BONNY ACE LTD v. THE ATHLETIC CO., LTD

DCCJ 6445/2020

[2022] HKDC 1309

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6445 OF 2020

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BETWEEN

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ASSESSMENT OF DAMAGES

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INTRODUCTION

1.  This is the hearing of assessment of damages suffered by the plaintiff as a result of the defendant’s breach of tenancy agreement entered between the parties. The plaintiff was the landlord, and the defendant the tenant.

2.  In absence of notice of intention to defend, the plaintiff obtained a final and interlocutory judgment against the defendant, whereby the defendant was required to pay the arrears of rent and other outstanding charges plus interests incurred up to 24 July 2020 (the date of re-entry). It was also adjudged that further damages for the defendant’s breach were to be assessed. This assessment hearing was held in pursuance of the latter part of the judgment.

3.  In the present assessment, the plaintiff claimed damages under the heads of (i) the loss of rents, (ii) loss of management fees and air-conditioning charges, (iii) loss of government rates, and (iii) the loss of licence fee. In the statement of claim, the plaintiff also claimed the costs for the reinstatement of the premises[1]. It however appears from the witness statement, as well as the submissions by Ms Pang, solicitor acting for the plaintiff, that the plaintiff now abandons this part of the claim.

4.  The defendant was not legally represented and did not attend the hearing. According to the Court’s records, a Notice of Hearing dated 14 July 2022 was sent to the defendant at its registered office, but the notice was returned and marked “Refused”. A sealed copy of the Order made by Master Jocelyn Leung dated 30 June 2022 (in pursuance of which this hearing was fixed) has also been served on the defendant by ordinary post at its registered office address on 28 July 2022[2]. I was informed by Ms Pang that the said order was also returned by reason of “Refused”. In this respect, Ms Pang relied on s 827 of the Companies Ordinance (Cap 622) and submitted that, notwithstanding the defendant’s refusal to accept service of the documents, such service remained to be valid. She also referred me to the latest record from the Companies Registry[3] showing that the defendant’s registered office address remained unchanged since 6 February 2018. Ms Pang also pointed out that the service of the Hearing Bundle and the plaintiff’s Opening Submissions was not returned as of the date of the assessment[4]. I accepted Ms Pang’s submissions. I was satisfied that sufficient notice had been given to the defendant of these proceedings, and that it was appropriate to proceed with the assessment in the defendant’s absence. I ordered so at the beginning of the hearing.

5.  At the conclusion of the assessment hearing, I indicated that a written decision would be handed down on 15 November 2022. My decision is as follows.

ANALYSIS OF EVIDENCE

6.  Having considered the contents of all the documents placed before me, I find that they are inherently plausible and consistent with one another. Full weight will be attached to them.

7.  At the assessment hearing, Ms Pang called Ms Ng Hiu Hung, the Senior Manager – Listing of the Chinachem Group (“the Group”), of which the plaintiff forms part, as factual witness. Ms Ng adopted her witness statement filed on 12 April 2022 as examination in chief and confirmed the accuracy of the documents attached thereto. Ms Ng also answered questions raised by me and thereafter was re-examined by Ms Pang.

8.  Most of Ms Ng’s oral evidence was supported by the documentary evidence and inherently plausible. Having observed her testifying in the witness box, I find her to be a credible witness. I accept her evidence as set out in the plaintiff’s case below.

THE PLAINTIFF’S CASE

9.  The plaintiff is the registered owner of the premises known as Shop Nos 1 and 2 (lounge) on Ground Floor, One Hennessy, No 1 Hennessy Road, Hong Kong (“the Premises”), as well as a designated area, known as Area A (“the Licensed Area”)[5], on Ground Floor of the same building.

10.  The plaintiff and the defendant entered into the subject tenancy agreement on 18 April 2019 (“the Tenancy Agreement”) for a fixed term of 3 years commencing from 1 May 2019[6]. Clauses and schedules referred to in this Decision are the clauses and schedules of the said tenancy agreement.

11.  Pursuant to Clause II(1)(a) and Part I of the Second Schedule, the defendant was required to pay monthly rent of $60,000, or 12% on the gross sale turnover, whichever was higher. Clause II(1)(b) and Parts II and II of the Second Schedule further provide that the defendant was required to pay management fee and air-conditioning charges at the monthly rate of $6,260, and government rates at $9,000 per quarter[7]. The management fee and air-conditioning charges were subject to adjustment from time to time by the plaintiff and/or the manager.

12.  In addition to the tenancy agreement, the parties also entered into a licence agreement dated 22 August 2019 (“the Licence Agreement”), whereby, in return of the defendant’s payment of $1 per month, the plaintiff granted licence to the defendant allowing its customers to use the Licensed Area for seating for the period between 23 August 2019 until 30 April 2022.

13.  By a letter dated 19 June 2020[8], the defendant informed the plaintiff that, due to the social unrest and COVID-19 pandemic, the defendant was not able to carry on the business and would surrender the Premises to the plaintiff. According to the plaintiff, the defendant failed and/or refused to pay rent, management fees and air-conditioning charges, and government rates since 1 May 2020. The defendant returned the keys of the Premises to the plaintiff on 24 July 2020 without the consent of the plaintiff.

14.  The plaintiff instructed its solicitors to issue a demand letter dated 31 July 2020[9], whereby the plaintiff accepted the wrongful repudiation of the tenancy agreement, and gave one-month notice for the termination of the licence agreement.

15.  According to Ms Ng, after the re-entering of the Premises on 24 July 2020, the plaintiff had reserved the Premises for use by the hotel of the Group for a year. The reason for doing so was that, in light of the height of COVID-19 pandemic at the material times, it would be unlikely to have potential tenants who would express interests in renting the Premises. It was also confirmed that the plaintiff received no payment in respect of such reservation.

16.  Ms Ng further testified during the hearing that the plaintiff started to contact estate agent to solicit offer for renting the Premises since July 2021. However, since these were done before she was made in charge of the matter, she was not able to give any details in this respect.

17.  On 16 September 2021 (after Ms Ng was made in charge of the matter), the plaintiff started contacting estate agent for leasing out the Premises. The asking rent was in the same terms as those stated in the tenancy agreement with the defendant. Ms Ng explained that the plaintiff was not willing to lower the asking rent because it might have adversely affected the rent review, renewals and new lettings of the building, and would in turn affect the valuation of the plaintiff’s properties located therein.

18.  About two months later, in November 2021, a potential tenant had come forward and made a counter-offer of $30,000 per month or 13% of the monthly gross sales turnover. The plaintiff also contacted another potential tenant, which was a chain coffee company in Hong Kong, to see if it were interested in renting the Premises. No agreement was made between the plaintiff and these potential tenants.

19.  Eventually, the plaintiff was able to lease the Premises to a new tenant on 21 January 2022[10]. The tenancy commenced on 20 January 2022 with a fixed term of 3 years[11]. The rent was $33,000 per month, or 13% of the gross sale turnover, plus a 1-month rent-free period[12]. The management fee and air-conditioning charges were $6,886 per month, and government rates were $4,950 per quarter[13].

20.  As indicated above, the plaintiff claims against the defendant for loss of rent, loss of management fee and air-conditioning charges, loss of government rates, and loss of licence fee. The plaintiff is also prepared to give credit to the security deposit and fitting-out deposit given by the defendant.

LEGAL PRINCIPLES

21.  The law regarding a landlord’s entitlement in case of a tenant’s wrongful repudiation of a tenancy agreement is well-established. The principles can be compendiously stated as follows:-

(1) Where a landlord accepts a tenant’s wrongful repudiation of a tenancy agreement, the landlord “can legitimately anticipate in the measure of damages to be awarded, such damages reflecting the rental, service charges, rates and reinstatement costs stipulated in the tenancy and therefore payable were the agreement to be permitted to run its full course, subject always to a duty to minimize his loss”[14].

(2) A landlord is expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at market rent. However, the burden falls upon the defendant to establish that mitigation has not taken place[15].

(3) The duty to mitigate is not onerous, and the landlord is not required to do anything other than in the ordinary course of business. The burden is on the tenant to show that damages had not been mitigated[16].

22.  With these principles in mind, I now turn to the plaintiff’s heads of claim in the present case.

DISCUSSION

Loss of rent

23.  In the present case, it is Ms Ng’s unrefuted testimony that, due to the substantial uptick of confirmed COVID-19 cases since July 2020, no real potential tenant has come forward to express their interests in renting the Premises, the Premises were reserved for the use of the Group’s hotels for about a year. The plaintiff started contacting estate agents for soliciting offer to rent the Premises in July 2021.

24.  In light of the height of COVID-19 pandemics at the material times (for which I give judicial notice), I accept that the said reservation was a reasonable step to be taken by the plaintiff. Since 16 September 2021, the plaintiff’s staff started to send messages to the estate agent soliciting invitation from potential tenants. In such circumstances, I accept that the plaintiff has discharged its duty to mitigate the damages by seeking assistance from estate agents[17]. In any event, as Ms Pang pointed out during her closing submission, there is no evidence adduced by the defendant to challenge the reasonableness of the steps taken by the plaintiff to mitigate its loss.

25.  Finally, I am also satisfied that the granting of the rent-free period to the new tenant was a reasonable step to mitigate the loss. In this connection, I note that the defendant had also enjoyed a one-month rent-free period as stipulated in Part I to the Second Schedule of the Tenancy Agreement[18].

26.  In the circumstances, the total loss of rent would be the rent from the period between the day following the date of re-entry (ie 25 July 2020) to the date of the expiration of the Tenancy Agreement (30 April 2022), plus difference between the old and new rents for the period between 20 February 2022 and 30 April 2022. The former amounts to $1,134,262.67, namely ($60,000/month ÷ 31 days/month x 7 days) + ($60,000/month x 18 months) + ($60,000/month ÷ 31 days/month x 19 days).

27.  The difference between the old and the new rents is $27,000 per month, ie ($60,000 - $33,000). The total loss of rent suffered by the plaintiff after the entering of the new tenancy would therefore be $61,714.29, namely ($27,000 per month ÷ 28 days/month x 8 days) + ($27,000 per month x 2 months).

28.  Accordingly, the total amount of loss of rent would therefore be $1,195,976.96 (ie $1,134,262.67 + $61,714.29). I would award this amount in the head of the plaintiff’s loss of rent.

Loss of management fees and air-conditioning charges

29.  In respect of the claim relating to the loss of management fee and air-conditioning charges, the plaintiff claims a total sum of $112,054, comprising of charges at the rate of $6,260 per month between 25 July 2020 and 31 December 2021, and at the rate of $6,886 per month between 1 January 2022 and 19 January 2022.

30.  I have no trouble in holding that this head of claim is recoverable at law. However, as I pointed out during the hearing, I had concerns regarding the increase of management fees which was not supported with any documentary evidence. I noted that the revised figure was only mentioned in Ms Ng’s calculation of the amount of damages in her witness statement. In her closing submissions, Ms Pang submitted that the court was entitled to accept Ms Ng’s evidence without documentary evidence in support.

31.  With respect, Ms Pang’s submissions are putting the cart before the horse. As mentioned above, Ms Ng’s evidence is not accepted out of nowhere. Her evidences were accepted because they were consistent with contemporaneous documents. It is trite that contemporaneous documents and documents which came into existence before the problem in question emerged are of the greatest importance in assessing a witness’s credibility[19]. Accordingly, I am not able to accept the increase of management fee by Ms Ng bare assertion in her witness statement.

32.  However, upon further reflection, while there is no direct evidence in support of the increase of management fee, such an increase can be inferred from circumstantial evidence. It is noted that the revised figure of the management fee was stated in the new tenancy agreement, which was entered shortly after the said increase. In the circumstance, I am prepared to allow the loss of the management fee and air-conditioning charges as claimed by the plaintiff in full.

33.  The total amount would therefore be $112,054, namely ($6,260 per month ÷ 31 days/month x 7 days) + ($6,260 per month x 17 months) + ($6,886 per month ÷ 31 days/month x 19 days). I would award this amount under the head of loss of management fee and air-conditioning charges.

Loss of government rates

34.  I accept in principle that the loss of government rates is recoverable at law where the tenant has wrongfully repudiated the tenancy. The plaintiff has also fairly applied the concession of rates granted by the government. The figures appeared in Ms Ng’s calculation are supported by the relevant Demands for Rates and/or Government Rent issued by the government[20]. I would therefore award the sum of $14,584.81 being the plaintiff’s loss of government rates, and the particulars are as follows:-

Period	Amount of Rate	Government Concessions	Number of day(s)/ quarter(s)	Amount
From 25/7/2020 to 30/9/2020	$7,650.00	$5,000.00	68 days ÷ 92 days per quarter	$1,958.70
From 1/10/2020 to 31/3/2021	$7,650.00	$5,000.00	2 quarters	$5,300.00
From 1/4/2021 to 30/9/2021	$6,150.00	$5,000.00	2 quarters	$2,300.00
From 1/10/2021 to 31/12/2021	$6,150.00	$2,000.00	1 quarter	$4,150.00
From 1/1/2022 to 19/1/2022	$6,150.00	$2,000.00	19 days ÷ 90 days per quarter	$876.11
			Total:	$14,584.81 ========

Loss of licence fee

35.  Finally, the plaintiff seeks to recover the licence fees for the unexpired period of the Licence Agreement. Clause 21 of the Licence Agreement provides that the plaintiff was entitled to serve a 1-month notice to terminate the agreement. It does not appear to have an equivalent right on the part of the defendant. In view of the insignificant amount of the licence fee, I do not find this clause to be unreasonable. Accordingly, I accept the plaintiff’s contention that it is entitled to recover the remaining licence fee until the expiry of the Licence Agreement.

36.  I would therefore award a sum of $20, namely $1 per month for 20 months, under this head.

Summary of assessment

37.  It is noted that, in the Tenancy Agreement, the plaintiff acknowledged receipt of $198,780 being the security deposit and $10,000 being the fitting-out deposits[21]. The plaintiff agrees to apply the security deposit and the fitting-out deposit setting off its losses and damages as a result of the defendant’s breach.

38.  In such circumstances, I would assess the plaintiff’s damages in this action to be $1,113,855.77, the details of which are as follows:-

	Description	Amount
1.	Loss of Rents	$1,195,976.96
2.	Loss of management fees and air-conditioning charges	$112,054.00
3.	Loss of government rates	$14,584.81
4.	Loss of licence fee	$20.00
	Sub-total	$1,322,635.77
	Less:
5.	Security Deposit	($198,780.00)
6.	Fitting-out Deposit	($10,000.00)
	Total:	$1,113,855.77

INTERESTS

39.  In the plaintiff’s Opening Submissions, the plaintiff seeks pre-judgement interests at the rate of 1% above the HSBC besting lending rate from the dated of the Writ of Summons (ie 1 December 2020) until final judgment and thereafter at the judgment rate until full payment.

40.  I think this is reasonable and accords with the usual practice of the court. I would award interests accordingly.

COSTS

41.  Costs should follow the event. According to the plaintiff’s statement of costs, the amount of its costs incurred was $91,782.

42.  I find that there is room for reduction in the amount claimed by the plaintiff. In this assessment of damages, the only substantive court document is Ms Ng’s witness statement. The plaintiff’s Opening Submissions were mainly repetition of the statement of claim and Ms Ng’s witness statement. I therefore cannot see any justification to spend 17 hours in preparation of documents (Item D1). It also appears to be excessive for the litigation clerk to have spent 2 hours in preparing 3 short affirmations of service. Since the assessment hearing only took less than an hour, corresponding reduction is also made in item D4.

43.  In my view, 20 hours at the nominal rate of $3,000 per hour should be more than sufficient for the solicitors to handle this matter properly. On a broad-brush approach, I assess the profit costs of this case to be $60,000. I would award the manual work (Part B) and disbursements (Part E) in full.

44.  Accordingly, by summary assessment, I fix the plaintiff’s costs of the assessment of damages at $64,737.

DISPOSITION

45.  For the above reasons, final judgment is entered in the plaintiff’s favour against the defendant in the sum of $1,113,855.77, together with interests accrued thereon at 1% above the prime rate of HSBC from 1 December 2020 to the date of this assessment, and thereafter at the judgment rate until full payment.

46.  I also order that the defendant do pay the costs of this assessment of damages, summarily assessed at $64,737, payable forthwith.

47.  Lastly, I wish to thank Ms Pang for her assistance rendered to this court.