HOPE BRIGHT LTD v. THE INCORPORATED OWNERS OF KA WING BUILDING

HCA 305/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 305 OF 2006

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ASSESSMENT OF DAMAGES

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1.  As of 4 November 2005, the plaintiff became the registered owner of the property known as Shop 1A, Ground Floor, Ka Wing Building, Nos 534-538 Nathan Road, Kowloon, Hong Kong (“Property”).  The said Ka Wing Building is and was at all material times a composite building comprising non-domestic units from the ground floor to the 3^rd floor and domestic units from the 4^th floor to the 21^st floor.  The defendant is and was at all material times the incorporated owners of only the domestic units of the said Ka Wing Building.

2.  The action was brought by the plaintiff against the defendant for trespassing and causing nuisance to the plaintiff over the Property.  On 22 March 2010, judgment was entered in favour of the plaintiff against the defendant upon the joint application of the parties by way of consent summons on terms that, inter alia, the defendant, its servants or agents or otherwise, be restrained from (1) doing any act of nuisance to hinder or obstruct the plaintiff, its servants or agents from access and egress to the Property and (2) trespassing in to the Property or any part thereof whether in exercise of any alleged right of way; and that the defendant do pay the plaintiff damages and/or mesne profits to be assessed arising from the acts of the defendant, its servants and/or agents or otherwise which denied the plaintiff, its servants or agents from access and egress to the Property and to its use and enjoyment of the Property or any part thereof.

3.  The hearing of the assessment of damages in this action took place before me on 3 December 2013.  Ms Jolie Chao appeared on behalf of the plaintiff.  Being a corporation without legal representation, the defendant was regarded as absent. 

4.  Evidence adduced on behalf of the plaintiff includes witness statements and oral testimony from Madam Wong Fung Ling, the sole director and sole shareholder of the plaintiff, and Mr Pong Tat Keung, husband of Madam Wong.  A witness statement of 周翠翠, the Chairperson of the defendant, dated 12 July 2010 had been filed on behalf of the defendant.  Attached to this witness statement are some photographs showing the Property when it was vacant (“Photos”).  Save for the Photos which were adopted by Madam Wong and Mr Pong at the hearing, the witness statement of 周翠翠 was, upon the application of Ms Chao, expunged.

5.  The parties jointly appointed a single joint expert to adduce evidence as to the prevailing market rent of the Property at the material times.  This resulted in the preparation of a single joint expert report dated 16 November 2012 (“Report”) by Lawson David & Sung Surveyors (“Surveyors”).  The Surveyors were requested to assess the “Market Rent” of the Property as at five specific dates agreed between the parties, namely 1 October 2005, 1 December 2005, 1 November 2006, 1 September 2007 and 1 January 2009, and the evaluations of the monthly Market Rent arrived at by the Surveyors for these five dates are respectively HK$23,000, HK$23,400, HK$23,900, HK$24,900 and HK$24,900.  The valuations were made on the basis of tenancies commencing from the dates of valuation for a term of three years exclusive of government rates and management fees.

6.  Reference is made in the Report to the meaning of the term “Market Rent” as defined by The Hong Kong Institute of Surveyors (“HKIS”).  The definition reads “the estimated amount for which a property, or space within a property, should lease on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s-length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion”.  The Report was adopted by Mr Wong Wai Man of the Surveyors as his evidence at the hearing of the assessment.

7.  As noted in the revised particulars of loss and damages filed by the plaintiff on 10 April 2013 (“Revised Particulars”), the loss claimed by the plaintiff comes under three heads.  They are

(a) damages for loss of rental between 4 November 2005 and 22 March 2010 (“Relevant Period”), totaling HK$900,868.60;[1]

(b) damages for inconvenience and disturbance; and

(c) interest on damages.

8.  The computation of the amount of HK$900,868.60 under paragraph 7(a) is particularized by the plaintiff in a table in the Revised Particulars.  This table, with some modifications made to ease understanding, is reproduced below:

9.  At the hearing, Ms Chao confirmed that the plaintiff would not pursue the claim for damages under paragraph 7(b).

LOSS OF RENTAL

10.  Except for two particular periods within the Relevant Period, the Property was not let out, but the reasons for it being left vacant were not the same.  I will refer to the period from 4 November 2005 to 14 November 2007 as the “first vacant period” and the period from 15 April 2008 to 18 June 2008 as the “second vacant period”.  As for the two specific periods when the Property was occupied by a tenant, I will refer to the period from 15 November 2007 to 14 April 2008 as the “first occupied period” and the period from 19 June 2008 to 22 March 2010 as the “second occupied period”.

11.  To have a better understanding of how the loss to the plaintiff came about, it should be borne in mind that the Property was owned by the sisters of Mr Pong before their sale of it to the plaintiff, and the interference with the use and enjoyment of the Property by the defendant commenced well before the plaintiff became the owner of the Property.  The Pong sisters as well as the plaintiff had been repeatedly prevented from carrying out installation works for the supply of electricity to the Property.  It was only when the plaintiff commenced litigation and obtained injunctive relief against the defendant that it had become able for the plaintiff to enter into the Property and carry out installation works for electricity connection.  Such works were completed on 5 July 2007.  Evidence from Madam Wong and Mr Pong shows that the plaintiff had made efforts in letting out the Property during the Relevant Period, but the plaintiff had not been entirely successful.

12.  Mr Pong gave evidence on the efforts expended by him, firstly on behalf of his sisters and then on behalf of the plaintiff, to find tenants for the Property, and the fact that prospective tenants were turned away when they learnt that there was no electricity supply to the Property.  It was his evidence that before there was electricity supply to the Property, he received many calls from different estate agents enquiring about letting or selling the Property, but a tenant was not found until 30 October 2007, a few months after electricity supply had been secured.

13.  I shall now turn to the evaluations of the market rent.  At page 7 of the Report, it is stated that the evaluation had been carried out by the Direct Comparison Method which, in general, means that the Surveyors looked at the rental transactions of comparable properties in the vicinity close to the date of valuation.  At the hearing, Mr Wong explained that, since it is a valuation principle that properties of a smaller size can command a higher unit rental, in selecting the comparables, care had been taken to pick those premises that are of relatively smaller size, like the Property.  Having identified properties that share as many features as the Property as possible, the Surveyors then made adjustments to the rental commanded by the comparables in terms of time, location, frontage, size, headroom, layout etc. to reflect the differences between the comparables and the Property.  In the case of each of the nominated date of evaluation, two comparables were adopted by the Surveyors. I have no qualms about the aforesaid methodology adopted by the Surveyors.

14.  My main concern with the evaluations is the size of the Property adopted. Madam Wong and Mr Pong were both asked at the hearing about the size of the Property and relying on an actual measurement taken by Mr Pong himself of the Property, they both testified to it being 20 sq ft in size.  However, on page 5 of the Report, the saleable area of the Property is taken as approximately 5.06 m² (this, according to Mr Wong, translates to 54 sq ft) with explanation that the figure was arrived at by scaling off the registered floor plan and the Approved Building Plans.  Enclosures VI to X of the Report are lists of the comparables as well as the analyses carried out for each of the five dates picked by the parties, and in each of them, the lettable area of the Property is also stipulated as 5.06 m².  There is no explanation in the Report as to why two different terms were used.  Mr Wong also did not explain whether there are any differences between the two terms, and if so, what they are.

15.  The question as to how the saleable area of the Property was arrived at was put to Mr Wong at the hearing and he confirmed that it was their practice to include the partition walls in such measurement.  He elaborated that where the partition wall is between the subject property and a common part, then the whole area of the wall would be included in the measurement of the size of the subject property, whereas if the partition wall is between two shops, then they would only include half of such wall.  This method of measurement was adopted by the Surveyors in coming up with the size of the Property as well as the comparables selected. 

16.  The Photos were shown to Mr Wong for consideration.  His opinion on whether the presence of the hose reels inside the Property[2] would affect the use that the Property can be put to was sought.  Mr Wong took the view that some adjustments in regard to the layout might be warranted, and a tenant of the Property should only be able to remove the hose reels if the advice of a fire consultant or engineer had been obtained.  As to the effect of the presence of the hose reels on the rental, Mr Wong agreed that the amount of rental the Property could fetch might be affected but he cautioned that since different tenants have different needs, some tenants may take a different view and not be affected at all.

17.  Since the Property was let out when the Surveyors were retained, Mr Wong confirmed that the only site inspection of the Property carried out by the Surveyors was done externally.  With the Photos of the Property in its vacant state before him, Mr Wong was then informed of the measurement taken by Mr Pong of the size of the Property and his comments about the discrepancy with the saleable area stipulated in the Report invited.  His remarks were, having seen the pictures of the internal area of the Property for the first time, he himself was confused as to why the actual size of the shop was quite different from the plans.  He also agreed that a willing tenant might not have offered as much rental for the Property as he would have for a property with 5.06 m², seeing that the Property was so small.

18.  In respect of the valuation principle mentioned by Mr Wong that properties of a smaller size can command a higher unit rental, Mr Wong was specifically asked whether there is a threshold for the application of this principle, so that where the size of a shop is so small that the range of tenants that it can attract will be so limited that the principle should not apply.  To this, Mr Wong said that where the shop was smaller than 10 sq ft, then it would be difficult for the user to carry out any trade.  He added though that he had seen cases where a shop with depth measuring only 1-2 ft could still fetch a tenant because of its having a good frontage.  Thus, small-sized shops may still be able to attract tenants of particular trades. Ms Chao specifically asked Mr Wong whether the business of a money changer would find the Property suitable.  Although Mr Wong responded in the affirmative in the general sense, he gave a particular example that a money changer operator might find a shop of 30-60 sq ft to be quite okay.

19.  As mentioned earlier, the Property was let out for two periods during the Relevant Period, after electricity supply to the Property had been secured.  In respect of the first occupied period, the tenancy agreement was signed on 30 October 2007 and the agreed rental was HK$12,000 per month inclusive of rates, management fees and government rent.  As regards the second occupied period, the tenancy agreement was signed on 24 May 2008 and the agreed rental was HK$15,300 per month inclusive of rates, management fees and government rent.  I will refer to the other details of the tenancy agreements later, but I need to point out here that both tenants were introduced to the plaintiff by estate agents.  In the case of the first occupied period, there is no indication that the Plaintiff had more than one offer to rent the Property, whereas in the case of the second occupied period, evidence of the plaintiff shows that there were two offers, both from parties who intended to operate a currency exchange shop, and the plaintiff naturally selected the higher of the two offers.

20.  At the hearing, the testimony of Mr Pong covered all the tenancy agreements entered into by the plaintiff in respect of the Property.  There is therefore information about the monthly rental that the plaintiff has been able to receive through the letting of the Property beyond 22 March 2010, the date on which judgment was entered.  According to Mr Pong, the tenant to whom the Property was let during the second occupied period stayed on after the expiry of the original term of its tenancy at the revised rental of HK$17,000 per month, and about 18 months ago, the Property was let to a new tenant, another currency exchange operator, at HK$28,000 per month.

21.  Although electricity supply to the Property was secured by 5 July 2007, the plaintiff was only able to let out the Property on 30 October 2007.  There is evidence which shows that the plaintiff had been in constant contact with estate agents and there is nothing before me that points to any lack of diligence on the part of the plaintiff in finding suitable tenants for the Property.  To assess the loss of rental recoverable by the plaintiff, I will have to determine the full amount of rental that the Property would have been able to fetch had there been electricity supply to it during the Relevant Period. This leads to the question of how such amount should be determined.

The occupied periods

22.  The Market Rents determined by the Surveyors vary to a substantial degree from the amounts that the plaintiff was able to negotiate for the first occupied period and the second occupied period.  The fact that the Market Rents are all exclusive of rates and management fees further accentuates the discrepancy.  There are a number of factors which suggest that I should not blindly adopt the evaluation done by the Surveyors.  I should go through them in greater detail. 

23.  First of all, there is no explanation on whether there is any difference between the saleable area and the lettable area, and whether the saleable area of the Property should be regarded as its lettable area for the purpose of calculating the Market Rents.  It is notable that, without the benefit of an internal inspection of the Property, the saleable area of the Property arrived at by the Surveyors, albeit computed in a manner that accords with professional practice, is more than double the actual internal size of the Property, as measured by the plaintiff itself.  I am mindful of the fact that the saleable areas of the comparables used by the Surveyors were calculated in a similar manner, but I can tell from the plans attached to the Report that of the three sides of the Property that adjoin other properties, two of them abut common areas of the building.  If the sides of the comparables do not adjoin any common areas or adjoins only a common area on one of its sides, that may partly account for the difference between the rent that the plaintiff had been able to bargain for and the values of the Market Rent that the Surveyors had come up with.

24.  The reaction of Mr Wong when presented with the Photos is telling.  He was taken back and remarked that he was so confused himself as to why the actual size of the shop would be quite different from the plans.  He himself was baffled by the magnitude of the difference between the actual size and the saleable area of the Property.  Even though Mr Wong did opine that despite the small size of the Property, tenants of particular trades might still find it suitable, the particular example he used to illustrate his point was that of a money changer operator who might still be interested in a shop of 30-60 sq ft. The Property is not of the same realm.

25.  I am also mindful of the principle of mitigation, under which the plaintiff cannot recover loss that had been and could be avoided.  The plaintiff is therefore expected to take reasonable steps to let the Property to interested parties on reasonable terms during the Relevant Period.  The fact that the tenants of the Property during the first occupied period and the second occupied period were all introduced by estate agents goes towards suggesting that the plaintiff had been attempting to let the Property out on terms that a willing landlord and a willing tenant would agree to, including the rent payable, albeit not necessarily successful in all of its attempts.

26.  In addition, Mr Pong, in his witness statement, explained why the plaintiff left the Property vacant from 15 April 2008 to 18 June 2008.  It was stated there that the plaintiff wanted to wait until the appeal had been heard (the defendant having appealed against the Order of Justice Yam which granted an interlocutory injunction directing that the defendant be restrained from, inter alia, withholding the plaintiff’s right to connect electricity and telecommunications supply to the Property via a specified route) so as to avoid trouble and also because the plaintiff hoped to be able to bargain for a better rate of rent in case the appeal of the defendant was dismissed.  Hence, when the plaintiff entered into the tenancy agreement covering the second occupied period, it should have taken into consideration whether the proposed rent was a good bargain. 

27.  Furthermore, even upon the expiry of this tenancy, when the renewal came to be negotiated in 2011, the rent that the sitting tenant was prepared to pay was only HK$17,000 per month, still way below the Market Rent for any of the dates determined by the Surveyors.  By the time of such renewal, it would not be reasonable to suggest that the rental the Property was able to command would in any way still be affected by any lingering effect of the dispute between the parties.

28.  Although I have before me the expert opinion of the Surveyors on the Market Rent of the Property, I still have to carefully assess the weight to be attached to such evidence.  Such assessment has to be carried out in light of the totality of the evidence adduced.  Having analysed the evidence available in the manner above, clearly it will not be safe for me to adopt the Market Rent for the computation of loss of rental without any reservations.  However, not being a surveyor myself, it is not for me to decide whether, and if so how, an adjustment can be made to the Direct Comparison Method referred to in paragraph 13 above, to reflect the impact on the Market Rent that the aforesaid matters would have on its determination.

29.  I would therefore approach the matter in another manner.  The plaintiff was no longer under any physical (in terms of the lack of electricity supply) or psychological (in view of the unknown outcome of the appeal) constraints when it let out the Property to the tenant for the second occupied period.  I have also referred to Mr Pong’s role in finding tenants for the Property first on behalf of the Pong sisters and then later on behalf of the plaintiff.  In fact, the holding up of the Property for the period from 15 April 2008 to 18 June 2008 was decided upon with the specific intention of letting it out later on better terms.  The eventual tenant was also introduced by professional estate agents.  In light of all these considerations, I take the view that the rent paid by the tenant during the second occupied period is what a willing landlord and a willing tenant at arm’s length would agree upon.  The plaintiff is therefore not entitled to damages for loss of rental for the period from 19 June 2008 to 22 March 2010.  

30.  The plaintiff received rent during the first occupied period.  However, the uncontroverted evidence of the plaintiff is that it was still apprehensive of trouble with its enjoyment of the Property because of the unknown outcome of the appeal.  Although the tenant was also introduced by an estate agent, it was the first letting of the Property after it had been left fallow for a long while because of the lack of electricity supply.  There is no evidence of there being more than one offer for the plaintiff to choose from.  It is thus not clear whether there had been such “proper marketing” as referred to in the definition of “Market Rent” of HKIS.  I am of the view that the contractual rental for the second occupied period should be adopted as that a willing landlord and a willing tenant at arm’s length would agree upon for the first occupied period had the plaintiff been free from all constraints.  The loss of rental for this period is thus calculated by (HK$15,300 – HK$12,000) x 5 months, ie HK$16,500.

The first vacant period

31.  With HK$15,300 per month taken as the market rent for the first occupied period and the second occupied period, this will work up to about 61.45% of the Market Rent applicable to these periods.  Applying this percentage to the Market Rent as at 1 October 2005, 1 December 2005 and 1 November 2006 would come up with the figures of HK$14,134, HK$14,380 and HK$14,687 per month respectively.  For the period from 4 November 2005 to 30 October 2006, the loss of rental can then be computed by HK465 per day[3] x 27 + HK$14,380.00 per month x 11, ie HK$170,735.00.  For the period from 1 November 2006 to 31 August 2007, the loss of rental is computed by HK$14,687 per month x 10, ie HK$146,870.  For the period from 1 September 2007 to 30 October 2007, the loss of rental is computed by HK$15,300 per month x 2, ie HK$30,600.  The loss of rental for the first vacant period adds up to HK$348, 205.00.

The rent free periods

32.  Both tenancy agreements in respect of the first occupied period and the second occupied period cover a rent free period during which the tenant in question was allowed to take possession without paying rent subject to the discharge of all utility outgoings by the tenant.  Such rent free periods ran from 1 November 2007 to 14 November 2007 (“first rent free period”) in the case of the tenancy agreement in respect of the first occupied period and from 19 May 2008 to 18 June 2008 (“second rent free period”) in the case of the tenancy agreement in respect of the second occupied period, Clause 17 of the tenancy agreement being the relevant provision in each case.

33.  There is no evidence of this being an unusual term in tenancy agreements of this nature.  In actual fact, what appears to be a standard form agreement was used as the tenancy agreements of the Property on both occasions and this suggests that it may well be a common term.  This means that the plaintiff would not have been entitled to receive rent during these rent free periods anyway.  No damages for loss of rental can thus be recovered for these periods.

The second vacant period

34.  The second vacant period runs from 15 April 2008 to 18 June 2008, the latter part of which forms the second rent free period.  The second vacant period came about because the Property was not let out after the early termination of the tenancy agreement in respect of the first occupied period. This tenancy agreement was signed by the plaintiff and a Lam Sze Nam on 30 October 2007 (“Lam Agreement”).  The term of the Lam Agreement was a fixed term of one year commencing from 15 November 2007 with a right of renewal for one further year.  There was early termination of the Lam Agreement in March 2008. Mr Pong was asked specifically about how the Lam Agreement came to be terminated prematurely and he said the tenant just left without paying rent for reasons unknown to him.  The Property was then left vacant until it was let to another tenant for the second occupied period.

35.  Clause 2 of the Lam Agreement requires the payment by the tenant of a security deposit in the sum of HK$24,000 (two months’ rental) which is to be held by the plaintiff as landlord.  The same clause goes on to provide for the return of the deposit to the tenant upon delivery of vacant possession to the landlord and permits the landlord to deduct from the deposit any unpaid rent or other expenses.  In addition to the signatures of the parties to the tenancy agreement, the landlord has separately signed on the document to acknowledge receipt of the security deposit paid.

36.  There is no indication in the evidence of the plaintiff how this security deposit had been dealt with upon the early termination of the Lam Agreement.  Since Mr Lam left on his own accord and before expiry of the fixed term, the plaintiff was entitled to retain the full amount of the security deposit instead of refunding it to Mr Lam.  It is indicated in the Revised Particulars that the plaintiff received rent under the Lam Agreement up to 14 April 2008.  In the absence of any evidence relating to the disposal of the security deposit to the contrary, I can only conclude that the security deposit was forfeited and so there had been no loss of the rental at the contractual rate for the two months’ period after 14 April 2008.  That being the case, subject to paragraph 37 below, no damages for loss of rental can be recovered for the period from 15 April 2008 to 18 May 2008, such part of the second vacant period that precedes the second rent free period.

37.  By adopting the rate of HK$15,300 per month for the first occupied period, this would mean the security deposit held by the plaintiff under the Lam Agreement should have been HK$30,600.  The difference in the security deposit that the plaintiff would have been entitled should also be recoverable from the plaintiff and so the amount of HK$6,600 (HK$30,600 – HK$24,000) is to be added to the damages recoverable.

38.  The following table sums up the amount recoverable for each period:

I award damages to the plaintiff in the sum of HK371,305.00 plus interest thereon at 1% above the best lending rate of HSBC from 5 July 2007 until judgment and thereafter at judgment rate until full payment.

COSTS

39.  I also make an order nisi that the defendant do pay the costs of the plaintiff for the assessment, such costs to be taxed if not agreed.  The order is to be made absolute upon the expiration of 14 days from the date of the handing down of this decision.