WINSOR AIR CARGO CENTRE LTD v. E-COMMENCE LOGISTICS LTD

HCA 1465/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1465 OF 2003

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J U D G M E N T

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1. On 23rd April 2003, the Plaintiff issued proceedings against the Defendant, seeking an order for possession of Unit 801 of Global Gateway (Hong Kong) No.168 Yeung Uk Road and 98 Wang Lung Street, Tsuen Wan, and of Units 901 to 903 of the same Global Gateway (Hong Kong) (Units 801, 901, 902 and 903 hereafter referred to collectively as "the Premises") to be delivered up to the Plaintiff. The Plaintiff also seeks an order for the Defendant's payment to the Plaintiff of mesne profits for the Defendant's failure to deliver vacant possession of the Premises in accordance with the provisions of the tenancy agreements governing the Premises on 14th February 2003. Alternatively, the Plaintiff claims damages to be assessed.

2. On 7th July 2003, an Order was made upon the joint application of the Plaintiff and the Defendant for final and interlocutory judgment to be entered for the Plaintiff in the action, with "all losses and damages to be assessed", and an Order was further made for vacant possession of the Premises to be delivered up by the Defendant to the Plaintiff on or before 15th July 2003. The assessment of damages was by Order of 7th July 2003 adjourned for argument.

3. The hearing for the assessment of damages pursuant to the Order of 7th July 2003 took place before me on 24th March 2004, 25th March 2004, 1st April 2004 and 2nd April 2004. Three witnesses were called on behalf of the Plaintiff: Law Yu Cheung, Yeung Yuk Fung and Chui Yu Wing. The Plaintiff's expert, Rita Wong of Jones Lang Lasalle, was also called to give evidence on her valuation report. The Defendant called Ng Yuen Chuen to give evidence, and also called its expert, Catherine Cheung of Knight Frank, to give evidence in relation to her valuation report.

4. For Unit 801, the monthly rental payable by the Defendant under the Tenancy Agreement dated 15th February 2000 for a term of three years (from 15th January 2000 to 14th January 2003) was HK$74,970.00, exclusive of Government rent, rates and management fees. Unit 801 has a gross area of 16,660 square feet.

5. For Units 901 to 903, the monthly rental payable by the Defendant under the Tenancy Agreement dated 22nd March 2000 for a term of 3 years from 15th February 2000 to 14th February 2003 was HK$263,560.50, exclusive of Government rent, rates and management fees. Units 901 to 903 have a total gross area of 58,569 square feet approximately.

6. In relation to the Premises, the management fee was HK$0.80 per square foot per month, which was increased to HK$0.9 per square foot per month from January 2004. Government rates was HK$0.20 per square foot per month, and Government rent was HK$0.10 per square foot per month.

7. The Defendant's tenancies in relation to the Premises expired on 14th February 2003. The Defendant claims that it delivered up the keys to the Premises on 15th July 2003. It is not in dispute that when the Premises were delivered up, they were not reinstated to their original state when possession was delivered to the Defendant on the commencement of the Tenancy Agreements in 2000. The Plaintiff claims that there had been no delivery of vacant possession on 15th July 2003, and that it was not until 20th August 2003 that Unit 801 was reinstated, and not until 6th September 2003 that Units 901 to 903 were reinstated. The Plaintiff claims that it is entitled to mesne profits from 14th February 2003 as it had been kept out of its properties. The dispute is the period during which the Defendant is to be made liable for mesne profits, and how such mesne profits are to be calculated, whether on the basis of the headline unit rent as determined by the Plaintiff's expert, or on the basis of the effective rent (i.e. the net proceeds of rent potentially to be received by the landlord after taking into account the rent free period normally allowed to tenants during the term of the tenancy).

8. The Defendant claims that possession of the Premises had been delivered to the Plaintiff on 15th July 2003 when the Defendant vacated the Premises and handed back the keys. Mr. Merry for the Defendant relies on the authorities that vacant possession does not mean the delivery of a bare shell or its original state: it means delivery of premises free of rubbish and furniture, etc. (Chan Tung Man v. Kam Shan Holdings [1999] 4HKC 303). Mr. Merry also referred to Clauses 2.25 and 2.26 of the tenancy agreements in respect of the Premises. Clause 2.25 obliges the tenant to:

"... consult the Landlord one month prior to the determination of the tenancy on whether the Tenant is to remove all or any part of the additional erections fixtures alterations or improvements which the Tenant may have made upon or in the Premises and to comply with the reasonable instructions (if any) as regards the aforesaid which may be given by the Landlord within 7 days after the said consultation."

9. Clause 2.26 of the tenancy agreements provides as follows:

"At the expiration or sooner determination of this tenancy quietly to yield up the Premises together with all fixtures, fittings and additions therein and thereto including, subject to paragraph 2.25 above, any additional erections fixtures alterations or improvements, which the Tenant may with the consent of the Landlord as aforesaid have made, in good clean and tenantable repair and condition (fair wear and tear excepted) without payment by the Landlord of any compensation for such additional erections fixtures alterations or improvements."

10. Mr. Merry claims that the Defendant as tenant was obliged under Clause 2.25 to deliver up the Premises with the fixtures, fittings, additions, alteration and improvements made to the Premises. There is no evidence of any consultation between the Plaintiff and the Defendant as envisaged under Clause 2.25 of the tenancy agreements. However, by a letter dated 15th February 2003 from the Plaintiff's solicitors to the Defendant, the Defendant was "reminded" to deliver vacant possession of the Premises to the Plaintiff in good clean and tenantable repair and condition and to remove all the additional erections fixtures alteration or improvements which the Defendant had made upon or in the Premises pursuant to the terms and conditions stated in the tenancy agreement. This should clearly have put the Defendant on notice that the Plaintiff required all the additional fixtures and fittings to be removed. The Defendant failed so to remove the fixtures, fittings and additions, as is apparent from the photographs taken within the Premises and which were put in evidence. As such, I find that vacant possession of the Premises were not delivered on 15th July 2003.

11. On the question of mesne profits, I am satisfied that the Plaintiff as landlord is entitled to the rental value of the Premises for the period during which the Plaintiff was kept out of its properties. There is dispute as to whether this should be based on the headline unit rent of comparable premises on the market, or whether the Court should use the net or effective rent that the Plaintiff as landlord may receive during the period, after taking into account the usual rent free periods which a Landlord normally agrees to grant to a tenant as a matter of market reality. After hearing Counsel's arguments, I am satisfied that the proper and fair approach is to award to the Plaintiff the effective rent or the net rent which it as landlord is entitled to receive during the period in which it was kept out of possession of the Premises.

12. Of the evidence adduced by the two experts on the market rental of comparable premises from December 2002 to August 2003, I prefer the evidence of Knight Frank. It adopts the effective rent which I consider to be more reasonable. The valuation made by Jones Lang Lasalle excluded one comparable (the tenancy agreement negotiated for unit 1103 of Global Gateway with a commencement date of 14th May 2003) on the basis that it was negotiated with a new tenant (as opposed to being a renewal with a sitting tenant) in the middle of the SARS period. The effect of SARS during the period from March 2003 to at least the end of the second quarter of 2003 in Hong Kong was a market reality as it undoubtedly had effect on the rent negotiated during this period. It would be unrealistic not to take the rent negotiated during this period into account when assessing the market rental of properties during the period from February to end August 2003 as I have to do in this case.

13. Having considered the expert evidence of Jones Lang Lasalle and Knight Frank, the fairest approach to determine the monthly rental of the Premises during the period from 15th February 2003 (when the Defendant should have delivered vacant possession of the Premises to the Plaintiff) to the time when the Plaintiff was actually able to let out the Premises and to receive rent (namely, 31st August 2003 for Unit 801, 1st February 2004 for Unit 901 and 4th March 2004 for Unit 903) would be to take an average of the market rental of comparable premises within the building during the period, using as I have found the real or effective rent to be received by the landlord after taking into the account the rent free period normally given to tenants.

14. In relation to Unit 801, reinstatement work was completed on 20th August 2003. The premises were let out from 31st August 2003 at the monthly rent of HK$83,330. In terms of the effective rent, this amounts to HK$4.538 per square foot. Taking this figure alone to calculate the mesne profits would not be fair bearing in mind that the market rent had fluctuated between February 2003 and August 2003 as a result of SARS. On the basis of the valuations made by Knight Frank and using the average of the effective rent relevant to the period between February 2003 to August 2003, the figure is HK$4.60 per square foot. I therefore allow mesne profits for unit 801 from 15th February 2003 to 31st August 2003 at the effective rate of HK$4.60 per square foot. This comes to:

15. In relation to Units 901 to 903, an offer was made by a potential tenant, Yosun Hong Kong Corp Limited ("Yosun"), on 22nd April 2003 to lease these premises for the period commencing 1st June 2003. I accept Mr. Merry's argument that the offer received should not be used to assess the Plaintiff's loss because of the uncertainties involved as to whether the offer would have led to an actual tenancy being concluded and an agreement executed between the Plaintiff and the Defendant on the terms of the offer made. The offer of HK$5 per square foot effective rent was less than the HK$5.50 to HK$6 per square foot which the Plaintiff was looking for at the material time, the rent free period of 3 months sought was longer than what the Plaintiff usually granted during the relevant time, and there was evidence that the Plaintiff was considering the sale of Units 901 to 903. The rent offered was also higher than the market rent then prevailing, and the potential tenant might have changed its mind. To calculate the Plaintiff's loss on the basis of the whole term of the tenancy offered by Yosun would have assumed that the offer would result in an actual tenancy, and that the tenant would have paid rent throughout the entire term. I am therefore not prepared to allow the Plaintiff's claim on the basis of the offer received from Yosun dated 22nd April 2003, nor for the period of the term offered by Yosun.

16. The average effective rent for Units 901 to 903 is, according to the Knight Frank report, HK$257,700 per month. I would allow mesne profits for Units 901 to 903 at the said average net rent of HK$257,700 per month from 15th February 2003 to the present date, less the actual rent received by the Plaintiff in respect of those units which have been let (as from 1st February 2004 for Unit 901 and 4th March 2004 for Unit 903). The mesne profits will also include the management fees, government rent and rates from 15th February 2003, at HK$46,855.20 per month for management fees, and HK$15,227.94 per month for government rent and rates.

17. The Plaintiff is to give credit to and to account to the Defendant for the rental deposits received from the Defendant under the two tenancy agreements.

18. The costs of the action have already been awarded to the Plaintiff by the Order of Master J. Wong dated 7th July 2003, which costs are to be taxed if not agreed.