ORIPUMA INVESTMENTS LTD v. WALTER YEUNG & CO

M.P. No. 1913 of 1988

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. These proceedings arise out of a dispute between the Plaintiff as landlord and the Defendant as tenant in relation to the rent payable upon renewal of a tenancy of office accommodation in Lane Crawford House, Queen's Road, Central, under a tenancy agreement dated 24th January, 1986.

2. That agreement contained a clause giving the Defendant an option to renew the tenancy, at the expiration of the term of two years, for a further period of one year, and it is not in dispute that the option has been validly exercised.

3. However, the landlord and tenant have been unable to agree on the rent payable for the renewed term as they hold different views as to the meaning of the clause, in so far as it relates to the calculation of rent, and the matter now comes before me for interpretation of that clause and a declaration of the rent payable.

4. The relevant part of the renewal clause reads as follows:-

".... and the rent for the term to be renewed shall be such an amount calculated according to the average unit rent per square foot exclusive of Government rates and air - conditioning charge obtained by the Landlord in the said Building during the three (3) months prior to the date of expiration hereof but otherwise on the same terms and conditions as hereunder Save and Except this renewal clause."

5. Miss Chow on behalf of the Plaintiff maintains that the words "average unit rent ..... obtained by the landlord in the building .... " clearly mean the rent obtained by the landlord for the whole building regardless of the identity of the occupants and the use to which the premises are put.

6. However, it is submitted by Mr. Lam on behalf of the Defendant that the surrounding circumstances of this matter, as revealed by the affidavits filed by both sides, neither party relying on further oral evidence, must he taken into account in interpreting the language of the relevant clause to ascertain its true meaning and the intention of the parties.

7. Those circumstances are that at the date of signing the original agreement, the landlord and owner of the building was Lane Crawford Ltd., who themselves occupied the basement and first seven floors as a department store, and the 21st to 23rd floors as their own office accommodation.

8. It is claimed by the Plaintiff that at that time Lane Crawford were paying rent to themselves, and have produced a copy of ledger entries purporting to show this. However, I find it difficult to believe that this was a genuine letting and payment of rent, rather than a book-keeping exercise for accounting purposes.

9. On 14th October, 1986, the building was assigned to the Plaintiff, a company within the "Lane Crawford Group", at least 50% owned by Lane Crawford Ltd., and on 20th August, 1987 a formal tenancy agreement was entered into by Lane Crawford with the Plaintiff with provision for payment of rent. I say "formal" tenancy agreement, as there had clearly been no break in the continuity of Lane Crawford's occupation of the premises, so there must have been some informal arrangement as to tenancy after the assignment, of which there is no evidence before me.

10. What is clear, however, from the figures relating to rents supplied, is that the level of rent obtainable for shop premises such as those occupied by Lane Crawford in this building, are very much higher than those obtainable for the units of office accommodation in the same building; particularly as in this case where the arrangement as to rent includes a percentage of the shop's retail sales. It is also clear that the rent paid by Lane Crawford for their office accommodation on 21st to 23rd floors is also at a rate considerably higher than that generally paid by the occupiers of other office units, raising same doubt as to whether this is a rent paid by way of normal commercial transaction by parties "at arm's length", or an arrangement between two companies in the same group for payment of a "special rent".

11. The question now is whether it was the intention of the parties, when entering into the agreement containing the option to renew, to make provision for calculation of rent for the renewal period by way of an attempt to relate it to the rents of similar units, which no doubt would have increased during the term of the tenancy in line with market forces, or to provide for a calculation which would relate the rent to premises with other uses, and higher rents, thus providing an artificial calculation.

12. I have to say immediately that I find it difficult to believe that the parties to this agreement intended that the new rent should be calculated in any method other than one designed to bring it into line with rents for similar office accommodation at the time of renewal. As the tenant was only permitted under clause 2(f) of the tenancy agreement, to use the premises as offices, the alternative would be to make him pay rent based not only on something he did not have, but could not have. This is clearly not the commercial purpose of the clause and I am of the view that, in interpreting the clause, I can override the literal meaning of the words to give effect to the commercial purpose of it, and what the parties must have intended.

13. As a matter of common sense the original rent must have been negotiated in the light of rents obtainable for similar office accommodation in the area. I find it unlikely in the extreme that the Defendant would have agreed a rent considerably higher than current market rents because of the presence of a department store, of whatever prestige, in the same building. And as was said by Vinelott J. in Pearl Assurance PLC v. Shaw (1985) 274 E.G. 490 at page 492:-

"The purpose of a rent review clause in general is to enable a landlord to bring the rent originally negotiated up to date and to substitute for it the rent that the parties might have been expected to agree if the rent had been negotiated on the same basis as before, but in the light of market conditions prevailing at the time of the review and of course, for the shorter term then unexpired."

14. In this case there is no evidence that at the date of the agreement the Defendant was aware of any other rents being received by the landlord except those for private office accommodation, and they would, in the absence of specific information being supplied, be entitled to assume that an owner occupies his own premises rent-free, and thus rent for those premises, whether notional or otherwise would not enter into the calculation of their own rent.

15. I am supported in my view that the intention of the parties and the commercial purpose of such a clause can override the literal meaning of the clause by Gibson J. in Forte & Co. Ltd. v. General Accident Life Assurance Ltd. (1986) 279 E.G. 1227, where at page 1238 he says:-

"A literal construction may be displaced if having regard to all the relevant circumstances, including the underlying commercial purpose of the rent review clause, the court is satisfied that another construction better reflects the intentions of the parties ....."

16. If I were to take as the meaning of this clause that which the Plaintiff's counsel submits is correct, it would involve bringing into the calculation of the Defendant's rent matters unrelated to the level of rents for office accommodation. In this case, not only the high value of retail shop premises, but the level of sales from month to month in Lane Crawford's department store, thus producing an inflated level of rent giving a windfall to the landlord but no benefit to the tenant.

17. There is no evidence and no special circumstances indicating that this unusual arrangement was what was intended.

18. It follows from what I have said that I find that the parties, in entering into this agreement, intended in the renewal option clause to provide for calculation of rent based on rents for similar office units in the building under normal commercial agreements negotiated at arm's length in the open market. In calculating such rent, therefore, rent for the shop premises, occupied by Lane Crawford, should be excluded.

19. I have more difficulty in respect of the office accommodation on 21st to 23rd floors occupied as such by Lane Crawford. Although the rent paid by them to the Plaintiff is considerably higher than that paid on average by the other tenants, and it is paid by them to another company within the same group, it is rent obtained by the landlord, and it is in respect of office premises.

20. I am therefore unable to say that this rent should similarly be excluded from the calculation in the absence of any evidence that it is anything other than rent paid under a commercial transaction for similar office accommodation.

21. I accordingly propose to make a declaration in these proceedings that the meaning and intention of the renewal clause in question is that the rent for the renewal period should be calculated as an average of office unit rent per square foot for the whole building obtained by the landlord during the three months prior to the expiry of the original agreement, thus excluding rent obtained for shop premises but including the office accommodation of Lane Crawford Ltd.

22. From the figures for this period supplied to me in the agreed bundle of documents (at pages 90 and 91), I calculate that the total area of office accommodation rented during that period was 66936 square feet, i.e. 142,211 square feet for the whole building less 75,275 square feet occupied by the shop premises. The total rent obtained by the landlord over the same period for the whole building was $7,607,205.42, and by deducting the rent paid for the shop premises of $4,560,818.26 one arrives at a total for the office accommodation of $3,046,387.16, or $1,015,462.38 per month. By dividing that by the total office accommodation a figure of $15.17 per square foot per month is arrived at, and I find that that figure is the rent payable by the Defendant for the renewal period.