LEGEND PACIFIC LTD v. NG CHOI CHI

HCA1320/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1320 OF 2009

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J U D G M E N T

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1.  There is no dispute that rent has not been paid, and there is no dispute as to the calculation of the amount in arrears.

2.  There are two lines of defence put forth, the first one under clause 8(c) of the Tenancy Agreement, the second, the equitable set-off raised by way of a potential counterclaim.

The first line of defence, clause 8(c)

3.  The evidence in this case from the Defendant was that there had been incidents of flooding, coupled with sewage problems.  The leased premises had been affected to the extent that over $800,000 had been expended on repairs.  The evidence was to the effect that water seeped through external main walls, the duty to repair of which remained on the landlord.

4.  An expert from the Defendant’s side purports to state that the overflow in question might have been caused by illegal connection of sewage and rainwater systems, and understandably, at this interlocutory stage, the expert could not have gone further in terms of doing tests without consent of the landlord.

5.  The flooding, and consequential bad smell caused by the sewage problem, had rendered the premises unfit for use and occupation as a nightclub.  It is arguable that the premises were damaged to such an extent as to suspend the tenant’s duty to pay rent, rates and management fees under clause 8(c).

6.  Rent has fallen into arrears since about August 2008.  There was no evidence as to when the nightclub resumed business after the July flooding.  Mr Lung, counsel for the defence, informed me that it was in about mid-September, but shortly thereafter, in about late September and early October, there had been two other incidences of flooding which created an equally devastating impact on the business of the Defendant and goodwill of the nightclub.  The Defendant did undertake renovation work to try and resume business.

7.  At this Order 14 stage, I am not to try the parties’ case on affidavit.  Suffice to say I am satisfied that there is evidence to support a defence to the claim for rent, management fees and rates under clause 8(c). 

8.  The Defendant should thus be given unconditional leave to defend for the amounts claimed for the period from August 2008 to mid-April 2009.

Equitable set-off

9.  Clear words are needed to exclude a tenant’s right of set-off.  Mere use of the words “Payment of rent clear of all deductions” does not per se exclude the equitable right of set-off.  See the case of Connaught Restaurants Limited v Indoor Leisure Limited.

10.   In the present case, the Defendant claims that it has a right to equitable set-off for the repair costs incurred and loss of profit.  On repair costs, I am of the view that there is no possible defence, because, as pointed out by Mr Lam, counsel for the Plaintiff, the cost of repair and reinstatement rests squarely on the tenant however the loss had arisen.

11.   However, it is less clear from the Tenancy Agreement whether or not the landlord’s liability for loss of profit suffered by the tenant was excluded.  Clause 7(c) of the Tenancy Agreement requires the landlord to keep the outside main walls in complete repair.  In the present case, there is prima facie evidence that this covenant was breached.  The alleged breach was closely connected to the use of the premises and had a direct bearing on the state and condition thereof.

12.   The tenant’s right to use and occupy the premises was compromised.  Clause 7(c), however, requires written notice of want of repair, which is lacking in the present case.  Mr Lung, for the Defendant, prays in aid the affirmation in opposition which gave purportedly written notice of that lack of repair.

13.   I have reservation as to whether this formed sufficient notice, because the affirmation came after the landlord has issued the writ and purported to terminate the Tenancy Agreement.  There was, however, evidence of the landlord admitting the liability to the extent of offering $70,000 as compensation for loss and damage, which was not accepted by the Defendant.

14.   How this purported act of omission would operate notwithstanding the lack of written notice of want of repair is an issue to be determined by the trial judge.  In principle, the Defendant can counterclaim for loss of profits against the landlord and rely on the defence of equitable set-off.

15.   What is unfortunate is that there are no particulars as to how the loss of profits were calculated.  There was a mere assertion of $2.5 million loss of profits, and it is not clear how this sum was computed.

16.   I am therefore not able to assess, even at this Order 14 stage, if the potential loss of profits will arguably exceed the rent or mesne profits due.

Conclusion

17.   I am of the view that there is an arguable defence for amounts claimed for the period from August 2008 to mid-April 2009.  The Defendant will have unconditional leave to defend this part of the claim.  For the rest of the rent, management fees and pro rata rates from mid-April 2009 onwards, there is, in my view, no defence, and there should be judgment accordingly.

(Discussion re calculation)

18.   Starting from January onwards to mid-April, the rent, the management fees and the pro rata rates for the month of April will be exempt.  In other words, the Defendant will have unconditional leave to defend.  And then rates for May and June and thereafter, the Plaintiff can get judgment.  Rent from mid-April to June, the Plaintiff can get judgment, and then mesne profits thereafter.

(Discussion re claim)

19. (i)  Vacant possession subject to section 21F relief,  that is, the 7 days’ relief against forfeiture.

(ii) The sum for arrears of rent, management fees and rates from mid-April to June 09.

(iii)    Interest on outstanding rent from mid-April to June 09 at 3 per cent per month to the date of judgment and thereafter at judgment rate until payment.

(iv)    Mesne profits at the rate of $122,260 per month from 1 July 09 until delivery of vacant possession.

(v) Management fees at $7,578 per month also from 1 July until delivery of vacant possession.

(vi)    Rates as claimed from 1 July until delivery of vacant possession.

(Submissions as to costs)

20   I think in terms of counsel’s brief, given the years of practice, the nature of this case, and the assistance which counsel has rendered to the court, I do not think I will do anything about it.  There are just two other comments.  Filing fee:  I think that should be costs of the action, which is not claimable today, so that should be crossed out.  The hearing time today is slightly less than what we expected.  I would just take a broadbrush approach instead of getting into the details.

21.  Costs of the Plaintiff, together with certificate for counsel, are assessed summarily at $75,000 for the Order 14 summons and all related costs reserved.  50 per cent is to be paid by the Defendant.  50 per cent of the summons and certificate for counsel will be costs in the cause.

(Discussion re quantum calculation)

22.  I will leave it to the parties to work out this figure and put it down in the draft order.  I have noted down the figure.