KIN TONG LAND INVESTMENT CO LTD v. CAPELLA LTD

DCCJ 3495/2017

[2019] HKDC 65

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3495 OF 2017

-------------------------

-------------------------

---------------------------------------------

ASSESSMENT OF DAMAGES

---------------------------------------------

Introduction

1.  This is the hearing of assessment of damages arising out of the defendant’s breach of an agreement for lease entered into with the plaintiff in July 2016 (“the Agreement”).

Procedural history

2.  On 3 August 2017, the Writ was issued.  Since no notice of intention to defend had been given, on 26 October 2017, final and interlocutory judgment was entered against the defendant ordering it to pay (1) a sum of HK$13,365, which represents the amount of a bounced cheque issued by the defendant for paying part of the security deposit under the Agreement; and (2) loss and damages for breach of such agreement to be assessed (“the Judgment”).

3.  It was only after the Judgment had been entered then the defendant appointed a law firm, C.F. Lee & Co, to represent it in this action.  The plaintiff’s solicitors served the notice of appointment of assessment of damages dated 13June 2018 on the defendant’s solicitors. However, on 26June 2018, C.F. Lee & Co took out a summons to apply to cease to act for the defendant, and leave was granted.  The defendant has been acting in person since then.

4.  Both parties filed and served their respective witness statements and lists of documents pursuant to Registrar Ho’s order of 2 October 2018.

5.  Mr. Caleb Chan, the defendant’s director (“Mr. Chan”), attended court and represented the defendant at this hearing. 

The Background

6.  There is no issue between the parties as to the following facts and matters.

7.  The plaintiff is the registered owner of the premises situate at Unit A, 19^th Floor, Queen’s Centre (“the Building”), Nos.58-64 Queen’s Road East, Wanchai, Hong Kong (“the Premises”). It was incorporated under a joint venture between the Chinachem Group and Asiasec Group.

8.  In July 2016, Chinachem Agencies Limited on the plaintiff’s behalf on one side, and Mr. Chan on the defendant’s behalf on the other entered into the Agreement in respect of the Premises.  Under the Agreement, the Premises shall be let to the defendant for commercial use as an office.  The tenancy shall be for a term of two years commencing from 1 August 2016 and expiring on 31 July 2018 at a monthly rent of HK$13,365 exclusive of rates, management fees and other outgoings.  The rent would be payable in advance on the 1^st day of each calendar month without any deduction.

9.  The Agreement also provided that:-

(1)   The defendant agreed to pay the management fees and air-conditioning charges at the rate of HK$1,950 per month on the 1^st day of each calendar month.  As for the rates, the defendant agreed to pay quarterly in advance on the 1^st day of January, April, July and October throughout the term.

(2)   There was one month’s rent-free period from 1August 2016 to 31 August 2016, during which the defendant was nonetheless obliged to pay for the management fees and air-conditioning charges, and the rates.

(3)   Apart from paying one month’s rent upon signing of the Agreement by way of cheque in the sum of HK$13,356 (“the Cheque”) as part payment of the security deposit, the defendant was also required to pay a further two months’ rent and three months’ management fees and air-conditioning charges (“the said balance of security deposit”) upon signing of the formal tenancy agreement. 

(4)   The stamp duty is to be shared equally between the parties.

10.  According to clause 26 of the Agreement, the defendant had to sign the formal tenancy agreement, and pay up the said balance of security deposit on or before 29 July 2016.

11.  The Cheque was bounced upon presentation, and the bank notified the plaintiff of the dishonoured cheque on 25 July 2016. The defendant neither signed the formal tenancy agreement nor paid up the said balance of security deposit as scheduled or at any time thereafter.

12.  The plaintiff also lodged the Agreement with the Stamp Duty Office for stamping by paying the full stamp duty amount of HK$769 so as to enforce the terms of the Agreement against the defendant to claim for its loss and damages.

13.  By way of their letter dated 19 August 2016, the plaintiff’s solicitors wrote to the defendant demanding the latter to pay up the bounced cheque amount and to compensate all the plaintiff’s loss and damages, and indicating that by reason of its conducts the defendant had evinced an intention not to be bound by the Agreement which amounted to repudiation of the same.  In the letter, the plaintiff’s solicitors also intimated to the defendant their client’s acceptance of such repudiation. 

14.  In mitigating their loss and damages, within a week or two after the aforesaid letter had been sent out, the plaintiff engaged various estate agents to list the Premises in the market for lease with an asking rent of HK$13,365 per month.  That aside, the plaintiff had also published notices in South China Morning Post during the period between 25 August 2017 and 17 February 2017 advertising that there was a vacant unit of 495 sq ft in the Building (i.e. referring to the Premises) immediately available for lease at an attractive rent.

15.  Eventually, on or about 9 March 2017, the plaintiff managed to lease out the Premises to a substitute tenant (i.e. Hong Kong Charity Association Limited) for a term of two years from 20 March 2017 up to 19 March 2019 at the same monthly rent of HK$13,365 (exclusive of rates, management fees and air-conditioning charges and other outgoings) with one month’s rent-free period from 20 March 2017 to 19 April 2017.

The plaintiff’s claim

16.  In this assessment exercise, the plaintiff originally claimed for the following loss and damages:-

(1)   Loss of rent from 1 September 2016 to 19 April 2017 at the rate of HK$13,365 per month totaling HK$102,019.50;

(2)   Loss of management fees and air-conditioning charges from 1 August 2016 to 19 March 2017 at the rate of HK$1,950 per month totaling HK$14,485.16;

(3)   Loss of rates from 1 August 2016 to 19 March 2017 at the rate of HK$912.50 per quarter (i.e. HK$1,912.50 per quarter minus the rates concession of HK$1,000 per quarter) in the total sum of HK$2,308.36;

(4)   Stamp duty in the sum of HK$769.

17.  After exchanges with the Bench in the course of her opening submission, Ms Pang Mei Ngan (solicitor appearing for the plaintiff) fairly conceded that in the aforesaid claim for loss and damages, credit should be given to the bounced cheque amount of HK$13,365, for which the plaintiff had already obtained judgment.  As pointed out above, such amount represented a portion of the security deposit which the defendant was obliged to pay under the Agreement.  If an authority is needed in this regard, it can be found in Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234.[1]

18.  Further, Ms Pang also confirmed with the court that the plaintiff would now only claim for half of the stamp duty, i.e. HK$384.50 in line with the defendant’s obligation under the Agreement. 

19.  Ms Pang therefore indicated to the court that the plaintiff’s claim for the loss and damages would be revised accordingly by virtue of the above two matters.

The defendant’s stance

20.  At the outset of the hearing, the court also explored with Mr. Chan as to what aspects of the plaintiff’s claim that the defendant was actually taking issues with in this assessment exercise because he did not make this clear in his witness statement filed on 24 August 2018.

21.  As can be discerned from Mr. Chan’s submission, the defendant’s objection is mainly twofold:-

(1)   First, before the defendant received the plaintiff’s solicitors’ letter of 19 August 2016, the defendant believed that since it had not signed the formal tenancy agreement to take up the lease or enter into possession of the Premises, that is the end of the matter.  Mr. Chan seems to suggest that the plaintiff should not hold against the defendant in compensating for their loss and damages. (“Issue 1”)

(2)   Second, the defendant through their estate agent, Mr Paul Chan of Golden Land Realty Limited, made a purported “offer” to the plaintiff on 23 and 24 of August 2016 to take up a lease of the Premises again with a view to avoid compensating the landlord’s loss and damages as claimed in the plaintiff’s solicitors’ letter of 19 August 2018.  The plaintiff however refused to consider such purported “offer”.  If the plaintiff had accepted the defendant’s purported “offer”, the plaintiff would not have suffered so much as it did. (“Issue 2”)

Issue 1

22.  Issue 1 is a non-point arisen out of the defendant’s misconception about the Agreement’s legal effect.

23.  By its legal nature, the document which both parties signed in July 2016 (i.e. the Agreement formed by the plaintiff’s letter of offer duly signed and accepted by the defendant[2]) is an agreement for lease.  It contains all the essential elements of contract by which one party agrees to grant and another agrees to take the lease.  The terms therein are sufficiently certain to be legally binding and enforceable. See : Woodfall on Landlord and Tenant (2018 edition), v1, para 4.001; Merry, Hong Kong Tenancy Law, 6^th ed, at p 25.  As pointed out above, the Agreement in particular also spells out at its clause 26 the date when the formal tenancy agreement was to be signed, and the said balance of the security deposit to be paid, and the consequences for their non-compliance.

24.  Under common law, two remedies for breach of agreement for lease are generally available to the injured party in line with the general principles of contract: (1) an action to recover damages for the breach; and (2) an action to compel specific performance of the contract.  Damages are calculated on the basis the injured party should be put in the positon in which he would have been if the contract had been performed.^[3]

25.  Owing to the defendant’s breach in failing to take up the lease as per the terms of the Agreement (which I find also amount to repudiation of the same on the evidence before me and the plaintiff had duly accepted such repudiation by their solicitors’ letter of 19 August 2016), the plaintiff is entitled to recover the rents, management fees and air-conditioning charges, and rates which it would otherwise (but for the breach) have received from the defendant for the term of the lease subject to the deduction of any loss it could avoid by taking reasonable steps to mitigate (which I find to be equivalent to those sums which the plaintiff obtained from the substitute tenant in the re-letting in this case).   See also : World Light Limited v MegaSuper Market Limited [2018] HKCFI 2864 per Fung J at paras 28-30.  I shall return to the point of mitigation later in the discussion of Issue 2 below.

26.  Upon reasonable construction of the Agreement as a whole and in context, I am also of the view that one of the purposes of clause 26 is to preserve the plaintiff’s common law remedy for seeking damages against the defendant when it exercised its right to terminate the Agreement pursuant thereto.  The relevant part of clause 26 provided thus:-

“Should you accept this offer, you are required to sign and return the duplicate of this letter and on or before 29^th July 2016 (“the said date”) to sign the formal Tenancy Agreement and to pay up the balance of the security deposit and advance charges (“the said balance”) (if any). If you fail to execute the formal Tenancy Agreement and/or fail to pay up the said [b]alance (if any) on or before the said [d]ate and/or fail to perform observe and comply with any of the terms herein contained, in such event, … the Landlord may, at its absolute discretion: (i) proceed to stamp this Agreement thereby deeming the grant of a new tenancy agreement to have been signed and be enforceable and binding against the parties hereto according to the terms herein contained; (ii) forfeit all your preceding payment, including but not limited to the deposit transferred from the (sic) those paid under the previous Tenancy Agreement, which shall be treated as part payment of the security deposit and performance of this Agreement; and (iii) treat this Agreement as terminated and let or otherwise deal with the Property in such manner as the Landlord think fit PROVIDED THAT the exercise of such rights and/or any of such rights would not prejudice the Landlord’s rights to claim against you for all the loss and damages suffered by the Landlord arising therefrom.” (emphasis added)

27.  Clause 26 also allows the plaintiff to forfeit any portion of deposit the defendant had already paid under Agreement in the event the defendant failed to sign the formal tenancy agreement and pay up the balance of the security deposit for the purpose of taking up the lease.  And such forfeiture would not prejudice the plaintiff’s right to claim for all the loss and damages arising from the termination caused by such breach (which in this case also amounted to repudiation of the Agreement).

28.  In Polyset (supra), Bokhary PJ at para 10 said that:-

“10. Provided that what the vendor takes as a deposit is within the bounds of an earnest of performance, it will constitute a true deposit. As such, it will be forfeited to the vendor if the purchaser wrongfully fails to perform his part of the bargain. This is so even if the vendor's loss is less than the deposit. It is so even if the vendor suffers no loss at all. Indeed, it is so even if the vendor makes a profit by selling the property to someone else at a higher price. If the vendor's loss exceeds the deposit, he is of course entitled to recover the full extent of his loss, giving credit for the deposit forfeited to him.” (emphasis added)

29.  Ribeiro PJ at paras 67 and 68 also held that:-

“67. Given the nature as a guarantee of performance, deposits have been regarded as subject to forfeiture regardless of whether non-performance by the party in breach has caused, or was thought likely to cause, the innocent party any, or as much, loss…

68. The object of a deposit is therefore not to provide compensation for loss resulting from the breach of a contract. The mechanism for such compensation is the claim for damages. Having forfeited the deposit for failure to complete, the vendor remains entitled at common law to sue for damages, giving credit for the forfeited deposit where such damages exceed its amount. This is reflected in standard clauses in modern contracts for the sale and purchase of land which provide (as does Clause 26(a), discussed further below) for the vendor to forfeit the deposit and additionally to recover, inter alia, any deficiency arising on resale of the property, with such deficiency treated as liquidated damages, giving credit for the forfeited deposit: Shuttleworth v Clews [1910] 1 Ch 176. This is, for instance, how the standard covenant set out as clause 10 in Part A of the Second Schedule to the Conveyancing and Property Ordinance, Cap 219, is structured.” (emphasis added)

30.  Although Polyset is a sale and purchase of land case, the general principles concerning deposit as enunciated by my Lords in the above passages would, in my respectful view, be equally apposite in an agreement for lease context as in the present case.  I am also satisfied that, upon proper construction of the Agreement, the security deposit mentioned therein also serve the purpose of deposit (in its proper legal sense) as being an earnest which guaranteed performance of the contract of which the defendant had made purported partial payment by way of the Cheque.

31.  For completeness sake, I should also mention that although there are some subordinate clauses in clause 26 which made references to ‘the previous Tenancy Agreement’.  This is an obvious draftsman’s blunder as it is common ground between the parties that the defendant was a completely new tenant to the plaintiff.  The earlier clause 20(a) of the Agreement also provides that the Premises will be delivered (by the Landlord) to the Tenant in ‘bare-shell’ condition, and this clearly shows that the defendant had not at any time occupied the Premises, nor was the Agreement made for renewal of any previous tenancy. As a matter of principle and proper construction of clause 26, these obvious errors would certainly not prevent this court from giving proper legal effect to such clause as so construed in paras 26 and 27 above.

32.  In any event even without clause 26, in my judgment, the plaintiff would still be entitled under common law to recover their loss and damages as caused by the defendant’s repudiation of the Agreement though giving credit to the judgment sum already awarded in relation to the defendant’s bounced cheque for the partial payment of deposit in this case.

Issue 2

33.  In my judgment, Issue 2 would boil down to whether the plaintiff had taken reasonable steps to mitigate its loss and damages in the circumstances of this case.  In particular, whether it is reasonable for the plaintiff not considering the defendant’s purported offer after it had accepted the defendant’s repudiation of the Agreement.

34.  In Park Avenue Toys Ltd v Candy Novelty Works Ltd (unrep, HCA 11135 of 1997, 23 August 2004), Saunder J succinctly summarized the principles on mitigation of damages at paras 43-46 :

“ 43. The law does not allow a plaintiff to recover damages to compensate him for loss which he would not have been suffered if he had taken reasonable steps to mitigate his loss: British Westinghouse Electric & Manufacturing Co v Underground Electric Rly Co of London [1912] AC 673 at 689, per Lord Haldane. It must be noted that it has been held that it is wrong to express this rule by stating that the plaintiff is under a duty to mitigate his loss: Sotiros Shipping Inc v Sameiet, The Soholt [1983] 1 Lloyds Rep 605.

44. In taking steps to mitigate, a claimant is not under any obligation to do anything other than in the ordinary course of business. He is not required to go to extreme steps and is not bound to nurse the interests of the defendant: Harlow & Jones v Panex (International) [1967] Lloyds Rep 509. In mitigating his loss the claimant victim of a wrong is only required to act reasonably, and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer: see Banco de Portugal v Waterlow [1932] AC 452 per Lord Macmillan at 506. The criterion for reasonableness is stated in Dunkirk Colliery Co v Lever (1878) 9 Ch D 20 CA, and was approved in British Westinghouse (above). Whether the claimant has acted reasonably is in every case a question of fact, not of law: Payzu v Saunders [1919] 2 KB 581 CA.”

45. At the time when the contract is broken it is not always clear what to do next. A plaintiff will not be treated as behaving unreasonably when he chooses one of the possible reasonable alternatives only to find out later that the other one would have been cheaper: Gebruder Metalmann GmbH & Co KG v NBR (London) Ltd [1984] 1 Lloyds Rep 614.

46. The onus of proof on the issue of mitigation is on the defendant. If he fails to show that the claimant ought reasonably to have taken certain mitigating steps, then the normal measure of damages will apply: McGregor on Damages 17th Ed, para 7-019.”

35.  I would respectfully adopt these principles to determine the issue of mitigation in this case.

36.  I heard evidence from Mr Tam Wai Koon (“Mr Tam”), the head of the plaintiff’s leasing department.  His account of events is credible and tallies with the contemporaneous documents produced in the hearing bundle.  His evidence remains intact after cross-examination and I accept his evidence.

37.  In particular, Mr Tam in his testimony explained why the plaintiff refuse to consider the defendant’s purported ‘offer’ made on 23 and 24 August 2016 through its estate agent. 

38.  In gist, this was owing to the defendant’s bad track record of failing to honour its cheque and reneging its promises made under the Agreement. The plaintiff thus had great concerns as to whether the defendant could make payment of rents punctually and duly perform the other tenancy obligations if a new lease was entered into with the defendant.

39.  Having carefully surveyed all the evidence before me, I find it reasonable for the plaintiff to refuse considering the defendant’s purported ‘offer’ under the circumstances of this case. In my judgment, Mr Tam’s explanation makes commercial sense and sounds reasonable.  Objectively speaking, the due performance of any new tenancy obligation by the defendant would hinge on its financial ability and trustworthiness to abide by the contract. One essential obligation would doubtless be the obligation to pay rent and other fees and charges it would be responsible for.  And yet, the defendant had countermanded the Cheque (even of one month’s rent only) without informing the plaintiff about the reason why it did so according to the evidence before me.  

40.  Although Mr. Chan said in his witness statement that on or around 29 July 2016, the defendant asked its estate agent (which he identified as one Mr. Paul Chan of Golden Land Realty Limited) to request the plaintiff to postpone the deadline for signing the formal tenancy agreement, and Mr. Gipsy Yung (the plaintiff’s leasing officer) turned down their request.   But Mr. Tam testified that he had in fact made enquiry of such matter with Mr. Yung, and Mr. Yung denied there was any estate agent (including Mr. Paul Chan of Golden Land Realty Ltd) making such request on the defendant’s behalf. 

41.  In this regard, I prefer Mr. Tam’s evidence and reject Mr. Chan’s.   I find Mr. Chan’s evidence incredible and unreliable.  First, he materially changed his account at trial by saying that after he asked its estate agent to request the plaintiff to postpone the deadline for signing the formal tenancy agreement, the defendant did not receive any response from the plaintiff.  As such, the defendant then countermanded the Cheque on or about 25 July 2016. 

42.  But upon further questioning by the Court why he said in his witness statement that the defendant told the estate agent only on or around 29 July 2016 to postpone the deadline.  In other words, it seems that in his earlier account the defendant had asked the estate agent to postpone the deadline after rather than before it countermanded the Cheque.  Mr. Chan then changed his version again by saying that Mr. Yung in fact gave them a reply but without committing as to whether the plaintiff would agree to postpone or not. 

43.  Not only that this sounds odd for the plaintiff’s leasing officer to give such an ambivalent response in the circumstances when the plaintiff had apparently much stronger bargaining power than the defendant, Mr. Chan flatly contradicted himself because as pointed out above, he said earlier in his witness statement that Mr Yung actually turned down their request for the postponement of the deadline. In light of the aforesaid, I find Mr. Tam’s evidence in this regard to be more probable (and which I accept): Mr Paul Chan of Golden Land Realty Limited in fact already informed Mr. Yung in early August 2016 that the defendant would not rent the Premises anymore and hence would not sign the formal tenancy agreement[4].

44.  Against this backdrop and in light of my findings, if a new tenancy agreement in respect of the Premises was to be entered into with the defendant in these circumstances, I think the plaintiff would effectively be asked to bear an unreasonable risk given the previous irresponsible attitude adopted by the defendant which would naturally arouse the plaintiff’s legitimate doubts about the defendant’s financial soundness and sustainability in keeping its rental payment obligations over a period of 24 months, as opposed to, say, an one off transaction of sale of goods.  Also, the defendant cannot really produce any evidence showing any material change of circumstances since their last repudiation of the earlier agreement that could allay the plaintiff’s concerns. See : Tung Guan Company Pte Ltd v Jih Dong Enterprises Ltd [1992] 2 HKLR 225, per Hooper J at pp.247-248. 

45.  Apart from the aforesaid, the purported ‘offer’ also stipulated that the new tenancy would commence on 18 November 2016[5], and this means the plaintiff would be asked to wait for another three months before the new tenancy could begin[6]. So, even leaving other matters aside, the plaintiff would suffer about 3.5 months’ loss of rent by leaving the Premises vacant just to wait for the defendant’s ‘proposed new tenancy’ to commence.  Any interim short-term tenancy granted to a third party during the waiting period does not seem commercially viable since the Premises was in a bare-shell condition which would not be ready for use as office without substantial renovation. 

46.  The plaintiff’s position was rendered even more vulnerable or disadvantageous if one observes that the defendant’s letter of ‘offer’ was in fact marked ‘subject to contract’.  In other words, the defendant did not actually intend to be bound by sending such purported ‘offer’ to the plaintiff unless and until a formal contract is drawn up.^[7] There was in truth no firm offer put on the table by the defendant at the time.  As long as negotiations are proceeding ‘subject to contract’, the defendant was entirely free to withdraw at any time^[8].

47.  For completeness sake, I should also mention that although the Premises was only eventually rented out in March 2017, the standard of reasonable behavior as expected from the plaintiff is not high given that the defendant is the admitted wrongdoer who created a difficult situation for the plaintiff to face with in the first place.  The steps as taken by the plaintiff in engaging the estate agents and advertising the property for lease, and eventually re-letting the Premises to Hong Kong Charity Association Limited are in my view normal and usual steps as would be expected from a reasonable landlord to mitigate its loss in the circumstances.  For completeness sake, the one month rent-free period granted to the substitute tenant would also appear to be reasonable.  First, this is part and parcel of the deal as negotiated with the substitute tenant. Second, it would understandably take quite some time to renovate the Premises to turn it from a bare-shell condition into an office with basic facilities to operate.  Third, the same length of rent-free period was in fact also provided to the defendant under the Agreement, and the term of lease (2 years) and monthly rent (HK$13,365 per month) for the two leases are the same.

48.  By looking at the issue in the round, I find the plaintiff had taken reasonable steps to mitigate its loss and damages in this case. 

Conclusion

49.  In light of the aforesaid, I find that as a result of the defendant’s breach of the Agreement, the plaintiff is entitled to fully recover from the defendant its revised claim for loss and damages[9] in the total sum of HK$106,192.55 which quantum are also corroborated by the plaintiff’s supporting documents and properly justified in the circumstances of this case.  The breakdown of such figure is set out below:-

Items of loss			Amount (HK$)
(1) Loss of rents			102,019.50
(2) Loss of management fees and air-conditioning charges			14,845.16
(3) Loss of rates			2,308.36
(4) Half share of stamp duty			384.50
		Sub-total:	119,557.52
Less:	The amount of dishonoured Cheque[10] adjudged to be paid by the defendant under the Judgment
			(13,365)
Balance:			106,192.52

Disposition

50.  Due to the above reasons, final judgment is entered in the plaintiff’s favour in respect of their loss and damages assessed in the sum of HK$106,192.52 together with interest thereon at 1% per annum above HSBC’s best lending rate from time to time from the date of Writ (i.e. 3 August 2017) until the date hereof and thereafter at judgment rate until payment.

Costs

51.  The Costs should normally follow the event.  I also make a costs order nisi that save and except for the costs already covered under the Judgment dated 26 October 2017, costs of these proceedings, including previously reserved costs (if any), be paid by the defendant to the plaintiff, to be taxed if not agreed.  This costs order nisi shall become absolute in the absence of any application to vary the same within 14 days from the date of this order.