REGENCY POWER ENTERPRISES LTD v. SCS EXPRESS INTERNATIONAL LTD

HCA 2195/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2195 OF 2009

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J U D G M E N T

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Introduction

1.  The Plaintiff is the owner and landlord of part of a building which under the Government Lease can only be used for industrial purposes.  The Defendant who is the tenant operates a successful logistics business from there which is a commercial use of the premises.  By this summons, the Plaintiff is applying for an interlocutory injunction to restrain the Defendant from carrying on such a business at the premises.

2.  This is a matter for which considerable sympathy is due to the Defendant.  That this is so can be readily understood from a brief account of the background to its occupation of the premises which are situated at Ground Floor, Block B, Alexandra Industrial Building, 1064-1066, Tung Chau West Street, 62 King Lam Street and 27 Wing Hong Street, Kowloon.  The Defendant, which is a husband and wife owned business, first occupied the premises in mid-2005.  At that time, the premises had been let by the Plaintiff to another logistics company called Leadway Logistics Limited (“Leadway”) and the Defendant entered into what has been termed a co-operation agreement with Leadway under which it took over the premises and paid Leadway what, I suppose, might be termed a licence fee for use of the premises until the expiry of Leadway’s lease.  In mid-September 2007, the Plaintiff agreed to give the Defendant a tenancy of its own and proposed a tenancy agreement which appears at page 114 of the Exhibit Bundle.  The point is that the Plaintiff knew that the Defendant intended to carry on using the premises as a base for its logistics business, as had its previous tenant Leadway.

3.  The draft tenancy agreement proposed by the Plaintiff contained a user clause (clause 8) which said that”

“The premises is only to be used as ‘warehouse annexed with office’ ”

The rent was agreed at $82,000 a month from 24 November 2007 to 23 November 2010.  As to the rental, Mr Chan, one of the two owners of the Defendant, says that this rent was about double the rent that could be obtained for these premises had they been put only to industrial use (like a manufacturing or assembly unit) rather than to commercial use such as this.  This may or may not be so because I do not have valuation evidence and in any event this may not matter very much for present purposes.

4.  This form of tenancy agreement was rejected by Mr Chan because he considered that it was something of a home-made document.  He wanted a lease that was properly drawn by a lawyer and so he put forward a common-form commercial tenancy agreement regularly used by Estate Agents.  The Plaintiff agreed because the term, user and rent would be the same as in the tenancy agreement proposed by it.  The tenancy agreement is at pages 6-9 of the Exhibit Bundle.  Notably, it contains the following clause:

“The Tenant shall comply with all ordinances, regulations and rules of Hong Kong and shall observe and perform the covenants, terms and conditions of the Deed of Mutual Covenant and Sub-Deed of Mutual Covenant (if any) relating to the Premises.  The Tenant shall not contravene any negative or restrictive covenants contained in the Government Lease(s) under which the Premises are held from the Government.”

It is this clause which is of crucial importance to the Plaintiff’s application.  For the sake of completeness, I will also set out the material part of clause 7 which gives the landlord the right of re-entry in circumstances:

“… or if the Tenant shall commit a breach of any of the terms and conditions herein contained, it shall be lawful for the Landlord at any time thereafter to re-enter the Premises whereupon this Agreement shall absolutely determine and the Landlord may deduct any loss or damage suffered by the Landlord as a result of the Tenant’s breach from the Security Deposit without prejudice to any other right of action or any remedy of the Landlord in respect of such breach of the Tenant.”

5.  Since the signing of this tenancy agreement, the Defendant has been conducting its logistics business and paying the rent timeously but what has happened is that the District Lands Office has inspected the premises and found that the defendant’s activities are in clear breach of the Government Lease restricting use of the building to industrial use.  It has sent a letter to the Plaintiff on 16 June 2009 (Exhibit Bundles 11-13).  The letter pointed out the following:

         “I would advise that in the event of your failure or neglect to observe or comply with any of the lease conditions, the Government is entitled to re-enter upon and take back possession of the lot and any buildings thereon.  This right may be exercised in respect of a part of a building by vesting the same, in this case the above described premises and interest in the lot, in The Financial Secretary Incorporated under the previsions of the Government Rights (Re-entry and Vetting Remedies) Ordinance, Chapter 126.

         Under these circumstances, you are therefore required to remedy the said breach of the lease conditions forthwith, and in the event that the breach is not purged within 28 days from the date hereof, i.e. on or before 14 July 2009, re-entry or vesting action will be taken by Government without further notification to you.”

6.  The Plaintiff has made efforts to try and get the District Lands Office to grant it some accommodation but the Lands Office has been unrelenting in this regard.  Firstly, as it is entitled to do, it has exacted forbearance fees of $96,557 for the period 15 July 2009 to 14 October 2009.  A further fee of $64,371 was paid for 15 October 2009 to 14 November 2009.  Now a further fee of $128,742 has had to be paid to expire on 15 January 2010 (that is to say in seven days time).

7.  Faced with the risk that the Government will re-enter and/or exact very high forbearance fees from it, the Plaintiff has brought this application.

The Arguments

8.  Mr Kenneth Chan, for the Plaintiff, submits that the Defendant’s business is in clear breach of the Government Lease and this is accepted by Mr Poon, who appears for the Defendant.  Secondly, Mr Chan submits that clause 4 of the tenancy agreement requires compliance by the Defendant with inter alia all express negative covenants in the Government Lease.  In such circumstances, and given the on-going and undoubtedly future consequences of this breach at the suit of the Lands Office, Mr Chan submits that his application is both urgent and unanswerable.  Mr Chan has cited authority for his proposition which I accept and do not propose to recite from here.  Suffice it to say that he has referred me to Incorporated Owners of Mia On Industrial Building & Anr v Hedit, HCA 6529/1987 unreported, a decision of Godfrey J (as he then was) and Hampstead & Suburban Properties Ltd v Diomedous [1969] 1 Ch.248, a judgment of Megarry J (as he then was).

9.  In response, Mr Poon has submitted that these authorities are no doubt correct and applicable to the usual case but not to this case.  He relies on the incontrovertible evidence that the Plaintiff has known of the activities of Leadway and of the Defendant as logistics companies whose activities were clearly in breach of the Government Lease on user and yet was perfectly content to grant leases which contravened the head lease.  It has acquiesced and indeed been content to encourage this user which, subject to having valuation evidence, attracts much higher rents than permitted industrial uses.  Mr Poon prays in aid notions of estoppel.  He says the Plaintiff cannot blow hot and cold where it was clearly content to permit such user for some years, it must now honour its agreement with the Defendant who is not being unreasonable and is willing to move, hopefully by April this year, once it finds alternative premises.  It is also willing to help on the question of the forbearance fees.  It cannot be any more reasonable than that.

Conclusion

10.  As I said at the start of this judgment, I have a lot of sympathy for the Defendant but it seems to me that I cannot avoid making the injunctions asked for.  Firstly, the court cannot just stand by and permit the continuing breach of the Government Lease, no matter the circumstances that it has been allowed to come about and I think there is fault on both sides although I suspect the Plaintiff must bear the greater share of that fault.  It knew of the restrictions in the Government Lease and yet it willingly entered into leases that it knew would be in breach of that negative covenant.  It did not have to let the premises for these purposes to Leadway and subsequently to the Defendant.  The unsigned lease that it put forward shows its willingness to let the premises for commercial rather than industrial use and the actual tenancy agreement also gives that liberty to the Defendant.  For its part, the Defendant also knew of the restriction — the Government Lease is a public document — and so it must be taken to know what it was potentially letting itself in for.  In any event, the tenancy agreement that it put forward and which regulates the parties’ position contains clause 4 supra which requires it to comply with all the covenants in the Government Lease.

11.  In any event, even if one addresses this on the usual basis of American Cyanamid, the Plaintiff has shown an overwhelming contractual case after which the balance of convenience requires the grant of the injunction.  It simply would not be right to allow this state of affairs to continue.  Whilst I appreciate the fact that the Defendant will now suffer considerable losses, some of which may be difficult to quantify, its remedy against the Plaintiff must be in damages.  The court will usually say such a thing in refusing an injunction, leaving the Plaintiff with its remedy in damages, but in this case all the circumstances indicate that there is no alternative to the grant of the injunction leaving the Defendant, by counterclaim or separate action, to pursue its claims for damages on any basis that it is advised to advance.

12.  Accordingly, I will grant the injunctions asked for as from midnight on 15 January 2010 when the current forbearance arrangements come to an end, on the Plaintiff’s undertaking in damages which it has offered and which I am satisfied it has the wherewithal to meet.

13.  I have heard argument on costs and Mr Chan has asked for an outright order in his favour in the event of his succeeding.  On this occasion, I do not think that this would be right.  I propose to reserve costs to the trial judge who will be well placed to assess the overall justice of this situation having regard to the outcome of the claim and any counterclaim for losses sustained by the Defendant as a result of the grant of these orders.  And so, costs reserved.