THE WORLD REALTY LIMITED v. KWAN NGAR YIN

1986, No. A1898

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. In this action, The World Realty Limited as landlord claim a substantial sum from the defendant Madam Kwan by way of arrears of rent and mesne profits. The matter goes back to October 1983 when the defendant entered into a written tenancy agreement with the plaintiff for the rental of Shop 10B on the ground floor or level 1 of Lucky Plaza, Shatin. The agreement was for 36 months, to run from 1st November 1983 to 31st October 1986. The rental was $6,200 a month payable in advance. The tenant also agreed to pay a management fee of $260 a month and an air-conditioning fee of $938 a month. The defendant proposed to use this shop for the sale of clothing and so she was no doubt content with the covenant which reads:-

"Not to use the said premises or any part thereof for any purpose other than Commercial Use. "

2. It is apparent from her evidence that covenant (j) was also explained to her at the time. This was "not to assign, sublet or part with possession of the said premises or any part thereof. " I am told, and I have no reason to doubt, that this is a common form type of agreement in Hong Kong. If that be right then there must be, I think, some very chancy or possibly very foolish tenants in Hong Kong. Because anyone who enters into a tenancy in these terms with the intention of starting some new business is in dire trouble if that business fails. He or she can do nothing whatever to part profitably with the premises, or to allow anyone else into them. He or she is at the mercy of the landlord, who may or may not be disposed to show mercy. The agreement also recorded that at the time of the execution the defendant had paid a deposit of $15,296 as security for the due payment and performance of her various obligations under the tenancy. The agreement also contain the proviso for forfeiture.

3. The defendant's was the first shop apparently to open on this level of Lucky Plaza. She was occupying 10B. Next door to her at 10C was the office from which the caretakers of the building operated. Not far from that was an area marked "Yellow" on the plan which has been put before me, which is where the rubbish from the entire building and a considerable numbers of units was collected. I will come back to that later. There seemed to have been trouble from the start with the air-conditioning system. The initial trouble was that it did not function. The defendant was unwilling to pay anything for air-conditioning when she was not receiving it. But the plaintiffs and the caretakers insisted upon everything being paid, and unless everything was paid, nothing was accepted.

4. This deadlock was broken after some period of time, as I understand it, when the defendant took advice and was advised, she tells me, by her solicitor, to pay up on the basis that she was making money out of the premises at that time, and it was more sensible to pay rather than go on arguing with the landlord. That advice may well have been good sense, and indeed, its acceptance may have indicated that at that time she was making some money from the shop. I doubt whether it was good law. In my judgment where an agreement of this nature requires a tenant to pay an air-conditioning charge per month, that covenant gives rise to a corresponding obligation on the part of the landlord to supply air-conditioning. By that I mean, to supply air which is cooled and is reasonably pure. If instead foul air issues from the air-conditioning system or no air issues from the air-conditioning system, that I would regard as a breach of that implied obligation. Indeed, the contrary has not been seriously contended.

5. Eventually, the air-conditioning started to function with some continuity. It was then, the defendant tells me, that the trouble with smells started. She said this started in about January 1985. The trouble was this. The rubbish was accumulated at the position marked yellow on the plan. This was removed once a day. Having regard to the very large number of units, there must have been a considerable quantity of rubbish. Whilst that was being removed, considerable smells were given off. Unfortunately there was somewhere near the yellow area an intake for the air-conditioning system. The result was that these smells did not dissipate into the atmosphere. They were sucked into the system and taken round the building; certainly, that part of this floor of the building. Particularly the units which seem to have been affected were those which lay between the yellow area on the plan and the air-conditioning plant itself which lay behind No. 14A. The principal sufferers seem to have been the occupants of 15A to 10C inclusive.

6. The defendant says, this smell, she first noticed in January and I accept that. But it seems to be common ground that the situation got a good deal worse come April, when the rubbish collection function was taken over by Urban Services. The effect of this can be put like this:

7. There was a further hazard to this defendant having regard to the nature of her business. I hope I do not insult her if I describe that as somewhat down market clothing. She was getting goods from factories, some of which were perfect, some of which were imperfect and some of which were samples. In the nature of her business, she said, quite a lot of it was displayed in open cardboard boxes in the shop. The trouble with this smell was that shoppers could all too readily conclude that this smell was coming from the clothes themselves. This is what she herself first thought. She thought it was coming from the stock at the back of the shop. The sting in this as far as she was concerned, was that the shopper could readily conclude that she was selling soiled garments.

8. One only has to rehearse those facts, for it to be apparent that someone who was trying to conduct a business such as the defendant, was bound to be very adversely affected by those conditions. This defendant may or may not have kept proper books. She certainly has not produced any to the Court, and she never filed tax returns. Therefore it is objected by the plaintiff that she has succeeded in proving nothing by her evidence in this case. I do not think that I am prepared to go as far as that. She has told me that her turnover in 1984 varied between $1,000 and $2,000 a day. By comparison she said that when this smell was operating in 1985 it fell to some tens of dollars or some hundreds of dollars a day. I am quite prepared to accept that the inevitable consequence of the conditions she has described must have brought about a fall in turnover, which even upon the material before me, I feel can properly be assessed as a minimum of $250 a day. I emphasize that that is a minimum figure which probably operated for the whole of the first six months of 1985.

9. From May onwards it is apparent that there was a mounting wave of protest from certain of the occupants, with the result that remedial steps were put in hand. It was decided that two things were necessary. First a partition had to be erected at the top or north end of the yellow part of the plan. The specification for this work was dated 5th August, and it was put in hand shortly after that. The second thing that needed doing, so the plaintiff Is second witness, told me, was that a new air extraction system had to be put in, drawing air out of that yellow area and, I assume, making sure that air from that yellow area was not allowed any longer to be drawn into the air-conditioning system. When that work was done I know not. But I was told that it was done after the partition was built, and therefore I am not prepared to accept as accurate, the assertion in the letter in the supplemental bundle at p. 8 that the whole matter had been remedied by the 23rd September.

10. The effect of these conditions brought about financial problems to this defendant. It is common ground, because she so admits, that she paid no rent, management fee or air-conditioning charges for the months of May, June or July of 1985. And the only issue of fact before me is whether she paid anything for April. She thinks she did but frankly upon the material before the Court she is not sure. The material before the Court is really very confusing. It consists of a ledger kept by the plaintiff company. It was not disclosed until the second day of the hearing as a result of observations from the Court. There was an order for discovery in this case on 15th July last. This ledger was the one most obviously significant document in the case. It is deplorable that the document only came to light in the circumstances I have described on day two. If it had been produced at the proper time, it might have encouraged this defendant, who probably had no idea what an order for discovery was, to take steps to get the pass-sheets of the business bank account she kept in 1985. They would have given us the whole story. I have got to do the best I can with this ledger.

11. The rent collection process utilised in respect of this building, was a somewhat complicated one. It seems to have started with the book-keeper drawing a receipt, of which four copies were made, the top copy being intended for the caretakers. They then gave the receipt to the individual tenants in exchange for the rent, in cheque or cash form. The payment was then passed back to accounts department at head office; who paid the money into the bank; got a paying-in slip; seem to have put a voucher number upon that slip or some document based upon it; and sent that voucher back to the book-keeper. It was in the light of that, that the entries were then made in the ledger. That process did not apply in full to this defendant. Receipts were made out, but the top copy was not given to the caretaker. The caretakers made some demand on her, as I understand it from her. She was paying her rent by cheque direct to head office. Thereafter if head office was purporting to follow their usual procedure, she should have received the receipt from them. When she was three months in arrear, head office should have operated their normal practice of referring the matter to Legal Department for special demand.

12. Coming back to the ledger, the original book-keeper was a man by the name of Chan who is no longer with the plaintiffs. Another hand then emerges whom Mr. Tse was not prepared to identify. Finally there was Mr. Tse who took over in July 1985. But he only made the last two entries to which I will come. The document is something of a mess. The entries are not in chronological order. A half entry dated 31st May, which seems to have been started by Mr. Chan and completed by another, appears before the entry dated 18th April. This suggests that the second cheque was lost at some point, and it had to be added in later. It gives one no great confidence that the payments have been attributed necessarily to the right month, which is the very point that the defendant takes. Receipts were duly recorded in the ledger but she objected that she never got a receipt for some of these payments. That was plainly right because the receipts for the last two recorded payments were produced in evidence. By receipts, I mean the top copies of those receipt should have been gone to her. The vouchers have not been produced. When I look at these matters and having regard also to the late discovery of the document, I ask myself this question: am I prepared to make a finding as to whether rent was paid in April or not?  The answer is that I am not. I simply do not know on this material. It therefore seems to me that the claim for recovery of rent unpaid in April fails.

13. As I say there is no question that no rent was paid for May, June or July. On the 30th June the defendant wrote to the plaintiffs in these terms. I read the 2nd crucial paragraph of the letter:-

"I hereby give you one month notice that due to the financial difficulties suffered by me, I could not to carry on the business at the above premises, therefor, I will surrender of the unexpired tenancy in respect of the above tenancy agreement and I will deliver up vacant possession of the above premises to you on or before 31st July 1985."

That was a blunt frank statement: "I cannot afford to go on: I will hand the premises back to you on the 31st. "

14. This was a three-year term. The plaintiffs were under no sort of obligation to accept a surrender. Under the terms of their common form tenancy, this defendant was at their mercy. They were not then disposed to be merciful. Mr. Siu's reply of 12th July is crisp and to the point: "we regret to advise that we find your proposed early termination of the above tenancy agreement unacceptable".

15. But the defendant had no option, as she explained. She could not afford to pay for some of the goods that she had in stock, and those goods had to go back. She could not afford to continue this business in any shape or form. She returned the goods that had to go back. She sold what she could of the balance of her stock in a week's closing-down sale, and returned the unsold balance to the factory. This was done quite openly from premises next door to the care-taker's office. Some of them came to the sale and bought, and she said to them that she had to close the shop. 31st July was the last day of operation. She opened the shop normally till 8 o'clock, but it was nearly 10 o'clock that evening when she had finally finished. She put up a notice showing her new telephone number on the door. She went next door to the care-taker's office. found the door closed, left the keys on a desk outside. The keys were labelled 10B. She then left the premises and has not been back since.

16. Mr. Tong, one of the care-takers gave evidence. He said he never saw a key. I am satisfied that that key was returned by the defendant in the way she described. Whether Mr. Tong was aware of this, was neither here nor there. I can see no reason for concluding that when the key was returned in that way, one or more of the care-takers did not see it or pick it up. I doubt if they attached any significance to it at all. They made a daily report to head office covering the state of affairs at this building, and at an equally late stage, the two reports for the 31st July and 1st August were produced. They said nothing about the defendant leaving the building or leaving a key. But Mr. Tong said it was probably orally reported to head office. As from that moment the care-takers took no further action as far as this defendant was concerned. She started to work in the next door Centre, the Shatin Centre. This was plainly known to the caretakers. But they made no attempt to return the key to her or to ask her for money. In fairness to them, they had no idea that she had written in the terms she had on the 30th June.

17. Head office, I am prepared to accept, were informed of the defendant's departure. Someone unknown wrote in pencil on the front of the ledger card, "moved out". That same person, or another, wrote at the foot of the ledger card in pencil, the number and the sum and the date of what seems to be the last cheque received. Mr. Tse took over the handling of this ledger in July, and no doubt in July or early August, made the last two entries do the ledger. These relate to the period 1st to 30th June and 1st to 31st July. I say he made them at the same time because he made out two consecutively numbered receipts as part of the initial collection process. That is the last entry in this ledger. When asked why that was, Mr. Tse gave an explanation which I simply did not start to find credible.

18. He said first of all that no entry was made beyond July, because no rental was being received. The same observations apply equally to June and July, when he in fact made entries. He then said that he checked and discovered that the tenant was in arrears, this is in August. Therefore the issuing of the voucher stopped. That made no more sense than the earlier answer because the tenant had been in arrears equally in June. The significance of the arrears now was that they had reached the three-month limit, and in accordance with the usual practice, special steps should have been taken. So that I have received no credible explanation as to why in effect this ledger was ruled off for lack of entry on the 31st July. The coincidence of date between the cessation of entry and the abandoning of the premises by this defendant is massive.

19. In the same way as no attempt was made by the care-takers after the 31st July to recover current rent or indeed anything from this defendant, neither was any attempt made by head office. If one was testing the possession at the end of 1985, and one asked oneself objectively: "what has happened here?"   I think that there is strong grounds for asserting that the plaintiffs' conduct strongly suggests a change of mind between mid July and the end of July: That they had written off this defendant in the vernacular as a worthless tenant.  The best evidence of that is the cessation of any further entries in respect of alleged current rent in this ledgers.

20. By March 1986 the position changed. The plaintiff's asserted that by reason of short staff and overwork, the failures of the defendant to pay rent had been overlooked, and that what Mr. Tse said he discovered in August, did not reach higher office until March. A claim for rent was then made by letter, and shortly followed by the issue of the writ on the 4th April of this year.  That initially simply claimed rent. But it was amended on the 6th May to claim possession and to forfeit the lease for non-payment of rent. In her Defence of the 15th May the defendant asserted, amongst other things, that "the plaintiff accepted the delivery of keys and vacant possession of the premises through its management office in about the end of July 1985."  That defence was plainly based upon some legal advice. In so far as the paragraph was based upon wrongful repudiation, the advice was not well found, Total Oil v. Thomson Garage⁽¹⁾.

21. Following the delivery of those pleadings, Mr. To got in touch with the defendant by telephone. He said he wanted to persuade the defendant to attend the premises with him when the door to the shop could be opened. The defendant's response was that "you have had the key for months; it is all yours."  Mr. To's reply was that they had no record of any key being delivered. Mr. To says that following that on the 25th June the lock was in fact forced, and physical possession obtained. This and the issue of the writ are now said by the plaintiffs to be the 1st unequivocal conduct accepting possession of the premises. I accept this was physically the first time that possession was recovered. The defendant, had she been represented, would I think have tried to reply, that whether you used the key or not, was a matter for you. This was no more than an attempt to recover from the inevitable results of what she would wish to contend, was the unequivocal conduct in 1985.

22. The issue in those circumstances is whether or not what has happened here constituted a surrender by operation of law. The principle is conveniently summarised in Hill and Redman Law of Landlord and Tenant, 17th ed. Vol. 1 at paragraph 373.  "Delivery of possession by the tenant to the landlord and his acceptance of possession effect a surrender by operation of law. Surrender in this case depends upon the agreement by the landlord and tenant that an end should be put to the term and upon the change of possession in pursuance of such an agreement.  The change of possession is essential. " That sentence has to be read with the opening sentence of the next paragraph. "There is a delivery of possession sufficient to effect a surrender, when the tenant returns the key of the premises and the landlord accepts them with the intention of changing the possession. " The authority for that proposition is the old case of Dodd v. Acklom⁽²⁾ which shows that the delivery of keys themselves can be a sufficient change of possession if coupled with the necessary intent. Because what is necessary here is not a change of physical possession but "something amounting to a virtual taking of possession". That is the phrase of Cockburn CJ. in Oastler v. Henderson⁽³⁾. Dodd v. Acklom⁽²⁾ shows that the delivery of keys can constitute this, if they are accepted in circumstances which found a proper inference that they have been accepted by the landlord without qualification and by way of acceptance of a surrender. Smith v. Roberts⁽⁴⁾ is an example of just such a case.

23. The principle, I think, is most clearly set out in the decision in Phene v. Popplewell⁽⁵⁾ where Erle CJ. says this :-

"The key vas left by the tenants at the counting house of the landlord with the intention of relinquishing the tenancy, and it remained on the landlord's premises. "

(Those words precisely apply here.)   "It is true that the tenant's offer was not then accepted; but leaving of the key with him was a continuing offer on the part of the tenants; and as soon as the landlord did an act which would have constituted him a trespasser, if he had not exercised the option thus given to him, that afforded ground for the inference that he assented to the tenancy being put an end to it."  More simply, the leaving of the key was a continuing offer which the landlord by conduct might accept. Over the page he says :-

"Anything that amounts to an agreement on the part of the tenant to abandon and on the part of a landlord to resume possession of the premises amounts to a surrender by operation of law. "

Willes J, a very great Common Lawyer, gave judgment to the same effect, pointing out that the matter depended on the intention of the parties, and that such intention is "to be made out by the circumstances."   p. 341.

24. The defendant's intention was plain. She wanted to surrender and she left the premises and the keys with such intention. What of the plaintiff's intention? Had the plaintiff by its conduct apparently accepted the defendant's continuing offer. I believe that the test of intention in the formation of contract in modern circumstances is objective. One has to look objectively at what the plaintiffs did beyond retaining the keys. What they did was first, no further communication of any sort with this defendant; an abandonment of the then ruling rent collection procedures; and what I have described as the ruling off of the ledger, the fact that no further attempt of any sort was made to record arrears or to collect arrears, accruing as against this defendant. I think that the proper inference to be drawn from this, looking at the matter objectively is that the plaintiffs have decided not to pursue the defendant further. They may for good reason, have decided that she was worthless. Their motives are, neither here nor there. You have to ask yourself what inference is to be drawn from the plaintiff's conduct. I think the only reasonable objective conclusion is that they had accepted the return of these premises.

25. In my judgment therefore there was a surrender of this tenancy at 31st July and that the defendant is not liable for rents and other charges beyond that date. She failed to pay any rent or the other charges for the months of May, June and July. What she seeks to do there is to set-off the damage which she asserts that she suffered by reason of the smell at that time. This smell in my judgment constituted a breach of the implied obligation I have already referred to. I have already said that I would have no hesitation in concluding that during those three months, and indeed beyond, she suffered a fall in turnover of not less than $250 a day. The shortfall of $250 a day over a 30 day month exceeds the total figure of $7,398 a month due under the lease. I think she is entitled to set-off that in extinction of that obligation. In my judgment, therefore, the plaintiffs' claim fails but this defendant is entitled to recover her deposit of $15,296.

(1) (1972) 1Q.B. 318

(2) 1843 6 man & G672

(3) 1877 2QBD 575, 578

(4) (1892) 9 T.L.R.77

(5) (1862) 12 CB(NS) 334, 339.