CREATOR (HK) LTD v. KWONG WING FOOD INDUSTRIES STAINLESS STEEL ENGINEERING LTD AND ANOTHER

HCA2821/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2821 OF 2006

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J U D G M E N T

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1. This is an appeal from Master Lung’s order on 21 May 2007 by which order he ordered that :

(1) interlocutory judgment be entered in favour of the defendant against the third party, with damages to be assessed;

(2) costs of the third party proceedings, including reserved costs (be to the defendant to be taxed if not agreed, with certificate for counsel); and

(3) liberty to apply.

2. Previously in the same morning, the defendant has successfully resisted the Order 14 application of the plaintiff also before Mater Lung.

3. The background of this case is necessary in order to understand how these two sets of orders were made.  The third party, in fact, was the owner and landlord of the building at Nos. 312-314 Shanghai Street, Kowloon.  The defendant was the third party’s tenant under two written tenancy agreements in Chinese as follows :

(1) The first tenancy agreement was in respect of the ground floor and the cockloft of the building.  It was undated, but it was said that it was a tenancy for eight years.  But in the body of the tenancy agreement, it said that the tenancy should run from 12 January 2003 to 11 December 2011.  Therefore, there was a discrepancy whether it was an eight-year tenancy or is a tenancy for eight years eleven months.

(2) The second tenancy agreement was in respect of the 1^st floor of the building.  It was dated 1 May 2005.  The tenancy was for a term of five years from 1 June 2005 to 1 June 2010.  It is not disputed that there are two originals of the second tenancy agreement and each party kept one copy.

4. In this case, it was alleged by the landlord that since the first tenancy agreement was drafted by the defendant, there was only one copy kept by the tenant defendant.  However, the defendant adduced evidence that the two separate copies exhibited by the third party and the defendant respectively are in two versions.  The position of the signatures are quite different in the two copies.  The defendant said that there was an original of the first tenancy agreement in the hands of the landlord as the second tenancy agreement.  This is a disputed point but apparently from the defendant’s allegation, it is quite clear or, to my mind, plain and obvious that there must be two different originals of the tenancy agreement.  Otherwise the landlord could not produce one version of the tenancy agreement which is not exactly the photocopy of the defendant’s version.

5. Subsequent to these two tenancy agreements, the third party entered into a provisional sale and purchase agreement with the plaintiff as the purchaser on 6 June 2006 whereby the third party agreed to sell, and the plaintiff agreed to purchase, the whole building subject to existing tenancies.  Copies of the tenancy agreement were given to the estate agent who prepared the documents.  There was no formal sale and purchase agreements but the plaintiff and the third party completed the assignment on 28 September 2006.

6. Thereafter, the plaintiff gave notice to the defendant to pay rent from October 2006 onwards to the plaintiff directly.  By the same letter, they also gave notice to quit on the basis that the defendant was only a monthly tenant of both properties.  Suffice it for me to say that at the Order 14 application of the plaintiff, the defendant has successfully argued that it is arguable that this notice to quit is not valid.  Thereafter, on 25 May 2007 the plaintiff actually served a notice to quit on the defendant and the defendant considered that there is no defence to the new notice to quit.  Therefore, the defendant subsequently agreed to deliver vacant possession of the two properties to the plaintiff on or before 30 November 2007, and the defendant has continued to pay mesne profits since the expiry of the notice to quit.

7. In the afternoon of the same hearing on 21 May 2007, Master Lung gave interlocutory judgment against the third party as aforesaid.

8. The third party now launched an appeal to this court and submitted that there are arguable defences to the defendant’s third party action and, therefore, they should be given unconditional leave to defend.  The first point advanced by Mr H.Y. Wong of counsel for the third party is that there is no known cause of action as stated in the third party notice that the third party failed to ensure that the plaintiff when purchasing the reversion of the first and second properties from the third party, they should be bound by the two tenancies.

9. In fact, this is just a pleading in the third party notice whereby, the defendant pleaded that the third party’s failure to register the two tenancy agreements in the Lands Registry was in breach of the two tenancy agreements.  The defendant in fact relied on the Court of Appeal’s decision in Wellmake Investment Limited v. Chan Yiu Kong [1996] 2 HKLRD 44.  I read from the head note for the facts of the case :

“Defendant claimed a written tenancy agreement of October 1992 for a term of three years with an option to renew for a further two years.  In February 1994, each landlord entered into agreement for sale with P which was expressly to be sold subject to the tenancy and the option.  An agreement for sale was registered in February 1994.  In August 1994, D registered the tenancy agreement.  P obtained against D and order for possession of the premises.  D appealed.  Held :

1.    Each option to renew was against P absolutely null and void to all intents and purposes under section 3(2) of the Land Registration Ordinance for want of registration prior to the restoration of P’s agreement for sale.”

10. In the judgment of Godfrey JA, he said at page 47D to F :

“It follows that the vendor on reversion would be well advised to check before he agrees to sell the reversion, whether an option to renew the lease has been registered or not.  If it has been registered, he can content himself with selling the reversion subject to the option without more, for then the tenant will be able to enforce the option against the purchaser and would have, in any event, no claim for damages against the vendor.  But if the option has not been registered, the vendor will be well advised to procure the entry by the purchaser into an express stipulation to give effect to the option if he is to protect himself against such a claim.  See Wright v. Wright & Dean [1948] DH 686 and Hollington Bros Ltd v. Rhodes [1951] 2 TLR 691.  He would be unwise to assume that he will be sufficiently protected against a claim by the tenant (as distinct from a claim by the purchaser [simply by selling the reversion subject to the option] without more).  There must be something more before the court will impose on the purchase a constructive trust to give effect to the tenant’s option.  What might be sufficient will depend on the facts of the particular case.”

11. It is accepted by both parties — i.e. the third party and the defendant herein — that there is no constructive trust on the new landlord.  Thus, it is quite clear that the liability in not registering the tenancy agreement before the landlord sold the reversion to the purchaser, was a breach of the tenancy agreement.  Mr Wong tried to distinguish Wellmake by saying that the option is different from the tenancy agreements.  I am afraid I cannot find the distinction.  It is quite clear, be that an option or a tenancy agreement, the non-registration is a liability on the part of the previous landlord/vendor.

12. In short, the liability stems clearly from the non-registration of the tenancy agreement on the part of the landlord.  It is accepted by the third party that if the two tenancy agreements had been registered, then the tenancy agreement would take priority to the purchaser’s right.  In other words, the purchasers would be buying the whole building subject to these two existing tenancies.  That being the case, one of the subsidiary points raised was whether the first tenancy was a tenancy for eight years eleven months, or eight years’ tenancy.  As a matter of construction, I would consider that it must be eight years eleven months since there was a definite date stated in the tenancy agreement, albeit in the other part it says it is an eight-year tenancy.  The specific provisions would take over the non-specific eight-year description.

13. In any event, it is accepted that if the two tenancy agreements have been registered, the purchaser will be buying the building subject to these two existing tenancies, albeit that the two tenancy agreements were not made by deed.  It has been long-established under the principle of Walsh v. Lonsdale that a lease could be enforceable in equity against the new purchaser.

14. Mr Wong then sought to argue that since the two tenancies are now monthly tenancies, then there are other points to be decided.  As to the validity of the tenancy agreements, apart from the eight-year eleven-month point, he raised the point that the date of the payment of the rents for each tenancy — whether they are paid in arrears or in advance; whether they are paid on the 1^st day or the 12^th day of the month; whether when paid on the 12^th day of the month they were paid in advance or in arrears; or partly in advance and partly in arrears.  I am afraid all these points raised stem from the very fact that the two tenancies were not registered at all.  If the previous landlord/third party has performed the tenancy agreement by registering the interest of the defendants in the Land Registry as decided in the case of Wellmake and, in particular, the judgment of Godfrey JA, then this point would not have arisen.  It would be two tenancies — one for eight years eleven months, one for five years and one day — as stipulated by the commencement date and the expiration date.

15. Therefore, on that liability, damages would be assessed by the landlord’s failure to register the same.  In other words, the measure of damages is the difference between if the contracts were performed and the present situation when the contracts, in terms of the tenancy agreements, were not performed.  That will be the usual rule in the measure of damages.

16. Thus, all in all, where the uncertainty of the agreements is only a consequence of the non-registration of the tenancy agreement — and it could not be used in this circular argument to say that since there was uncertainty in the tenancy agreement, the basis of the liability of the third party is arguable and therefore the third party shall be given unconditional leave to defend.

17. In the end, I agree with the learned master in that there is no arguable point in respect of the liability of the third party to the defendant.  Whether the third party can join the estate agent as a fourth party is a matter for them which they have stated in their submission, but that is not a point for me to decide in this case.

18. In the end, the appeal is dismissed with costs to the defendant to be taxed if not agreed.  It is further directed that the defendant and the third party shall exchange experts’ reports as to the measure of damages within 42 days hereof.  The assessment of damages shall be set down for trial before a Master of High Court with one day reserved.