XCHRX CHARMWAY DEVELOPMENT LTD. v. LONG CHINA ENGINEERING LTD.

HCA54/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.54 OF 2001

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J U D G M E N T

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1. This is the plaintiff's appeal against the Order of the Master made on 17 May 2001 granting it conditional leave to defend the counterclaim.

Background

2. The defendant is the registered owner of a commercial building known as Wu Yi Centre ("the Building") in Causeway Bay. The Building is managed by a Wu Yi Properties Company Limited ("the Manager").

3. By a Tenancy Agreement dated 15 February 2000 ("the Tenancy Agreement"), the defendant let to the plaintiff the 1st floor of the Building ("the Premises") for a term of three years commencing from 15 February 2000 at a monthly rent of $90,000. The plaintiff has been operating a café and bar known as Premier League on the Premises.

4. The counterclaim herein is for arrears of rent together with interest thereon and an order for possession of the Premises. The plaintiff does not dispute that it has not paid rent since 15 August 2000, but denies that the defendant is entitled to rent by reason of the defendant's breaches of the Tenancy Agreement.

5. The plaintiff's case is that the defendant has failed to designate or cause the Manager to designate part of the external wall of the Building for the plaintiff to put up advertising signs for Premier League. The plaintiff says that the defendant's failure has violated its entitlement under clause 10(ii) of the Special Conditions ("the Special Conditions") in Part 8 of the First Schedule to the Tenancy Agreement.

6. Further the plaintiff says that the defendant has been in breach of the convenant of quiet enjoyment contained in clause 3.1 of the Tenancy Agreement in that for some months in 2000, the metal gate at the street entrance of the Building was closed after mid-night when Premier League opened for business up to 4 a.m.

7. These alleged breaches form the subject matter of the plaintiff's claim for damages in the Statement of Claim. The damages cover operation loss and loss of the capital investment.

8. The defendant denies being in breach. Its case is that the plaintiff's right under clause 10(ii) of the Special Conditions is subject to its compliance with the terms and conditions set out thereunder. In particular, clause 10(ii)(d) stipulates that the erection of advertising sign requires the consent of the Manager. The defendant says that the plaintiff has not submitted to the Manager any proposal or drawing for the advertising sign and no consent has been given by the Manager. Accordingly, the plaintiff's right or the defendant's obligation to designate an advertising space under clause 10(ii) has not arisen.

9. As to the closing of the entrance of the Building, the defendant accepts that the entrance was closed between 1 a.m. and 4 a.m. between mid-March and end of July 2000, but not thereafter. The defendant also says that there is an alternative entrance to the Building which could and can be used to access the Premises.

10. In November 2000, the defendant issued distraint proceedings against the plaintiff. By an Order of the District Court dated 5 January 2001, the auction of the plaintiff's goods seized under the distraint warrant was stayed upon the plaintiff paying into court $270,000. On the same day, the plaintiff issued the writ herein. The defendant has filed a defence and counterclaim.

11. On 8 February 2001, the defendant applied for summary judgment on the counterclaim. On 17 May 2001, the Master after hearing arguments granted the plaintiff leave to defend on condition that the plaintiff paid into court within 14 days the arrears of rent for the period of 15 November 2000 and 14 June 2001, being the sum of $540,000, and that the plaintiff makes periodical payment in the monthly sum of $90,000 as from 15 June 2001 until the conclusion of this action. The plaintiff by its Notice of Appeal dated 24 May 2001 appeals against the Order of the Master. In the meantime, the plaintiff has not complied with the condition and its application for stay of execution of the Master's Order has been refused. Accordingly, judgment on the counterclaim was entered by default on 1 June 2001.

Reasons for Judgment

12. It is trite law that in an application for summary judgment, the opposing party will be granted unconditional leave to defend where the defence put up involves a triable issue of fact or law. On the other hand, where the defence put up is shadowy or there is little or no substance in it or that the court is almost prepared to give judgment, then it is appropriate to grant leave to defend conditional on the amount claimed being paid into court : para. 14/4/16 Hong Kong Civil Procedure 2001.

13. In the present case, there is no dispute that rent has not been paid. The defence put up to the counterclaim is that the defendant is not entitled to rent by reason of its breaches of the Tenancy Agreement.

14. The issue of whether the defendant is guilty of the alleged breaches is very much a matter for the trial on the plaintiff's claim, which will go on irrespective of the outcome of the defendant's application for summary judgment on the counterclaim. I would however make two observations on this aspect of the action. Firstly, the plaintiff's right or entitlement to put up advertising sign on part of the external wall of the Building as designated by the Manager is qualified by the terms and conditions set out under clause 10(ii) of the Special Conditions in the Tenancy Agreement. The plaintiff is obliged to obtain the consent of the Manager in erecting any advertising sign. There is no evidence before this court that the Manager has given the requisite consent. As such, it is, to say the least, arguable that the plaintiff cannot put up any advertising sign even if the Manager has designated an advertising space on the external wall of the Building.

15. Secondly, it is not in dispute that there is an alternative entrance to the Building which could or can be used to access the Premises. This being the case, the closing of the gate at the main entrance may only be in the nature of temporary inconvenience and does not constitute a breach of the convenant of quiet enjoyment : Manchester, Sheffield and Lincolnshire Railway Company v. Anderson [1898] 2 Ch. D. 394.

16. These observations aside, the crucial point is whether taking the plaintiff's case of breach of the Tenancy Agreement to the highest, are there triable issues on the counterclaim. In this regard, the first issue to be resolved is whether the plaintiff's obligation to pay rent is conditional upon the defendant's compliance with clause 10(ii) of the Special Conditions of the Tenancy Agreement and/or the convenant to quiet enjoyment.

17. The plaintiff's obligation to pay rent is set out in clause 2.1 of the Tenancy Agreement. It is not expressed to be subject to or conditional upon compliance by the defendant of all or part of its obligations thereunder. The Tenancy Agreement only provides in clause 4.10 for suspension of rent in the event of the Building being destroyed or rendered inaccessible by reason of such events as fire, defective construction or cause or calamity beyond the control of the landlord. The Tenancy Agreement therefore contemplates the obligation to pay rent to operate independently from the other contractual obligations, including the ones in issue.

18. Under the common law, the convenant to pay rent has been regarded as independent of the other convenants or obligations under a lease, including, for example, the convenant for quiet enjoyment : Edge v. Boileau and Others [1885] 16 QB 117, see also Taylor v. Webb. [1937] 2 KB 283. A tenant's obligation to pay rent is not dependent upon the compliance by the landlord of its obligations under the lease.

19. There is therefore no room for the defence asserted by the plaintiff to the counterclaim, namely, it is not obliged to pay rent or the defendant is not entitled to rent by reason of the alleged breaches of the Tenancy Agreement on the defendant's part.

20. That would have been sufficient to dispose of the matter in that the plaintiff's defence is confined to the defendant's entitlement to rent: see paragraph 3 of the affirmation of Mr Mok Man Fai Patrick filed on 10 March 2001. The submissions advanced by Mr Mok at this appeal is similarly confined.

21. Nevertheless, counsel for the defendant has sought to support the Master's Order by reference to the doctrine of set-off. His argument is that the rent due cannot be used to set-off the plaintiff's present claim for damages for breach of the Tenancy Agreement. I shall therefore deal briefly with it.

22. As previously observed, the convenant to pay rent is independent of the other convenants and obligations under the Tenancy Agreement. The Tenancy Agreement also does not permit any set-off on the rent. Secondly, the present claim of the plaintiff is for unliquidated damages. There is therefore no right to a legal set-off.

23. As to equitable set-off, the relevant principles are set out in para. 14/4/14 of Hong Kong Civil Procedure 2001. Generally speaking, where the claim and counterclaim are sufficiently closely connected so that it would be manifestly unjust to enforce one without regard to the other, a right to an equitable set-off may arise : Esso Petroleum Co. Ltd v. Milton [1997] 1 WLR 938, at 950D and Dole Dried Fruit & Nut Company v. Trustin Kerwood Ltd [1990] 2 Lloyd's Rep.309, 311.

24. In the present case, although the claim and counterclaim both arise out of the Tenancy Agreement, there is insufficient connection between the claim for damages for breach of clause 10(ii) of the Special Conditions and of the convenant for quiet enjoyment and the counterclaim for rent. The alleged breaches have no bearing on the state and condition of the Premises. The alleged breaches also in no way compromise or deny the plaintiff's right to the use and occupation of the Premises, for which the rent is paid.

25. It is also to be noted that the Statement of Claim contains no particulars for arriving at the amount of damages claimed by the plaintiff, being $2.5 million. The affirmations filed in opposition to the summary judgment application also contains no details of how the sum is reckoned or estimated. Mr Mok, in the course of his submissions, explains that the plaintiff has difficulties in quantifying its loss. The point therefore is this : even if the plaintiff establishes a right to claim for damages, its claim may or may not exceed the counterclaim.

26. In the circumstances, there must be considerable doubts as to whether the right of equitable set-off is available to the plaintiff. There is therefore no basis for granting unconditional leave to defend.

27. For the above reasons, the Master's Order cannot be faulted. The appeal is therefore dismissed with costs to the defendant, to be taxed if not agreed.