WINLEAD LTD v. MANWELL MANAGEMENT LTD

HCA 3534/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3534 OF 2002

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J U D G M E N T

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1. This is the Plaintiff's application for summary judgment against the Defendant in respect of the Plaintiff's claim for possession, arrears of rent and rates, mesne profits and damages arising out of the Defendant's non-payment of rent in respect of Shops A-E, Ground Floor, Kwai Chung Car Park and Shopping Centre, Nos. 26-30 Wo Yi Hop Road, Kwai Chung, New Territories ("the Premises") of which the Plaintiff is the landlord and the Defendant the tenant, under a Tenancy Agreement dated 1 June 2001 ("the Tenancy Agreement").

2. Prior to the hearing, two affirmations were filed by each party. The Plaintiff's affirmations were made by Mr Cheung Yiu Shing ("Mr Cheung"), the credit officer of the Plaintiff who was responsible for this particular tenancy. The Defendant's affirmations were made by Mr Leung Wai Man ("Mr Leung"), who described himself as the manager of the Defendant. Leave was sought at the hearing by the Plaintiff to file a third affirmation from Mr Cheung, which exhibited certified translations of certain documents, and made some minor corrections to the order of exhibits in his second affirmation. This was not opposed by the Defendant, and accordingly I gave leave for Mr Cheung's third affirmation to be filed.

3. By the Tenancy Agreement, the Plaintiff let the Premises to the Defendant for a term of 3 years, at a monthly rental of HK$300,000 per month exclusive of rates and other outgoings, but inclusive of management fee and Government rent. Pursuant to Clause 3(1) of the Tenancy Agreement, rent was payable in advance on the first day of each calendar month. Also pursuant to the Tenancy Agreement, the Defendant paid to the Plaintiff a deposit of HK$600,000 as security for its performance of its obligations under the Tenancy Agreement, and paid the first month's rental in advance. A rent-free period of one month was also agreed. The monthly rental was, it seems, subsequently reduced by agreement, in the circumstances mentioned below.

4. The Premises were used by the Defendant for the purpose of operating a billiards hall and video game arcade. It appears that the Defendant company had operated such a business at the Premises for some 10 years, although initially under a lease from a different landlord, the Plaintiff having acquired the Premises from the previous owner on about 25 August 1999, subject to an existing tenancy in favour of the Defendant. Control of the Defendant company also changed hands, its present shareholders and management having acquired control of the Defendant on about 1 June 2001, which the Plaintiff says resulted in the Tenancy Agreement being entered into.

5. It is common ground that from the outset, the Defendant has been slow in paying the rent due under the Tenancy Agreement. Having regard to the rent-free period and the payment of one month's rental in advance, the first payment of rent due from the Defendant under the Tenancy Agreement was for the month of August 2001, which should have been paid on 1 August 2001. In the event, this was not paid until 20 August 2001. Thereafter, every month's rental from September 2001 until April 2002 was paid upwards of one month, and as much as three months, late. No payments have been made by the Defendant in respect of rent for the periods from May 2002 onwards. No payments have been made in respect of rates for the first three quarters of 2002. This is not disputed by the Defendant.

6. In November 2001, at a time when the rental for October and November 2001 had already become due but had not been paid, the Plaintiff applied for and obtained from the District Court a warrant of distress in respect of the Premises. In the event, this warrant was never executed, and the Defendant says that it was unaware that this warrant had been issued. According to Mr Cheung, this warrant was not executed because the rental for these two months was eventually paid (albeit late), and the Plaintiff was by that time minded to afford the Defendant a reduction in rental.

7. As mentioned above, the rental in respect of the Premises was subsequently reduced. The precise circumstances in which this came about do not seem to be agreed upon by the parties.

8. The Plaintiff says that there were two separate reductions, first to HK$270,000 and then later to HK$250,000 following a further request by the Defendant. Mr Cheung exhibited to his first affirmation a document dated 7 February 2002, signed by both parties recording an agreement which involved two reductions.

9. The Defendant, however, seems to say (in paragraph 5 of Mr Leung's first affirmation) that there was only one reduction, from HK$300,000 to HK$250,000 per month, in January 2002, and that there was no written agreement in relation to this reduction.

10. It was not suggested by counsel for either party that anything in relation to the present application turns on these differences, and I do not therefore propose to deal further with this point.

11. As I have noted, notwithstanding the agreement to reduce the rent, the Defendant continued to be late in its payment of rent to the Plaintiff, with the reduced rent for December 2001 and January 2002 not being paid until 11 February 2002, and the further reduced rent for February 2002 not being paid until 28 March 2002. Rent for March and April 2002 was not paid until 3 June 2002 and 29 June 2002 respectively.

12. Thereafter, the Plaintiff obtained a second warrant of distress on about 30 June 2002, which it did not execute until 30 July 2002, when the bailiff seized goods and chattels belonging to the Defendant. These were eventually sold at auction, realising only some HK$81,795. The Defendant claims that such execution was wrongful, although it did not apply to the District Court either to discharge or suspend the warrant pursuant to section 93 of the Landlord and Tenant (Consolidation) Ordinance ("the Ordinance), or for relief or compensation pursuant to sections 95 to 97 of the Ordinance. I was, however, shown at the hearing copies of correspondence from solicitors formerly instructed by the Defendant in which it does appear that a complaint was made to the Plaintiff as to the distraint levied on 30 July 2002. Although this correspondence was not exhibited to any affirmation on behalf of the Defendant, counsel for the Plaintiff indicated that he was content for me to look at such materials de bene esse, as the Plaintiff did not wish the hearing of its application for summary judgment to be further delayed.

13. The Plaintiff then commenced these proceedings by writ dated 14 September 2002, and brought an application for summary judgment pursuant to RHC Order 14 rule 1 by summons dated 3 October 2002, supported by Mr Cheung's first affirmation of the same date. Mr Leung's first affirmation in response was dated 17 October 2002. On 21 October 2002, the matter came on for hearing before Registrar C Chan, who gave directions for the filing and service of further evidence, and adjourned the matter for argument before a Judge in Chambers.

14. The Defendant does not dispute that it has not paid any rent to the Plaintiff for the months from May 2002 onwards. Its defence, put forward in Mr Leung's affirmations and in a draft Defence and Counterclaim exhibited to his first affirmation is based on an alleged oral agreement with the Plaintiff made in about mid-May 2002, by which the Plaintiff is said to have agreed to withhold demanding rent from the Defendant for a period of two months, to enable the Defendant to free up funds to spend on renovating the Premises, and adding new features such as a cafeteria and a foot massage centre to it, in the hope that this would improve the Defendant's takings sufficiently to enable it to pay rent to the Plaintiff on time in future. The Defendant's case as to the terms of this agreement is set out in paragraphs 6 and 7 of Mr Leung's first affirmation, which are in identical terms to paragraphs 6 and 7 of its proposed defence. As this is the crux of the Defendant's defence, I set these paragraphs out in full:-

"6. Despite the reduction of rental, business prospects were not promising. The Defendant considered that adding another service to customers might improve the overall attractiveness of the Defendant's business at the subject premises. The Defendant proposed to use part of the subject premises for foot massage and renovate the restaurant which could stimulate business. But in order to do so, extensive renovation and fitting out would be needed. Given the tight cash flow of the Defendant, and the reduced volume of business due to the extensive renovation at the said premises, the Defendant wanted to have an agreement with Plaintiff first in respect of a moratorium on rental payment.

7. For this purpose, the Defendant's representative Mr Raymond Leung spoke to Mr Joe Cheung of the Plaintiff who was responsible for the Plaintiff's tenancy matters of the Defendant's proposal at about the end of April 2002. The Defendant explained to the Plaintiff that without adding new features to the Defendant's business, it could not sustain its business. The end result would be that the Defendant's business would be closed down and wound-up causing damages to both the Defendant and the Plaintiff. Based on commercial considerations that would benefit both the Plaintiff and the Defendant, the Plaintiff at about the middle of May 2002 agreed to withhold and/or defer its demand for rent for the coming 2 months (for rental arrears and the rental for the coming 2 months) so that the Defendant would use the cash flow from its business to refurbish the subject premises ("the Supplemental Agreement")."

15. The Supplemental Agreement is alleged to have been made orally. The Defendant goes on, in Mr Leung's first affirmation, to say that in reliance on the Supplemental Agreement, the Defendant entered into two contracts for certain renovation and refitting works to be carried out at a total cost of some HK$776,000, exhibiting copies of such contracts. Mr Leung goes on to say that despite the Supplemental Agreement, the Plaintiff demanded payment of rent at the beginning of June 2002, and again in mid-June 2002, which the Defendant (notwithstanding that it was of the view that this was contrary to the Supplemental Agreement) complied with, by paying the arrears of rent for March and April 2002. Mr Leung goes on to complain (in paragraphs 19 and 20 of his first affirmation) that the Plaintiff's execution of the second warrant of distress, on 30 July 2002 was a breach of the Supplemental Agreement, which seriously affected the Defendant's business. It is said that as a result of the allegedly wrongful distraint, the Defendant has suffered substantial losses, arising from the loss of its equipment and fittings said to be worth about HK$2 million on their seizure and subsequent sale, disruption to business causing a drop in turnover of some one-third, or HK$300,000 in August 2002, having to lease back the equipment seized and sold from the buyer thereof at a rental of HK$3,000 per day, and having to lease other equipment from new suppliers on less favourable terms, causing a further loss of profit of HK$1,500 per day. This final complaint is said to have involved an interference by the Plaintiff with the Defendant's contracts with its original equipment suppliers, apparently by the Plaintiff requiring the original suppliers to withdraw their equipment from the Premises. All of these matters are pleaded in the Defendant's draft defence, and the losses form the basis of its intended counterclaim, and are said to be matters which should be set off against any liability of the Defendant to the Plaintiff for rent (paragraph 26 of the draft Defence and Counterclaim).

16. Mr Leung goes on to suggest that this was all part of a plot by the Plaintiff to lure the Defendant into spending money on renovations, and then to force the Defendant out of the Premises, with a view to leasing the Premises to new tenants, with the benefit of the renovations done by the Defendant, possibly for a higher rental.

17. In his second affirmation made on 28 October 2002, Mr Leung provides some details of the amount spent by the Defendant on its equipment and on improving the Premises, both before and after the entry into of the Tenancy Agreement, and even after the warrant of distress was executed on 30 July 2002. He exhibited to his second affirmation a computer print out which was said to show the details of the amounts spent by the Defendant in relation to the Premises between June 2001 and September 2002.

18. Mr Leung also suggests that the Plaintiff has overstated the amount of its claim, since it has not taken account of the security deposit of HK$600,000 which it holds.

19. Unsurprisingly, the Plaintiff denies the existence of the Supplemental Agreement. In his second affirmation dated 2 November 2002, Mr Cheung denies having had any discussion with Mr Leung resulting (or which could have resulted in) the Supplemental Agreement. In his second affirmation, Mr Cheung also ventures a number of observations on some of the losses claimed to have been suffered by the Defendant.

20. There was little dispute as to the legal principles to be applied, it being well established that in an application for summary judgment, unconditional leave to defend should be granted where the defence asserted discloses a triable issue of fact or law. So far as issues of fact are concerned, both counsel were content to accept that the test is as established by the decision of the Court of Appeal in Civil Appeal No. 182 of 1993, Ng Shou Chun v Hung Chun San (unreported) 26 January 1994, where Godfrey JA said (at p.4):-

"It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?' If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

21. I was also referred to the later decision of the Court of Appeal in Civil Appeal No. 81 of 1994 Re Safe Rich Industries Ltd (unreported) 3 November 1994 (involving an appeal from a refusal to strike out a winding-up petition on the grounds that the debt relied upon was genuinely disputed) where Bokhary JA (as he then was) said this (at p.4):-

"The test at the summary stage is indeed as simple as whether the Defendant's assertions are believable. But it must be recognised because failure to recognise it would create a debt-dodgers' charter - that whether or not the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute."

22. Counsel for the Plaintiff, in the course of his submissions, made a number of points as to the unlikelihood of the Supplemental Agreement having in fact been made, with a view to persuading me that the Defendant's case on the making of the Supplemental Agreement was unbelievable.

23. Emphasis was placed on the fact that the previous agreements were recorded by the Plaintiff in a document which was signed by both parties. Reliance was also placed on the failure of the Defendant to avail itself of the procedures available under the Ordinance in relation to the allegedly wrongful distraint.

24. It was also said that there was a lack of evidence showing that the funds which the Defendant said it was going to spend on renovations were in fact so spent it being pointed out that the records produced by Mr Leung only contained a small number of entries which might be referable to the renovation contracts said to have been entered into in reliance on the Supplemental Agreement, which did not appear to show expenditure of the full amount which was to have been spent (only some HK$58,000 in relation to one contract, and HK$100,000 in relation to the other), and which did not correlate well with the timing of the alleged expenditure pursuant to the renovation contracts put forward (the $100,000 in relation to the second contract not being paid until August 2002, after the distraint, notwithstanding that on the terms of that contract it should have been paid on signing the contract, which was dated in mid-May 2002). These figures were also analysed with a view to demonstrating that there had been little change in the level of expenditure on such works over the whole period of the Tenancy Agreement to date.

25. Criticism was also made of the Defendant's failure to exhibit primary evidence of the expenditure which it had claimed to have incurred, such as invoices and cheques that were clearly referable to the renovation contracts relied upon. Counsel for the Defendant suggested that these were matters that could be explored at trial however, in my view the burden of establishing the existence of a triable defence clearly rests with the Defendant, and it is for it to put forward sufficient evidence to enable the court to be satisfied that a triable issue has been raised. If insufficient evidence is put forward by the time of the hearing of the application for summary judgment, the Defendant clearly takes the risk that judgment will be entered against it.

26. Although on the basis of the material which the Defendant has chosen to put forward, I would be inclined to regard its defence as lacking in substance, having regard to the fact that the alleged agreement is said to have been oral, and that there appears also to have been a complaint about the distraint in the form of the Defendant's former solicitors' letter to the Plaintiff, I would have had some hesitation in shutting out the Defendant from attempting to establish the existence of the Supplemental Agreement, if it would provide a factual basis for a triable defence to the Plaintiff's claim.

27. However, in my judgment, even if it is assumed in the Defendant's favour that it will be able to establish the existence of a Supplemental Agreement in the terms set out in paragraph 7 of Mr Leung's first affirmation, this does not go far enough.

28. Counsel for the Plaintiff submitted that even if the existence of an oral agreement were accepted as being a triable issue, the Supplemental Agreement was unsupported by consideration. Counsel for the Defendant did not seek to suggest that there was any consideration for the Supplemental Agreement, contending that it gave rise to a promissory estoppel, which required no consideration, but only a showing of detriment in reliance on the promise. As to this, the Plaintiff's response (which appeared to be borne out by the material relied upon by the Defendant) was that as the level of expenditure before and after the alleged promise was virtually unchanged, it was difficult to see that there had been any change of position in reliance on it.

29. Having regard to these points, I would, had I thought it appropriate to grant leave to the Defendant to defend, have only been prepared to give conditional leave to defend.

30. But quite apart from any difficulties that the Defendant might face in establishing an enforceable agreement or estoppel, and the problems that the Defendant might have in seeking to use a promissory estoppel as the basis of its counterclaim for damages, it seems to me that the terms of the Supplemental Agreement alleged by the Defendant are such that there is no scope for complaint in relation to the Plaintiff's actions after mid-July 2002. As described by the Defendant, the Supplemental Agreement was that the Plaintiff would not make any demand for rental (whether rental already in arrears or to fall due) for the period of two months from the date of its making. Given that the Supplemental Agreement is said to have been made in mid-May 2002, it follows that at most the Defendant was excused from paying rent until mid-July 2002. After this date, the obligation to pay rent would revive, and it seems to me that the Plaintiff would be entitled from that point onwards to demand payment of rent, or to take such steps as were open to it to recover the outstanding rental.

31. Even if the Plaintiff's demands for rental in June 2002 were unjustified, it seems that the Defendant decided for its own reasons, not to press the matter and paid two months' rental nonetheless. It does not seem to be suggested that any loss or damage or further detriment flowed from this.

32. It is not the Defendant's case that the rent which was said to be the subject matter of the Supplemental Agreement was permanently waived. This was confirmed by counsel for the Defendant at the hearing before me, when he accepted that the rent in question was owed to the Plaintiff. He sought to suggest, however, that the Plaintiff should, have given reasonable notice to the Defendant before executing the warrant of distress. However, I am unable to find room for such a course in the terms of the Supplemental Agreement as described in paragraph 7 of Mr Leung's affirmation and pleaded in paragraph 7 of the draft Defence and Counterclaim. In any event, it must have been clear to the Defendant well before the issue of the writ in these proceedings in September this year that the Plaintiff was no longer willing to allow it to continue to defer payment of rent (not least because of the execution by the Plaintiff, rightly or wrongly, of the warrant of distress).

33. Moreover, it is clear that notwithstanding the execution of the warrant of distress on 30 July, or the subsequent alleged interference by the Plaintiff with the Defendant's relations with its equipment suppliers, the Defendant has remained in occupation of the Premises, and carried on its business from the Premises at all material times thereafter. This appears from Mr Leung's affirmation (although he complains that the Defendant has been inconvenienced and put to greater expense by the distraint and subsequent actions of the Plaintiff). This being so, the Defendant remains under an obligation to pay rent under clause 3(1) of the Tenancy Agreement.

34. Even if the execution of the warrant of distress gave rise to a claim for damages on the part of the Defendant against the Plaintiff, as any such claim would be for unliquidated damages, there can be no right to a legal set off.

35. As far as an equitable set off is concerned, the general principle (described at para 14/4/4 of Hong Kong Civil Procedure 2002) is that where claim and counterclaim are so closely connected that it would be clearly unjust to enforce one without regard to the other, a right to an equitable set off may arise. In this case, having regard to the fact that the Defendant has remained in occupation and has had the use of the Premises to carry on its business, and has not been prevented from doing so by the allegedly wrongful acts of the Plaintiff, I do not consider that it would be unjust to enforce the Plaintiff's claim to rent and to possession of the Premises, while leaving the Defendant to pursue its claims against the Plaintiff in separate proceedings should it wish to do so.

36. I therefore conclude that the Plaintiff is entitled to summary judgment on its claims. As to the amount of such claims, I do not consider that it would be appropriate to reduce the amount for which judgment is given by the HK$600,000 security deposit held by the Plaintiff, particularly as the Defendant at present remains in occupation of the Premises, and may continue to do so in the event that it exercises its right to relief from forfeiture. In that event, the Plaintiff should have the benefit of the deposit as a continuing security for the Defendant's performance of its obligations under the Tenancy Agreement. In the event that the Defendant does not avail itself of relief from forfeiture, the Plaintiff will have to return any surplus that may remain in relation to this deposit after making such deductions as it may be entitled to in relation to breaches by the Defendant of its obligations under the Tenancy Agreement.

37. At the conclusion of the hearing, Counsel for the Plaintiff provided me with a draft of the order which he invited me to make in the event that I found in the Plaintiff's favour.

38. The first order sought is for delivery up of vacant possession of the Premises. I shall make this order, subject to the statutory relief from forfeiture which I am required to grant pursuant to section 21F of the High Court Ordinance. In this case, having regard to the fact that the Defendant has failed to pay rent for some five months now, I shall grant relief from forfeiture if the Defendant pays, within four weeks of today, firstly all arrears of rent and government rates in respect of the Premises (as at today, the amount of rent and rates in arrears is HK$1,836,005, representing rent from May to November 2002, and four quarters of rates, less the proceeds of the distraint in July 2002), and secondly $280,000 on account of the costs of this action. This latter figure is based on the information with which I have been supplied by the Plaintiff as to its costs, and takes into account that under clause 8(ii) of the Tenancy Agreement, reasonable costs and expenses, including legal costs on a solicitor and own client basis) are recoverable by the Plaintiff from the Defendant. I note also that this sum is, under section 21F of the High Court Ordinance, to be paid "on account of" costs, and would not therefore appear to preclude the possibility of either party seeking to have the costs taxed on the appropriate basis with a view to recovering any shortfall or overpayment.

39. The second order sought is for payment of the sum of HK$1,292,805 in respect of arrears of rent and rates as at the date of the writ (after deduction of the proceeds of the distress levied on 30 July 2002). I make an order for payment of this sum, on the footing that the Defendant does not exercise its right to relief from forfeiture.

40. The third order sought is for interest on the sum of HK$1,292,805 at judgment rate from the date of writ until payment. In my view, the Plaintiff is entitled to an award of interest. However, I consider that interest should be awarded at a commercial rate from the date on which the sums claimed fell due. For present purposes, I think that an appropriate rate of interest would be 1% over the Hong Kong and Shanghai Banking Corporation Ltd's prime lending rate.

41. The fourth and fifth orders sought are for the payment of mesne profits from 1 October 2002 at the rate of HK$250,000 per month and payment of rates at $43,200 per quarter (or such other sum as may be imposed by the HKSAR Government) until delivery up of vacant possession of the Premises. I make such an order, again on the footing that the Defendant does not avail itself of its right to relief from forfeiture.

42. The sixth order sought is for damages to be assessed, in respect of the costs (on a solicitor and own client basis) of the two distraint proceedings in November 2001 and July 2002 respectively. It seems to me that such costs are recoverable pursuant to Clause 8(ii) of the Tenancy Agreement (although that Clause makes such costs recoverable as a debt, counsel for the Plaintiff indicated that in the light of the fact that the writ claimed them as damages, the Plaintiff would be content to have an order for damages to be assessed). I therefore make an order in those terms.

43. Finally, the costs of these proceedings are sought on a solicitor and own client basis, in reliance on Clause 8(ii) of the Tenancy Agreement. Given that this basis of recovery was expressly agreed by the parties, I shall make an order nisi that the Defendant should pay to the Plaintiff the costs of this action, including the costs of and incidental to this application, to be taxed, if not agreed, on a solicitor and own client basis.