HSBC TRUSTEE (HONG KONG) LTD v. CHIU KOON SHOU AND OTHERS t/a VICTOR CHIU TSANG & PARTNERS (a firm)

HCA 1858/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1858 OF 2006

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RULING ON ORDER 14 APPLICATION

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Background

1. The Plaintiff is the Landlord of the Premises as stated in paragraph 1 of the Statement of Claim.

2. By a tenancy agreement dated 8^th October 2004 (“the Agreement”), the Premises were let to the Defendants for a period of 2 years at the monthly rent of HK$24,320 (plus service charge at HK$9,652 per month and rates at HK$1,750 per month).

3. Pursuant to the Agreement, the Defendants paid a deposit of HK$100,092.

4. Since 1^st July 2006, the Defendants failed to pay rental and service charge for the Premises.

Forfeiture and Forfeiture Clause

5. The Plaintiff’s solicitor issued a letter to the Defendants dated 15^th August 2006 terminating the tenancy and forfeiting the rental deposit.  They demanded the Defendants to deliver up vacant possession of the Premises and to pay mesne profits and legal costs.

6. I set out the relevant part of Part IX clause 1 of the Tenancy Agreement on forfeiture –

“…in the event of any breach or non-observance or non-performance of the agreements stipulations or conditions aforesaid the Landlord shall be entitled to terminate this Agreement in which event the said deposit may be forfeited to the Landlord by way of liquidated damages.”

Defendants’ Action after Forfeiture

7. It is not disputed that the Defendants had failed to pay the rental for July and August when the said forfeiture letter was issued.  The Defendants then tried to negotiate with the Plaintiff, through the Plaintiff’s estate agent, PropertyOne Limited.

8. On 23^rd August 2006, the Defendants wrote a letter to PropertyOne Limited proposing some terms of settlement.  The letter reads as follow –

“I attach a cheque of HK$68,568.52 representing the outstanding rent for July and August 2006.  Please note that the delivery and clearing of the cheque is on the conditions that the deposit under our tenancy agreement shall not be forfeited and our rent free period for the September 2006 is still effective.

Please acknowledge safe receipt of the cheque and acceptance of the above by signing and returning to us a copy of this letter.”

9. The letter was ended with an acceptance clause –

“Accepted by

______________

PropertyOne Limited”

10. One Winnie So, a property management assistant of PropertyOne Limited, signed the letter and chopped the same with a chop of PropertyOne Limited.  The Defendants argued that this was a concluded settlement between the Defendants with the Plaintiff and the forfeiture had been waived.  This is the first defence raised.

The Plaintiff’s Case on Settlement

11. The Plaintiff denied any concluded settlement.  The Plaintiff had, through their solicitor, returned the cheque to the Defendants on 26^th August 2006 stating that the offer was not accepted by the Plaintiff.  It was also explained by the Plaintiff in the affidavit that Winnie So did not have authority to enter into any agreement with the Defendants on behalf of the Plaintiff.  She only signed on the said letter to acknowledge receipt of the letter.

12. I do not intend to go into the details of how Winnie came to sign the letter.  If necessary, it would be a matter for trial.  Plaintiff counsel submitted that at the highest, the Defendants could only argue that the Plaintiff had accepted the terms that “the delivery and clearance of the cheque is on the conditions that the deposit under the Agreement shall not be forfeited”.  Since the cheque had not been cleared, the Plaintiff was not bound by the terms.

First Ruling

13. I agree with Plaintiff’s submission.  There is no arguable case on this defence of the Defendants.  And I would add, there does not seem to be any consideration for this alleged settlement.  Since the cheque had not been cleared, there is no room for any argument of estoppel.

14. There is no arguable defence on the claim that the Defendants was in breach of the Agreement in failing to pay rent for July and August.  The Plaintiff was entitled to terminate the tenancy on 15^th August 2006 and to forfeit the deposit in accordance with Part IX clause 1 of the Agreement.

Rent in Arrears and Mesne Profits

15. I was confirmed by the parties that vacant possession of the Premises had been delivered on 17^th October 2006.  No order for possession is necessary.

16. The remaining issue is on rent in arrears and mesne profits.  The Defendants must be liable to pay for the July rent, which had not been paid.

17. The Plaintiff claimed against the Defendants for the rent for August.  They also claim against the Defendants for mesne profits from 16^th August 2006 onward.  The Defendants argued that this was double benefit and was inequitable for the Plaintiff to have judgment both on rent and mesne profits for the period from 16^th to 31^st August 2006.

18. Plaintiff’s counsel referred me to paragraph 17.092 of Woodfall on Landlord & Tenant.  It was argued that all claims which had accrued before the forfeiture remain unaffected.  The learned author quoted the judgment of Canas Property Co. v. KL Television Services [1970] 2 QB 433.  I was not provided with a copy of this judgment.  I informed the parties that I would look up the matter further.

19. Upon reading the judgment of Lord Dennings MR given in ‘Canas Property Co.’ case, I quote –

“If the rent is payable in advance, the writ should claim for the whole quarter's rent due in advance on March 25, 1968: Ellis v. Rowbotham [1900] 1 Q.B. 740; and mesne profits from June 24, 1968, to the date of delivery of possession. If the rent is payable in arrear the writ should claim the last quarter's rent due (for example, on March 25, 1968), and then there should be a claim in words for "rent at the rate of ... from March 25, 1968, to the date of service of the writ and mesne profits at the rate of ... from the date of service of the writ till the date of delivery of possession.”

20. The case is on when an act of reentry took place.  And at the ending of His Lordship’s judgment, he analyzed that if rent is payable in advance, it should be recovered as rent, notwithstanding that the reentry took place during the rental period.  But mesne profits were not payable until the end of the rental period.

21. Accordingly, I would allow the Plaintiff to have judgment for rental and service charge for July and August 2006 as claimed.  The claim for mesne profits shall be from 1^st September 2006.  The Plaintiff had suffered no loss and the Defendants had no gain for the period from 16^th to 31^st August 2006, as rent had been awarded till the end of August.  The Plaintiff should be entitled to mesne profits from 1^st September 2006 until 17^th October 2006, when possession had been returned to the Plaintiff.

Set off of Deposit Forfeited against Damages

22. The Defendants sought to argue that the Plaintiff could not forfeit the deposit and claim for damages, upon a proper construction of the Agreement.  Further, if the Plaintiff sought to claim damages, the Plaintiff must give credit for the deposit.  This is the defence relied on heavily by the Defendants.

23. The Plaintiff’s counsel submitted that deposit could not be set off against the rent or mesne profits.  Counsel relied on the case of Orient Bright International Limited v. Hiang Kie Hong Kong Limited CACV 220 of 2004.  Madam Justice Le Pichon says –

“at common law there is no bar to a landlord forfeiting the deposit if there is a stipulation as to the deposit and the forfeiture of it in the agreement.  In such a case, the deposit is not recoverable and therefore cannot be used as a set off against the claim for arrears of rent unless some equitable principle is applicable.”

24. A classic example of intervention by equity is when the deposit is excessive and penal in nature.  No argument of that nature was raised by the Defendants herein.  And the deposit was for 3 months rental and service charge.  I cannot say that it is excessive or higher than the market rate.

25. The Defendants sought to distinguish the Orient Bright’s case.  In Orient Bright’s case, the deposit was forfeited to the landlord “absolutely”.  In this case, the deposit was forfeited “by way of liquidated damages”.

26. Mr. Chiu, solicitor for the Defendants, relied on a passage in Hong Kong Tenancy Law by Malcolm Merry, 4^th Edition.  I quote the passage relied on by the Defendants herein below, and underlining the other parts that I also read.  The learned author says at page 103 –

“The landlord does not of course have to return a deposit, no matter when paid, if he has the power to forfeit it and that power has been exercised.  The power of forfeiture can expressly be given; it has also been said to arise by implication from the nature of a deposit of security that the tenant will perform his obligations under the lease.  If, however, the deposit is expressly or implied forfeitable as liquidated or agreed damages, the landlord would seem to be precluded from suing for any damages arising from the breach over and above the amount of the deposit.

“In the common situation that the tenant has failed to pay rent and other charges which leads to forfeiture of the deposit and an action for possession, can the landlord pocket the deposit and sue for the whole of the overdue rent and charges?  The Hong Kong cases suggest that he can, but the answer may depend on whether the deposit is forfeited as liquidated damages or simply as a deposit.  If liquidated damages, the losses arising from the from tenant’s breaches of covenant to pay rent and other charges are quantified as the amount of the deposit and he may not recover more for those breaches.  The landlord may be able to obtain more by suing for rent, that is for debt rather than for damages for breach of the covenant to pay rent, but the court would surely not permit him double recovery.  The rent would be recoverable only to the extent that it is greater than the liquidated damages for breach of the covenant to pay rent.”

27. The tricky part of the forfeiture clause of the Agreement is the provision that the deposit was forfeited as liquidated damages.  I agree that the interpretation could be different from the provision that the deposit was forfeited absolutely.

28. Plaintiff’s counsel submitted that the drafting was to prevent any argument that the deposit was a penalty.  He seems to suggest that the drafting has not specific purpose.  I disagree.  The Court is not bound by the choice of words.  The Court is entitled to look at the true nature of the Agreement and to decide if the deposit was a penalty, or liquidated damages in truth.

29. Mr. Merry in his book acknowledged that the case law of Hong Kong shows that the landlord may forfeit the deposit and claim rent in arrears.  He argued that it depends if the deposit is forfeited as liquidated damages or as deposit.  If as liquidated damages, the landlord cannot recover more than the deposit.  There is some force in the argument by the learned author.  But I do not have to rule on this point for the following reason.

30. Claim for rent is not a claim for damages.  It is the contractual liability of the Defendants under the Agreement and had accrued on the respective due dates for payment, and before forfeiture.  Contractually, rent may not be set off against the deposit. 

31. As for mesne profits, it is again not damages for breach of the stipulation or condition of the Agreement.  It is in fact the gain to the Defendants that he is not entitled to keep.  I refer again to the judgment of Madam Justice Le Pichon at paragraph 17 –

“In any event, regardless of the position with common law damages, the plaintiff’s claim here is essentially for mesne profits, which is measured by the value of the accommodation to the trespasser, rather than the actual loss to the landlord.  There is no question of giving credit for the forfeited deposit.”

32. One may argue that when the trespasser gains, the owner must suffer loss and hence suffer damages.  It may be argued that the owner do suffer loss.  But then the loss is caused by the trespassing, and not by breach of the tenancy.

33. When we are concerned with a breach of the tenancy by failure to pay rent, the common law damage would be the loss to the landlord when he cannot let out or only let out the property at a lower rental.  For such claim, there may be a possible argument that the damages had been fixed by the parties at a sum equal to the deposit, if the deposit is to be forfeiture as liquidated damages.  There is no such claim in this action. 

34. The Defendants also sought to rely on Fujitsu Hong Kong Ltd. v. Kwan Sit Cham DCCJ 2192 of 1990.  It is sufficient to note that the terms of tenancy did not provide for forfeiture.  It is not helpful to our case here.  The Defendants also wished to rely on Profitex Development Limited v. Tarxen Promotion Company Limited HCA13267 of 1998.  Again, the tenancy had no provision for forfeiture.  The judgment is not assisting me.

35. In conclusion, I rule that there is no possible argument of having the deposit set off against the rent and mesne profits payable by the Defendants.

Mesne Profits at Market Rate

36. The final issue is on the quantum of mesne profits.  There is no dispute that the mesne profits should be the market rental of the Premises.  The Plaintiff had produced a valuation report by Mr. Andy Chan of Debenham Tie Leung Limited and opined that the market rent of the Premises as at 16^th August 2006 was HK$53,500 per month.  There is no dispute that the service charge was HK$9,652 per month, and rates were HK$1,750 per month.

37. The Defendants did not apply to assess the market rental, which was a practical course to take.  He argued that the market rental of Ruttonjee Building, where the Premises form part, was HK$38 per square foot.  He relied on an advertising leaflet of PropertyOne Limited on the asking rental for office in Ruttonjee Centre.  He further submitted that the rental for the Premises should be lower and he adopted HK$35 for calculation.

38. In the advertisement, PropertyOne Limited used lettable area.  The Premises have a lettable area of 1,520 square feet, and a saleable area of 1,380 square feet.  If one multiple 1,520 by HK$35, that would produce a market rent of HK$53,200.  Adding on the service charge and rates, the result is the same as the assessment of Mr. Leung, with a few hundred dollars in different.

39. In the circumstances, I would adopt the assessment by Mr. Leung that the mesne profits of the Premises were HK$64,902 per month from 1^st September 2006 to 17^th October 2006.

Judgment

40. There be judgment to the Plaintiff for the sum of HK$73,456 as pleaded in paragraphs 16 & 19 of the amended Statement of Claim, representing the rent and service charge for July and August, and the rates for the quarter ending on 30^th September 2006 and interests up to 26^th August 2006; there be further interests on HK$67,944 at the rate of 3% over prime rate from 27^th August 2006 until judgment and thereafter at judgment rate until payment.

41. There be judgment to the Plaintiff for mesne profits of the Premises from 1^st to 30^th September 2006 at HK$63,152 per month (since the rates for the month have been awarded above) and from 1^st to 17^th October 2006 at the rate of HK$64,902 per month.

42. And on costs, it should follow the event.  The Agreement provided that costs should be paid on indemnity principle and I do not see any reason to depart from the parties’ contract.  I therefore give an order nisi that the Plaintiff is to have costs of the action including costs of the O.14 application and all costs reserved, to be taxed on indemnity basis if not agreed, and there be certificate for counsel for the hearing of the O.14 summons.