BONNY ACE LTD. v. ELANBY NOMINEES LTD.

CACV 285/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 285 OF 2000

(ON APPEAL FROM HCA 2628/1998 and 2629/1998 CONSOLIDATED)

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J U D G M E N T

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Hon Mayo VP:

1. This is an appeal from an order made by Deputy Judge McMahon in these two actions. He granted leave to the plaintiff who was the landlord of the two premises to amend their statement of claim. The defendant who was the tenant of the two premises contends that the amendments should not have been permitted.

2. The two premises are separate suites in Asian House, Hennessy Road, Wanchai. They were leased to the tenant by two separate tenancy agreements. As the issues which have to be considered are identical in both cases it is convenient to only consider the facts of Action 2628 of 1998.

3. The tenancy agreement in question was entered into in December 1995 and was for a term of 3 years. Since October 1997 the tenant has failed to pay rent or maintenance charges or rates.

4. On 20th February 1998 the landlord commenced proceedings against the tenant.

5. In the statement of claim a claim was made for possession and included an averment that:

"The plaintiff by the service of this Writ forfeits the Defendant's tenancy."

6. The tenant filed a defence and counterclaim which referred to the "deteriorating" condition of the premises. It claimed a set-off against rent and other charges. It also pleaded that the tenant had accepted the landlord's repudiation by a letter dated 8th December 1997 and that vacant possession of the premises had been delivered up to the landlord and possession had been surrendered. The tenant denied that the tenancy was forfeitable or that the lease had been terminated by forfeiture.

7. In June 2000 at the trial of the actions the landlord made an application to the Judge to amend the statement of claim.

8. Mr Benjamin Yu SC for the landlord has conveniently summarised the amendments sanctioned by the Judge in his helpful skeleton argument:

"(1) In paragraph 10(a), the Landlord pleaded that the Tenant had, by a letter dated 8th December 1997, purported to surrender a set of keys and 'surrendered the said premises' to the Landlord, alleging that the Tenant found it difficult to continue to stay in the relevant premises.

(2) In paragraph 10(b), the Landlord pleaded that by letter dated 12th December 1997, the Landlord refused to accept the surrender of keys to the relevant premises.

(3) In paragraph 10(c), the Landlord pleaded that the Tenant maintained its position in a letter dated 25th December 1997 (later re-amended to '25th February 1998').

(4) Paragraph 11 pleaded that the Tenant had, by reason of the matters pleaded, evinced an intention no longer to be bound by the tenancy agreement. It went on to plead that the Tenant was guilty of a repudiatory breach of the tenancy (in that the Tenant refused to pay rent and other outgoings for 5 months and unilaterally and wrongfully purported to give up possession) and the Landlord was therefore entitled to accept the Tenant's wrongful repudiation.

(5) Paragraphs 12(b) and 13 reiterate that the tenancy was liable to forfeiture and that by the service of the writ, the Landlord forfeited the tenancy.

(6) Paragraph 16 pleaded that vacant possession of the relevant premises was given to the Landlord on 25th February 1998, some 5 days after the issue of the writ."

9. Mr Ronny Tong SC for the tenant has summarised the issue which has to be determined on this appeal in this way:

"In a case where a plaintiff has served a writ claiming forfeiture (without any alternative relief) and where the defendant has thereafter delivered vacant possession of the leased premises to the plaintiff, is the plaintiff entitled thereafter to claim damages based on the rent receivable during the unexpired term of the tenancy?"

10. He contended that since the plaintiff has admitted that vacant possession of the premises was rendered up on 25th February 1998 the claim for vacant possession had become academic and that the only outstanding question was the amount of the accrued rental and mesne profits. This being the case the proposed amendments were useless and should not have been ordered.

11. The answer to this must be determined upon whether the landlord can make out an arguable case that even when a lease is being terminated by forfeiture it may still be open to the landlord to amend its pleadings by adding a plea that the lease had been terminated by repudiation and acceptance.

12. Mr Tong submits that this is not arguable. He does so on the basis that the service of the writ operates as an irrevocable election to forfeit and brings the lease to an end. On a forfeiture a landlord cannot sue for damages for the unexpired residue of the lease.

13. Mr Yu accepted that the authorities which were referred to by Mr Tong do establish that where a landlord serves a writ on the tenant claiming possession he is treated as making an irrevocable election to terminate the lease. However where the underlying facts are such as to give rise to a claim for forfeiture and a claim on the basis of acceptance and repudiation there is no reason why a landlord should be precluded from making claims in the alternative.

14. The High Court of Australia considered this matter in Progressive Mailing House Proprietary Ltd v. Tabali Proprietary Ltd (1984-5) 157 CLR 17.

15. At p. 31 Mason J (as he then was) said:

"Termination in the exercise of a contractual power is not an affirmation of the contract which debars the innocent party from suing for damages for breach on the ground of repudiation or fundamental breach. This is because the termination, so far from insisting on performance by the party at fault, brings to an end his obligation to perform his promise in specie.

Nor can it be said in the case of repudiation or fundamental breach, that loss of the bargain is attributable to the innocent party's exercise of his contractual power to terminate. It is different in the case of termination for non-essential breach, as Shevill demonstrates, because, by terminating pursuant to the contract at that stage, the innocent party puts it beyond his power to insist on performance, thereby bringing to an end any possibility of repudiation or fundamental breach with consequential damages for loss of bargain.

If the lessor has a common law right to recover damages for loss of bargain consequent upon repudiation or fundamental breach, in the event that the lease is determined, either by acceptance of that repudiation or fundamental breach or by forfeiture as a result of re-entry, there is a difficulty in asserting that the lessor's right to recover after re-entry is subject to an acknowledgment of that right by the terms of the lease. It would be consistent with the principle to say that the right continues unless it is excluded by the lease.

The appellant's first submission in this Court is that on the exercise by the respondent of its right of re-entry for breach of covenant, its right to recover damages was limited to damages for breaches which had already occurred and that they did not extend to damages for loss of the benefit of the covenant to pay future rent and outgoings, that is, rent and outgoings accruing due after the re-entry. The appellant contends that this result follows from the terms of cl. 10.1 which confer the right of re-entry for breach of covenant. On its true construction, so the argument runs, the clause restricts the lessor's right to sue for damages to those breaches which have taken place before re-entry. The weakness in this argument is that the clause does not exclude liability for non-performance of obligation accruing after the date of re-entry. The clause explicitly preserves 'any claim which the Lessor may have against the Lessee in respect of any breach of the covenants and provisions ... to be observed or performed ...'. A claim based on a repudiation or a fundamental breach occurring before re-entry, necessarily answers this description. The comments of Gibbs C.J. in Shevill (55) give no support to the appellant's submission because his Honour was rejecting an argument that cl. 9(a) in the lease in that case conferred on the lessor who re-entered the same rights as would have been available to him if he had accepted a repudiation of the contract or had rescinded it on the ground that the lessee had committed a breach of an essential term."

16. At p. 55 Deane J said:

"It follows from the foregoing that, in the circumstances which had arisen, the landlord had both a contractual right to terminate the lease by re-entry under cl. 10.1 for breach of covenant and, on the application of the ordinary principles of contract law, a common law right to terminate for fundamental breach. The landlord was not obliged to elect between the two grounds for terminating the lease: it was entitled to rely upon them both. A party entitled to terminate a contract for repudiation or fundamental breach may rely upon both a specific contractual right to terminate the contract and the common law right to terminate unless, as a matter of construction, the former excludes the latter: see, e.g., Rawson v. Hobbs (44); Shepherd v. Felt and Textiles of Australia Ltd. (45) and, generally, the cases referred to in Carter, Breach of Contract (1984), pars. 914, 1006. More specifically, where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach exist concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate will not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract expressly or impliedly so provides: cf. Yeoman Credit Ltd. v. Waragowski (46)."

17. These passages would certainly appear to indicate that the question is at least arguable.

18. If one has regard to the underlying principles there would seem to be no valid reason why the landlord should not be permitted to pursue both claims in the alternative. There is also no reason to suppose that the law of Australia is different to the law of England. This can be seen from the commentary at para. 17.314 of the 1994 Edition of Woodfall's Law of Landlord and Tenant:

"Repudiation

In England it has been held that a lease is not capable of determination by repudiation and acceptance. Part of the reasoning which led the court to this conclusion was that a lease is not capable of determination by frustration, and that consequently contractual remedies available in other cases do not apply. But it is now clear that, in principle, a lease is capable of being frustrated. Thus the foundation of the reasoning has been eroded.

Further, in other Commonwealth jurisdictions, it has been held that a lease may be terminated by repudiation and acceptance. This is the law in Canada, and Australia. It is considered that there is no reason in principle why the law should be any different in England.

In any event, it may be that the law of England has always been that a lease is capable of determination by repudiation and acceptance. And it has been so held in at least two recent cases, the latter in the Court of Appeal."

19. Although Mr Tong makes reference to the doctrine of election it is by no means certain that any question of election need arise in the present case. It is only necessary for a party to make an election when it is pursuing two inconsistent rights. Termination by forfeiture need not necessarily be inconsistent with termination by an acceptance of a repudiation.

20. Even if it were correct that it was necessary for the landlord to make an election there is no reason why he should be required to do so prior to the commencement of proceedings.

21. If this is correct the fact that the landlord had terminated the lease and averred that it had been terminated under one route and one set of remedies it could not be said to amount to an unambiguous representation that he would not seek to amend his claim to aver that the termination was made also under another route and proceed with that claim.

22. While all of these matters may at this stage be somewhat speculative I am satisfied that it is at least arguable that the amended case which the landlord is seeking to maintain may be sustainable. This being the case in my opinion the Judge was right to grant leave for the amendments and accordingly this appeal should be dismissed.

Hon Woo JA:

23. I agree with the Vice-President. I am not satisfied that the amendment to the statement of claim allowed by the Judge below is totally unarguable or useless. I am not satisfied that in the circumstances of the case the plaintiff/landlord should not have been allowed to amend in order to raise a claim for damages based on acceptance of the alleged repudiation of the tenancy by the tenant, though the originally raised claim was for forfeiture. I am not disposed to hold that the Judge had exercised his discretion to allow the amendment wrongly or against any principle. I would also dismiss the appeal.

Hon Mayo VP:

24. That being the case the appeal is dismissed. The plaintiff will have its costs.