CITADINES ASHLEY TST ( Hong Kong ) LTD v. QUENCHERS LTD

HCA2704/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2704 OF 2006

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D E C I S I O N

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1. On 17 September 2003, the plaintiff’s predecessor in title and the defendant (respectively the landlord and the tenant) entered into a tenancy agreement for shop premises in Kowloon.  For the purpose of this summons under Order 14A the key terms were that a rent of $36,000 per calendar month was payable on the 12^th day of each month and Clause 11.  Clause 11 gave the tenant an option to renew the tenancy for a further two years (i.e. up to 11 September 2008) upon certain terms.  The first lines of Clause 11 state as such :

“11.     Prior to the expiration of the Term of this tenancy on the 11^th day of September 2006 and subject to the Tenant having duly paid the Rent and performing and observing the terms and conditions herein contained on its part, the Tenant shall have the option to enter into a new Tenancy Agreement (‘the New Tenancy Agreement’) in respect of the Property for a further term of two (2) years ….”

2. Clause 11 also provided that the new rent would either be by agreement or, absent agreement, set by an independent surveyor.

3. During the tenancy (in 2005) the parties agreed that the due date for monthly rent would become the 1^st day of each month instead of the 12^th day of each month.

4. The original term was therefore due to expire on 11 September 2006 and the final rent day was 1 September 2006.

5. The tenant had, in March 2006, exercised its option to renew for a further two years after 11 September 2006.  For the purposes of this application only the plaintiff accepts that the notice to renew was validly made.

6. With this background, the tenant proffered a cheque for $36,000 “for September’s rent” at the appropriate time.  The landlord (which by June 2006 had become the present plaintiff in place of its predecessor) returned the cheque for $36,000 and issued a debit note for $13,200 being the rent due for 1 to 11 September, i.e. up to the end of the original term.  The tenant continued to offer $36,000.

7. The new rent for the new tenancy had yet to be agreed.

8. Thus, the tenant believed it was obliged to pay $36,000 for the calendar month and the landlord maintained it should only receive $13,200.  This, on the face of it, minor difference of opinion has spawned this litigation which the combined efforts of the parties, the solicitors, counsel and, not least, the court have been unable to resolve without a hearing.  The pleadings, as amended, prompted the plaintiff to issue these Order 14 and Order 14A proceedings.  The original summons sought as follows :

(1)     Under Order 14, rules 1 and 2, for judgment in this action against the defendant for —

(a)   An order for possession of the subject premises known as All That First Floor of No. 18 Ashley Road, Kowloon, Hong Kong (“the Premises”).

(b)   Subject to the plaintiff giving credit for payment received from the defendant under the Order of Mr Registrar C. Chan dated 2 March 2007,

(i)    an order for payment of $13,200 by the defendant to the plaintiff as claimed in paragraph 14 of the Statement of Claim;

(ii)   an order for payment of the rates of the Premises by the defendant to the plaintiff as payable for the period from 12 September 2006 until vacant possession of the Premises is delivered by the defendant to the plaintiff;

(iii)  an interlocutory judgment on the mense profit payable by the defendant to the plaintiff as from 12 September 2006 until vacant possession of the Premises is delivered up by the defendant to the plaintiff to be assessed; and

(iv)   further or in the alternative to (iii) an interlocutory judgment for damages for wrongful occupation of the Premises by the defendant as a trespasser to be assessed.

(c)   Interest on sums and damages payable by the defendant to the plaintiff at a rate and for such period as decided by this court.

(2)    Further or alternatively, under Order 14A, rules 1 and 2 

(a)    That the following question of law or construction be determined —

(i)    whether the letter dated 13 March 2006 from the defendant to the plaintiff as pleaded in paragraph 13 of the Defence is a valid and effective notice for the defendant to exercise the option under Clause 11 of the Tenancy Agreement of the Premises dated 17 September 2003 as pleaded in paragraph 2 of the Statement of Claim and paragraph 3 of the Defence (“the Tenancy Agreement”) for the defendant to enter into a new tenancy agreement of the Premises;

(ii)   if the answer to question (i) is affirmative, whether on a proper construction of the Tenancy Agreement and Clause 11 thereof in particular, the defendant was still entitled to a new tenancy agreement of the Premises after 12 September 2006 notwithstanding the fact that the defendant had not on or before 11 September 2006 paid the plaintiff the rent of the Premises as from 1 September 2006 to 11 September 2006.

(b)   If the answer to question (i) is negative and/or the answer to question (ii) is negative, then judgment be entered for the plaintiff against the defendant in term of paragraphs 1(a) to (c) herein.

9. After the summons was issued, the defence was amended.  No objection was taken to the amendments and as a result the only remaining issue, which the plaintiff pursues, is at paragraph 2(a)(ii) above.  Put shortly, assuming the notice to renew was valid is the tenant nonetheless in breach of his obligation to pay the rent and, if so, in accordance with the condition precedent contained in the first few lines of clause 11 has no right to renew the tenancy.

10. Detailed and carefully researched submissions have been made by Mr C.Y. Li for the plaintiff and by Mr Nigel Kat for the defendant.  I have come to the conclusion that, in the context of this case, paragraph 2(a)(ii) is not suitable for determination under Order 14A for the following reasons.

11. (1) If, as contended for by Mr Li, the defendant is in breach of the tenancy agreement by offering to pay $36,000 on 1 September 2006 when only $13,200 was due, it is arguable that, at trial, that may be construed as a breach which was not substantial and therefore relief against forfeiture may be granted.  The determination of the question under Order 14A will therefore not bring the matter to a conclusion.  I accept that it is not essential for the answer in an Order 14A summons to be determinative of the whole case but where it is not it is a strong factor to be taken into account when deciding the suitability of the proceedings (per Chan PJ at paragraphs 24 and 38 of Shell Hong Kong Ltd v. Yeung Wai Man Kiu Yip Co. Ltd and another (2003) 6 HKCAFR 222).

12. (2) In any event, if I were to decide the point, the merits seem to be in the defendant’s favour.  The main defence, as amended, is the defence of tender.  Put simply, by offering $36,000 the defendant has tendered the due rent.  The defendant submits that having received the cheque for $36,000 it was open to the plaintiff to either (i) keep $13,200 and return $22,800 or (ii) credit the $22,800 balance towards the new rent for 12 September to 30 September 2006 or (iii) accept the balance as a fair rent for that period pending agreement on the new rent.

13. Mr Li on the other hand relies on passages from Chitty on Contract.  He cites paragraphs 21-085 and 21-096 of the 29^th Edition :

“Amount to be tendered.  The debtor must tender the full amount of the debt, since a creditor is not bound to accept less than the whole of his demand; hence, a tender of part of an entire demand is invalid.  If there are separate items in a claim, the debtor may make a valid tender in respect of particular items, if he appropriates his tender to such items.  A tender of more than is due is a valid tender of the amount due if the debtor does not require change; but if the debtor does ask for change out of the larger sum, this is not a valid tender of the amount due, since a creditor is not obliged to give change.  If, however, the creditor does not object to the tender on this ground, but makes some other objection, or demands a larger sum, the tender will be valid, because the creditor will be taken to have waived any objection as to change.

….

Failure to comply with valid demand.  Since the principle of the defence of tender is that the defendant has always been ready to perform the contract, if the claimant can show that performance of the contract was demanded and refused at any time when by the terms of the contract he had a right to make such a demand, the plea of tender will fail, whether such demand and refusal took place before or after the tender.”

14. Mr Li submits that “there is nothing to suggest that D did not require change”, therefore it is not a valid tender.  A fairer reading of the correspondence is that the defendant wanted to meet its obligations under the tenancy agreement; the $13,200 was contained within the $36,000; there was no request for change and the balance would be utilized as either a payment of or a credit towards future rent. 

15. Mr Li further contends that by returning the cheque for $36,000 and issuing a debit note for $13,200 he was demanding performance of the contract and so the tender defence must fail.  In truth however, the plaintiff had no right to demand $13,200 because it had already been received within the $36,000.  One would be forgiven for regarding the plaintiff as a landlord pursuing all legal possibilities of extracting himself from the “option to renew” clause in the agreement he had inherited in June 2006.

16. (3) On an overall view of the matter, it would be unwise to extract the Order 14A issue for separate consideration.  The defence and counterclaim is 12 pages and 40 paragraphs long.  There are legal and factual issues.  At trial the issue concerning the validity of the notice, conceded in this application, will be resurrected.  A counterclaim (albeit concerning a relatively minor issue of breach of quiet enjoyment) will remain regardless of this summons.  Factual issues concerning the reason for issuing the $36,000 cheque may arise and become relevant.  Other legal and factual issues, such as “appropriation”, “punctuality of payment”, “whether the ‘paid up rent’ condition in Clause 11 related to the date at which the option was exercised or the termination date” were all touched upon in this hearing.  In view of my observations concerning jurisdiction at (1) and the defence of tender at (2) it has not been necessary to address them.  They are nonetheless arguable issues in a trial context.  The defendant’s valid “tender” arguments should properly be advanced in the trial context alongside the other trial issues.

17. The effect of this judgment is that, notwithstanding the merits of the defendant’s submissions, I consider the question to be unsuitable for Order 14A disposal.  It would not finally dispose of the matter and, at trial, the context in which it would be argued will be different because, at trial, the plaintiff will not concede that the notice to renew was a valid notice.

18. This is one of those regrettable cases that is now “costs driven”.  At best, the defendant’s tenancy will expire in September 2008.  The likelihood is that the trial of the action and/or appeals will fully occupy the time ahead up to or close to the expiration of the new tenancy had it been granted.  The plaintiff’s entitlement to mense profit will be much the same as the rent that would have been settled by an independent surveyor pursuant to Clause 11.  These practical realities have sadly been overshadowed by the costs incurred to date (now greater still as a result of this application).

Costs

19. I make the following nisi orders :

(i)       Costs of the defendant’s summons to amend the defence and counterclaim to the plaintiff in any event (to include the plaintiff’s costs of amending the reply and defence to counterclaim).

(ii)      Costs of the Order 14 and Order 14A summons (relating to both the parts pursued and the parts not pursued) in the cause.