SILVER SOURCE DEVELOPMENT LTD v. TIME CENTURY LTD

1990, No.A7051

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. On 6th June 1989, Silver Source Development Limited (the plaintiff in these proceedings, hereinafter referred to as "Silver Source") entered into a tenancy agreement with Time Century Limited (the defendant in these proceedings, hereinafter referred to as "Time Century") whereby Silver Source agreed to grant a term of 2 years from 15th June 1989 to 14th June 1991, both days inclusive, at the rent of HK$25,000, exclusive of rates and management fees a calendar month, payable in advance. This tenancy agreement was signed on behalf of Silver Source by Mr Ma Won Cho, whose signature was witnessed by one Mr Eric Cheng Kai Hung, who described himself as sales executive. A Mr Anthony Hung signed the tenancy agreement on behalf of Time Century. Mr Hung's signature was witnessed by one Miss Louisa Pun Shuk Yi. By way of security for the due and punctual payment of rent and due observance and performance of the terms and conditions of the tenancy agreement, Silver Source was paid by Time Century the sum of HK$50,000.

2. This tenancy agreement concerned premises known as House F7 and its curtilage at a development known by the name of "Las Pinadas", which was erected on Lot No. 247 in demarcation district No. 223, Tai Ku Ling, Sai Kung, New Territories. The occupant of the suit premises was one Mr Anthony Poynton, Managing Director of Time Century.

3. It is not in dispute that in about July 1990, Mr Poynton spoke to Mr Ma Won Cho of Silver Source (hereinafter referred to as "Mr Ma") to the effect that Time Century wished to determine the tenancy so that Mr Poynton may move to other premises. It is also not in dispute that Time Century did not find the proposition unacceptable in principle. However, it is Silver Source's case that a surrender would only be accepted either upon a tenant being found by Mr Poynton for the remainder of the term, or alternatively, that a new tenant was found to take up a new lease for a term of two years at the rent of $30,000 to $32,000 per month. On the other hand, it is Time Century's case that an oral agreement had been reached between Mr Poynton and Mr Ma to the effect that Silver Source will accept, unconditionally, a surrender of the tenancy.

4. On 16th August 1990, the keys to the suit premises were delivered to the management office of Las Pinadas. This office was managed by Lee On Realty Company, which was a property company involved in the management of Las Pinadas. It also engaged in property agency work.

5. Rent was paid by Time Century for the period up to 14th June 1990. On 14th June 1990, a debit note was issued by Silver Source to Time Century for payment of rent for the period from 15th June to 14th July 1990. On 25th June 1990 another debit note was issued for the same period but with interest on arrears calculated from 15th May 1990 to 24th June 1990. Also on the 25th July 1990 a debit note was issued for rent for the following month, namely from 15th July 1990 to 14th August 1990, together with arrears of rent for the period 15th June 1990 to 24th July 1990. On 28th August 1990, a further debit note was issued for the period 15th August to 14th September 1990. On 30th August 1990, a reminder as to overdue payment of rent was issued for the period 15th July 1990 to 14th September 1990 together with management fees and interest on arrears of rent.

6. On 16th October 1990 the present High Court Action was taken out. In a general indorsement to the writ, Silver Source claimed specific performance of the tenancy agreement against Time Century in addition to arrears of rent for management fees for the sum of HK$79,000 and interest thereon. A statement of claim was filed on 2nd November 1990.

7. On 26th November 1990, Silver Source, however, by its solicitors, wrote to Time Century's solicitors (by then Time Century had instructed solicitors) to the effect that Silver Source would accept Time Century's repudiation of the tenancy agreement and thereby would amend its claim from that of specific performance to arrears of rent as well as damages following acceptance of repudiation. The Statement of Claim was accordingly amended on 22nd December 1990 and thereafter the plaintiff's claim proceeded on the basis of arrears of rent as well as damages.

8. At the centre of this dispute are the following two issues both involving as their basis the doctrine of "surrender by operation of law":

(1) Whether or not there was an oral agreement between Silver Source and Time Century to the effect that the lease may be unconditionally terminated from 16th August 1990;

(2) Whether or not the surrender of the keys and the circumstances attending such surrender amounted to surrender of the lease by operation of law.

9. Although surrender had to be effected by deed (see; section 4(1) of the Conveyancing and Property Ordinance, Cap. 211), it has been established that it is possible to effect the surrender of a lease by oral agreement in circumstances which amount to the acceptance of a new lease. In Fenner v. Blake (1900] 1 QB 426, Channell, J. had this to say:

"It is by no means uncommon for a landlord and tenant to agree by parol to a variation of the terms of an existing tenancy, such as an alteration in the amount of the rent, and at all events in cases where the tenancy was such that the contract creating it was not required by law to be in writing, as in the case of a tenancy from year to year, a parol variation of the terms as the rent would be perfectly good and sufficient in point of law. And if an agreement as to an alteration of the rent may be made by parol, why may not equally an agreement as to alteration of the date at which the tenancy is to be determinable? It seems to me that the effect of the agreement in December was that the defendant accepted a new tenancy for six months terminable in June in lieu of the existing tenancy. And if so, then all the authorities agree that the acceptance of a new tenancy works a surrender of the old tenancy by operation of law".

10. Although by s.4 of the Conveyancing and Property Ordinance, Cap. 215, a legal estate in land may be created, extinguished or disposed of only by a deed, the section is specifically precluded from applying to a surrender by operation of law, including a surrender which may by law, be effected without writing.

11. The doctrine of surrender by operation of law derives from the implication by law of a surrender from the unequivocal conduct of both parties which is inconsistent with the continuance of an existing tenancy. Time Century asked the court to infer such unequivocal conduct from the following alternative statements of its case:

(1) An oral agreement That there was an oral agreement conclued in the circumstances pleaded in paragraph 3 of the Re-re-amended Defence and Counterclaim. The circumstances may be summarised as follows, namely:

(a) That during a telephone conversation between Mr Poynton of Time Century and Mr Ma of Silver Source in about July 1990, a letter indicated to the former that there was no objection whatsoever to an early termination of the tenancy agreement because Silver Source could let out the suit property at a higher rent in the region of HK$30,000 to HK$32,000 per month, and that rented accommodation at Clearwater Bay Road (where the suit premises were situated), was very much in demand.

(b) That on the basis of such "mutual oral agreement", Time Century delivered vacant possession of the suit premises to Silver Source.

(c) That in accordance with instructions of Miss Wan of Silver Source, Time Century (by Mrs. Poynton) delivered the keys to the suit premises to the management office of Silver Source.

(d) That at no time did Silver Source indicate to Time Century that an early termination was unacceptable and Silver Source was well aware and had full knowledge of Time Century vacating the suit premises on 15th August 1990.

(e) That in consideration for early termination of the agreemnt, Time Century agreed to and did leave behind six units of air-conditioners together with some fittings at the suit premises without charging Silver Source.

(2) Estoppel

That in reliance of Silver Source's promise of an early termination of the tenancy agreement, Time Century had acted to its detriment by entering into a new tenancy with Favrit Development Limited on 15th August 1990 at a monthly rental of HK$29,000 for a term of three years.

(3) Acts irrespective of agreement

That with full knowledge that Time Century had vacated the suit premises and would not return, Silver Source:

(a) Allowed the keys to the suit premises to be left with the management office of Silver Source.

(b) Allowed Jones Lang and Wootton ("JLW") to look for new tenants and consented to their letting potential tenants to view the suit premises by making use of the keys left with Silver Source; and

(c) Caused or instructed Lee On (a company associated with Silver Source) to look for new tenants to replace Time Century.

12. The first two alternative cases of Time Century presuppose the existence of an agreement or a promise of early termination. It is necessary, therefore, to determine whether or not such an agreement or promise had existed.

13. I shall first consider the evidence of Mr Anthony Poynton, director of Time Century. In about July 1990, Mr Poynton had wanted to move to new premises at Shatin so as to be near to Time Century's office which were and is, in an industrial building in Fotan, Shatin. In order that he may move to Shatin, he needed to be released from the tenancy agreement for the suit premises, which was to run until July 1991. He told the Court that he spoke to Mr Ma of Silver Source on the telephone at about this time. Mr Ma appeared to be quite friendly and indicated to Mr Poynton that it would be acceptable to Silver Source if Time Century either found a tenant to take up the lease for the remainder of the term at the existing rent of $25,000 or to sign a new lease for a new term of two years at $30,000 to $32,000 per month. Mr Ma said that Time Century could find such a tenant easily. Mr Poynton suggested that a friend of his in JLW might assist in finding a new tenant and Mr Ma suggested that JLW might give him a call. Mr Poynton then thanked Mr Ma and said that he would leave behind certain air-conditioners and carpets.

14. Mr Poynton told the Court that he moved out of the suit premises on 15th August 1990. He asked Mrs Poynton to deliver the keys to Lee On's office at Las Pinadas, Lee On being Silver Source's management office for the suit premises. The delivery of the keys was effected on 16th August 1990 in accordance with instructions given by Miss Wan of Silver Source to Miss Pun, Mr Poynton's secretary.

15. In cross-examination, Mr Poynton admitted that Mr Ma had made it a condition of acceptance of his surrender of the lease that Time Century should find a tenant to take up the remainder of the term at the existing rent of $25,000 per month. As to the letting out of the premises at $30,000 to $32,000 for a new term of two years, Mr Poynton insisted that it was Mr Ma who suggested that he could easily find a new tenant to sign such new lease. Despite this admission, Mr Poynton nonetheless took the view that he would not have signed his new lease at Shatin, had he not been sure that he could keep his contractual commitments to Silver Source.

16. Mr Ma Wun cho, who gave evidence for Silver Source, agreed that he did indeed have a telephone conversation with Mr Poynton in about July 1990 during which the surrender of the suit premises was discussed. Mr Ma indicated to Mr Poynton that there was no objection in principle to the surrender provided that a tenant could be found to continue with the lease until its expiry. Mr Ma told the Court that Mr Poynton then suggested that he might find a new tenant to sign an agreement for a term of two years. Mr Ma again did not object to this but said that if that were the case, a new rental rate of $32,000 was applicable. Mr Ma reiterated that if Mr Poynton could not find a new tenant then he would have to carry on with the tenancy.

17. Mr Ma said that he did not give any instructions as to acceptance of the keys. While he was in America, he left Hong Kong on 24th August 1990 for the U.S.A., he was told by Mr Eric Cheng Kai Leung, that the keys had been left at the management office. Mr Ma then told Mr Cheng that the keys should not been accepted but was told by Mr Cheng that the keys had been accepted to enable Jones Lang Wootton to show the premises to prospective tenants.

18. On 25th July 1990, a debit note for rent for the period 15th July to 14th August 1990 was issued by Silver Source to Time Century. This debit note was signed by Mr Ma. While Mr Ma was in the United States, he communicated with his secretary, Miss Wan from time to time, and did soon after his arrival in the United States ask Miss Wan to make sure that Time Century did pay its rent on time. Thus on 28th August 1990, Miss Cindy Wan, on behalf of Silver Source, issued a further debit note for rent for the period 15th August to 14th September 1990. On 30th August 1990, a reminder was sent for the rent for the period 15th July to 14th September 1990 together with a debit note for the management fee and interest on the arrears of rent. This reminder was sent by Miss Cindy Wan on behalf of Silver Source.

19. On 3rd September 1990, Time Century, by the hand of Mr Poynton, sent a letter to Silver Source. The letter expressed surprise at receiving the demand letter (namely the debit note for rent) from Silver Source and cited the following reasons for the surprise:

"(1) On 12th July 1990, we informed your Mr Ma and Miss Wan that we required to end our lease agreement with your company; and requested your agreement to this.

Verbally, you informed us that this would not be a problem as you could re-lease the property very easily; and attain a rental of between $30,000 - $32,000 monthly; which is a most attractive rental increase.

(2) We therefore informed you we would vacate the property on 15th August 1990, and you requested that we leave the keys for the property with the management office; to enable you to show prospective clients the house referred to above.

(3) We, thinking you already had clients on hand, telephoned you to ascertain whether you had re-leased the property; and you informed us you had not.

(4) We then arranged for Jones Lang Wootton to advertise the property; to assist you in your endeavours.

(5) We have heard nothing from yourself or J.L.W. re the renting of the house, and assumed that all was in hand.

(6) The undersigned (namely Mr Poynton) spoke with Mr Ma and informed him that we would leave 6 pcs of airconditioning units, plus other fittings free of charge; which in total are worth a considerable amount."

The letter ended by the following three paragraphs:-

"In conclusion, we feel there has been misunderstandings on both sides, and to revert to legal action will be a costly and time consuming exercise.

We want this matter finalised in a friendly, reasonable manner, so we request you to consider. all of the above points; and reconsider your position.

We await your reply with interest; and meantime we will push J.L.W. to work to finalise clients for the property."

20. Taking the letter at face value, it is difficult to escape the conclusion that the facts therein recorded point to a conditional rather than an unconditional agreement to terminate the lease. The letter started by recording a request by Time Century for termination of the tenancy agreement, which was met by a response from Silver Source that that would not be a problem as Silver Source could release the property very easily. The letter then records Time Century informing Silver Source that it would vacate the property on 15th August 1990 and Silver Source requested Time Century to leave the keys for the property with the management office "to enable you (Silver Source) to show prospective clients the house". Such conduct is certainly more consistent with the position of a landlord who would be prepared to terminate the agreement provided he could let the premises than with the position of a landlord who was prepared, before a tenant could be found, to terminate the agreement and release the tenant from all his obligations under the lease. Perhaps a reflection of the uncertainty felt by Time Century as to the existence of an unconditional agreement lies in the phrase we feel there has been misunderstandings on both sides" in the second page of the letter.

21. While Mr Ma was still in the United States, he was informed by his office of the receipt of the letter of 3rd September 1990 from Time Century. He gave instructions for Silver Source's legal advisers to reply to this letter. So on 11th September 1990, Messrs Kwan & Chow, solicitors, replied to Time Century's letter of 3rd September 1990 on behalf of Silver Source. The operative part of Messrs Kwan & Chow's letter is as follows:-

"We are instructed that you enquired for the early termination of the tenancy, our client indicated that so long as there is a new tenant who is willing to pay a new rental of between HK$30,000.00 to HK$32,000.00 per month, our client would be prepared to accept an early surrender of the premises. Although the proposed new rental exceeds the present rental paid by your goodselves, it must be borne in mind that such new rental will be for a period of two years from the date of the new tenancy rather than for the remainder of the existing term. We are further instructed that at no time had our client agreed to terminate the tenancy without a new tenancy being signed with a new tenant. Your decision to vacate the property on 15th August 1990 is a matter of your own decision and our client had not accepted that this was the date when the existing tenancy was terminated."

22. Two days later, that is on 13th September 1990, Time Century replied in writing to Messrs. Kwan & Chow. Again, Time Century asserted that Mr Ma had advised Mr Poynton that he (Mr Ma) would have absolutely no problem in acquiring a client willing to pay HK$32,000 per month for the premises, and that Mr Poynton had informed Mr Ma that he (Mr Poynton) would be vacating the premises on 15th August 1990. Again, in conclusion, Time Century stated that "this is a misunderstanding that can be settled amicably, with compromise".

23. Mr Ma returned to Hong Kong on 26th September 1990, and immediately instructed Messrs Kwan & Chow to reply to Time Century's letter of 13th September 1990. Meanwhile another debit note was sent by Silver Source to Time Century for the rent for the period 15th September to 14th October 1990.

24. On 27th September 1990, Messrs Kwans & Chow, on behalf of Silver Source, wrote to Time Century. This letter recorded that the discussions relating to the termination of the lease of the suit premises in fact took two stages. In the first stage, there was a conversation between Mr Eric Ho (later corrected to Mr Eric Cheng by Kwan & Chow's letter of the same date) with someone (unidentified) in Time Century. That someone in Time Century, it was recorded by that letter, first indicated Time Century's desire for an early termination of the tenancy to Mr Eric Ho (Cheng) and asked whether Silver Source would be prepared to accept a replacement tenant for the residue of the unexpired term of the lease. This enquiry was conveyed by Mr Cheng to Mr Ma who gave the indication that Silver Source would be prepared to allow Time Century to terminate the tenancy provided Time Century could find another tenant acceptable to Silver Source to continue with the tenancy for the remainder of the term. The second stage of these discussions was the conversation between Mr Poynton and Mr Ma. The letter then records that Mr Ma indicated to Mr Poynton that Silver Source would have no objection to early termination if Time Century were able to find another tenant to continue on the same terms until the expiry of the tenancy provided that the identity of the tenant is acceptable to Silver Source. However, if the new tenant required another term of two years or more, the rent would have had to be revised. It was understood that Time Century would instruct JLW to look for a replacement tenant and furthermore, Silver Source would also try to look for a new tenant. But in all the discussions, at no time did Silver Source ever agree to terminate the tenancy without a new tenant having entered into a tenancy with Silver Source. The letter further went on to state that Silver Source had never instructed Time Century to leave any keys with the management office nor had Silver source ever authorized the management office to accept such keys on its behalf as acceptance of Time Century's surrender of the premises.

25. I next turn to the evidence given by Mr Eric Cheng Kai Hung. Mr Cheng was a sales executive in Lee On Property Company, a company associated with Silver Source. In fact it was Lee on who managed the suit property for Silver Source. Mr Cheng left the employ of Lee On in September 1990.

26. Mr Cheng had been involved with this particular tenancy since its inception since he was the person who witnessed Mr Ma's signature on behalf of Silver Source. He told the Court that in July 1990, he received a telephone call from a person who identified herself as Miss Pun from Time Century. She asked if it was possible for Silver Source to release Time Century from its tenancy to the suit premises as they wanted to move out earlier. Mr Cheng said that that would not be acceptable unless Time Century could find a new tenant for the remainder of the term. Mr Cheng, who told the Court that he was an experienced property agent, said that it would not be usual for any landlord to accept early termination of a tenancy unconditionally. In early August 1990, Mr Cheng recalls having received a telephone call from a Mr Chan from JLW. Digressing here, Mr Poynton in his evidence, agreed that his friend in JLW had an assistant whom he believed was a Mr Chan. Returning to Mr Cheng's evidence, he told the court that this Mr Chan mentioned that Time Century had wanted to move to a place in Shatin and he appeared to Mr Cheng as being aware that Silver Source would not allow Time Century to move out unless another tenant were found. Thus he sought clarification as to this from Mr Cheng and details of the tenancy.Mr Cheng told the court that there might have been another telephone conversation with Mr Chan from JLW but in any event details of the tenancy, including the rental rate, were furnished to JLW. Mr Cheng also told Mr Chan that Time Century would be willing to consider signing a new tenancy agreement for two years but the rent would have to be higher than the existing rent.

27. Mr Cheng also told the Court that on or about 15th or 16th August 1990, a person identifying herself as Miss Pun had a telephone conversation with him regarding the suit premises. This Miss Pun told him that Time Century would be moving out of the premises and that they would return the keys to Silver Source. Mr Cheng said that Silver Source would not accept the keys as it would not accept a surrender. Mr Cheng then reminded her that JLW as well as Lee On were helping Time Century to find a new tenant but Miss Pun said she would leave the keys at the management office. Mr Cheng reported this to Mr Ma but could not remember whether Mr Ma gave any instructions as to the keys. Mr Cheng subsequently found out that the keys had been left at the management office but took no action in view of the fact that both JLW and Lee on were looking for new tenants for the suit premises and they would have to view the premises.

28. Miss Pun, whose full name was Pun Shuk Yee, also gave evidence to the court. She was, in July/August 1990, secretary to Mr Poynton, in which post she remains to this day. Miss Pun said that she could not recall having any telephone conversation with a Mr Cheng of Silver Source although she did speak on the telephone with Mr Ma. She insisted that it was Miss Wan of Silver Source who told her to leave the keys at the management office at Las Pinadas. Miss Wan, who also gave evidence to this Court, did not however recall having spoken to Miss Pun in relation to the keys though she knew that the keys had been left at the management office in order to facilitate the viewing of the premises by prospective tenants.

29. Mrs Poynton who also gave evidence to this Court, told the Court that at the request of her husband, she handed the keys to two elderly genltemen in the management office at Las Pinadas. As neither Mr Ma nor Mr Cheng who both gave evidence in this Court, could be described as elderly gentlemen, I can only come to the conclusion that the two persons in the office were probably watchmen or other persons in charge of the management office.

30. There is obvious conflict as to how the keys came to be left at the management offices between the witnesses for the plaintiff and the defendant. On the basis that Mr Cheng had now left the employ of Lee On and therefore has no direct connection with Mr Ma or Silver Source, the Court can place perhaps better reliance on such evidence than that of Miss Pun who continues to be Mr Poynton's secretary. That however is not the most important consideration. Mr Cheng told the Court that he was an experienced property agent, which the court accepts, and it was in his experience unusual for a landlord to accept termination or a surrender by acceptance of the keys, without having actually found a tenant to replace the old, out-going tenant. In Hong Kong where land is always at a premium, I would expect no less from any landlord. Allowing the keys to be left at the management office is consistent with the position taken by Mr Cheng and JLW whereby both were looking for a tenant to replace Time Century and that it would be convenient for the keys to be left at the management office so that prospective tenants could be shown the suit premises. For these reasons, I would prefer Mr Cheng's evidence.

31. In the light of the evidence given by both parties, I come to the conclusion that although Silver Source had taken the position that it would in principle be prepared to release Time Century from its commitments under the tenancy agreement, such release was conditional. The conditions were that either a new tenant was found to take up the remaining portion of the existing term or to sign a new tenancy agreement for a new term but at a higher rent. It would be surprising if a landlord, however optimistic his view of the market is, would be prepared to risk the vagaries of the market and unconditionally release a tenant. A prudent landlord would certainly be prepared to do so provided a substituting tenant would be found. Having heard Mr Ma's evidence and Mr Cheng's evidence I have absolutely no reason to believe that either of them would not act prudently. Indeed, their position is completely consistent with the contemporaneous documents. In July 1990 the debit note for rent for the period up to 14th August 1990 was issued. Again a debit note for rent for the period 15th August to 14th September " 1990 was issued on 28th August 1990. A "reminder for rent payable for 15th July 1990 to 14th September 1990 was issued on 30th August. If indeed there was an agreement to acceptance of a surrender, a debit note should not have been issued for the period beginning 14th August to 14th September. Furthermore, Messrs Kwan & Chow's letter of 11th September and 27th September showed Silver Source's position very clearly. Even on Time Century's own documents, I cannot infer an unconditional agreement Mr Poynton, in evidence before this Court, candidly a admitted that the agreement was conditional upon a tenant being found to take up the remainder of the lease term.

32. I now then turn to the issue relating to the leaving of the keys at the management office and whether such conduct, together consenting to JLW looking for tenants and allowing potential tenants to view the suit premises, and causing and instructing Lee On to do the same, would amount to conduct which was unequivocally inconsistent with the continuation of the tenancy agreement.

33. I accept that the law is accurately stated by the learned editors of Woodfall on Landlord and Tenant, at paragraph 1-1849 of the current loose-leaf edition as follows:-

"...Where the owner of a particular estate has been party to some act having some object other than that of a surrender, but which object cannot be effected whilst the particular estate continues, and the validity of which act he is by law estopped from disputing. Such surrender is the act of the law, and takes place independently of, and even inspite of, the intention of the parties."

34. If Silver Source had in fact, upon accepting the keys, and subsequently relet the premises, I would completely accept that upon the reletting, a surrender would have been completed because the reletting by itself would be completely inconsistent with treating the lease as being in existence. Here, there was no reletting, the parties have left the keys at the management office to enable a new tenant to be found. As I have earlier found, the agreement between the parties for termination was a conditional one and the leaving of the keys at the management office was merely a necessary step to allow one or other of the conditions to be fulfilled, but in the event, neither of the alternative conditions were fulfilled.

35. As I have found neither an agreement nor a promise to allow Time Century to move out of the premises unconditionally, nor do I find that the mere leaving of the keys in the management office constitute an act which is unequivocally inconsistent with the continuation of the tenancy, I therefore, regrettably, cannot find in favour of Time Century. I could only add that a contractual commitment under a tenancy agreement could only be released upon agreement unequivocally and unconditionally entered into or if conditionally entered into, fulfillment of those conditions. Time Century, in moving out, took the risk of the premises being not let. Indeed, if the premises had been let earlier, the case would not have come before this court. However, as the premises could not be let, the burden of the risk must fall upon Time Century.

36. The story does not end here. On 26th November 1990, Silver Source, by its new legal advisers, Messrs Ho & Wong, wrote to Messrs Johnny K.K. Leung & Co., (Time Century had by then instructed solicitors to act for it) informing them that Silver Source had decided to accept Time Century's repudiation of the tenancy agreement and thereby would relinquish its claim for specific performance in the present High Court Action and claim for damages instead. The writ was subsequently amended to reflect this election. It is accepted by both parties that the law relating to leases has now developed to a stage where contractual principles would apply. In particular, counsel for both parties accepted that the relevant principles are correctly stated in Hop Woo Cheung Enterprises Ltd. v. Intergroup Industries Ltd. (unreported, High Court Action No. 4760 of 1981, Barnes, J., 12th August 1982) and James S. Lee .& Co. (Kowloon) Ltd. v. Kapok Garments Ltd. (unreported, High Court Action No. 8696 of 1982, Mantell, J., 20th June 1984), and Annie Chan v. Lau Wai Kwong and others (unreported, High Court Action No. 5062 of 1982, Mantell, J. 11th May 1984). There it was held that where a tenant has failed to abide by its obligations under a tenancy agreement and those obligations were fundamental to the agreement, then the landlord may treat such conduct as being in fundamental breach of the contract and elect to treat the contract as being at an end and sue for damages for breach.

37. Time Century's vacation of the premises had evinced an intention on its part not to be bound by the tenancy agreement and would therefore, in this Court's view, amount to fundamental breach of the tenancy agreement. It was open to Silver Source to accept such repudiation, which it did on 26th November 1990. From that day onwards, Silver Source was entitled to claim damages for breach of contract, subject of course to a duty to mitigate.

38. Prior to 26th November 1990, Silver Source would be entitled to claim for rent and such outgoings under the tenancy agreement as it had paid on behalf of Time Century. In paragraph 4 of the re-re-amended statment of claim, the sum (calculated up to 30th November 1990) was quantified as HK$122,625.72.

39. From 26th November 1990 until 14th June 1991 (the date when the tenancy agreement should have terminated according to its terms), the claim was quantified at $184,059.43 being rent which would have been payable under the tenancy agreement and management fees and rates payable under the tenancy agreement but for which Silver Source had had to pay on behalf of Time Century. This sum is subject to a duty of mitigation on the part of Silver Source. Such mitigation should lie in making reasonable efforts to let out the premises. The position, however, was that the premises could not in fact be let out and was finally sold on 10th October 1991 at the price of HK$3,350,000. The question then is whether Silver Source did enough to mitigate its loss.

40. I now turn to what was done by Silver Source to let out the premises. In early December 1990, Silver Source caused advertisements to be published in a Chinese newspaper in relation to the suit premises. But it was not until 21st March 1991 that the Silver Source instructed Messrs Jones Lang Wootton to sell or otherwise let the premises. In the interim, Silver Source had relied upon Jones Lang Wootton (who had previously been informed as to the availability of the premises by both Mr Poynton and Mr Eric Cheng) to let them know if there were interested tenants. At the same time, a signboard was put up at the suit premises within Las Pinadas. Mr Ma explained in his evidence that the reason why no further advertisements were issued after December 1990 was because of the advent of Chinese New Year. And soon after Chinese New Year in 1991 when he found no prospective tenants, he instructed Messrs Jones Lang Wootton as well as another firm of Property Consultants, Town and Country Properties, on 9th April 1991, either to sell or let the premises at HK$32,000.00 per month.

41. In final submissions, counsel for Time Century suggested that Silver Source had not taken reasonable steps to mitigate its loss. He suggested that it should have continued to advertise the premises after 4th December 1991 when the advertisements first appeared. Although, Silver Source might have done so, the standard of mitigation is that only reasonable steps should be taken. Silver Source had already caused paid advertisements to be published in early December. It is entirely reasonable that because of the Christmas, New Year and Chinese New Year holidays, no further advertisements were published. Furthermore, Jones Lang Wootton were already aware that the premises were available and could have been expected to recommend clients, if they were available, to view the premises. Subsequent efforts made after 21st March 1991 showed that the premises were difficult to let and indeed they were not sold until October 1991. It is as much in the interest of Silver Source to let the premises at the higher rent of $32,000.00 in order to mitigate its loss as it is in the interest of Jones Lang Wootton to recommend a client as it would have then be able to obtain agency fees. I therefore find that Silver Source had done what was reasonable in the circumstances, to mitigate its damages.

42. Accordingly, subject to the security deposit of HK$50,000 being brought into account, I give judgment for Silver Source in the amounts claimed, namely HK$122,625.72 for the period up to 30th November 1990, being rent and outgoings payable under the tenancy agreement, and HK$184,059.43, being damages suffered by Silver Source from 1st December 1990 to 14th June 1991. The security deposit should be brought into account on 26th November 1992, when the tenancy agreement was terminated.

43. I now turn to interest. Under paragraph 4 (1) of the tenancy agreement, Time Century contracted to pay to Silver Source on demand interest on the amount in arrears at the rate of 1.2% per month calculated from the date on which the same became due for payment, until the date of payment as liquidated damages and not as penalty. As there is no evidence nor argument before me that this rate of interest is not a genuine pre-estimate of loss, I am bound by the terms of the contract to award damages on the amount payable until 30th November 1990 at such rate of interest. However, as a security deposit of $50,000.00 had been paid, Silver Source should bring the $50,000.00 security deposit into account as soon as the lease was terminated. Therefore, insofar as interest is applicable to the period before 30th November 1990, I award interest at the rate of 1.2% per month from the time each sum fell due and payable to the time of payment.

44. In respect of the damages claimed after 30th November 1990, I shall award interest at the rate of the Hongkong & Shanghai Banking Corporation best lending rate plus one per cent annum from the time each sum fell due until judgment, and thereafter, interest shall be calculated at the judgment rate.

45. As the calculations as to interest may be complicated, I shall give liberty to the parties to apply for further directions, if necessary, as to the working out and interpretation of my order.

46. Now turning to costs, I shall make the usual order nisi that the plaintiff shall have the costs of the action, such order to become absolute after 14 days from the delivery of judgment if neither party applies for a hearing.

47. Finally, it remains for me to thank counsel for their able assistance. It was a pleasure to see Mr Thong and Mr Yuen.