XCHRX PARKWELL COMMERCIAL LTD. v. SWEET VIEW PROPERTIES LTD.

HCA 10449/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10449 OF 1999

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REASONS FOR DECISION

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1. This is the appeal of the Defendants by Counterclaim against the order of Master Barnes dated 17 February 2000 whereby final summary judgment was entered against them together with interest and costs. At the end of the hearing on 8 May 2000, I dismissed the appeal (save as to the amount of the judgment sum) with costs. These are the reasons for doing so.

2. This action was brought by the 1st Defendant by Counterclaim (as the Plaintiff herein) ("the 1st Defendant") in respect of a tenancy agreement dated 8 January 1998 whereby 143 car parking spaces were let to the 1st Defendant by the Plaintiff by Counterclaim ("the Plaintiff") from 1 January 1998 to 31 December 2000. The monthly rental under the agreement was $424,800. The 1st Defendant alleges in the Statement of Claim herein that misrepresentations were made by the Plaintiff and the 1st Defendant was therefore entitled to rescind the tenancy agreement and/or have the deposit of $933,480 returned. It is to be noted that:-

(a) the 1st Defendant is and has been in possession of the suit property;

(b) although damages to be assessed have been prayed for in the Statement of Claim, no damages were particularized therein. There is also no evidence that damages have been suffered.

3. The Counterclaim against the 1st Defendant arises from the alleged failure by the 1st Defendant to pay the rent or rates in arrears from February 1999 to October 1999. Further, the Plaintiff alleges that the 2nd to 4th Defendants by Counterclaim have executed personal guarantees regarding the said tenancy agreement and are therefore also liable for the amount for which the 1st Defendant is liable to pay to the Plaintiff.

4. The alleged misrepresentation of the Plaintiff is in short related to a lack of title by the Plaintiff over the ground floor entrance and facilities regarding the control of access to the said car parking spaces. This is based on a claim made by the Incorporated Owners of the building in which the said car parking spaces are located that the entrance thereto and the facilities controlling the access to those car parking spaces in fact belong to the owners of that building and not the Plaintiff. For the purpose of this appeal (and, I understanding, also for the purpose of the Ord. 14 application before the learned Master), the Plaintiff is prepared to proceed on the assumption that the alleged misrepresentation did exist.

5. The principal line of defence raised by the Defendants by Counterclaim ("the Defendants") in this appeal (and, I understand, also in the Ord. 14 application before the learned Master) is their right to a rescission of the tenancy agreement by reason of the alleged misrepresentation. In this connection, Mr Ng for the Defendants relies on Chitty on Contract (1999) 28th ed. para. 6-101 to 6-118.

6. Even if the Plaintiff had made the misrepresentation referred to above, the defence of rescission of the tenancy agreement faces at least 2 insurmountable obstacles:-

(a) one arising from the need to restitute;

(b) the other arising from the doctrine of "tenancy by estoppel".

7. In relation to the need to restitute, it has been pointed out that "the remedy [of rescission] will not lie if the parties are not in a position to make restitutio in integrum": see Chitty, para. 6-112. The modern law relating to this aspect is flexible. For example, a substantial rather than precise restitution may suffice: see Chitty, para. 6-113, and it may be made in the form of money: see Chitty, para. 6-116. Mr Ng fairly (and correctly) accepts that a tenancy (being a leasehold) is a property in its own right. Once that is accepted, I do not consider that the Defendants can effect restitution when the tenancy has already run for about 1 1/2 years by the time the Writ herein was issued.

8. Mr Ng relies on 2 cases regarding the issue of rescission:-

(a) Mostyn v. West Mostyn Coal Co. (1876) 1 C.P.D. 145;

(b) Killick v. Roberts [1991] 1 W.L.R. 1146.

9. However, none of these 2 cases involved the question of "restitutio in integrum". In Mostyn, the tenant has not entered into possession of the suit property. In Killick, the misrepresentation was made by the tenant which resulted in a tenancy being granted. The court in that case decided that the landlord was entitled to rescind the tenancy and recover possession.

10. In relation to the doctrine of "tenancy by estoppel", Mr Ng accepts (correctly) that "In an action for rent, the tenant is estopped from saying the lease is not a good one": see Woodfall's Law of Landlord and Tenant (1994), para. 1.037, text to n.2. He argues that such a doctrine only applies when the tenancy agreement (whether written or oral) makes clear that the landlord lacks title over the leased property. I have no hesitation in rejecting this argument. Authority contrary to Mr Ng's argument can be found (among others) in the following passage in Woodfall:-

"When the lease is at an end, the man who was formerly the tenant, but has now ceased to be so, may show that it was altogether a mistake to have taken that lease, and that the land really belonged to him; but during the continuance of the lease he cannot show anything of the sort; it must be taken against him that the lessor had a title to the land": para. 1.037, text to n.7 (emphasis supplied).

This passage implies that the mistake could not have been made known to the "tenant" in the agreement.

11. I therefore conclude that the 1st Defendant has not been able to show any issue which ought to be tried regarding the Counterclaim or there ought for some other reason to be a trial of the Counterclaim in relating to its liability to pay rent and rates in arrears.

12. There is also an alleged misrepresentation that the management fees would not be substantially increased. This part of the defence suffers from the same difficulties discussed above.

13. Having come to the above conclusion on liability, I do not find it necessary to consider whether the other arguments raised by Mr Zimmern for the Plaintiff are correct.

14. The Defendants have filed evidence to the effect that the monthly rent of $424,800.00 has been reduced to $354,000.00. They also argue that this rent-reduction agreement is supported by the rent debit notes issued by the Plaintiff (for the period from January 2000 to June 2000). The Plaintiff has deposed that the debit notes were mistakenly issued. Without going into details, I consider that issues of fact have been raised by the Defendants over this point such that leave to defend ought to be given to them to defend this part of the Counterclaim.

15. The Plaintiff submits that even if there was an agreement to reduce rent, it was unsupported by consideration. Mr Ng refers to Chitty, para. 3-063 and 3-064 and contends that there is a triable issue as to whether "factual" benefits (which may amount to sufficient consideration) were obtained by the Plaintiff in that, for example, the 1st Defendant agreed to continue the tenancy despite its financial difficulties created by the economic down-turn. Despite Mr Zimmern's argument to the contrary, I agree with Mr Ng's contention.

16. The parties agree that the amount of rent arguably reduced totalled $637,200 (($424,800 - 354,000) x 9 months). The final summary judgment of $3,884,220 (which already took into account the deposit of $933,480) is therefore replaced by a final partial judgment of $3,247,020.

17. It is common ground that the 2nd to 4th Defendants by Counterclaim executed personal guarantees. The issue raised by Mr Ng is that the demand letter may arguably be invalid because it failed to state the correct amount due. He relies on the following passages in O'Donovan & Phillips: The Modern Contract of Guarantee (1996) 3rd Ed.:-

"..... In Donnelly v. National Australia Bank [unrep., W.A. F.C. Sup. Ct. 19 May 1992 [1992] A.C.L. Rep. 325 W.A. 79] the Full Court of the Supreme Court of Western Australia granted the appellant guarantors unconditional leave to appeal against a summary judgment in favour of the respondent bank. It held to be arguable that the guarantee contained an implied term that the bank's demand should have specified the correct amount owing or otherwise provided the appellants with sufficient information to enable them to ascertain that amount. The guarantee defined the term 'moneys hereby secured' broadly to include several items which appeared to be within the peculiar knowledge of the bank. Moreover, the guarantee provided that interest was to be 'calculated in the manner and at the rate or rates determined by the bank for the time being, compounded and turned into principal accordingly'. Consequently, it might have been difficult for the guarantors to ascertain their liability for interest on a particular date. The Full Court found that the guarantors had raised an arguable defence:

'Without the respondent providing the guarantors sufficient information when the letter of demand is sent so as to enable them to ascertain details of the amounts which, according to the respondent, are owing under the guarantee and how those amounts are arrived at, it might well be impossible for the guarantors to ascertain those amounts. If that occurred, it would not be possible for the guarantors, on demand, to pay the correct amount owing.'"

(pp. 489 to 490) (emphasis supplied).

18. Even if the implied term in Donnelly were applicable to the present case, bearing in mind:-

(a) the 2nd to 4th Defendants by Counterclaim were the directors of the 1st Defendant;

(b) they were (or at least ought to have been) in a position to ascertain the amount of rent and rates in arrears;

(c) the demand letter clearly stated that the sum due was the rent and rates in arrears,

I do not consider that it is arguable that the Plaintiff has breached that implied term.

19. For the above reasons, this appeal is dismissed save that the amount of the judgment sum should be as stated above. There will be unconditional leave to the Defendants to defend the remainder of the Counterclaim.

20. Further, although the point was not raised by either party, I notice that the costs order below was that the costs of the action were to paid by the Defendants to the Plaintiff. The parties agree that those costs should have been the costs of the Counterclaim. That part of the learned Master's order is therefore also varied to refer to the costs of the Counterclaim.

21. In order to avoid any doubt, it is appropriate to order that the costs of the Counterclaim up to the date of the appeal (including the costs of the Ord. 14 application before the Master) be paid by the Defendants to the Plaintiff in any event. The costs of the remainder of the Counterclaim (that is, the claim for $637,200) should be reserved.

22. There is no good reason why the costs of the appeal should not follow the event. Indeed, Mr Ng did not argue that they should not. Costs of the appeal are also to be paid by the Defendants in any event.