PONENTE CO LTD v. MANSTER LTD AND OTHERS

HCA 2840/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2840 OF 2003

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J U D G M E N T

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1. There are two appeals before me. The first one is an appeal against the decision of the Registrar made on 20 October 2003 on interim payment. That appeal was part heard on 8 December 2003 and the hearing resumed on 26 February 2004. The second is an appeal against the decision of Master So made on 19 December 2003 giving summary judgment for possession and damages to be assessed against the 2nd to 4th Defendants. That appeal was adjourned by Sakhrani J on 19 January 2004 to be heard together with the interim payment appeal. Hence, it also came before me on 26 February 2004.

2. The Plaintiff was the landlord in respect of the First, Second and Third floors of Witty Commercial Building at Nos. 1A to 1L, Tung Choi Street, Kowloon ["the Premises"]. They are shop premises. By a tenancy agreement dated 8 November 2002 ["the Tenancy Agreement"], the Plaintiff let the Premises to the 1st Defendant from 1 July 2002 to 30 June 2005 at $500,000 per month. Under the Tenancy Agreement, the 1st Defendant also had to pay the rates, air-conditioning charges and management fees.

3. Since 1 January 2003, the 1st Defendant defaulted in payment of rent, management fees, air-conditioning charges and rates. The Plaintiff had tried to obtain payment through Distraint Action No. 3454 of 2003 but to no avail. Further, the Premises were actually occupied by the 2nd to 4th Defendants respectively, viz. the 2nd Defendant occupied the 1st Floor, the 3rd Defendant the 2nd Floor and the 4th Defendant the 3rd Floor.

4. The Plaintiff said it had no knowledge of the parting of possession by the 1st Defendant and alleged that the same constituted a breach of Clause 16 of Section V of the Tenancy Agreement. On the other hand, the 2nd to 4th Defendants averred that they were sub-tenants of the 1st Defendant with the acquiescence of the Plaintiff.

5. The 1st Defendant continued to be in default in terms of the payment obligations under the Tenancy Agreement. A letter of demand was written on behalf of the Plaintiff by Messrs Baker & McKenzie on 23 July 2003. It served as a notice under Section 58 of the Conveyancing and Property Ordinance.

6. On 31 July 2003, the Plaintiff issued the Writ in the present action forfeiting tenancy of the 1st Defendant. The Writ was served on the same date. Order 14 summons was issued on 21 August 2003. The summons also contained a prayer for interim payment.

7. On 20 October 2003, the Registrar ordered interim payment against the 1st to 4th Defendants as follows,

(a) a sum of $6,021,810 as payment on account of arrears up to 31 October 2003;

(b) from 1st November 2003, a monthly sum of $580,881.

The Registrar did not distinguish the positions between each Defendant in making the order. Hence, they were liable jointly and severally for all the payments.

8. On 19 December 2003, Master So granted summary judgment in favour of the Plaintiff. Possession was ordered against all the Defendants. As against the 1st Defendant, the judgment was for all the sums in arrears plus mesne profits, management fees, air conditioning charges and rates up to the date of delivery of possession. As against the 2nd to 4th Defendants, the Master granted interlocutory judgment for mesne profits, management fees, air conditioning charges and rates from 1 August 2003 up to the date of delivery of possession. These were to be assessed and the assessment was stayed pending the outcome of the interim payment appeal.

9. There is no appeal against the final judgment by the 1st Defendant. Nor did it appeal against the interim payment order.

10. At this juncture, I should explain why Master So ordered interlocutory judgment against the 2nd to 4th Defendants and stayed the assessment pending the outcome of the interim payment appeal. This stemmed from a point emerged in the interim payment appeal at the hearing on 8 December 2003.

11. As mentioned, the order of the Registrar drew no distinction between the defendants. However, that does not sit easily with the fact that as far as the 2nd to 4th Defendants are concerned, each of them only occupies one floor of the Premises. Further, it fails to take into account of the fact that up to the forfeiture of the tenancy of the 1st Defendant, the Plaintiff has no cause of action against the 2nd to 4th Defendants regarding their occupation of the Premises, see Zenuna Ltd v Jingdou Trading Co. [2002] 1 HKC 63 and Winsworld Properties Ltd v Chance Full International Development Ltd HCA 4161 of 2002, 14 February 2003.

12. After an appeal had been launched by the 2nd to 4th Defendants against the interim payment order, the Plaintiff's solicitors wrote to the solicitors for the 2nd to 4th Defendants indicating that the Plaintiff would concede the second aspect mentioned above in the light of the authorities. They were agreeable to replace the order of the Registrar with an order that, as far as 2nd to 4th Defendants were concerned, liabilities for interim payment shall start from 1 August 2003. However, the letter did not address the first aspect, which I shall call the issue of apportionment.

13. The issue of apportionment was actually brought up by this court at the hearing on 8 December 2003. Mr Fung, counsel for the Plaintiff, anticipated the same and cited the case of Viscount Chelsea v Hutchison [1995] 2 EGLR 61 as supporting liability on each of the 2nd to 4th Defendants regarding whole premises instead of the respective floor each of them were occupying. Mr Allen, counsel for the 2nd to 4th Defendants, was not in a position to deal with the case and the appeal was therefore adjourned.

14. Hence, when the matter came before Master So, the parties were conscious about the dispute regarding the extent of liabilities of each of the 2nd to 4th Defendants owing to the issue of apportionment. As a result, the Master ordered the interlocutory judgment to be entered against them with assessment stayed pending the outcome of the interim payment appeal.

15. Whilst the issue of apportionment has to be resolved in any event, I am of the view that I should start with the appeal against the summary judgment. As there is no appeal by the 1st Defendant, Mr Allen accepted that the tenancy of the 1st Defendant must have been forfeited.

16. Once the principal tenancy has been determined, sub-tenancies created thereunder must also come to an end, see Viscount Chelsea v Hutchison [1995] 2 EGLR 61 at p.62H; Megarry & Wade, The Law of Real Property, 6th Edn., Para.14-142. A sub-tenant can apply for relief in the form of vesting order under Section 58(4) of the Conveyancing and Property Ordinance. He may also apply for relief under Section 58(2), see Escalus Properties Ltd v Robinson [1996] QB 231. However, Mr Allen indicated to this court that at this stage, he has no instructions from his clients to apply for such relief. He told the court that the 2nd to 4th Defendants wanted to wait until the court has decided on the apportionment issue and assessed the respective mesne profit payable by each of them. It is of course a matter for them. I express no view as to whether it would then be too late for relief to be sought since it is not the function of this court to advise the 2nd to 4th Defendants. I shall therefore consider the summary judgment appeal on the basis that there is no application under Section 58 by the 2nd to 4th Defendants.

17. In the light of that, it is difficult to see what defence the 2nd to 4th Defendants could have vis-à-vis the Plaintiff's claim for possession and mesne profit after 1 August 2003. The evidence filed by the parties is pertinent to the question whether the 2nd to 4th Defendants were sub-tenants to the 1st Defendant and whether the Plaintiff had acquiesced in such sub-tenancies. But even if I were to hold that it is arguable that they were sub-tenants with the acquiescence of the Plaintiff, it does not advance their defence to these claims of the Plaintiff. As far as the Plaintiff is concerned, it is entitled to possession upon forfeiture of the principal tenancy. The occupation by the 2nd to 4th Defendants after the forfeiture effected by the service of the Writ on 31 July 2003 constituted trespass for which the Plaintiff is entitled to mesne profit.

18. If the 2nd to 4th Defendants applied for relief under Section 58 of the Conveyancing and Property Ordinance, it might then be necessary for this court to enquire whether they became subtenants with the acquiescence of the Plaintiff (see Creery v Summersell & Flowerdew Co Ltd [1949] 1 Ch 751). However, since the 2nd to 4th Defendants did not make any application for relief, it is not necessary for me to embark on that exercise. Mr Fung invited this court to express some views on the merits of the case of the 2nd to 4th Defendants. That invitation was made to anticipate an application for relief by those defendants. Parties have not addressed me on the correct approach in dealing with an application for relief. It seems to me that the acquiescence of the landlord to the subletting is only one of the factors to be taken into account. As regards the status of these defendants as sub-tenants, Mr Fung brought the attention of this court to the terms of the agreements signed by these defendants with the 1st Defendant (called "authorized management co-operation agreements" by the parties thereto), in particular the last paragraph thereof which expressly stipulated that the agreements do not contain any element of a lease. That is obviously a damning piece of evidence against the 2nd to 4th Defendants as to their assertion of sub-tenancies. However, I do not think I should express any final conclusion on the point. That would be usurping the function of the court that hear the application for relief, if any.

19. When this court pointed out this difficulty to Mr Allen as regards his appeal against the summary judgment, he tried to argue that there was some kind of oral agreement between the Plaintiff and the 2nd to 4th Defendants. He was however unable to pinpoint any evidence in the affirmations filed on behalf of these defendants to support the existence of such an agreement, let alone informing this court what were the terms of the alleged oral agreement and the circumstances under which it was allegedly made. Mr Fung also pointed out that in the Notice of Appeal dated 3 November 2003 filed on behalf of the 2nd to 4th Defendants, it was asserted under Paragraph 2 that there was no privity of contract between the Plaintiff and these Defendants. It is obvious that Mr Allen's contention of oral agreement has no merit. In the absence of any agreement between the Plaintiff and the 2nd to 4th Defendants, it is difficult to see how they could have any valid cross claims against the Plaintiff, not to mention the complete lack of particulars or credible evidence as to alleged losses or damages suffered by the Defendants in their evidence.

20. The only problem with the Order 14 judgment is the terms of the order for possession. I have highlighted the need to observe Section 21F of the High Court Ordinance in an action for forfeiture on account of non-payment of rent in Super Century Investments Ltd v Advance Limited HCA No. 73 of 2002, 24 June 2002. Since then, the Court of Appeal has held in Well Century Holdings v Leung Kam Yu CACV 370 of 2002, 7 March 2003 that Section 21F only applies where the lessee remains in possession and has made payment into court within the periods of time stipulated in the section.

21. "Lessee" in Section 21F includes sub-tenants, see Section 21H(1) and United Dominions Trust Ltd v Shellpoint Trustees Ltd [1993] 4 All ER 310. Hence, if the 2nd to 4th Defendants were sub-tenants, they could make payment of all arrears into court. In the present case, either the 2nd to 4th Defendants occupied the Premises as sub-tenants or they occupied it on behalf of the 1st Defendant. In either case, it is a case where the lessee remains in possession. Section 21F(3) requires at least 7 days be given to the lessee to pay into court all the rent in arrear and costs of the action before an order for possession shall take effect. This has not been provided for in the order of Master So.

22. Accordingly, the order for possession should be varied. For reasons I gave in Super Century Investments Ltd v Advance Limited, the arrears should include all arrears incurred up to the date of payment. In other words, as far as the period between the Writ and date of payment is concerned, for the purpose of Section 21F, the amount due should be treated as rent notwithstanding that technically, it would be regarded as mesne profit if the relief under Section 21F were not utilized by the tenant, see Maryland Estate Ltd v Bar-Joseph [1999] 1 WLR 83. After a very full and detail analysis, Beldam LJ came to the following conclusion at p. 91G,

"In my view it is not straining the interpretation of the language to hold that all rent in arrear means the rent in arrears at the time when the court making its order assumes that payment of that rent will result in the lease continuing for all purposes. Thus if the lease is not forfeit, the rent plus the amount claimed for use and occupation is the amount of "rent in arrear" and on condition that this amount is paid the court declares that the lease is not forfeit. In my view it was not Parliament's intention that the words used in section 138(3) [which is the equivalent of our Section 21F] should be construed to mean that the court could order payment only of the rent in arrear at the date of service of the summons as a condition of granting relief."

23. See also Escalus Properties v Robinson [1996] QB 231 as regards the effect of various statutory relief against forfeiture and Wong Wan Leung v Secretary for Transport [2001] 1 HKLRD 427 as to the doctrine of relation back as regards relief against forfeiture in general.

24. Further, for reasons set out in Super Century, the condition for relief should include payment of arrears in terms of management fees, air-conditioning charges and rates. As regards costs, I have not heard submissions from the parties. I will direct parties to file written submissions on the proper amount as to costs that should be included in the order under Section 21F(3) together with a draft revision of the order for possession within 7 days from the handing down of this Judgment to deal with the same.

25. Subject to the revision of the order for possession as indicated, I would dismiss the appeal against the order of Master So.

26. I now turn to the interim payment appeal. Given my conclusions in the summary judgment appeal, the preconditions in Order 29 Rule 12(b) are satisfied. The outstanding point is the issue of apportionment. As I said, Mr Fung relied on Viscount Chelsea v Hutchison [1995] 2 EGLR 61. He contended that the 1st to 4th Defendants should be jointly and severally liable for the interim payment for the whole premises after 1 August 2003. I do not think that case assists the Plaintiff in its claims against the 2nd to 4th Defendants. The defendant in that case was the principal tenant and she sought to argue that she should not be liable for mesne profit regarding units occupied by sub-tenants. Not surprisingly, that argument was rejected by the court. There is a duty on the part of the principal tenant to deliver up the whole property at the termination of the lease and it is certainly no defence that she herself was not in physical possession (see p. 62M). I have highlighted a similar point from a tortious point of view in Mutual Luck Investment v Yeung Chi Kuen (No. 1) [2003] 1 HKC 47 at p. 88 Para. 137. It does not follow that the same can be said with regard to the sub-tenants.

27. Vis-à-vis the Plaintiff, the 2nd to 4th Defendants had no obligation to deliver vacant possession. Rather, they were trespassers as from 1 August 2003. They should therefore pay mesne profit in respect of their respective occupation and use of part the Premises. The normal measure of damages is the market rental value of the property occupied or used for the period of wrongful occupation or user (McGregor on Damages, 16th Edn., Para. 1503). The evidence before the court does not suggest any joint occupation on the part of these defendants. It was instead an exclusive occupation of each floor by one of these defendants. There is no evidence to justify any claim for consequential losses (see McGregor on Damages, 16th Edn., Para. 1510). I therefore see no reason why each of them should be jointly liable with the others for others' occupation and user.

28. I therefore decide the issue of apportionment in favour of the 2nd to 4th Defendants and the interim payment appeal order would have to be set aside accordingly.

29. As a fall back position, Mr Fung invited this court to order each of the 2nd to 4th Defendants to pay one third of the total amount due to the Plaintiff by way of apportioned interim payment. Mr Allen however contended that the figures due under the Tenancy Agreement could not be relied upon since there could be drop in the market rental value in the meantime. He urged this court to take into account of what I had said in Paragraph 22 of my judgment in Winsworld Properties.

30. Whilst I agree that the fluctuation of market value can be taken into account (see McGregor on Damages, 16th Edn., Para. 1503), it is necessary to have regard to the facts of the case. The Tenancy Agreement was dated 8 November 2002 and we are dealing with mesne profit starting from 1 August 2003. In contrast, the tenancy agreement in Winsworld Properties was made in May 1999 whereas the mesne profit started from November 2002. Notwithstanding that Mr Allen had applied for an adjournment on 8 December 2003 to have time to put in a valuation report (and he indicated to this court at that time one week would be sufficient for that purpose), no valuation report had been adduced by the 2nd to 4th Defendants at the resumed hearing on 26 February 2004. Mr Allen also referred to the effect of the SARS crisis although no specific evidence had been led.

31. Although the burden is on the Plaintiff, one cannot be too precise in dealing with an interim payment application. Bearing in mind the matters set out above, I am satisfied that for the purpose of interim payment, this court could use the amounts payable under the Tenancy Agreement of 8 November 2002 as a reference but adopt a discount of 15% for calculating the interim payment. Under Order 29 Rule 17, if those figures turned out to be excessive or inadequate, there could be adjustments.

32. I will therefore order each of the 2nd to 4th Defendants to pay interim payment for their respective use and occupation of part of the Premises apportioned at $164,582.95 per month (viz. 15% of 1/3 of $580,881) starting from 1 August 2003 to date of delivery of possession to the Plaintiff or final judgment, whichever is earlier. To this limited extent, the interim payment appeal succeeds.

33. As regards costs, I think neither party wholly succeeds in the interim payment appeal. I shall make a costs order nisi that there shall be no order as to costs for that appeal. As regards the summary judgment appeal, I make an order nisi that the 2nd to 4th Defendants shall bear the costs of the Plaintiff, such costs to be taxed if not agreed.

34. As mentioned, I also direct parties to file written submissions on the quantum as to costs to be included in the revised order for possession and draft orders for consideration within 7 days. I propose to circulate this judgment and parties could put in submission regarding such proposal within 7 days.