GOLDEN SUNRISE LTD v. LEE KWOK HUNG AND ANOTHER

HCA 4133/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4133 OF 2003

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J U D G M E N T

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1.  This is the plaintiff’s appeal against the Master’s decision made on 29 May 2004 granting both defendants unconditional leave to defend the action together with other consequential directions.  At the conclusion of counsel’s submissions, I dismissed the appeal against the 1^st defendant but allowed the appeal against the 2^nd defendant and gave oral reasons for the decision.  I now reduce the reasons into writing.

2.  The plaintiff has also subsequent to the hearing before the Master issued an application for interim payment under Order 29 rule 12(b) of Rules of the High Court, which had been adjourned to after the conclusion of the appeal.  I shall in the later part of this Judgment deal with the application.

The undisputed facts

3.  The following facts are not in dispute.

4.  The plaintiff has since 30 July 2003 become the registered owner of the shop premises known as Ground Floor, 33A Hankow Road, Kowloon, Hong Kong (“the Shop”). 

5.  By a Chinese tenancy agreement dated 23 October 2001 (“D1’s tenancy agreement”), the Shop was let to the 1^st defendant by the plaintiff’s predecessor-in-title, Massfine Investment Ltd, for a term of three years commencing from 1 November 2001 at the monthly rent of $100,000, exclusive of rates, management fees and other outgoings.

6.  The Shop was let to the 1^st defendant for commercial purpose.  Clause 2 of D1’s tenancy agreement prohibited sub-letting or transfer of the tenancy without the consent of the landlord.  Clause19 provided that the landlord gave no warranty as to the fitness of the Shop for commercial use.  Clause 20 further provided that the tenant took the Shop as he found it and was satisfied with the condition of it.

7.  The Shop has since 1 February 1999 been used as a hair and beauty salon.  Initially the business was called “Leon Salon”.  Sometime in 2003, the name of the business became “The Salon”.   According to the business registration records, neither the 1^st defendant nor the 2^nd defendant is entered as a partner of either of these businesses.

8.  By an assignment dated 31 July 2002, Massfine Investment Ltd assigned the Shop to Free Power Industrial Ltd (“Free Power”) together with D1’s tenancy agreement. 

9.  By an assignment dated 30 July 2003, Free Power assigned the Shop to the plaintiff together with D1’s tenancy agreement.  By a letter dated 6 August 2003 to the 1^st defendant, the plaintiff’s solicitors herein informed gave notice of the assignment and instructed the 1^st defendant to deposit the monthly rental into the plaintiff’s bank account.

10.  Prior to the assignment of the Shop to the plaintiff, a structure attached to the external wall of the building in which the Shop was situated collapsed and fell onto the pavement in front of the Shop.  There are some disputes as to whether it was the canopy of the Shop or the signboard of the Shop that had collapsed.  The difference is of no material importance since the respective surveyors engaged by the parties are in agreement that the structure was part of the common part of the building in which the Shop is situated.

11.  The rent and rates for the Shop have not been paid since 1^st October 2003.  As at the date of the appeal, the unpaid rent and rates amount to $1.6 million and $559, 670 respectively.

12.  Previously, Free Power had through its solicitors written to the 1^st defendant on 22 January and 25 July 2003 respectively to demand for rent for January and July 2003 that was in arrears. 

13.  On 10 September 2003, the plaintiff commenced proceedings in the District Court under DCCJ 5308 of 2003 against the 1^st defendant for the rent of August and September 2003 and rates.  On 27 October 2003, summary judgment was entered against the 1^st defendant.  The 1^st defendant is currently appealing against the judgment.

14.  On 3 November 2003, the plaintiff’s solicitors wrote to the 1^st defendant demanding for the rent of October and November 2003. 

The action

15.  On 7 November 2003, the plaintiff commenced the present action against the 1^st defendant for vacant possession, outstanding rent and rates, mesne profits, interest and costs.  Upon the ex parte application of the 2^nd defendant, it was ordered on 20 November 2003 that the 2^nd defendant be added as a defendant in this action.  The Writ and the Statement of Claim were consequently amended on 4 December 2003.

16.  The 1^st defendant filed his defence on 23 November 2003, which was amended on 8 December 2003.  The 2^nd defendant had filed his defence and counterclaim on 27 November 2003, which was amended on 8 December 2003.    On 18 December 2003, the plaintiff filed its reply and defence to counterclaim.

17.  Also on 18 December 2003, the plaintiff issued the summons applying for summary judgment against both defendants.

The plaintiff’s claim against the 1^st defendant

18.  The plaintiff’s case is that the 1^st defendant is in breach of his tenancy agreement in failing to pay the rent and rates.  The plaintiff therefore by the issue of the Writ herein forfeits the tenancy and exercises its rights of re-entry.

The 1^st defendant’s defence

19.  The 1^st defendant defends the claim on the basis that he had in about December 2002 reached an oral agreement with Free Power, acting by its director, Madam Mak Kwok Hung (“Mak”) whereby his tenancy was terminated and the 2^nd defendant would rent the Shop thereafter.  It is the 1^st defendant’s case that since January 2003, the 2^nd defendant has become the tenant of the Shop and had been responsible for paying the rent and rates to Free Power.

The plaintiff’s claim against the 2^nd defendant

20.      The plaintiff does not accept that the 1^st defendant’s tenancy had been terminated by agreement and that the 2^nd defendant has been made the tenant of the Shop by agreement.  The plaintiff, however, says that the 2^nd defendant has not paid for his possession and use of the Shop.  On the basis of the 2^nd defendant’s assertion that he is the tenant, the plaintiff claims that the purported tenancy is also liable to be forfeited by reason of non-payment of rent.  By the service of the Amended Statement of Claim, the plaintiff forfeits the tenancy and claims against the 2nd defendant for vacant possession, unpaid rent and rates and mesne profits.

The 2^nd defendant’s defence and counterclaim

21.    The 2^nd defendant’s case is that sometime in March 2003, he and the 1^st defendant had a meeting with Mak, during which Mak confirmed Free Power’s agreement to the 2^nd defendant becoming a tenant of the Shop.  The 2^nd defendant says that he has since 31 December 2002 carried on hair and beauty salon business at the Shop, that he had become a tenant of the Shop since January 2003 and had been paying the rent of the Shop with his personal cheques and that Mak had issued receipts in respect of these payments.

22.  The 2^nd defendant defends the claim on the ground that it is an implied term of his tenancy that the landlord has to regularly inspect and maintain the canopy of the Shop so as to ensure that the Shop is fit for commercial purpose.  The 2^nd defendant refers to the collapse of the structure, which is part of the common part of the building, and contends that the plaintiff is in breach of the implied term such that he is not liable to pay rent under the tenancy. 

23.  The 2^nd defendant further claims that because the plaintiff did not carry out maintenance or remedial work, the turnover of his hair and beauty salon business has declined.  He therefore counterclaims for damages in the sum of $1.2 million.  In the affirmations filed in opposition to the summary judgment application, the 2^nd defendant also seeks a set-off based on his counterclaim, which he revises to $170,000 per month.

The issues

24.  The issues to be resolved in this action are therefore:

(1)	Whether the tenancy of the 1st defendant had been terminated by agreement between the 1st defendant and Free Power acting through Mak.
(2)	Whether a new tenancy in respect of the Shop was created between the 2nd defendant and Free Power acting through Mak.
(3)	If there was a new tenancy in favour of the 2nd defendant, what are the terms of the tenancy.
(4)	In particular, whether it is to be implied into the 2nd defendant’s tenancy a term obliging the landlord to maintain and repair the common part of the building.
(5)	If the 2nd defendant’s tenancy does contain an implied term to maintain and repair, whether the plaintiff is in breach of the term.
(6)	If the plaintiff is in breach of the implied term, what is the effect on the 2nd defendant’s obligation to pay rent and rates.

The appeal against the 1^st defendant

25.  The core issue in the claim against the 1^st defendant is whether the 1^st defendant’s tenancy had been terminated by agreement.  It is essentially an issue of fact that evolves around the credibility of Mak and the defendants. 

26.   In substance, the 1^st defendant relies on two matters as supporting his case of termination of tenancy.  The first is the 2^nd defendant had been paying the rent, and the cheques for paying the rent for April to July 2003 were exhibited.  The second is that Mak had agreed to grant to the 2^nd defendant rent-free periods when the Shop was under decorations, and that Mak had issued rent receipts to the 2^nd defendant.  Three rent receipts were exhibited.  The receipts for May and June 2003 recorded a monthly rebate of $15,000 and a $30,000 subsidy for decoration.   It is said that all these show that Free Power and Mak were aware of the change of tenant, had dealt with the 2^nd defendant and had also accepted him as a tenant.   It is also said that there is no plausible reason to grant decoration subsidy to an existing tenant during the occurrence of the tenancy.  

27.  The thrust of Mr Wu’s submissions for the plaintiff is that the 1^st defendant’s case is no more than mere assertions and is incredible.   Firstly, it is pointed out that the 1^st defendant had not responded to the letters of demand from Free Power’s solicitors and the plaintiff’s solicitors.  Secondly, Mr Wu refers to the fact that the 1^st defendant together with a Mr Luk Wing had gone to the plaintiff’s solicitors for the purpose of executing a surrender of the defendant’s tenancy and a new tenancy agreement in favour of Mr Luk.  Mr Luk is entered on the business registration record of The Salon as one of the two partners.   The plaintiff’s case is that the 1^st defendant had requested to surrender his tenancy and to have Mr Luk to take over the tenancy.  The 1^st defendant in his affirmations denied having requested to surrender the tenancy, and stated that it was on the plaintiff’s suggestion to regularize the position that the surrender and new tenancy agreement were signed.  According to the 1^st defendant, Mr Luk is the 2^nd defendant’s partner in the hair and beauty salon business.    Thirdly, Mr Wu refers to the fact that in the District Court action for rent, the 1^st defendant did not initially dispute being the tenant.  The defendants however said that they have since 6 August 2003 contacted the plaintiff’s representative who has notice that the 2^nd defendant has become the tenant.

28.  As to the rent receipts, Mr Wu points out that they were issued to Leon Salon and not to the 2^nd defendant and that the evidence of Mak is that she had agreed to reduce the rent and to subsidize the decoration costs of the 1^st defendant having regard to the effects of SARS.  However, according to the business registration record of Leon Salon, the 1^st defendant is not one of its partners.  Mak has not in her affirmations explained why the rent receipts were made out to Leon Salon and not to the 1^st defendant, who is the tenant named in D1’s tenancy agreement. 

29.  The principles applicable to an Order 14 application are well known and are not in dispute: see Hong Kong Civil Procedure 2004 para. 14/4/9.  A defendant must show that there are triable issues and that he has a real or bona fide defence.  The test is whether the defendant’s assertions are reasonably capable of belief, having regard to the context and the circumstances and evidence of the case as a whole: Re Safe Rich Industries Ltd [1994] HKLY 183.  It is also trite that the court should not embark upon a mini-trial on affidavits: Mass International Ltd. v. Hillis Industries Ltd & Another [1996] 1 HKC 434 at 439.   Accordingly, it is inappropriate to resolve disputed credibility on affidavits.

30.  In the present case, notwithstanding the submissions of Mr Wu, it is plain that the credibility of Mak and the defendants is critical to the determination of the factual dispute between the plaintiff and the 1^st defendant.  In my view, it cannot be said that the 1^st defendant’s version that his tenancy had been terminated by agreement is so practicably moonshine or is utterly incapable of belief.  At this summary stage, the court must be slow to reject his evidence because there are grounds for suspicion or that the plaintiff’s witness contends differently.   In my view, the 1^st defendant has demonstrated that there are triable issues of facts on the claim against him.  The Master is correct in giving him unconditional leave to defend.  The plaintiff’s appeal insofar as it relates to the 1^st defendant is dismissed together with costs to be taxed, if not agreed.

The appeal against the 2^nd defendant

31.  The issues underlying the claim against the 2^nd defendant involve not only issues of fact, but also issues of law.  Accordingly, the conclusion that there are triable issues of facts on the issues of whether the 1^st defendant’s tenancy had been terminated and whether the 2^nd defendant has become the tenant of the Shop is not determinative of the Order 14 application against the 2^nd defendant.   It is still necessary to consider issues (3) to (6) set out in paragraph 24 above.

32.  In respect of the terms of the 2^nd defendant’s tenancy, it is in a state of uncertainty, notwithstanding that pleadings and affirmations had been filed by the 2^nd defendant and on his behalf.  It is for instance not clear whether the 2^nd defendant’s case is that he has taken over the 1^st defendant’s tenancy for the remainder of the term.  It is also unclear whether his tenancy is on the same terms and conditions as those of the 1^st defendant.  The 2^nd defendant has given no particulars of the terms of his tenancy, other than the amount of the rent.

33.  The 2^nd defendant’s pleading and affirmations are also silent on the basis on which the term to maintain and repair is to be implied.  In Halsbury’s Laws of England (Fourth Edition Reissue)vol. 27(1) para.328, it is said that:

“In the absence of express stipulation, or of an obligation imposed by statute, the landlord is generally under no liability towards the tenant to put the demised premises into repair at the commencement of the tenancy, or to do repairs during the continuance of the tenancy.
…
The general rule is, however, subject to the following exceptions:
…
(5)	where the implication of a term that the landlord will undertake certain repairs is necessary to give business efficacy to the transaction or to complete the terms of the tenancy such a term may be implied, …”

34.  It is therefore not as a matter of course that a landlord is under an implied obligation to repair and maintain the leased premises.  It is therefore incumbent upon the 2^nd defendant to condescend upon particulars and to identify the grounds and circumstances that allegedly give rise to the implied term.   The 2^nd defendant has simply failed to discharge the burden in this regard.  It is to be noted that if the 2^nd defendant’s case is he had taken over the 1^st defendant’s tenancy for the remainder of the term, then under clauses 19 and 20, the landlord has disclaimed any warranty as to the conditions of the Shop and its suitability for commercial purpose.  The business efficacy exception would have no application.

35.  Further, the implied term contended by the 2^nd defendant is not an implied term to repair and maintain the subject matter of the tenancy.  The 2^nd defendant’s case is that the implied obligation extends to the common part of the building in which the Shop is situated.  It is difficult to see how such a term can be implied in a tenancy agreement.  No authority has been cited to support this contention.  There is also nothing in the 2^nd defendant’s case to justify such a term being implied in his tenancy.  In the circumstances, the 2^nd defendant’s assertion that it is an implied term of his tenancy agreement that the landlord is under a duty to maintain and inspect the canopy at the front of the Shop is, putting the matter at its highest, doubtful.

36.  Even assuming that such a term can be implied into the 2^nd defendant’s tenancy agreement, the 2^nd defendant must still show that the breach of it will entitle him to withhold payment of rent and rates. 

37.  In the absence of express agreement, the common law does not imply into a lease a condition or term that the property is fit for the purpose for which it is let.  Accordingly, a tenant takes the property subject to any defects existing at the time of the letting, and to any events that subsequently affect its value.  Accordingly, even where the property has become useless to the tenant by reason of the landlord’s neglect of an obligation to repair, the rent continues to be payable: see Halsbury’s Laws of England (Fourth Edition Reissue) para.243. 

38.  Further, in the absence of express agreement to the contrary, the covenant to pay rent has been regarded as independent of the other covenants or obligations under a lease, including, for example, the covenant for quiet enjoyment: Edge v. Boileau and Others [1885] 16 QB 117, see also Taylor v. Webb [1937] 2 KB 283.

39.  It follows that under the law, the 2^nd defendant cannot claim to be released from the obligation to pay rent on the basis that the landlord is in breach of an implied term to maintain and repair the common part of the building in which the Shop is situated.

40.  It is further not the 2nd defendant's case that the Shop has become uninhabitable or that business cannot be carried on at the Shop.  Quite the contrary, the evidence shows that the hair and beauty salon business has continued throughout the time after 30 June 2003.  All that the 2nd defendant is contending is that because the plaintiff has taken no step to repair the part of the external wall above the Shop and the risks of further collapse of concrete, customers have refrained from going to the salon.  The plaintiff's evidence is that a Building Order had been issued against all the owners of the building and arrangement for the remedial work had been made.  That aside, there is no doubt that the 2nd defendant's use and occupation of the Shop has never been affected, let alone interrupted. 

41.  In the circumstances, even if it can be established that the plaintiff is in breach of an implied term in the tenancy agreement, which is doubtful, the 2nd defendant remains liable to pay the rent and rates.  The 2nd defendant's failure and refusal to pay rent since October 2003 constitutes a breach of the covenant to pay rent that entitles the plaintiff to forfeit the tenancy.     

42.  Mr Cheng argues that the 2nd defendant has a right of set-off such that it is not a breach of the tenancy agreement to withhold payment of the rent.  The set-off that the 2^nd defendant relies on is an unliquidated claim for damages on account of a breach of the implied term to repair the common part.  As such, it is in the nature of an equitable set-off.

43.  I accept that as a matter of law, a cross-claim by a tenant may operate as a set-off to a claim for rent by the landlord: Woodfall on Landlord and Tenant vol. 1 para.7.114.  But that is not the same as saying that a tenant will be released from his obligation to pay rent whenever he has an unliquidated cross-claim.  What is clear in this case is that the collapse of the structure attached to the external wall took place outside the Shop. The cross-claim that the 2^nd defendant is asserting does not relate to the condition and state of any part of the Shop itself.  The alleged breach relied on by the 2^nd defendant has not denied the 2^nd defendant of the use and enjoyment of the Shop, which is the subject matter of the tenancy. 

44.  The 2^nd defendant has also never notified the plaintiff of his intention to withhold or suspend payment of the rent and rates as a set-off of his loss of business.    In fact, the 2^nd defendant’s case, as appeared from the pleading and affirmations, is that the landlord has no right to receive rent because the plaintiff did not carry out remedial work to the part of the external wall above the Shop.  

45.  Moreover, the loss that gives rise to the counterclaim is the loss of business, and the business admittedly is a partnership business.  The business registration does not reveal the 2^nd defendant to be a partner of The Salon.  The 1st defendant however asserts that the 2^nd defendant is in partnership with the partners named in the business registration record.  This was confirmed by the 2^nd defendant to be correct.  The fact that the 2^nd defendant may have an interest in the business as a partner does not detract from the fact that the loss is a loss of the partnership.  Yet the 2^nd defendant is counterclaiming for the loss in his personal capacity.   Mr Cheng argues that it is open to the 2^nd defendant to make the appropriate amendments to the pleadings.  I do not say that it is a matter incapable of remedy, but it remains a fact that a claim for the loss of the partnership cannot operate to exonerate the 2^nd defendant from the obligation to pay rent in his capacity as a tenant.

46.  In my view, while it may be possible for the 2^nd defendant’s counterclaim to operate as a set-off against the claim for rent and rates, it is not an arguable defence to the claim for possession on account of non-payment of rent and rates.  The plaintiff is therefore entitled to enter summary judgment against the 2^nd defendant for vacant possession of the Shop subject to the statutory right to a relief against forfeiture.

47.  As for the claim for unpaid rent and rates and mesne profits, it is to be observed that the 2^nd defendant has given no particulars for the counterclaim of $1.2 million in the pleading.  In his affirmations, he said that prior to the incident on 30 June 2003, the business was operating at a monthly profit of $65,000, whereas after 30 June 2003, it was incurring a monthly loss of $95,000.  On this basis, he counterclaims for a monthly sum of $170,000.  No documents, such as the books and accounts or the tax returns of the salon, have been produced to support any of these assertions.  Although the 2^nd defendant has exhibited the computer printouts of his personal bank account, they do not show the turnover, income or expenditure of the salon business.  At any rate, the printouts stop at 30 June 2003.

48.   The 2^nd defendant’s counterclaim and the defence of set-off are therefore at best shadowy.  Leave to defend the claim for rent, rates and mesne profits should only be granted on terms.  The appropriate condition is for the 2^nd defendant to make payment into court of the rent and mesne profits accrued up to January 2005, being the sum of $1.6 million (i.e. $100,000 x 16 months) and of the future rent as and when it falls due.   Given that the 2^nd defendant will have a period of 28 days to pay the arrears in rent for the purpose of the relief against forfeiture, it will be appropriate to allow 28 days for meeting the condition for leave to defend.

Conclusion

49.  For the reasons set out above, I make the following orders:

(1)	The plaintiff’s appeal against the 1st defendant is dismissed.
(2)	The plaintiff’s appeal against the 2nd defendant is allowed.
(3)	Final judgment be entered for the plaintiff against the 2nd defendant for vacant possession of the Shop.
(4)	Upon the 2nd defendant paying the sum of $1,600,000 into court within 28 days from 19 January 2005 as provided under paragraph (5) below, there be relief against forfeiture.
(5)	There be leave to the 2nd defendant to defend the balance of the plaintiff’s claim on condition that the 2nd defendant pays into court:
	(i)	Within 28 days from 19 January 2005, the amount of $1,600,000, and
	(ii)	The amount of $100,000 on the first day of each month commencing from 1st February 2005, until after the conclusion of the trial or further order of the court.
(6)	In the event the 2nd defendant fails to comply with the conditions set out in paragraph (5) above, the plaintiff be at liberty to enter judgment against the 2nd defendant for the balance of the claim together with costs.
(7)	The costs of the plaintiff’s application for summary judgment against the 2nd defendant before the Master be paid by the 2nd defendant to the plaintiff in any event, to be taxed if not agreed.
(8)	The plaintiff to pay the 1st defendant the costs of the appeal, including the costs of the hearing on 4 November 2004, to be taxed if not agreed.
(9)	The plaintiff’s costs of the appeal against the 2nd defendant, including the costs of the hearing on 4 November 2004, be paid by the 2nd defendant, to be taxed if not allowed.
(10)	The 1st defendant’s costs of the hearing on 19 January 2005 be apportioned at one-third. The plaintiff’s costs of the hearing on 19 January 2005 be apportioned at two-thirds.

Plaintiff’s summons for interim payment

50.  In view of my decision on the appeal as indicated above, it will not be necessary to deal with the plaintiff’s application for interim payment.  I therefore make an order nisi that there be no order on the plaintiff’s summons.  The order to be made absolute after 14 days from the date of handing down of this Judgment.