CHEN MING JAMES v. CHEUNG HOI YIN

DCCJ 2708/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2708 OF 2005

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JUDGMENT

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1. This is an application for summary judgment by the plaintiff against the defendant under Order 14 rule 3 of the Rules of District Court.

The claim

2. The plaintiff is the owner of a commercial property known as Shop No. 1 Ground Floor, Race Course Mansion, 1A Broadwood Road and 93, 93A, 93B, 95, 95A, 95B, and 95C Wong Nai Chung Road, Hong Kong (the “Premises”). By a tenancy agreement dated 12/2/2004 (the “Lease”), the plaintiff leased the property to the defendant to operate a hair saloon business for a term of three years commencing from 12/3/2004, at the monthly rent of $6,800 plus rates and management fees in the sum of $480.

3. In breach of the Lease, the defendant has failed to pay rents, rates and management fees since March 2005. As of November 2005, the date of filing of this claim, the defendant owed the plaintiff $20,400 in outstanding rents and $1,440 in arrears of rates and management fees.

The defence and counterclaim

4. The defendant admitted she did not pay rent, rates and management fees as claimed; however, she alleged the plaintiff was in breach of the implied covenants of not to derogate from grant and quite enjoyment and counterclaimed for damages.

5. There is no dispute that rents, rates and management fees have not been paid. The defence is that the plaintiff is not entitled to the claimed sum because of breaches of the Lease and the defendant has suffered damages due to the plaintiff’s breaches of implied covenants not to derogate from grant and quite enjoyment and is entitled to set-off against the outstanding rents.

The issue

6. The issue of whether the plaintiff was in breach of the Lease will be tried on the defendant’s counterclaim, irrespective of the outcome of this application. The defendant’s sole argument in opposition to this application is: The defendant is entitled to set–off her counterclaims against the outstanding rent, rates and management fees.

Legal set-off

7. Although solicitor for the defendant did not distinguish between legal and equitable set off, for completeness, I will deal with them separately. 

8. As to legal set-offs, the defendant’s obligation to pay rent as stipulated in paragraph 3 of the Lease states: “該楼之租金必須在每月租期之首日以上期形式支付, 不得籍词拖欠”. Clearly, the Lease contemplated the obligation to pay rent is independent of all other covenant. Although the defendant in her third affirmation attempted to estimate her damages, the counterclaim is unliquidated and therefore there is no legal set-off.

Equitable set-off

9. As to equitable set-off, Chu J. in Charmway Development Ltd. v Long China Engineering [2001] 3 HKC 515 held: “Generally speaking, where the claim and counterclaim are sufficiently closely connected so that it would be manifestly unjust to enforce one without regard to the other, a right to equitable set-off may arise.”

10. In Charmway, a case where the tenant withheld rent payment due to the landlord’s failure to designate part of the external wall of the building for the tenant to put up advertising signs, in breach of a provision of the tenancy agreement. On the landlord’s application for summary judgment, the Master gave the tenant conditional leave to defend, upon payment into court all arrears of rents and periodical payment of future rents. The tenant appealed and in dismissing the appeal, Chu J. held “(t)he alleged breaches have no bearing on the state and condition of the premises. The alleged breaches also in no way compromise or deny the plaintiff’s right to the use and occupation of the premises, for which the rent is paid.”

11. In Ridge Limited v Golden Castle Limited HCA122/2005, a case where a tenant claimed a right to set-off outstanding rents due to the landlord’s blocking off the internal stairs or escalators going from the landlord’s department store to the leased premises, on the landlord’s application for summary judgment, the Master gave order for vacant possession, payment of the outstanding sum, mesne profits until vacant possession be delivered up. On appeal, Deputy High Court Judge Muttrie followed Charmway, dismissing the appeal and stated before the defendant could set off a claim for unliquidated damages, “(t)here had to be a close connection so that it was only fair and just that the equity should be treated as going to the very foundation of the plaintiff’s claim.”

12. QuotingOwen v. Gadd [1956] 2 QB 99, Deputy High Court Judge Muttrie in Ridge Limited further stated: “ In general, interference with quiet enjoyment requires some substantial physical interference with the enjoyment of the premises.”

13. In British Anzani (Felixstowe) Ltd v International Marine Management (U,K,) Ltd. [1980] 1 QB 137, an English case submitted by the defendant’s solicitor, a landlord agreed to construct a warehouse on part of it’s land and grant a lease to the tenant. The landlord brought an action against the tenant for unpaid rents, mesne profits and interest. The tenant counterclaimed against the landlord for damages due to defective floor in the warehouse. On the question of whether the tenant was entitled to set-off against the admitted liability for rent, it was held that although the tenant’s claim for damages arose under a separate agreement to build and not the lease, there was such a close connection between them that it was only fair and just that the tenant’s equity should be treated as going to the very foundation of the landlord’s claim for rent.

14. Accordingly, before there is a right to equitable set-off, a landlord’s alleged breach must be: (a) compromise or deny the tenant’s right to the use and occupation of the premises, for which the rent is paid; or (b) some substantial physical interference with the enjoyment of the premises; or (c) such a close connection so that it was only fair and just that the equity should be treated as going to the very foundation of the plaintiff’s claim.”

Application to the facts

15. Here, the alleged acts of breach by the plaintiff were:                        

(1)  A substantial portion of the Premises, being 213.02 square feet of the total leased area of 540 square feet, encroached on common area of the building containing the Premises. The defendant has received constant demands from the Incorporated Owners of the building requesting the defendant to surrender the 213.02 square feet (the “Encroached Portion”). The defendant alleged she had refrained from using the Encroached Portion since July 2004.

(2)  Repair works conducted on the external wall of the building by the Incorporated Owners of the building caused noise, dust, pollution and water seepage through the walls of the Premises.

(3)  Scaffolding work had been erected outside the entrance of the Premises, obscuring the entrance and signboard and deterring patrons from entering the defendant’s shop.

16. The repair and the scaffolding work are acts by the Incorporated Owners of the building. If these works caused damages to the defendant, she is entitled to seek compensation from the Incorporated Owners. It is trite that an Incorporate Owner is a legal entity separate from the individual unit owners, capable of suing and being sued (see section 8 (2)(a) of the Building Management Ordinance cap. 344). These were not acts of the plaintiff at all, clearly the plaintiff did not: compromise or deny the defendant’s right to the use and occupation of the Premises; did not constitute any physical interference with the enjoyment of the Premises; and were clearly unconnected with the plaintiff’s claim for rent. There can be no equitable set-off based on these alleged acts.

17. As to the alleged encroachment, although the Incorporated Owners have issued several letters to the plaintiff, demanding the plaintiff to vacate and deliver up possession of the Encroached Portion, no demand letter has been send to the defendant directly. Although the defendant alleged the management office had verbally demanded her to surrender the Encroached Portion, but except the verbal demands the management did nothing further. The defendant did not surrender any part of the Encroached Portion, she only alleged that she had refrained from using the encroached area since July 2004.

18. My review of the photographs of the Premises reveal that the Encroached Portion contained the only washroom facility, the only hair washing basins and the only hot water heater in the Premises. In Hong Kong, a warm water hair wash is part of the basic service every customer expects from a hair saloon. If the defendant could not offer her customers a warm water hair wash, one would expect her business would come to a complete halt. Yet, on page 6 of the defendant’s second affirmation, one can clearly see the defendant’s business had continued, although at a reduced pace. The defendant clearly did not stop using the Encroached Portion.

19. The plaintiff’s breach certainly did not compromise or deny the tenant’s right to the use and occupation of the premises, for which the rent is paid; there was no substantial physical interference with the enjoyment of the premises; nor was there any close connection so that it was only fair and just that the equity should be treated as going to the very foundation of the plaintiff’s claim.

The Orders

20. Now that I have found the claim and counterclaim insufficiently connected and there is no right to legal or equitable set-off, there should be final judgment for the plaintiff as follows:

(1) Order for possession of the Premises;

(2) Arrears of rents and/mesne profits at the rate of $6,800 per month from 12/3/2005 until possession is delivered up;

(3) Rates and management fees at the rate of $480 per month from 12/3/2005 until possession is delivered up;

(4) Interest on (2) and (3) above pursuant to section 49 and 50 of the District Court Ordinance cap. 336; and

(5) Costs of this action and application to be taxed if not agreed.