HK MACAU FORTUNE LTD v. KWOK CHUN WA

LDPE 893/2021

[2022] HKLdT 18

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO LDPE 893 OF 2021

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JUDGMENT

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BACKGROUND

1.  This is the application filed by the applicant as landlord on 23 August 2021, and amended on 27 September 2021, for recovery of possession of the suit premises (the “Property” - Shop D on Ground Floor of Sun Hey Mansion, Nos 68 – 76 Hennessy Road, Hong Kong) and rent / mesne profits, which is opposed by the respondent as tenant.

2.  The applicant contends that the respondent has not paid full amount of monthly rent (i.e. $110,000) since February 2021. According to the first-in-first-out calculation as at the date of the amended application, the respondent had made payment up to the rental period from 11 June 2021 to 10 July 2021 only. For the month of July 2021, the respondent had settled the amount payable partially in the sum of $13,200, of which the remaining $96,800 and the rental payment for the months of August and September 2021 remained unpaid.

3.  The respondent filed the Notice of Opposition on 27 August 2021, which was subsequently amended on 18 October 2021. The respondent contends that as agreed between the former owner of the Property, Sincere Link Asset Management Limited (“Sincere Link”) and the respondent, the monthly rent payable from 11 April 2020 has been revised to $70,400 and the respondent has been paying the monthly rent in the sum of $70,400 since 11 April 2020. In the circumstances, the respondent has not failed to pay the rents for July 2021 and thereafter as alleged by the applicant.

UNDISPUTED EVENTS

4.  The applicant has two witnesses, Mr Cheang Weng Hang, the representative of the applicant, and Mr Li Sai Kei, the property agent in the sale and purchase of the Property between Sincere Link and the applicant. The respondent has 1 witness, Mr Cheung Hung Cheong, the representative and business partner of the respondent.

5.  The trial was conducted on 25 January 2022, and there were by and large no major disputes in facts. The following events are not in dispute, should not be in dispute between the parties, and/or are not challenged by the opposing party critically, and are accepted by the tribunal: -

(1)  On 6 May 2019, Sincere Link as landlord and the respondent as tenant signed a Tenancy Agreement of the Property, which contains inter alia the following clauses: -

(i)  Lease term from 11 May 2019 to 10 May 2022;

(ii)  Monthly rent at $110,000 exclusive;

(iii)  The tenant shall pay to the landlord the rent in advance on the 1^st day of each and every calendar month during the term; and;

(iv)  The tenant has a first right to renew the lease for another 2 years from 11 May 2022 to 10 May 2024 at a monthly rent not exceeding $126,500 and not less than the original rent at $110,000.

(2)  The applicant purchased the Property from Sincere Link at $40,000,000 subject to the Tenancy Agreement dated 6 May 2019, and the transaction was completed on 3 February 2021.

(3)  On 3 February 2021, Messrs Wong & Tang Solicitors, the solicitors for the applicant, wrote to the respondent and advised the respondent about the change of ownership of the Property, and further requested the respondent to pay rent onwards into the applicant’s bank account.

(4)  The Tenancy Agreement was at all material time not registered in the Land Registry when the applicant purchased the Property.

(5)  On 17 March 2021 and 21 June 2021, Messrs Wong & Tang Solicitors sent letters to the respondent reminding the respondent that the respondent as tenant was obliged to pay monthly rent in the sum of $110,000 but the respondent has just paid $70,400 only per month since February 2021.

(6)  The parties had discussed about settlement from March to July 2021 but in vain.

(7)  Irrespective of the monthly rent of $110,000 as stated in the Tenancy Agreement, the respondent had paid monthly rent of $88,000 from October 2019 to March 2020 to Sincere Link, and has then paid monthly rent of $70,400 since April 2020 to both Sincere Link and the applicant.

(8)  The respondent had once paid $70,400 late to the applicant in June and July 2021.

THE ISSUES

6.  In the pre-trial review, the parties agree that the following 5 issues are in dispute: -

(1)  Whether the applicant had entered into any form of agreement or reached any form of consensus at any point in time with the respondent regarding the rent reduction?

(2)  Whether the applicant was previously informed by Sincere Link that there was a reduction in monthly rent payable when the applicant agreed to purchase the Property in or about December 2020?

(3)  Whether the term(s) regarding the rent payable had been varied between the respondent and Sincere Link?

(4)  Subject to the change of registered ownership of the Property, whether the respondent is obliged to make monthly rental payment in the sum of $110,000, instead of $70,400, pursuant to the payment obligation under the Tenancy Agreement?

(5)  Whether the respondent has been in breach of the terms of the Tenancy Agreement which might have been varied respectively on 11 October 2019 and 11 April 2020?

Issue (1) - Any Agreement On Rent Reduction Between The Parties?

7.  Since the respondent has not pursued this issue at trial and there is also no evidence to prove the existence of an agreement on rent reduction between the parties, I accept the applicant’s submissions that there was no agreement on rent reduction between the parties.

Issue (2) – Whether Sincere Link Had Informed The Applicant That There Was Rent Reduction?

8.  While the parties have not called any representative of Sincere Link to give evidence, the 2 applicant’s witnesses testified at trial that Sincere Link had just informed the applicant about the Tenancy Agreement and had never informed the applicant that there was rent reduction.

9.  Without evidence to the contrary, I accept that Sincere Link had not informed the applicant that there was rent reduction. 

Issue (3) – Whether The Term(s) Regarding The Rent Payable Had Been Varied?

10.  As testified by the respondent’s witness at trial and without evidence to the contrary, I accept that Sincere Link had not taken any action against the respondent because of the shortfalls in rent payment since October 2019 before the Property was sold to the applicant in February 2021. During the period of 16 months, the respondent had been paying the reduced amount of monthly rent and occupying the Property without interruption by Sincere Link.

11.  Nevertheless, even if Sincere Link had not taken any action against the respondent, there is still a question of whether the terms regarding the rent payable under the Tenancy Agreement had been varied. Looking into the subject issue in detail, there are also sub-questions as follows: -

(1)  Whether the terms under the Tenancy Agreement could be varied verbally or by conduct?

(2)  Whether Sincere Link had agreed verbally or by conduct to accept the rent reduction?

(3)  Even if Sincere Link had once accepted rent reduction verbally or by conduct for a period, whether Sincere Link had consented to the rent reduction up to lease expiry?

12.  The applicant submits that if a contract has been reduced in writing, the patrol evidence rule shall apply and extrinsic or verbal evidence shall not be admitted so as to add to, subtract from or in any way vary or qualify the Tenancy Agreement. Further, even if a party is able to rely upon the oral agreement or warranty as a contract, the court must be satisfied that it was intended to have legal effect, and was supported by consideration[1] . It is also not possible to vary a material term of a contract by a mere exchange of correspondence[2] .

13.  Having considered the evidence in this case that the respondent had been paying a reduced amount of monthly rent for a period of 16 months and no action was taken by Sincere Link against the respondent during the period, I agree with the respondent that the terms regarding the rent payable under the Tenancy Agreement should have been varied verbally or by conduct. Alternatively, there should have a waiver of breach or acquiescence of the breach.

14.  I accept that a written contract can be varied by an oral contract or conduct, and the payment records in this case are strong evidence to prove the variation of the payment terms or the waiver. I also accept that the practical benefit in this case can be good consideration for variation or waiver. Amid the social movement in 2019 and the pandemic since 2020, there was practical benefit to Sincere Link as landlord if the respondent as tenant could continue to make partial rent payment on time, otherwise the Property might be left vacant for a considerable period if the respondent moved out. In this case, an agreement for variation or a waiver was formed when the tenant made the first revised payment and promise to make further payment according to the revised payment schedule, and at the same time there was no objection from the landlord for a lengthy period.

15.  Nevertheless, an agreement for variation may have time limit, a waiver may cover the breach in the past only, and the extent of acquiescence is also arguable. The applicant submits that even if the acceptance of rent by Sincere Link be considered as an acquiescence and amounts to a waiver, there is no further evidence in this case to support the inference that Sincere Link had waived the continuing breaches.

16.  In Hongkong Bank Trustee Ltd v Chan Chi Wah and Others[3] , the Court of Appeal held that acceptance of rent did not operate as a waiver of future breaches unless the landlord knew the period that the breaches would continue. Where the breach is of a continuing nature, breaches which continue after the date of the original waiver give rise to a fresh right of forfeiture. In Chinachem Investment Co Ltd v Chung Wah Weaving and Dyeing Factory Ltd[4] , a case that was concerning the continuing breach of restrictive covenant, Huggins JA had, in his findings at page 3, relied on the case of Lloyds Bank Ltd v Jones[5] and stated that

“… On the admitted facts I cannot see that any implication arises that the landlords agreed that they would never again insist on full performance of clause 15. It may well be that if they accepted with knowledge they waived breaches of covenant from time to time, but I can see no reason why they should be prevented from demanding proper compliance as from the date they required it.”

17.  It is the respondent’s evidence that Sincere Link had just agreed the 1^st rent reduction from $110,000 to $88,000 for a period of 6-month only from October 2019, but there is no clear evidence about the duration of the 2^nd rent reduction from $88,000 to $70,400 since April 2020. Based on such evidence, I consider that the 2^nd rent reduction would likely be a temporary arrangement only subject to review upon change if any of the then pandemic. I am of the view that in the then circumstances a landlord would unlikely agree rent reduction for a fixed period of 2-year up to the lease expiry in May 2022. Alternatively, from the perspective of waiver, I am of the view that a landlord would unlikely waive the continuing breach of rent payment amid the then uncertainties in the market.

18.  Although I agree that there should have been an agreement between Sincere Link and the respondent on variation of monthly rent to $70,400 under the Tenancy Agreement or a waiver of breach, the agreement or waiver would just be a temporary arrangement subject to review by the landlord.

Issue (4) – Whether The Respondent Is Obliged To Pay Monthly Rent at $110,000?

19.  The applicant submits that even if there was an agreement between Sincere Link and the respondent on variation of monthly rent or a waiver, the variation or wavier would not bound the applicant as the successor-in-title of the Property. According to section 3(2) of the Land Registration Ordinance Cap 128, any unregistered agreement is regarded as “null and void to all intents and purposes” as against a bona fide purchaser for value without notice.

20.  Although I accept that Sincere Link had not informed the applicant the rent reduction, it is doubtful whether the applicant is a bona fide purchaser without notice. The applicant had not inspected the Property or verified with Sincere Link about the actual receipts of rent before the acquisition. In a regular and steady market, inspection and further enquiry may not always be demanded, but such investigations should be necessary in 2020 - 2021 when there were social movement in 2019 and pandemic since 2020. The Tenancy Agreement was entered on 6 May 2019 at the commencement of the social movement. Given that the Property as an eatery along Hennessy Road in Wan Chai close to the Police Headquarters in Admiralty should have then been adversely and seriously affected by both the social movement and the pandemic, rental concessions in the period should not be unusual. Conversely, I consider that it was rather unusual if there was no rent concession but an eatery could continue the operation in such circumstances.

21.  Having considered the backgrounds and evidence in these proceedings, I am of the view that the applicant should have constructive notice of the respondent’s interest, where the equity would have come to the applicant’s knowledge if proper inquiries had been made. A general enquiry about rent reduction by a property agent only in this case is not considered as proper and complete inquiry.

22.  In addition, other than the payment of the reduced rents to Sincere Link for 16 months, there is evidence that the respondent had carried out some renovations and repairs to the Property around and after the agreement to rental reduction in February 2020. In view of these expenditures, the respondent should have an intention to stay at the Property for a period subject to rent reduction, which was also allowed by Sincere Link temporarily.

23.  While I decide that the agreement or waiver would just be a temporary arrangement, I am of the view that the respondent is not obliged to pay the monthly rent at $110,000 unless there is notice for reinstatement of the original monthly rent by the landlord. I consider that a reasonable notice is necessary in this case because, except for the amount of reduced rent, Sincere Link and the respondent had unlikely made the agreement on variation in detail.

Issue (5) – Any Breach of Tenancy Agreement?

24.  The applicant after the acquisition of the Property had notified the respondent the change of ownership and had also demanded the payment of the monthly rent at $110,000 under the Tenancy Agreement, but the applicant has never accepted that the rental terms of the Tenancy Agreement was varied and has not taken any alternative position to demand the reinstatement of the original monthly rent. It is the applicant’s position in its demand letters to the respondent and in these proceedings that the applicant should have received the monthly rent at $110,000 under the written terms of the Tenancy Agreement. It is also the obligation of the respondent to make monthly payment of $110,000 under the written terms of the Tenancy Agreement. The respondent has already breached the Tenancy Agreement when the respondent has just been paying $70,400 only per month since the applicant’s acquisition of the Property in February 2021.

25.  Since there was no notice for reinstatement of original rent, it is not necessary to discuss what would be a proper and reasonable notice in this case. In any event, there should be at least a demand for reinstatement of original rent instead of insistence on the written terms of the Tenancy Agreement. Without a notice, I am of the view that the respondent has not breached the Tenancy Agreement, which has been varied verbally or because there is a waiver of breach for a period, and the variation or waiver should bind the applicant as the successor-in-title with constructive notice.

ORDERS

26.  Accordingly, I order that: -

(1)  The application for recovery of possession of the Property and rent / mesne profits be dismissed; and

(2)  A costs order nisi that the applicant do pay the respondent the respondent’s costs in these proceedings, including all costs reserved and on District Court scale, to be taxed if not agreed, and unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of the judgment.