HARVEST TOP DEVELOPMENT LTD v. HKS PARKING LTD

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.20165 OF 1998

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JUDGMENT

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Introduction

1. This is the Plaintiff's appeal against the order of Master Lung dated 8^th September 1999 dismissing the Plaintiff's Order 14 application for summary judgment taken out after a Defence and Counterclaim was filed and served by the Defendant.

2. The following facts are undisputed :-

3. The following provisions can be found in the Lease dated 9^th September 1993 :-

"If the rent or any part thereof shall be in arrear [sic] for five (5) days after the same shall become due ... then ... it shall be lawful for the Lessor [the Plaintiff] at any time thereafter to re-enter on the premises ... whereupon this Lease shall absolutely cease and determine ..."

"... but without prejudice to any right of action by the Lessor in respect of any outstanding breach of non-observance or non-performance of any of the covenants stipulations and conditions herein contained ... and to the Lessor's right to deduct all reasonable loss and damages thereby incurred from the deposit paid by the Lessee [the Defendant] ..." (underline supplied)

"A written notice served by the Lessor on the Lessee ... to the effect that the Lessor thereby exercise the power of re-entry herein contained shall be a full and sufficient exercise of such power without physical entry on the part of the Lessor."

"The Lessee shall on the execution hereof deposit with the Lessor the [deposit] ... to secure the due observance and performance by the Lessee of the covenants ... the said deposit shall be retained by the Lessor throughout the said term ... and in the event of any breach or non-observance ... the Lessor shall be entitled to deduct from the deposit the overdue amount of any rent ..." (underline supplied)

4. Counsel for the Plaintiff has criticised the reasons given by the Master for dismissing the Plaintiff's Order 14 application. This appeal is by way of an actual rehearing. I do not see any useful purpose in repeating the Master's reasons or Counsel's criticisms (unless I agree with the Master's reasons). Since I do not agree with his reasons, there is no need to do so.

5. The Court of Appeal had said on a number of occasions that it is both undesirable and unnecessary for the Courts in deciding Order 14 applications to set out in detail their reasons for doing so. In the present case, however, quite a number of points were raised by the parties, and I feel it would not be just or fair to them if I were to decide this appeal without indicating my reasons for doing so. I shall therefore set them out briefly.

The Defence relating to the Oral Settlement Agreement

6. The Plaintiff's claim in the pleadings (and in the Order 14 application) can be summarised as follows :-

7. The Defence set out in the Defence and Counterclaim is in effect that an oral agreement was reached between the Plaintiff and the Defendant on 27^th October 1998 whereby in consideration of the Defendant waiving all its claim to the deposit, the Plaintiff would allow the Defendant to stay until the end of October 1998 and waive any claim arising out of the Lease against the Defendant. This alleged oral agreement was denied by the Plaintiff, both in the pleading and in the affirmations filed in support of the Order 14 application. The Plaintiff, however, agrees that there was a meeting between the Plaintiff's representatives and the Defendant's representative on 27^th October 1998 where the Defendant raised a settlement proposal (in similar terms as alleged by the Defendant in the Defence and Counterclaim) but the Plaintiff said no agreement was reached.

8. The factual dispute between the parties is therefore a very narrow one. Mr Li for the Plaintiff submitted that the Defendant's allegation is unbelievable. He argued that since the Plaintiff would have been entitled to payment of $661,250.00, the retention of the deposit and possession of the suit premises any way, there was no reason why the Plaintiff should agree to the Defendant's settlement proposal. I do not agree. For example, although tenants in Hong Kong are generally not entitled to compensation for repossession of rented premises for the landlord's own use under the statute, it is not uncommon that landlords would be willing to settle cases with their tenants by paying "compensation" in exchange for an amicable delivery up of vacant possession of the premises. I find that there is nothing inherently implausible about the Defendant's allegation of an oral settlement agreement to make it unbelievable.

9. Mr Li then argued that even if this allegation is believable, it is unenforceable as a matter of law by virtue of section 3 of the Conveyancing and Property Ordinance, Cap.219. He argued in this connection it does not matter whether the Defendant is relying on the alleged oral agreement to find a cause of action, or merely doing so by way of defence : see Take Harvest Ltd. v George H. Liu [1994] 1 HKLR 32, at 46, lines 36-43.

10. In the Take Harvest case, the Privy Council also stated that although the tenant can be barred by section 3 of Cap. 219 from relying on such an oral agreement, this is subject to the doctrines of part performance and/or estoppel : see Take Harvest, at page 48, lines 33-44 and page 48, line 45 to page 49 line 8. Mr Liu for the Defendant indicated that he will rely on this observation in the Take Harvest case.

11. Since I find that the factual defence is not unbelievable, it is necessary to consider whether the Defendant is able to raise a triable case based on the doctrines of part performance and/or estoppel.

The Defence relating to setting-off the deposit against the Plaintiff's claim

12. The Plaintiff has kept the deposit of some $1.32 million when it commenced this action. As stated above, the Plaintiff pleaded in its Statement of Claim that it served a written notice dated 27^th October 1998 on the Defendant in exercise of its right of re-entry pursuant to Clause 6(2)(a) (and presumably also on Clause 6(2)(b)) and later in fact re-entered (see paragraphs 9 and 10 of the Statement of Claim). Indeed, when one looks at the Plaintiff's affirmations, letters respectively dated 26^th October 1998 and 27^th October 1998 stating that the Plaintiff would exercise its right of re-entry pursuant to Clause 6(2)(a) of the Lease can be found.

13. There are authorities which support the Defendant regarding :-

These authorities include :-

14. On the other hand, there are authorities which support the Plaintiff's case to the effect that there is no valid reason in principle on authority or on policy why the landlord should be so barred. These authorities include :-

15. Despite the above, Mr Liu for the Defendant indicated that he will not argue that :-

It is therefore unnecessary in the present appeal to go into the details of this aspect of the case or to examine further the 2 lines of authorities.

16. I have stated that the Plaintiff has been and is still keeping the deposit of about $1.32 million. There is no valid reason for the Plaintiff to do so under the Lease save to rely on its right (if any) to forfeit the deposit. This is because, according to Clause 7(1) of the Lease, the Plaintiff can retain the deposit "throughout the said term" only.

17. In the Plaintiff's list of authorities, there is the case of Wong Kam-kong v Intercontinent Mercantile [1986] HKLR 331 which stated inter alia that a deposit forfeited cannot be used to set-off against rent in arrears. However in the case of Profitex Development Ltd., the Court observed that since the tenancy agreement in that case only entitled the landlord to appropriate the deposit towards the payment of arrears of rent, it did not entitle him to forfeit it and thus the tenant could still set off the sums due against the deposit paid. I consider it quite arguable that the provisions in the present Lease may fall within the same category as those in the Profitex Development Ltd. case.

18. At the hearing, Mr Li for the Plaintiff fairly accepted that he will not dispute that the Plaintiff is liable to set off the deposit against the Plaintiff's claim for $661,250.00. Such being the case, the Defendant must have an arguable case regarding this part of the Plaintiff's claim.

The Plaintiff's claim for damages

19. The Plaintiff claims that it suffers damages by reason of the Defendant's wrongful pre-mature termination of the Lease. There is evidence that the suit premises were let to another person for the period from 1^st December 1998 to 30^th May 1999 at $450,000.00 per month and from 1^st June 1999 to 30^th November 1999 at $480,000.00 per month. The total rental receivable from the new tenant or licensee is therefore $5,580,000.00.

20. During the period from 1^st October 1998 to 30^th September 2000 (a period of 24 months), the Defendant would have been liable to pay monthly rent of $661,250.00. The total rental receivable under the Lease for the same 12-month period as that for the new tenant/licensee would have been $7,935,000.00. It is unknown how much rent (if any) the Plaintiff would be able to obtain from 1^st December 1998 to 30^th September 2000.

21. The first problem with this part of the Plaintiff's case is evidential in nature. As Mr Liu for the Defendant pointed out, there is no evidence that :-

Further to the above, Mr Liu for the Defendant raised 3 more points.

22. His first point is that the Defendant is entitled to rely on the doctrines of part performance and estoppel : see the Take Harvest case, at pages 48-49. The two acts of part performance relied on by Mr Liu are : (1) delivery up of vacant possession of the suit premises, and (2) not claiming for the return of the deposit. In answer to these points, Mr Li for the Plaintiff argued that the alleged first act of part performance is not supported by the Defendant's pleading or its evidence. Mr Li said that the Defendant alleged, in both the Defence and Counterclaim and the opposing affirmation, that the possession of the suit premises was taken over by the Plaintiff by reason of the Plaintiff's wrongful act. This is inconsistent with the Defendant's case on part performance. I agree with Mr Li and find that the Defendant has failed to establish any case on this point. As regards the question of not claiming for the return of the deposit, I also agree with Mr Li the fact that in the Defence and Counterclaim, the Defendant claims for its return negatives the alleged second act of part performance.

23. Mr Liu's second point is based on estoppel. He relied for this point on the observation of the Court in Pacific South v Million Unity International [1971] 1 HKLRD 1238 at 1244-45. This point will have to be premised on the Plaintiff's knowledge of the Defendant's mistaken belief (if any) namely, the Plaintiff knew that the Defendant had been misled into believing that an oral agreement had been reached. There is, however, no evidential basis for doing so because the Defendant did not state that the Plaintiff knew it was in any way misled.

24. Mr Liu's third point is based on the observation of the Court in :-

25. In short, Mr Liu argued that the Plaintiff's breach may not be repudiatory in nature. This is because the Defendant has been paying rent punctually for a good part of a seven-year lease and has only failed to pay one month's rent. In answer, Mr Li argued that the failure to pay rent must be looked at together with :-

26. In relation to Mr Li's point (a), I do not think that Mr Li can argue that it was the Defendant who had intended to give up possession of the suit premises. This is because in relation to the part performance argument, Mr Li had argued earlier that the Defendant's case was that it was the Plaintiff who wrongfully repossessed the suit premises. Mr Li cannot now turn round and argue that it was the Defendant who handed over the suit premises. The Plaintiff cannot (at least in this appeal) shift its position back and forth over the same factual matter. As regards Mr Li's point (b), I do not consider that because the Defendant has given up other rented properties, it must have intended to give up the suit premises as well. This is a factual question and needs to be investigated into further.

27. If it is found that the Defendant was not in repudiatory breach of the Lease, the Plaintiff's purported re-entry was wrongful, and thus the Plaintiff would not be entitled to sue for any consequential loss : see the Hop Woo Cheung case at pages 441E-2B.

Conclusion

28. For the above reasons, I find that this is not a case fit for an Order 14 application. Since the Defendant has already filed and served a Defence and Counterclaim prior to the Plaintiff's Order 14 application, this case falls within Order 14, r.7 because the Plaintiff's belief in support of the application must be that the Defendant has no defence and not that it has no arguable defence to the Plaintiff's claim. The Master was correct in dismissing the Plaintiff's claim and ordering costs against the Plaintiff. The appeal is therefore dismissed.