XCHR YUENFIELD LIMITED v. CUMING DEVELOPMENT COMPANY LIMITED

1996, No. A13726

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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Tenancy dispute

1. By a lease dated 1^st April 1992 ("the Lease"), the Defendant ("Landlord") leased premises to the Plaintiff ("Tenant") for 55 months from 1^st April 1992. The monthly rent that was payable up to 31^st October 1993 was $500,000 while the monthly rent from 1^st November 1993 to 31^st October 1996 was $580,000.

2. On 29^th July 1996, the parties agreed that the Tenant would surrender part of the premises back to the Landlord. This was done and from 1^st August 1996 the rent was reduced from $580,000 to $500,000. By a written Notice of Termination dated 24^th May 1996 the Landlord terminated the lease on 30^th November 1996.

3. The Tenant said that the parties had entered into an oral agreement in mid October 1996 in which the Landlord agreed to continue to let the premises to the Tenant on a monthly basis at the rent of $250,000 per month. The Tenant paid the rent for November 1996 at $250,000 and seeks a declaration that it is holding the premises on a monthly tenancy at $250,000 per month.

4. The Landlord denies that there was any such oral agreement. It counterclaims for possession of the premises and $1.74 million being arrears of rent.

Four applications

5. There are four applications before me :

(1) an appeal by the Landlord against the decision of Master To on an O.14A Summons issued by the Landlord;

(2) an appeal by the Tenant against the order of Master To for interim payment;

(3) an appeal by the Tenant against the order of Master Chu imposing an unless order based on Master To's order; and

(4) an O.14 Summons issued by the Landlord for final judgment for possession of the premises and payment of the rent in arrears.

Order 14

6. I will deal with the O.14 summons first. The parties agreed that the O.14 summons should be determined first.

7. Mr Chain took the point of the delay in bringing the O.14 application. On the authorities of Morrison Sons & Jones (Hong Kong) Ltd. v. Yiu Wing Construction Co. Ltd. [1989] 1 HKLR 432 and Brinks Ltd. v. Abu Saleh [1995) 1 WLR 1478, there really is no time limit imposed in bringing the O.14 application. There is nothing to show that the delay in bringing the O.14 application had affected the parties in such a way that the application should not be dealt with at this stage.

Arrears of rent

8. The Tenant denied that it owed any rent to the Landlord. It said that under the Lease the Landlord held a deposit of $1.74 million from the Tenant; in June 1996, the Tenant suggested that the deposit should be used to set off the rent and this was agreed by the Landlord. The Landlord denied that there was such an agreement.

9. The Tenant relied on a statement dated 20th August 1996 issued by the Landlord in which the words "Transfer from security deposit" were typed against the entries for rent for March, April and July 1996. The Tenant argued that this is the strongest evidence that the Landlord had agreed to the set off.

10. The statement recorded, inter alia, the outstanding rent between March and September 1996. The statement did not simply say "Transfer from security deposit" but rather, it was recorded above these words "Informed by Yuenfield's (i.e. Tenant's) Accounts Department" This statement did not support the Tenant's contention at all. On the contrary, if the rents were indeed set off, one would not expect to find on the statement a column on outstanding rents.

11. The alleged agreement reached in June 1996 was that the deposit would be used to pay rent. By the end of July 1996 the deposit would be exhausted to satisfy all the arrears of rent in the amount of $1.74 million. The next payment of rent would then only be due in August 1996. Yet according to the Tenant's own case (para. 6 of the Reply), three cheques for the payment of rent for August and part of the September rent were already issued in July. This is a tenant who admitted that it had problems with paying rent on time. The payment of these three cheques could not be consistent with the alleged agreement reached in June 1996.

12. The rental deposit was security for ensuring that the terms of the Lease were to be observed. It is not credible that the Landlord would agree to deplete the security and use it to set off the rent which the Tenant was obliged to pay, particularly when the Lease had not yet expired.

13. Furthermore, under the terms of the Lease, the Landlord was already entitled to set off arrears of rent against the deposit, hence there was no consideration even if there was such an oral agreement. The question of practicable advantage does not arise because the deposit was already with the Landlord and under the terms of the Lease, it was entitled to use it to set off the arrears of rent.

14. The defence of set off is not credible and I find that there is no defence to the Landlord's claim for arrears of rent in the sum of $1.74 million.

Possession

15. The defence to the Landlord's claim for possession of the premises is that the parties had reached an agreement in mid October 1996 that the Landlord would continue to let the premises to the Tenant on a monthly basis at a reduced rent of $250,000.

16. The pleading of the oral agreement was in its barest form. It appeared that the monthly tenancy would only commence from the expiration of the term of the Lease. The defence is simply not credible. In June 1996 the parties were already in negotiation for a new lease. Draft tenancy agreement sent by the Landlord's solicitors to the Tenant's solicitors showed that the new tenancy would be for six years. The proposed terms were from 1^st December 1996 to 30^th November 1999 and from 1^st December 1999 to 30^th November 2002. The rent for each of the three years would be at the rate of $580,000 and $725,000 per month respectively.

17. During the negotiation, the terms required by the Landlord were recorded in a note dated 8^th October 1996 which again showed that the rent required for the first three years was $580,000 per month. The discussion failed because Mr Ho Lit Yen of the Tenant refused to sign a personal guarantee for all arrears of rent due by the Tenant to the Landlord. At that stage, the Tenant must have owed the Landlord substantial rent otherwise the demand for a personal guarantee would not be required. The Landlord's solicitors requested the return of the draft agreement on 11^th October 1996 after the negotiation broke down.

18. With this background, it is just not credible and it does not make any commercial sense for the Landlord to agree within one week after the break down of the negotiation that the Tenant could remain as a monthly tenant at half of the rent that it was required to pay.

Cheque for November rent

19. The Tenant relied on a cheque dated 29^th October 1996 for $250,000 paid to the Landlord. The cheque had the words at the back that "This cheque was for the payment of the November 1996 rent". The Tenant said that by accepting the cheque, the Landlord must have accepted the agreement that rent of $250,000 would be paid from November 1996 onwards.

20. At that stage the Tenant still owed the Landlord substantial amount of rent and as it was in the habit of making partial payment of rent, the Landlord did not verify the purpose for which the cheque was given and it did not pay attention to the indorsement at the back of the cheque before paying in the cheque.

21. In my view the acceptance of the cheque did not assist the Tenant at all. By its own case, there had been a number of partial payment of the rent by cheques of $250,000. Considering the background of the case, and the rent due to the Landlord at that time, the acceptance of the cheque does not constitute a triable issue. Mr Chain did not press with the point.

Benefits to the Landlord

22. I will deal with the alleged benefit to the Landlord that may arise by the new arrangement. It is said that the Landlord intended to sell the property and if the premises were let on a monthly basis it would continue to receive some rental income and it would be a selling point to potential purchaser that the premises were used as a restaurant and agreement could be reached with the purchaser to transfer the restaurant licence.

23. My comments on these benefits are that as at 8^th October 1996, the Landlord's intention was not to sell the property immediately. The break clause, as disclosed in the note, would operate two and a half years after the new tenancy. It was also a known fact that a restaurant had been operated at the premises since 1971. A transfer of a restaurant licence would still require the approval of the appropriate authority. But what is more important is that the idea that the Landlord could at the meantime receive some rent just does not make sense. The rent was only half of what the Landlord was receiving and had intended to get if a new six-year tenancy agreement was granted. These so-called benefits do not make the Tenant's case any less incredible.

24. Mr Chain argued that the Landlord merely denied the existence of the agreements in June and October 1996, but it had not dealt with the nature of the Defence in its affidavits. It is not the function of an affidavit to set out the submissions or arguments of the parties, I just cannot see any reason why counsel cannot make submissions on the incredible nature of the defence.

Arguments on law

25. The parties addressed me on the law relating to the oral agreement. As a matter of law, the oral agreement relied by the Tenant was not enforceable because s.3(1) of the Conveyancing and Property Ordinance provided that no action shall be brought upon an agreement for the disposition of land unless it was in writing.

26. Mr Chain agreed that the oral agreement was not enforceable since it was not in writing as required by s.3(1). He further agreed that the exception in s.6(1) and (2) did not apply. He relied on s.121(1) in Part V of the Landlord & Tenant Ordinance and argued that the Landlord could only recover the premises by serving a six-month Notice of Termination afresh. Section 121(1) applied to "every tenancy .......... whether the same be effected orally or in writing ......" Mr Chain submitted that even if the oral agreement only constituted an agreement for a lease, the tenant had taken possession of the premises and hence s.121(1) applied.

27. Mr Chan S.C. on the other hand submitted that the tenancy in s.121(1) only applied to an enforceable tenancy. If the oral agreement was not enforceable under s.3(1) of the Conveyancing and Property Ordinance, then s.121(1) was not applicable.

28. It is not necessary for me to decide whether s.121(1) applies or not after 31^st October 1996, because I do not accept the Tenant's case that there was such an oral agreement. As the Defendant had already served a six-month notice of termination, the Defendant is entitled to recover possession of the premises.

Judgment granted

29. I shall accordingly give judgment to the Defendant for possession of the premises and the arrears of rent in the sum of $1.74 million. Mesne profit at a rate to be assessed from 1^st November 1997 to the date of delivery of vacant possession of the premises. Interest at 7% per annum on $1.74 million and the mesne profit from the date of the service of the Defence and Counterclaim to date and thereafter at judgment rate until payment. Costs nisi of the action and the O.14 application is to the Defendant.

Appeal from O.14A

30. The law that the parties now wish to determine is different from the one formulated in the O.14A Summons. The issue now is simply based on s.121(1) of the Landlord & Tenant Ordinance. Although the parties invited me to make a determination, I would decline to do so since the issue is academic and the parties could not agree on the factual basis on which the determination is to be made, namely, whether the Tenant entered into possession of the premises pursuant to the oral agreement or was merely holding over at the expiration of the Lease.

31. Accordingly, I shall not make any order on the appeal against the O.14A decision of the Master.

Interim Payment

32. Master To ordered interim payment of $255,000 per month together with management fees and rates per month from 1^st December 1996 until judgment. The interim payment for 1^st December 1996 to 31^st July 1997 totalling $2,040,000 and fees were required to be paid into Court within twenty-one days from 7^th July 1997.

33. Earlier on a Consent Order was reached whereby the Tenant agreed to pay interim payment of $250,000 per month and management fees and rates from 1^st December 1996 until judgment. Thus the effect of the Order of Master To was to require the Tenant to make interim payment of $505,000 per month.

34. Interim payment is payable on account of the use and accommodation of the premises by the Tenant. The rent payable by the Tenant up to the expiry of the Lease was $500,000 per month. A surveyor instructed by the Landlord said that the monthly rental was $505,000. Although it was said by the Tenant that the surveyor had failed to consider that the tenancy was a monthly tenancy, no evidence was adduced by the Tenant on the valuation of the rent.

35. Mr Chain argued that it was unjust for the Master to impose an order requiring the Tenant to pay $505,000 per month. He submitted that the discretion on the amount to be ordered was restricted by the words of the rule, namely "even if a final judgment or order were given or made in favour of the defendant". He argued that the Tenant was at most required to pay $250,000 per month.

36. In my view, the Master was not restricted to making an order which the Defendant said was the amount that it was required to pay. Considering the nature of the Defence, the valuation of $505,000 and the previous agreement between the parties that the Tenant was to pay $500,000 monthly rent, I find that Master To was correct to impose the amount of the interim order and required the money to be paid into Court. The appeal is dismissed with costs nisi to the Defendant.

Unless Order

37. Master Chu ordered that unless the Tenant paid $2,040,000 and $255,000 into Court before 29^th September 1997, its claim was to be struck out and judgment was to be entered for the Defendant on its Counterclaim.

38. An appeal against Master To's order does not operate as a stay of his order. Hence Master Chu was right to impose the Unless Order. On 15^th September 1997 when she made the order, the Tenant still had not complied with the Order of Master To.

39. Mr Chain argued that the Master should not make the Unless Order because interim payment order was usually enforced by way of execution. It has to be pointed out that the interim payment order was for the money to be paid into Court and I see no objection that instead of proceeding by way of execution, a further opportunity was given to the Tenant to comply with the order.

40. It was then argued that the summons for the Unless Order merely asked for the striking out of the Tenant's claim whereas the actual Order would give judgment to the Landlord on its Counterclaim as well. It was argued that if the Landlord had indicated that it would make such an application, affidavits would be filed by the Tenant to deal with the question of its ability to pay.

41. The fact remains that no affidavit was ever filed by the Tenant. This effectively removes the argument of Mr Chain. The oral agreement of October 1996 was relied upon by the Tenant both in its own claim and in its defence to the Landlord's Counterclaim. It is artificial to merely order the striking out of the Tenant's claim without giving judgment on the Landlord's Counterclaim as well.

42. The history of litigation reveals that even after the Consent Order for interim payment was made in March 1997, the Tenant had defaulted in making the payment resulting in a number of further applications by the Landlord for further interim payment. Cheques presented by the Tenant for interim payment were also dishonoured. In my view, Master Chu was correct to impose the Unless Order and the appeal is accordingly dismissed with cost nisi to the Defendant.