendant had not served any written notice on the plaintiff.  The plaintiff as a tenant was obliged to yield up the Premises at the expiration of the Tenancy Agreement in “bare shell” condition, i.e. without any fixtures, fittings or decorations. 

(iii) Whether the plaintiff breached the terms of the Tenancy Agreement on yielding up possession of the Premises

76. The defendant argues that it is generally accepted that a tenant is not entitled to remove the landlord’s fixtures.  It relies on the case of Timeless Software Ltd v Glorious Ltd, HCA 151/2007 (unrep, 17.7.2009, Hon Sakhrani J) at §67.  The defendant submits that the cockloft, the shop front and the roller shutter are all the Landlord’s fixtures and fittings.  It cannot be right that they to be returned and delivered up are to be demolished and removed. The defendant submits that the plaintiff was obliged to yield up the Premises with the Landlord’s fixtures and fittings.

77. With respect, I do not see it a valid argument. The relevant provision in Timeless Software Ltd is different from the present case.  The tenancy agreement in the case of Timeless Software Ltd required the tenant to reinstate the premises to the original handover condition given by the landlord to the tenant, as opposed to “bare shell condition”.  It is clause 2(s) that this court should take into consideration.

78. Under clause 2(s), the Tenant is obliged to yield up the Premises with the Landlord’s fixtures and fittings together with in “bare shell” condition at the expiration of the agreement.  Pursuant to “PROVIDED FURTHER THAT” proviso, in my judgment, the defendant can choose whatever Landlord’s fixtures and fittings it proposed to retain and serve on the plaintiff a written notice.  It is those Landlord’s fixtures and fittings that the defendant which had chosen and listed in the written notice that the plaintiff is obliged to return on yielding up procedure. Otherwise those landlord’s fixtures would be liable to be removed by the plaintiff.  It is the plaintiff’s obligation to give a “bare shell” condition at the expiration of the lease.  The Premises is to be yielded up in its unfurnished and undecorated state in a bare shell condition.

79. I find that on the proper construction of clause 2(s), the plaintiff had rightly demolished the cockloft, shop front, toilet, iron door and the roller shutter.

80. For the reasons aforesaid, I find the plaintiff did not breach clause 2(s). 

81. The defendant also submits that since no prior written consent or permission had been sought from the defendant under clause 2(h) in respect of the removal of the landlord’s fixtures which include the cockloft, shop front with the roller shutter etc, the plaintiff was in breach of clause 2(h) of the Tenancy Agreement.  Clause 2(h)  reads as follows:-

“Not (without the prior consent of the Landlord) to make or permit to be made any alternations in or additions to the interior or exterior of the Premises or to the electrical wirings, fire service, plumbing, drainage, gas and air-conditioning etc. installations or other Landlord’s fixtures and fittings or cut maim or injure or suffer to be cut maimed or injured any doors windows walls structural members or other fabric thereof without having first obtained the written licence and consent of the landlord thereof. If any such consent shall be granted by the Landlord it shall in any event be subject to the condition that the Tenant shall not cause any damage to the Premises or ay part thereof in addition to such other conditions as the Landlord shall think fit to impose and subject to the approval of the Manager or the Management Committee or the Incorporated Owners of the Building and/or the Buildings Department and/or other Government authority (if necessary).” (emphasis added)

82. In my view, clause 2(h) was clearly intended that prior written consent to be sought from the landlord to make any alternations or additions on the Landlord’s fixtures during the tenancy period.  Clause 2(s), on the other hand, was specifically to cater for the condition when the Premises yielded up to the landlord at the expiration of the Tenancy Agreement.

83. In the instant case, the plaintiff delivered the vacant possession of the Premises to the defendant on the last day of the lease on 14 August 2010 upon the expiration of its term.  Clause 2(h) is clearly not applicable.

84. Further, under clause 2(h), “electrical wirings, fire services, plumbing, drainage, gas and air-conditioning etc installation” are objects which are legal.  Under the ejusdem generis rule, “other Landlord’s fixtures and fittings” should be restricted to legal objects.  Hence, the cockloft did not fall within the meaning of “other Landlord’s fixtures and fittings” under Clause 2(h).  In my view, this clause is of no assistance to the defendant’s case.

85. In my judgment, the plaintiff had not breached the terms of the Tenancy Agreement on yielding up a “bare shell” condition of the Premises to the defendant.

(iv) Whether the defendant is entitled to forfeit the Deposit

86. The defendant contends that it is entitled to deduct from the Deposit any monetary loss suffered by virtue of clause 4(b)(i) where there is a breach of the clause 2(s) of the Tenancy Agreement.

87. In my view, clause 4(b)(i) is clearly intended to provide the landlord with a right to forfeit the Deposit together with the tenancy.  In the present case, upon the expiry of the term without any forfeiture of the tenancy, the Deposit would become refundable. 

88. The plaintiff has correctly pointed out, and I so find, that the  defendant had failed to comply with the mandatory notice requirement stipulated under section 58(1) of the Conveyancing and Property Ordinance, Cap 219, which provides that a landlord has no right of forfeiture unless he has served a notice on the tenant (a) specifying the particular breach; (b) if the breach is capable of remedy, requiring the tenant to remedy the breach; and (c) specifying the compensation, if any, and the tenant must be given reasonable time to remedy the breach (“section 58 notice”).  Any purported forfeiture without a section 58 notice, or in pursuance of a notice which fails to specify the breach and require the breach to be remedied if remediable, is void. (See Land Law in Hong Kong, SH Goo and Alice Lee (3^rd Ed 2010) at p 472)

Clause 4(b)(i) is a penalty clause

89. The plaintiff further submits that the forfeiture clause being a penalty clause is unenforceable.  It was never intended by the parties that the “whole” sum of the Deposit would be paid to the landlord in the event of any breach of the Tenancy Agreement.  It is evident by the fact that, under Clause 2(s), the landlord is entitled to claim damages or “deduct” the same from the Deposit. Further, forfeiting the “whole” sum of the Deposit in the event of “minor” breaches of the Tenancy Agreement would indeed be “extravagant and unconscionable in amount” when compared with the greatest loss that could be proved.

90. I agree with the above submission and find that clause 4(b)(i) is a penalty clause.

91. In any event, given that I find the plaintiff did not breach clause 2(s) of the Tenancy Agreement in yielding up the Premises, clause 4(b)(i) is not applicable.

92. In my judgment, the defendant is not entitled to forfeit the Deposit.  The plaintiff is entitled to be returned with the same.

93. Clause 4(b)(i) provides that the Deposit shall be refunded to the Tenant by the Landlord without interest within 30 days after the expiration of the tenancy.  Hence the Deposit became repayable upon the expiration of the tenancy on 14 August 2010.  I find that interest on the Deposit began to run from 15 September 2010.

(v) Whether the reinstatement was incidental to any damage caused by the plaintiff

94. Tam denied that the defendant and Regent are in fact associated companies.  Based on the documentary evidence, it is unquestionable that Simon Tso is a person in control of both the defendant and Regent.  Tam’s explanation that the S&P Agreement and the Assignment between Rich Venture and the defendant were sent to Sweden for his lady boss for endorsement was simply incredible.  The contemporaneous documents of the S&P Agreement and the Assignment with Simon Tso’s signatures affixed cast serious doubt on Tam’s evidence.  I am wholly unimpressed by this part of his evidence.

95. The plaintiff submits that the defendant had always intended to and did in fact purchase the Premises for its own use.  I agree.   I find that this is the main reason why the defendant refused the plaintiff’s request to renew the tenancy in June 2010.

96. The plaintiff submits, correctly in my view, the refurbishment works would have to be carried out when the defendant repossessed the Premises in August 2010 in any event.  Thus, the alleged reinstatements were not incidental to the damage caused by the plaintiff.  The plaintiff cannot be held liable for such costs.

97. In Lee Ho Seok v Kanvest Limited DCCJ 5074/2002, Lok J in considering whether the tenant was liable to damages related to repairing to the walls of leased premises, referred to Hong Kong Tenancy Law by Malcolm Merry 4^th ed., at p116:

“The standard will vary with the length of the lease, the obligations to repair undertaken by tenant and landlord in other covenants, and the age, character and location of the premises at the time the lease was entered into. In one old case it was said that:

‘good tenantable repair’ is such repair as, having regard to the age, character and locality of the house, would make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it.

This means that a higher standard of repair would be expected, for instance, in a modern flat in a middle-class district than in a flat in an old tenement block in a crowded area.  The character of the district and the character of the premises may change over time, so it is important to consider the nature of the location and the premises at the beginning of the lease.  Where, as is common in Hong Kong, the lease is for three or fewer years these considerations are, however, unlikely to make a difference.”

98. Lok J also referred to Burkeman v G E Capital Europe Limited (2002). In that case, Stuart Brown QC was asked to assess the damages for breach of covenant to repair on the part of the tenant.  The lease involved an “attractive” property with high rent.  Stuart Brown QC stated that:

“25. Any tenant moving into a property of this quality would expect, if not perfection, something approaching perfection. A landlord would, as previous experience …… demonstrates, thus be required to do some works before tenants moved in. In any event, I re-emphasise that this was not a repairing tenancy. Any landlord letting property under a tenancy of this kind would expect to have to redecorate on a regular basis.

41. … Common sense, one’s own experience and, indeed the evidence, would suggest that a property would require to be redecorated perhaps every three or five years, a distinction being drawn between emulsioned areas, woodwork and wallpapering. Though it was fresh, it was not without defects. I have already made the point that if the Claimant succeeded in full for that figure of 21,000 pounds, she would be able to move a new tenant in every two or three years without expending another penny on the décor. That cannot possibly be right. However, even in the context of this property, there are large sums and there were clear breaches. …” (emphasis added)

99. Stuart Brown QC held that any landlord letting “attractive” property would expect to redecorate on a regular basis.  In my view, the Premises is situated in the prime site in Wanchai area.  The shops thereat are famous for selling the high-class building and construction materials.  After the term of three years under the Tenancy Agreement, the defendant was expected to redecorate in any event to make changes and to cater for the latest trend in the building field in order to remain competitive.  As Kempster, JA commented in Chou Kou Pim, “shop-premises new tenants have their own ideas of fittings and decor and would immediately be concerned to put the shop into an appropriate state for the selling of their particular retail goods”.  In these circumstances, I find that the plaintiff cannot be held liable for the alleged costs for the reinstatement or redecoration works.

100. Tam denied in cross-examination that refurbishment works rather than reinstatement works had been carried out. However, he agreed that the quotation dated 3 September 2010 was for works carried out to the whole Premises and that the responsibility for many items on the quotation should not be borne by the plaintiff.

101. I note that the defendant had obtained 3 quotations for the reinstatement works on the Premises.  The reinstatement costs increased from HK$280,000 to HK$450,000.  In my judgment, the defendant’s alleged reinstatement was obviously refurbishment.  The Premises was refurbished into an extravagant state.  The photos clearly support my finding in this respect.  They are certainly more objective and reliable evidence than the subjective opinion of Tam.  The alleged reinstatement costs in the sum of HK$450,000 were clearly excessive and unreasonable.

102. Further, it is pertinent to note that the defendant through its then solicitors first wrote to the plaintiff making complaints about the cockloft and the shop front on 24 August 2010.  The defendant stated in the said letter that it had “duly retained contractor(s) to carry out the said reinstatement works” and asked the plaintiff to settle the loss and damages alleged suffered by the defendant.  However, the defendant neither furnished to the plaintiff any quotation for the alleged reinstatement works nor pursued the matter any further. On 21 March 2011, seven months afterwards, it was the plaintiff’s solicitors who wrote to the defendant’s solicitors referring to the letter dated 24 August 2010 and demanding the defendant to refund the Deposit.  Ten days later, on 31 March 2011, the plaintiff’s solicitors again wrote to the defendant’s solicitors asking for a reply.  Yet, until after these proceedings were commenced on 1September 2011, the defendant had never made any replies to the plaintiff.

103. According to the defendant’s case, not only did it incur reinstatement costs in the sum of HK$450,000, but it also suffered loss of rental of HK$217,500, making a total of HK$667,500.  Even if the Deposit was deducted, the defendant would still have a claim for HK$217,500 against the plaintiff.  Nonetheless, subsequent to its first complaint letter dated 24 August 2010, the defendant never wrote to the plaintiff’s solicitors again to raise such a claim.  

104. If the defendant had a genuine claim, it is inconceivable that it would not make any response even when the plaintiff’s solicitors wrote back to the defendant’s solicitors twice in March 2011.  The inaction of the defendant is inconsistent with its case that it had any genuine complaints as to the condition of the Premises.  I accept with the plaintiff’s submission that the defendant in fact had not suffered any loss and damages at all.

105. I would dismiss the defendant’s counterclaim given my conclusion that:-

(i) the defendant had not incurred any costs and expenses for reinstatement;

(ii) the plaintiff did not breach any clauses under the Tenancy Agreement; and

(iii) the defendant had not suffered any loss and damages as alleged.

DAMAGES

106. In view of the conclusion reached above, there is no need to assess the defendant’s damages.  However, I would proceed to make the following assessment for completeness.

Cockloft

107. Under this item, the defendant claims costs and expenses for the following works:-

(1) Item 4.1 – supply and install metal structural cockloft (HK$186,000);

(2) Item 4.2 – supply and install metal structural cockloft staircase (HK$38,000);

(3) Item 4.3 – relates to decorative works and the defendant does not pursue the same.

108. The plaintiff relies on the quotation from Marlbo Engineering dated 21 October 2013 in which the costs for reinstating the cockloft and staircase are HK$131,500.  The plaintiff submits that, taking into account the depreciation and the original state of the cockloft, a reasonable cost for reinstating the cockloft should be in the region of HK$80,000 to HK$100,000.

109. Tam said the costs for reinstating the cockloft and staircase added up to HK$240,000 (the cost including the decorative works) because in 2010 the price of iron was most expensive.  He explained that for every meter of the penthouse, a long iron bar would have to be secured and put in place.  Further, the daily rate of labour per head costs about HK$1,000 per day. 

110. The defendant did not have the first hand knowledge of the cockloft in 2007.  I accept Ho’s evidence that the cockloft was very old and torn.  It was even unstable and unsafe when the plaintiff obtained possession of the Premises from Rich Venture.  Therefore the plaintiff arranged strengthening works to the cockloft.  It was supported by the quotations of the plaintiff’s contractor Hung Mau in 2007.  This was a contemporaneous document.  I find that the defendant is not entitled to have the cockloft be reinstated with heavy iron to a situation much better than the state in 2007.

111. Under such circumstances, I find the appropriate award for the cockloft with the staircase to be HK$131,500.

Roller Shutter

112. Tam alleged that defendant had initially reinstalled the roller shutter in 2010 which was subsequently removed about one month after the installation by Regent.  The defendant claims reinstatement costs of $8,800 for the supply and installation under this head.

113. The defendant provided no photos showing the Premises with the installation of a roller shutter.

114. In this respect, Ho explained that the plaintiff has also rented Shop No 1 on Lockhart Road from about 2005 to the present.  When he occasionally walks past and observe the Premises, he found no roller shutter had ever been reinstalled at the Premises since the delivery of vacant possession on 14 August 2010.  Ho further testified that nowadays most retail shop in Lockhart Road no longer use the roller shutters which are old-fashioned and inconvenient.  Glass windows are used instead so that the shops are visible to outsiders.

115. The reinstatement was arranged by Regent itself.  Regent should have known exactly what it needed for its shop. It totally defies common sense that it would remove the same one month after the installation.  I do not accept this part of Tam’s evidence.  If what he testified were true, I believe he would have at least taken a photo showing the removed roller shutter. I prefer Ho’s evidence that the roller shutter had never been reinstated at the Premises. 

116. I would simply reject this claim.

Shop Front

117. Under this item, the defendant claims reinstatement costs for the following works:-

(i) Item 3.1 – supply and install clear glass at Shop Front window displays (HK$21,250); and

(ii) Item 3.2 – supply and install 15mm thick double glazing doors (HK$10,000).

118. The plaintiff submits that Items 3.1 and 3.2 were decorative features and irrelevant to the installation of a roller shutter.

119. Ho said the shop front of the Premises was old and without any decorations and fittings.  He accepted under cross-examination that back in 2007 the shop front of the Premises was installed with a window display.   It was demolished by Hung Mau without reinstating the same when the Premises were delivered up to the defendant in 2010. However, Ho said the shop front in 2007 was only with the upper part and not of full length. 

120. It is clear that the defendant did not have the first hand knowledge of the shop front when it was in 2007.  I accept Ho’s evidence that the shop front was very old and without any decorations and fittings.  The plaintiff incurred further expenses to demolish and install the same.  It was supported by Hung Mau’s quotation. I also accept that the window display in 2007 was only with the upper part because the Premises was previously installed with the roller shutter. 

121. On this basis, it would be just to award the defendant a nominal sum where the fact of a loss is shown but the necessary evidence as to its amount is not given.  The appropriate amount of damages in this case should be $100 (See McGregor on Damages, 29^th edition at § 12-004).

Iron back door

122. The first time that the alleged damage to the iron back door was mentioned, without any particulars, was in the Defence and Counterclaim dated 10 October 2011.  The defendant has also never produced any photos showing the alleged damage to iron back door.

123. It is also remarkable that whilst the quotation dated 2 September 2010 was for “repairing the metal back door” in the sum of HK$1,000.  However, the quotation dated 3 September 2010, which the defendant has finally relied upon, does not include any reinstatement of an iron back door.

124. For the aforesaid facts, I find that the defendant has failed to prove the damage to the iron back door.  I reject to make any award under this head.

Toilet

125. It is noted in the quotation dated 2 September 2010, the costs for the supply and installation of a toilet was HK$3,500.  Only one day later, the quotation dated 3 September 2010 provided for making good of the staff toilet and general cleaning in the total sum of HK$10,000.

126. Tam explained that additional costs and expenses had to be incurred for the staff toilet (items 10 to 10.2) because the entire sewage drainage was blocked with cement.  Workers were hired to unblock and clear the cement stuck inside.  Hence the extra costs for installation and reinstatement of the toilet.

127. Tam asserted that he found out about the damage on 15 August 2010.  However, I notice that in the quotation dated 2 September 2010, no works had been assigned to deal with the blockage of sewage.  I find that there was no genuine claim for the reinstatement of a toilet.  I accept the plaintiff’s estimation that a reasonable cost should be HK$1,600.

Rental income

128. The defendant claims that it suffered loss of rental of HK$217,500 for 1.5 months whilst the reinstatement works were carried out.

129. I note that no relevant tenancy agreement with Regent has been produced to show that the monthly rental was HK$145,000.  Tam said that Regent’s payment of $450,000 for refurbishment was treated as the deposit.  It means a monthly rental of $150,000.  If that was the case, the loss of rental for 1.5 months would be $225,000.  Now the defendant is claiming for HK$217,500 under this head. I find that it is hard to reconcile the defendant’s case.

130. Tam revealed under cross-examination that there was in fact a rent free period of 1.5 months given to Regent.  He said had the plaintiff not repeatedly pursued against the defendant on the Deposit, the defendant would prepare to forgo the loss of the rental income. Finally, the defendant decided to claim for the loss of rental albeit its legal representative advised to the contrary.  It seems to me that the defendant was acting in bad faith in order to get more money from the plaintiff. 

131. In light of my findings that the defendant and Regent are in fact associated companies, the defendant has in effect regained possession of the Premises for its own use.  Further, the evidence as set out above at § §102 to 104 casts doubt on whether the defendant had in fact suffered any loss of rental.  In my view, the defendant could not have suffered any loss of rental. I do not award any amount under this head.

Ceiling works

132. The defendant claims reinstatement costs for the following items for ceiling works:-

(1) Item 5.1 – supply and install suspended gypsum board false ceiling at general shop area (HK$34,000);

(2) Item 5.2 – access panel for maintenance purpose (HK$1,400).

133. Tam explained that when the Premises was taken over by the plaintiff in 2007, there was a cockloft floor. The bottom of the cockloft, in which the fire pipelines and sprinklers embedded, was used to be the ceiling for the ground floor.  Hence, the plaintiff should be liable for costs for reinstating the ceiling for the ground floor of the Premises.

134. The plaintiff submits that items 5.1 and 5.2 were for decoration and irrelevant to the defendant’s claim.

135. In my view, there is no evidence if any gypsum board false ceiling was installed under the cockloft at the time when the plaintiff gained possession of the Premises in 2007.  I notice the Hung Mau’s quotation in 2007 did not include the demolition work for the ceiling works.  Instead, the plaintiff had carried out the reinforcement works on the cockloft and installation of a false ceiling.  In my judgment, I find that the false ceiling works were the tenant’s own fixtures.

136. Therefore, I reject this claim under Item 5.1 and 5.2.

Flooring works

137. The defendant claims the following items for the flooring works:-

(1) Item 7.1 – cement and sand screed to received tiling (for G/F)(HK$7,440);

(2) Item 7.2 – Plywood backing screed to receive tiling (for cockloft)(HK$15,500);

(3) Item 7.3 – provide labour to install homogenous floor tiles to general area (HK$59,520).

138. The plaintiff agrees to plywood backing in item 7.2 but the cost should be included under the setting up of the cockloft and staircase above.

139. I agree and so I disallow item 7.2.

140. The plaintiff submits that the remaining part under this item 7 involved decoration and other works which is unrelated to the issue in dispute.

141. The defendant states that items 7.1 and 7.3 were necessary since the flooring of the Premises on the ground floor was not tenantable when it was returned to the defendant.  It was uneven and was broken up into bits and pieces and the defendant needed to smoothen the flooring on the ground floor again.

142. I have studied the Hung Mau’s quotation carefully.  I do not find any removal and construction works for the flooring works on the ground floor.  I believe that the Premises was originally installed with the flooring works when the plaintiff gained possession from Rich Venture.  Therefore, I allow items 7.1 and 7.3 in full.  The sum is HK$66,960 ($7,440 + $59,520).

Insurance

143. The defendant claims for the employee workman insurance HK$5,000.

144. The plaintiff states that the defendant’s works relate to decoration and other works.  Thus this claim requires apportionment.

145. Having considered the whole circumstances, I agree that apportionment is necessary.  I allow HK$2,000 under this head.

Site preparation works

146. The defendant claims for site preparation works for HK$5,000. 

147. The plaintiff asserts that this item is irrelevant to the issue in dispute.

148. I agree.  I disallow this item.

149. Based on the aforesaid, if the defendant has a valid claim against the plaintiff (this is not my finding), the damages that I would have awarded will be as follows:-

(i)	Cockloft	$131,500
(ii)	Shop front	$100
(iii)	Toilet	$1,600
(iv)	Flooring works	$66,960
(v)	Insurance	$2,000
	Total	$202,160
		=======

ORDER

150. In view of my findings, I enter judgment for the plaintiff against the defendant on the plaintiff’s claim for HK$450,120 with interest thereon at 1% above the best lending rate of HSBC from 15 September 2010 until judgment and thereafter at judgment rate until payment.

151. I dismiss the defendant’s counterclaim.

152. I further make a costs order nisi that the defendant is to pay the plaintiff costs of the original action and of the counterclaim with certificate for counsel, to be taxed if not agreed.  Such order shall be made absolute 14 days after the handing down of this judgment.