CHEONG NIN INVESTMENT CO LTD AND ANOTHER v. TOKYO SHOP LTD

 HCA309/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.309 OF 2004

-----------------------

--------------------

------------------------------------------------------

REASONS  FOR  JUDGMENT

------------------------------------------------------

1. At the conclusion of the hearing I dismissed the Order 14 appeal of the defendant with costs, and I said that I would give the Reasons later.  I now hand down my Reasons.

2. Upon the Order 14 application of the landlord plaintiffs (“Landlord”), the Master entered summary judgment against the tenant defendant (“Tenant”) for possession of the leased premises and for judgment sums in respect of arrears of rent and mesne profits.

3. The claim of the Landlord is simple, namely, repeated failures by the Tenant to pay rent thereby causing the Lease to be forfeited and entitling the Landlord to vacant possession of the premises and to arrears of rent as well as mesne profits.  The Tenant admitted the non-payment of rent.  The defence of the Tenant is that there was water leakage of the premises, which was unrepaired by the Landlord, causing expenses to be incurred and damage to the Tenant in the form of alleged loss of business.  The Tenant contended that it was entitled to equitable set-off which contention is disputed by the Landlord.

4. The Lease in question is a six-year lease of commercial premises by the Landlord to the Tenant.  The key provision of the Lease is the obligation to pay rent under clause 1 : “…. the clear calendar monthly rent set out in Part 5 of First Schedule payable in advance in each and every calendar month without any deduction or right to set off (whether legal or equitable) ….” (hereinafter referred to as “the Rent Clause”).

5. Clauses 2.5, 2.6, 2.9 and 2.30 of the Lease are various provisions relating to the obligation of the Tenant in respect of repairs.  It is to be noted that there was no provision in the Lease providing for the obligation of the Landlord to effect repairs.  The Landlord’s obligation is confined under Clause 3 to Quiet Enjoyment and to pay the government rent.

6. The case of the Landlord is that :

(a)      the Rent Clause clearly provides that there is no right of set-off (legal or equitable) and that in the absence of any right of set-off, the alleged water-damage provides no defence to the Order 14 claim;

(b)     the alleged water-damage is not the subject matter of Quiet Enjoyment Clause at Clause 3.1 and;

(c)     there was no obligation on the part of the Landlord to effect any repair and that the alleged water-damage (which is denied) is irrelevant. 

7. Parties before me were agreed that the right of set off could be excluded by contractual agreement expressed in clear words.  The main dispute between the parties was whether the Rent Clause was sufficiently clear as to exclude the attempted set-off.

8. Electricity Supply Nominees Ltd v. I.A.F. Group Ltd [1993] 1 WLR 1059 is a good illustration of the application of the exclusion of set-off by a similar contractual provision also in the context of landlord’s claim for rent.  There, the words used were “to pay the rent and all other sums payable under this lease …. without any deduction or set-off whatsoever ....”.  The point argued there was of course somewhat different, but there was no argument that such provision was not a sufficiently clear anti set-off provision.  The court there accepted that the provision in question was a set-off exclusion and that there was no defence to the claim for rent notwithstanding the counterclaim of the tenant for damages for breach of the landlord’s covenant to repair.

9. In Coca-Cola Financial Corporation v. Finsat International Ltd [1996] 3 WLR 849, the contractual provision in the relevant loan agreement is also in similar terms : “All payments … shall be made … in immediately available funds, free and clear of any right of set-off or counterclaim …”.  The English Court of Appeal rejected the argument of the defendant that its counterclaim could give rise to a set-off entitling the defendant to defend the action.  The Court of Appeal held that the contractual anti set-off provision prevented any alleged set-off and granted summary judgment to the plaintiff.

10. The above cases are to be contrasted with Connaught Restaurants Ltd v. Indoor Leisure Ltd [1994] 1 WLR 501 which was heavily relied on by Mr Cheng for the defendant.  In the Connaught case, the words of the contractual provision were : “… such rent to be paid without any deduction …”.  There was no reference in the contractual clause to set-off.  The English Court of Appeal held that the expression “without any deduction” was insufficient to exclude the tenant’s equitable right of set-off.  In our case the Rent Clause went beyond the mere words of without deduction and provided expressly for the exclusion of the right to set-off (whether legal or equitable).  The case of Connaught provides no support to the defendant.

11. The unreported judgment of Hart J in Anselm v. Anselm dated 29 June 1999, which Mr Cheng referred to during argument, in fact made it even more clear why the Connaught case could not assist him.  At pages 10 and 11 of the Lexis Search Judgment, the Judge drew the distinction between independent set-off and transaction set-off.  But there is before me no dispute that both types of set-off are capable of the subject of contractual anti set-off contractual agreement.  The Rent Clause in our case is sufficiently wide and clear as to cover both types of set--offs and therefore I have no doubt that the Rent Clause prevents the Tenant from resisting the summary judgment.

12. Mr Cheng relies as an alternative, on the alleged breach of the Quiet Enjoyment Clause 3.1.  I do not see how it is permissible to convert the Quiet Enjoyment Clause into a Landlord’s Covenant to Repair which was of course not in our Lease.  The two contractual concepts are very different.  A contractual covenant by the Landlord to repair premises casts a positive duty on the Landlord, for breach of which the Tenant has a contractual remedy.  The Quiet Enjoyment Clause is of a totally different dimension.  It speaks of “may peaceably hold and enjoy the said premises without any interruption by the Lessor or any person lawfully claiming through or under the Lessor”.

13. There are two obstacles to Mr Cheng’s reliance on that clause.  Firstly, it addresses interruption by the Landlord or those claiming under the title of Landlord and this is more in the area of adverse claims for possession not inconvenience due to water leakage.  No one can possibly suggest that there was interruption of the Tenant’s holding of the premises by the Landlord because of the water leakage.  Secondly, a condition for the quiet enjoyment of the premises by the Tenant is the continued payment of rent and performance of the Tenant’s obligations.  In our case, the Tenant had not paid the rent, and now has the audacity to suggest that there was a breach of Quiet Enjoyment Clause.

14. In my judgment, there is simply no basis whatsoever for the Court to refrain from ordering summary judgment against the non-paying Tenant.  The appeal of the Tenant has no merit and must be dismissed with costs.