PACIFIC DRAYAGE CO. LTD. v. MA ON SHAN WHITEHEAD GOLF CENTRE LTD.

HCA 5892/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5892 OF 2000

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J U D G M E N T

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Introduction

1. This is an action for recovery of arrears of rent of a piece of land situate at Whitehead in Ma On Shan ("the Premises"). The Plaintiff had obtained judgment in default for possession and vacant possession of the Premises was surrendered to the Plaintiff. The Defendant defaulted at the hearing.

2. The Plaintiff obtained a three-year Short Term Tenancy of the Premises from the Government commencing from 11 January 1999 at a quarterly rent of $1.2 million. Mr Lam, an influential member of Heung Yee Kuk and Chairman of the Shatin Rural Committee, suggested to establish a joint venture with the Plaintiff to operate a golf club on the Premises. At a meeting held in the Plaintiff's office on 20 January 1999, Mr Lam and Mr Lai of the Plaintiff agreed to set up a joint venture company between the two families, known as Ma On Shan (W.H.) Recreation Centre, to lease the Premises from the Plaintiff at a monthly rental of $1 million for the purpose of operating a recreation centre. The investment of each party was agreed to be $5 million. Lais' payment of $4 million, being one month advanced rental payment and deposit equivalent to three months rental, paid to the Plaintiff and another $1 million to be paid on 15 February 1999 were to be treated as the Lais' contribution to the investment. Lam agreed to pay $3 million on 26 January 1999 with the balance of $2 million to be paid also on 15 February 1999. This agreement is evidenced in a minute of the meeting dated 21 January 1999. A few days later, the joint venture company entered into possession of the Premises. Construction and lawn formation work began. The Lams had control and management of the joint venture.

3. Very shortly after that, in early February 1999, it was suggested and agreed between the parties that the joint venture should be continued through a corporate vehicle. The Defendant was incorporated with two corporate shareholders, Wandex Limited representing the Lais' interest in the joint venture and Summit Victory (Hong Kong) representing the interest of the Lams. The Lams had control of the day to day operation of the Defendant. Apart from rent for the month from 20 January 1999 to 19 February 1999, the Defendant failed to pay rent for the Premises. The tenancy was forfeited on 3 December 2001 with a total rental of $30,933,333 outstanding, net of various other part payments.

4. In its initial defence, the Defendant admitted there was a joint venture agreement under which the Lais and Lams would each invest $5 million into the joint venture company and that Lais', i.e. the Plaintiff's $5 million investment was in the form of providing the Premises for use by the joint venture free of rent. As the rent to be paid by the Plaintiff to Government under the Short Term Tenancy for the three-year lease would be $14.4 million, the Defendant's pleaded case was inherently incredible. In its amended defence, the Defendant pleaded that under the joint venture agreement, the Lams would provide a initial working capital of $5 million while the Lais would provide or procure the Plaintiff to provide the Premises rent free. Rent paid to the Government plus 10% for administration costs would be treated as the Lais' contribution to the joint venture, while the Lams would contribute the like amount, if so required (presumably meaning that if the Lais' contribution as aforesaid exceeded $5 million). However, this newly pleaded case is inconsistent with the provisional trial balances prepared by the Defendant's accounting staff for the period between 1 February 1999 and 31 January 2000. These accounting documents, on the contrary, are consistent with the Plaintiff's case that the rental payment made by the Defendant to the Plaintiff was $1 million and not $44,000 per month.

5. On the Plaintiff's evidence, I am satisfied that the Lams and Lais entered into a joint venture agreement to operate a recreation centre on the Premises; that the joint venture entered into a tenancy agreement with the Plaintiff at a monthly rental of $1 million and took possession of the Premises. Though technically the Defendant was not a party to the tenancy agreement, it was the corporate embodiment of the joint venture and managed and controlled by the same persons who operated the joint venture. Since February 1999, it continued in possession of the Premises with the consent of the Plaintiff. It continued with the purposes of the joint venture and continued with its business. I have no difficulties to find as a fact that by novation, the Defendant had substituted the joint venture as a party to the tenancy agreement and was bound by the terms of that tenancy agreement.

6. Mr Yau, on behalf of the Plaintiff, conceded that the Plaintiff has not taken into account a sum of $4 million which the Plaintiff was obliged to contribute through Wandex Limited towards the capital of the Defendant and asked for that to be deducted from the amount claimed. Mr Yau also conceded that the Plaintiff should give credit to a sum of $1.2 million paid by the Defendant to the Plaintiff to enable the Plaintiff to pay the 3rd quarterly rent of 2000 to the Government under the Short Term Tenancy and a sum of $2 million being consideration which the Plaintiff agreed to pay to the Defendant for the interest and possession of the fixtures and fittings erected by the Defendant on the Premises but left thereon when it surrendered vacant possession.

7. Accordingly, I enter judgment in favour of the Plaintiff in the amount of $26,933,333 with interest on the amount of $23,733,333 (after giving credit to the aforesaid $3.2 million) at half judgment rate from 20 February 1999 until payment. I also award the Plaintiff costs of the action against Defendant. The amount of $1.8 million paid into court by the Defendant shall be paid out to the Plaintiff in partial satisfaction of the above award after one month. The Defendant's counterclaim be dismissed with costs to the Plaintiff.