WALY DECORATIVE PRODUCTS LTD. v. LAM PUI WING t/a LAP SHING COMPRESSING PACKING FTY.

1992, No. A8445

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The Plaintiffs in this action were the tenants of a head lease granted by Yip Siu Wah, for a fixed term of three years expiring on the 31st May 1992 with a monthly rental of $150,000 and covenants making the Plaintiffs liable for other periodic payments in respect essentially, of rates and utilities used in the course of the tenancy.

2. By an agreement dated the 11th March 1991 the Plaintiffs granted an under lease to the Defendants for a term of 15 months expiring on the 31st May 1992 at a monthly rental of $85,000 - a surprisingly low sum of money considering that the under lease let the same premises as the Plaintiffs had been let but that does not concern me - with the same liability, under covenants, for the payments of rates and utilities.

3. The Head Lease, as I shall refer to the initial agreement whereby the Plaintiff became tenant of the premises, was not subject to Parts II, IV and V of the Landlord and Tenant (Consolidation) Ordinance (Cap. 7). Only the provisions of Part V are relevant to this matter. Section 121(2)(a) is the section which makes it clear why that is so :

"This Part (V) shall not apply to ... a tenancy for a fixed term of 3 years or more the agreement for which contains no provision for earlier determination ... other than for breach of any of the provisions of the agreement ....."

It is common ground that the tenancy under this head lease expires by effluxion of time and no notice of termination is required. The Plaintiff was required therefore to give up vacant possession to the landlord on the 31st May 1992. In the event he was unable to do so because the Defendant, his subtenant, remained in occupation, holding over until possession was finally given on the 31st October 1992, five months exactly after the tenancy and sub-tenancy expired.

4. The head landlord however commenced proceedings against the Plaintiff in July 1992 for possession, mesne profits and numerous other payments; again essentially these were for rates and utilities, provided for under the lease.

5. The essential issue is whether the sub-tenancy was a protected one in which notice was required, or whether it was unprotected in which case the holding over was a breach entitling the Plaintiff to an indemnity in respect of the sums which it became adjudged to be liable to pay to the head landlord in the proceedings referred to.

6. Paragraph 5 of the Amended Statement of Claim by this Plaintiff against the Defendant asserts that Part V of the Ordinance does apply to the sub-tenancy and in paragraph 6 goes on to assert that the sub-tenancy continued by virtue of Section 122(1) of the Ordinance. This position needs to be examined.

7. Section 121 of the Ordinance applies to "every tenancy .... including sub-tenancies ... whether ... effected orally or in writing ..." and this sub-tenancy is not excluded by any of the exceptions set out in section 121(2). It is against this application section that section 122 operated. The sub-tenancy comes within sub-section (1)(a):

"A tenancy for a fixed term shall not cease at the end of that term unless notice is served by the landlord, not less than 6 months ... before that end."

Such a provision means that for the sub-tenancy to expire on 31st May 1992 to enable the Plaintiff to give vacant possession to the head landlord on that date, notice must be given not later than the 30th November 1991. In fact a notice giving a little over 2 months notice was in the form of a letter from the Plaintiff's former solicitors dated the 26th March 1992.

8. My attention was directed to sub-section (3) but that simply deals with the effect of a notice given by the head landlord in a specific form, but complying with sub-section (1), on any sub-tenancies - i.e. the notice is good against all sub-tenancies created. The head landlord in this case was not required to give any notice, and did not do so, certainly in that form.

9. The next section to be considered is section 127B which provides that "nothing in Part V shall afford to any sub-tenant any security of tenure greater than that enjoyed by his principal tenant". This is a straightforward clause which is uncompromising in its expression. In simple terms it means, in relation to this case that as the principal tenant has no security of tenure, beyond the term provided for in the lease, so the sub-tenant has no security beyond that date.

10. In the course of argument my attention has been directed to the Hong Kong decision in Har Sio Ying v. Chung Yan Cheung decided by Hunter, J. as he then was. (HKLR 1987 p. 411)

11. In the circumstances of that case also Part V did not apply to the head lease it being a tenancy of Crown Land. In breach of a specific covenant not to assign or underlet etc., the tenant created a sub-tenancy. The sub-tenant knew that the sub-tenancy created, however they chose to describe it, was a breach of the tenant's obligations.

12. Having found that the "arrangement" was a sub-tenancy which came within Part V of the Ordinance and therefore subject to Sections 122 and 127B, Hunter J. decided that the amount of notice required to terminate the sub-tenancy was 3 months, the same period of notice which the Crown was required to give to the tenant.

13. The value of this decision is not so much the body of the judgment which was concerned with a number of factual and legal issues with which I am not concerned, but the application of section 127B, which as I have indicated is clear and unequivocal in its drafting.

14. In my view the Defendants in this action were bound to give up vacant possession on the 31st May 1992 and in failing to do so, were unlawful occupiers and therefore trespassers in the premises. The notice purportedly given by the letter of the 26th March 1992 was unnecessary, save as a reminder of what the Defendants had to do and certainly created no rights which would enable the Defendant to get around the restriction of section 127B. Since the Plaintiff was not entitled to stay in possession of the premises for a day later than the 31st May 1992, so neither was the Defendant. The Defendant of course knew that the head lease was for a fixed period of 3 years expiring on the 31st May 1992 since this was recited in the preamble to his agreement with the Plaintiffs, so he does not in my view have any argument to advance on the basis of ignorance of the position in any event.

15. So the Defendant is liable to the Plaintiff as a trespasser for mesne profits and any other liabilities as a consequence of his unlawful use of the premises, and that is the basis upon which the Plaintiff advanced his claim against the Defendants by letter of 16th November 1992 and in the subsequent initial Statement of Claim. Pausing at this stage, the Amended Statement of Claim really put the alternative bases of the claim back to front, but Mr. Chan in his argument before me put the claim in the proper order, reversing that pleaded in the Amended Statement of Claim. The actual loss and damage contended for is the financial liability of the Plaintiff to the head landlord. The unlawful occupation of the premises by the Defendant meant that the Plaintiff could not give vacant possession on the 31st May 1992 to his landlord. The landlord therefore had an unanswerable claim for loss of mesne profit, and any other liabilities or payments flowing from the unlawful continued occupation of the premises for the 5 month period. It is not necessary for me to restate the principles, and law governing liability of third parties to indemnify where their unlawful occupation as trespassers has given rise to loss on the part of those to whom they are directly liable by reason for their breach of an agreement.

16. Because, as far as the head landlord is concerned, the tenant held over, the former was entitled to payment for the use of the premises at the rate fixed by the original agreement, namely $150,000 per month, together with reimbursement of the payments made in respect of rates and the use of utilities etc. The mesne profit figure was negotiated downwards to some extent to reflect the state of the market. All payments are reflected in the judgment obtained against the Plaintiff. In fact the landlord also obtained judgment against the Defendant in this case but quite understandably chose to enforce it against the Plaintiff.

17. I am satisfied that the figure for mesne profits is a reasonable one, and in any event, since it was the subject of agreement and incorporated in a judgment, it would be difficult to go behind it as a reasonable one. The only item in respect of which there remains any argument concerns claimed costs of repair. It has been agreed that resolution of that issue can be left over pending my decision on the principal issues.

18. I have borne in mind that initially, that is by letter of 16 November 1992 and the Statement of Claim, the Plaintiffs claimed only the sums due under the sub-tenancy agreement, and not an indemnity. I am satisfied for the reasons set out earlier, that the Plaintiff is entitled to be indemnified in respect of the sums he has been adjudged to pay, and has paid, to the head landlord. It is in my view not open to the Defendants to argue that they have been misled in any way by the extended nature of the claim. In the first instance, by the letter and the Writ and Statement of Claim in its unamended form, they were faced with a claim to which they had no answer save in respect of the claimed cost of repairs. They could have paid this promptly with the probable result that the Plaintiff would have been estopped from putting the claim for a full indemnity as appeared in the amended proceedings.

19. The Plaintiff is entitled to judgment against the Defendant for the sums set out in paragraphs 21 (subject to the one outstanding item) and the costs paid by the Plaintiffs to the landlord in that action, in the sum of $48,800, - totalling $641,374.34 in all after an agreed reduction in respect of interest upon the sum for mesne profits.

20. I will not order reimbursement of the costs incurred by the Plaintiffs themselves in defending that action and, in relation to these proceedings, I will allow the Plaintiffs only 50% of their taxed costs. The reasons are these. The original proceedings should have resolved all these issues with a consequent substantial saving of costs. The Plaintiffs did not put their claim on its proper basis until April 1993 and even then in the wrong order. Furthermore if the claim for indemnity had been intimated to the Defendants from the outset, in unequivocal terms, it may well have concentrated the minds of that party and resulted in earlier settlement. Finally it is clear, as I have said earlier, that the Plaintiff had no answer to the head landlord's claim, its Defence was unmeritorious and costs were wasted in seeking to maintain it at all.

21. As far as interest on the sums to which the Plaintiff is entitled in this judgment, it will be on $425,000 (five months mesne profits at $85,000 per month), plus the rates and utilities charges totalling in all $468,800 - the repair charges excluded for the time being - less the deposit of $170,000 leaving a provisional net figure of $298,802, with interest running from 30th November 1992, the date of issue of the writ. There will be no interest running on the costs paid to the head landlord's solicitors in the original action.

22. Since delivering the above I have heard argument by Mr. Chan in respect of the outstanding item for alleged repair. There is no proper evidence in support of this aspect of the claim and so the figure falls by the wayside.

(Conrad Seagroatt)

Judge of the High Court