ITEC FOOD LTD. v. GLEEVILLE CO. LTD.

HCA1355/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1355 OF 2000

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J U D G M E N T

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1. The parties herein (the plaintiff, being the tenant and the defendant, being the landlord) entered into a provisional agreement for tenancy on 10 November 1999 in respect of an industrial property in Tuen Mun.

2. The provisional tenancy agreement stipulated under Clause 6 thereof as follows :-

"Term of tenancy from 16 December 1999 to 15 December 2003 (首兩年為死約，尾兩年為生約)."

The rental was $78,000 per month with three months rental deposit. Clause 11 further stipulated that both parties shall sign a formal tenancy agreement on or before 16 December 1999 at their respective solicitors' office.

3. Thereafter, the formal agreement was negotiated between solicitors for both parties. By a letter dated 24 November 1999, the defendant's solicitors drafted a Clause 18 which reads as follows :

"(18) Notwithstanding anything hereinbefore contained to the contrary, it is hereby expressly agreed and declared between the parties hereto that the Tenant shall have the right at any time after the expiration of the first twenty four (24) months from the commencement of the term hereby created to terminate the tenancy by giving to the Landlord six (6) months' notice of termination in writing or by payment of six (6) months' rent in lieu of such notice PROVIDED that the Tenant shall not give such written notice to the Landlord prior to the 16th day of December 2001 and PROVIDED always that the Tenant shall up to the expiration of such notice pay the rent and perform and observe all the terms and covenants on its part hereinbefore reserved and contained then immediately upon the expiration of such notice or payment in lieu thereof as the case may be the terms and conditions in this Agreement shall cease to have effect and be void save and except provisions applicable to termination and the parties' obligations upon and after the same, the parties' rights and remedies against the other for any antecedent breaches, and obligations which have yet to remain performed."

4. This clause means for the first two years, there will be no break clause whereas after two years, the tenant can give a six months' notice of termination in writing and put an end to the tenancy.

5. Under Part III of the Schedule, the term of the tenancy was described as "four years commencing from the 16th day of December 1999 and expiring on the 15th day of December 2003".

6. In a further letter of the landlord's solicitors dated 29 November 1999, they said that :

"Please note that the draft tenancy agreement sent to you undercover of our letter dated 24 November 1999 is already a complete draft incorporating all agreed terms between our respective clients."

7. By a letter dated 16 December 1999, the landlord's solicitors sent an engrossed copy of the tenancy agreement (incorporating the aforesaid Clause 18 which became Clause 17 and the aforesaid Part III) for the execution by the tenant, whereupon the tenant on the same date signed and paid the required rental and the rates as requested by the plaintiff's solicitors. The defendant also obtained vacant possession of the property.

8. Thus, the landlord should have signed the aforesaid engrossed copy of the agreement. However, some days later, on 10 January 2000, the landlord's solicitors wrote and put forward a re-amended tenancy agreement with a new Clause 17 and Part III of the Schedule for the tenant to sign thereon. The new Clause 17 stipulated that the tenancy was for a term of two years only, after which, the tenant would have an option to renew the tenancy for another two years at the market rental. Part III of the Schedule was amended in turn to two years, commencing from 16 December 1999 and expiring on 15 December 2001. The question now before me in this action by the plaintiff is : what is the true meaning of Clause 6 of the provisional agreement for tenancy?

9. The plaintiff said it means after two years, the tenant is entitled to terminate the tenancy by giving reasonable time of notice for termination and six-month notice is a reasonable time.

10. The defendant said it means after two years, the tenant only has an option to renew the tenancy for a further two years but the landlord can charge the market rental there and then.

11. Ms Law, counsel for the landlord, referred to certain evidence of the plaintiff's agent, Mr Yau and submitted that the original intention was for two years with an option to renew for another two years. In the first place, I am afraid this piece of evidence is not admissible and the parties should stand or fall on the wordings of the provisional tenancy agreement. In any event, the evidence of Mr Yau actually supported the plaintiff's version as the original draft was "from 16th December 1999 to 15th December 2001 (死約)" (which meant fixed term) and "from 16th December 2001 to 15th December 2003 (生約)" (which meant a break clause in favour of the tenant the plaintiff herein for the second two years of lease) and the rental deposit payment would be two months. The defendant's representative Mr Lee then said if the clause is drafted in such a way, it would mean the landlord would be entitled to raise the rent after the first two years of lease and if the tenant only paid two-month rental deposit, the landlord would increase the rental by 25% after the first two years of lease. According to Mr Yau, he said that :

"Mr Lee said that in order to avoid misunderstanding, the said terms should be re-drafted. Also, as Sam Chan would like to have the lower rent, he finally agreed to paying a 3-month rental deposit. After this, Marco So then filled in a new Provisional Agreement for Tenancy for both parties to sign, whereby it was stated that the term of the lease would be 'from 16th December 1999 to 15th December 2003 (首兩年為死約，尾兩年為生約)' (which meant fixed term for the first two years of lease and a break clause in favour of the tenant the Plaintiff herein for the second 2 years which in turn meant that the tenant the Plaintiff herein had the right to decide if to continue to lease the premises after the first 2 years of lease by giving notice to the landlord six months prior to the expiration of the first 2 years of lease, with all other terms remaining unchanged, including the rental of the premises)."

12. That is in line with the plaintiff's understanding of the effect of the said Clause 6.

13. Further, the original engrossed copy of the formal agreement of the defendant's solicitors, in my view, represented the true meaning of the provisional tenancy agreement. The wordings actually give the tenant no rights to terminate the tenancy agreement within the first two years but they were given a right to terminate it by giving reasonable notice after the first two years. Both parties do not dispute on the length of the reasonable notice and they consider that six months' notice is a reasonable notice. In other words, Clause 17 of the original engrossed copy of the tenancy agreement actually represented the true intention of the parties upon a true construction of these two Chinese sentences.

14. Ms Law is quite right in submitting that the dominant rule of interpretation is to take the natural meaning of the words. Further, she submitted that unless and until both parties agreed, neither side could impose unilaterally terms or conditions more onerous than the terms set out in the provisional agreement.

15. There is no indication in the provisional agreement that the tenancy is a two-year tenancy with an option to renew. In fact, the term of the tenancy was stated to be from 16 December 1999 to 15 December 2003, making it a four-year tenancy. Therefore, it could not be interpreted as entitling the landlord either to charge or to re-negotiate the tenancy for a market rental after the expiration of the first two years. On a proper construction of Clause 6, the term "死約" means the tenant cannot terminate the tenancy and the term "生約" on the contrary means the tenant is entitled to terminate by giving notice.

16. Even in a case where the tenant only has an option to renew, it has been decided in the case of Louis v. Stephenson [1898] 57 LJ QBD 296 that where an agreement contained an option to renew and was silent on the terms of the new or renewed lease, the tenant was entitled to a renewed lease for the same terms, i.e. at the same rental. In other words, even if it is a tenancy for two years with an option to renew and the agreement is silent on the rents after the expiration of the first two years, this case decided that the tenant would have a right to renew at the same terms. Obviously in this case, it is not a case of two-year tenancy with a right to renew. The provisional agreement has clearly stipulated that the term was for four years. It just gave the tenant the right to terminate after two years but not earlier.

17. Further, it has been decided in the case of D. H. Shuttlecocks v. Keung Siu Tang [1993] 2 HKC 600 (per Mentell J, as he then was) that where there is only the provisional agreement signed, neither party could impose unilaterally terms more onerous than those set out in the provisional agreement. The new amended Clause 17 and Part III of the Schedule were inconsistent with the term of the provisional agreement and they became more onerous to the tenant.

18. For the aforesaid reason, I do not consider that the defendant was right in unilaterally imposing the new Clause 17 and Part III of the Schedule on the tenant after the provisional agreement and after the original engrossed tenancy agreement has already been sent for the tenant's execution on 16 December 1999.

19. That being the case, the other incidental matter is who should pay for the penalty arising out of the late stamping of the provisional tenancy agreement? If the contract was performed according to the provisional tenancy agreement, the landlord would have executed the formal tenancy agreement and caused it to be stamped within one month thereafter and, therefore, no penalty would have been imposed under the Stamp Duty Ordinance. For that reason, I find the landlord liable also for the penalty imposed for refusing to execute the original formal tenancy agreement, and this small sum of $250 is now payable to the tenant by the defendant.

Order

20. The declaration is that upon the true construction of provisional agreement, the defendant shall be obliged to let and the plaintiff shall be entitled to take the premises for a term of four years, commencing from 16 December 1999 to 15 December 2003, at a monthly rental of $78,000 with rates and, after expiration of first 24 months on the commencement of term, the plaintiff shall be entitled to terminate the tenancy by giving six months' notice to the defendant. The plaintiff is also entitled to the judgment sum of $250. The defendant's counterclaim is hereby dismissed.

[Submissions on costs]

Costs

21. In respect of costs, Ms Law referred me to a letter of the defendant's solicitors dated 5 March 2001 and they offered in the letter, on a without prejudice basis save as to costs, that the plaintiff is prepared to sign a formal tenancy agreement with the defendant in the form attached, i.e. on the same terms as contained in the original draft enclosed in their letter dated 16 December 1999 to Messrs Patrick Leong & Man, the tenant's then solicitors. However, unfortunately, the offer was not a full offer and that was an offer on the basis that there should be no order as to costs. If the offer was that they would pay all the costs outstanding up to that date, to be taxed if not agreed, that would be a full offer of a settlement according to the plaintiff's wishes. The plaintiff was entitled to reject such an offer unless the other side was willing to pay the full costs incurred up to 5 March 2001. I would say the same thing about the open offer of the defendant on 17 March 2001 as there was no offer to pay the costs incurred up to that date either. As the offer was not a full offer, I cannot see why the plaintiff should not be entitled to costs. Accordingly, costs of the action and of the counterclaim be to the plaintiff against the defendant, to be taxed if not agreed.