SGS HONG KONG LTD. v. APPLAUD LAND INVESTMENT LTD.

HCA 3551 of 1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. A3551 OF 1996

(Transferred from the District Court C.J. Action No. 13567 of 1995)

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J U D G M E N T

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This is an action originally commenced by Writ of Summons filed in the District Court on 28th October 1995 in which SGS Hong Kong Limited (hereinafter referred to as 'SGS') was named as the Plaintiff and Applaud Land Investment Limited (hereinafter referred to as 'Applaud') was named as the Defendant. The claim was for the return of a security deposit of $89,730.00 paid by the Plaintiff to the Defendant in respect of a tenancy between the parties.

On 1st December 1995 a defence and counterclaim was filed on behalf of 'Applaud' as Plaintiff in the counterclaim, with 'SGS' being named as the 1st Defendant and South Crown International Limited (hereinafter referred to as 'South Crown') as the 2nd Defendant. Inter alia 'Applaud' sought in its counterclaim against 'SGS' rent, rates and management fees for the period 1st March to 31st December 1995.

There has been no appearance by or on behalf of 'South Crown' throughout these proceedings which proceedings were transferred to the High Court from the District Court on 16th February 1996 by reason of the sum of money counterclaimed.

I was informed the day after this trial concluded that on 19th February 1997 'South Crown' was ordered in the High Court to be wound up under the provisions of the Companies Ordinance and that the Official Receiver was constituted provisional liquidator of the affairs of 'South Crown'.

Chronology

1. 'Applaud', as the owner of commercial premises known as Unit J2 11th floor Kaiser Estate in Hung Hom (the premises) let them to 'SGS' by tenancy agreement dated 3rd March 1993 for a term of 2 years from 1st March 1993 to 28th February 1995 at a monthly rental of $29,910.00 exclusive of rates.

[It is agreed by counsel for the parties that by reason of the user of the premises and the tenancy being for a fixed term of 2 years with no provisions for earlier determination other than for breach of any of the provisions of the tenancy agreement, Part V of the Landlord and Tenant (Consolidation) Ordinance Chapter 7 applies to the tenancy].

2. Pursuant to clause 2 of the tenancy agreement 'SGS' deposited with 'Applaud' the sum of $89,730.00 as a security deposit. [This is the sum claimed by 'SGS' from 'Applaud' in the original action].

3. 'SGS' agreed by Sub-Lease Agreement dated 3rd June 1994 to sublet the premises to 'South Crown' for one year from 1st March 1994 until 28th February 1995.

4. 'SGS', in consideration of 'Applaud' consenting to the subletting of the premises to 'South Crown', undertook by letter dated 15th March 1994 to continue to observe and to perform the terms and conditions of the tenancy agreement dated 3rd March 1993 and in addition agreed to indemnify 'Applaud' in respect of any breach of or failure to perform any of the terms or conditions of the Agreement for Sub-Lease by 'South Crown'.

5. On 5th September 1994 'SGS' gave written notice to 'South Crown' to quit and to deliver up vacant possession of the premises on 28th February 1995. That notice was one week short of the required 6 months. 'SGS' added in that written notice that if 'South Crown' was interested in renewing the tenancy it should deal directly with the landlord 'Applaud'.

6. On the same date the 5th September 'SGS' gave written notice to 'Applaud' that it would not be renewing its tenancy of the premises when that tenancy expired, in accordance with the tenancy agreement, on 28th February 1995.

'SGS' added in that written notice that it had already informed 'South Crown' concerning the expiration of the sub-lease and that it had also informed 'South Crown' that it should contact 'Applaud' directly concerning any renewal terms and conditions.

7. On 29th December 1994 'Applaud' wrote to 'South Crown' offering a new lease of the premises, inter alia upon the same terms as those that existed in the tenancy agreement made between 'Applaud' and 'SGS' dated 3rd March 1994. In that letter 'Applaud' asked 'South Crown' to confirm agreement and to send a cheque for a sum equal to 3 months rental within the next week.

8. By letter dated 8th March 1995 'Applaud' wrote to 'SGS' saying, inter alia, that 'South Crown' had verbally agreed to enter into a new tenancy agreement with 'Applaud' but that 'South Crown' had failed both to sign such agreement and to pay over a deposit.

'Applaud' stated that if 'South Crown' did not deal with these matters by 10th March 'SGS' was required to deliver up vacant possession of the premises.

9. On about 16th March 1995 'South Crown' returned to 'Applaud' a copy of the offer letter dated 29th December 1994 duly signed in agreement of the terms for the new tenancy set out in that letter.

10. On 1st April 1995 the Solicitors for 'Applaud' wrote to 'SGS' saying that as it had failed to deliver up vacant possession of the premises on 28th February 'SGS' was in breach of the tenancy agreement dated 3rd March 1994. The letter went on to demand vacant possession on or before 8th April together with mesne profits and rates and other outgoings from 1st March until vacant possession was delivered, and legal costs and disbursements.

11. On 4th April 1995 the Solicitors for 'SGS' replied to the letter of 1st April saying that 'SGS' had not been kept informed of the progress of the new lease negotiations between 'Applaud' and 'South Crown' but if a new tenancy had not been agreed upon between 'Applaud' and 'South Crown' 'SGS' was still willing to assist in the recovery of possession of the premises and all mesne profits from 'South Crown'.

12. 7th April 1996. A meeting was held on the premises attended by representatives of 'Applaud' 'SGS' and 'South Crown'. A cheque in respect of a deposit for the lease of the premises was handed over to 'Applaud' by 'South Crown' which cheque was subsequently dishonoured twice.

13. 'South Crown' remained in occupation of the premises until December 1995 without payment of rent.

The Issues

It seems to me that the principal issue in this case is whether 'SGS' was obliged to deliver up vacant possession of the premises to 'Applaud' on 28th February 1995 or whether 'Applaud' had waived its right to claim vacant possession on that day by reason of its negotiations with "South Crown'. The relevance of the meeting on 7th April between the representatives of the parties to this issue is that it reveals the attitude and the actions of those parties, or more particularly of 'SGS' and 'Applaud', both prior to and following the 28th February.

The position adopted by 'SGS' and 'Applaud' following the meeting on 7th April (and the subsequent dishonouring of the cheque issued by 'South Crown' to 'Applaud') and which position has been maintained up until trial is encapsulated in a letter from 'SGS's' Solicitors to 'Applaud's' solicitors dated 19th April 1995 and a letter in reply dated 25th April. That position is generally reflected in the pleadings.

MR. CHAN Counsel for 'SGS' submits, inter alia, that the tenancy came to an end by notice and with, at the very least, tacit agreement on the part of 'Applaud' on 28th February, and formal oral agreement on 7th April that vacant possession was not required. MS. TSANG Counsel for 'Applaud' submits that any such agreement either on 28th February or 7th April was subject to conditions imposed by 'Applaud' which conditions (affecting the honouring of 'South Crown's' Cheque and the signing by 'South Crown' of a formal tenancy agreement) were not fulfilled and thus 'SGS' continued as a tenant of the premises until such time as vacant possession was delivered, or upon expiration of a notice to quit issued by 'Applaud' to 'SGS'.

The evidence

Before me 3 witnesses gave evidence for 'SGS' and 2 witnesses for 'Applaud'.

Having listened carefully to that evidence, and in particular to that of Miss Amy Leung who was responsible for the tenancy on the part of the tenant 'SGS' and Ms. CHAN Po Kum who was responsible for the tenancy on the part of the landlord 'Applaud', I am left in no doubt as what transpired as between the parties concerning the premises.

Between 29th December 1994 and a date in March 1995 (after the 2 year term of the tenancy between 'Applaud' and 'SGS' had ended) 'Applaud' and 'South Crown' were negotiating a new tenancy between themselves upon the same terms. 'South Crown' prevaricated; it did not prior to 28th February, as 'Applaud' had required of it, send a cheque as a deposit or countersign the letter of offer dated 29th December which is referred to in the chronology above in paragraph 7. 'South Crown' did sign that letter in about the middle of March and returned it to 'Applaud'. 'South Crown' handed over the cheque on 7th April.

Crucially I am satisfied, on the evidence before me, that 'SGS' was not informed of 'South Crown's' prevarication by 'Applaud' until the 8th March (after the original tenancy had expired) and for that reason up until that date 'SGS' believed that nothing was amiss; that 'South Crown' having negotiated a new tenancy directly with 'Applaud', 'South Crown' would continue in occupation of the premises beyond 28th February in accordance with the terms of that new tenancy agreement and, that that being so, it was not required of 'SGS' to deliver up vacant possession to 'Applaud'.

Upon receipt of the letter dated 8th March Miss Kitty WONG of 'SGS' was sufficiently concerned to speak to a member of staff at 'South Crown' to find out what the position was. She was reassured that 'South Crown' was to proceed with its agreement with 'Applaud' and she advised 'Applaud' accordingly. To that extent 'Applaud' might be said to have been misled or lulled into a false sense of security, but I say again that this was on a date after the tenancy between 'Applaud' and 'SGS' had expired and thus after the date when, if 'Applaud' had required vacant possession to be delivered up, 'SGS' would have been obliged to provide it. 'Applaud' did not require such vacant possession, it being content for 'South Crown' to remain in possession in the hope or expectation that 'South Crown' would provide what was required. It was too late, after 1st March to complain to 'SGS' about South Crown's continued occupation being in breach of the tenancy agreement dated 3rd March 1993.

After the letter dated 1st April was received 'SGS', determined to help to resolve the matter once and for all, (no doubt feeling at least some moral responsibility for what had happened) and arrangements were made for the meeting which took place on the 7th April.

As to what was said and done at that meeting I accept the evidence of Miss Amy Leung and reject that of Ms. CHAN Po Kum. Miss Leung told me that by the time of the meeting she believed that 'SGS' was no longer concerned with the premises but nevertheless she was prepared on her Company's behalf to persuade 'South Crown' to do what was required of it by 'Applaud' and indeed ' South Crown' did so at that meeting.

The position of 'SGS' in relation to the premises immediately prior to this meeting was as is set out in the letter dated 4th April from its solicitors to the solicitors for 'Applaud' (see paragraph 11 of the Chronology).

I reject completely on all of the evidence before me the contention by Ms. CHAN Po Kum of 'Applaud' that she told Miss Leung at the meeting on the 7th April - and indeed that she told both Miss Leung and Miss Kitty WONG on the telephone prior to that date - that 'SGS' would be held responsible for failing to deliver up vacant possession of the premises until such time as 'South Crown' paid the required deposit; the cheque for that deposit had been honoured; and 'south Crown' had entered into a formal tenancy agreement at a solicitor's office. That may have been Ms. CHAN's belief or understanding as to the legal position but I am satisfied that she did not express that view to any employee of 'SGS' let alone seek to make it a formal condition of purportedly releasing 'SGS' from its obligations at the meeting of 7th April.

Ms. Chan was sorely tested in cross-examination and in consequence of what she said I am left with the very real impression that she (as the representative of her family company 'Applaud' who was dealing with this property) was too busy with other matters to be unduly concerned about whether 'South Crown' might be a suitable tenant. She was content - despite the ominous signs evidenced by 'South Crown's' unwillingness to promptly enter into a written agreement and to pay a deposit - just to let things drift into March 1995 and then, when problems did arise, to seek to place the blame on 'SGS' which company by its representatives had done no more than to seek to act as an honest broker between 'South Crown' and 'Applaud'.

Conclusions

1. The tenancy agreement between 'Applaud' and 'SGS' terminated both by notice and by effluxion of time on 28th February 1995.

2. 'Applaud' was content for 'South Crown' to remain in the premises after that date as its new direct tenant and in the hope that 'South Crown' would enter into a formal tenancy agreement and pay over the required deposit.

3. The fact that 'South Crown' did neither of those things prior to 1st March 1995 cannot be blamed on 'SGS' which was not notified of the difficulties which had arisen until after its tenancy with 'Applaud' had terminated.

In the light of those difficulties, which could have been foreseen, 'Applaud' should have advised 'SGS' prior to the 28th February that vacant possession was required on that date - and 'SGS' would have been obliged to provide it or suffer the consequences in damages. 'Applaud' elected not to do so and could not thereafter complain to 'SGS'. After 28th February 'SGS' no longer had any interest in the premises and 'Applaud's' remedy then lay against 'South Crown' and not against 'SGS', albeit that 'SGS' was prepared to assist 'Applaud' in any action that it chose to take against 'South Crown'.

4. The so called guarantee issued by 'SGS' to 'Applaud' related only to the sub-tenancy of the premises whilst that sub-tenancy was in existence. That sub-tenancy came to an end on 28th February 1995 irrespective of whether the notice given by 'SGS' to 'South Crown' on 5th September 1994 was defective.

5. As from 28th February until 22nd April (when 'Applaud' gave notice to 'South Crown' that their lease agreement was withdrawn) 'South Crown' is liable to 'Applaud' for rent or for mesne profits. Thereafter until 'South Crown' vacated the premises in December 1995 'South Crown' is liable to 'Applaud' for mesne profits or for damages.

It follows from the above that I find for 'SGS.' 'Applaud' is hereby ordered to pay to 'SGS' the sum of $89,730.00 together with interest at Judgment rate from 1st March 1995. I make an order nisi that 'Applaud' also pay to 'SGS' its costs in this action.

The Counterclaim by 'Applaud' against 'SGS' is dismissed but, for what it is worth given what I have now been told about its winding up, 'South Crown' is ordered to pay to 'Applaud' damages to be assessed for the period between 1st March and 31st December 1995.