UNITED ASSETS CO. LTD. v. FORDYEAR INTERNATIONAL PROPERTY LTD. AND ANOTHER

HCA 7957/98 & HCA 10464/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 7957 of 1998 AND 10464 of 1998

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J U D G M E N T

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1. HC Action No. 7959/98 ("the 1st action") and HC Action No. 10464/98 ("the 2nd action") were consolidated on 26 November 1998. The parties are the same in both actions.

Background

2. The Plaintiff sues as landlord of the premises known as the Basement of Ramada Hotel, Kowloon, 73-75, Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong ("the premises"). By a tenancy agreement made on 8 October 1997 ("the tenancy agreement') the Plaintiff let the premises to the 1st Defendant as the tenant upon the terms set out therein. The 1st Defendant intended to operate a high class Shanghainese restaurant at the premises. The Plaintiff's claims against the 1st Defendant is for the arrears of rent and charges payable by the 1st Defendant to the Plaintiff under the tenancy agreement. The claims against the 2nd Defendant is under a personal guarantee signed by the 2nd Defendant. The 2nd Defendant is, and was at all material times, a director of the 1st Defendant. He was the one who signed the tenancy agreement on behalf of the 1st Defendant.

3. I heard evidence from Chu Sun Kwok, Raymond Chan Chi Wan, Tsui Fung Shum and Samuel Ko Man Lung who gave evidence for the Plaintiff. The 2nd Defendant did not give any evidence nor did he call any witnesses. I have no hesitation in accepting the Plaintiff's witnesses as witnesses of truth. I accept their evidence.

4. Under the tenancy agreement, the premises were let to the 1st Defendant for a term of three years from 8 October 1997 to 7 October 2000 with an option to renew for a further term of two years. The rent payable, exclusive of rates, management and air-conditioning charges, was $188,000 per month. The management and air-conditioning charges payable was $22,560 per month subject to increases from time to time. The 1st Defendant was given a rent free period of three months from 8 October 1997 to 7 January 1998 provided that it should pay the rates, management and air-conditioning charges and all other utility charges and outgoings. The rent free period was by agreement extended for three further days i.e. up to and including 10 January 1998 as is confirmed by the letter dated 14 October 1997 from the Plaintiff's former solicitors to the then solicitors for the 1st Defendant.

5. Under the tenancy agreement, the 1st Defendant had to provide as a deposit :

（a） a bank guarantee in favour of the Plaintiff to the extent of $752,000 being four months' rental and to be delivered to the Plaintiff on or before the commencement of the tenancy; and

（b） the sum of $90,240 being four months of management and air-conditioning charges.

By clause 4(b) of the tenancy agreement, the 1st Defendant was also required to provide a personal guarantee to be signed by the 2nd Defendant or any other director or officer of the 1st Defendant as the Plaintiff should designate in favour of the Plaintiff to guarantee the due performance of the 1st Defendant's obligations under the tenancy agreement as a security for the due performance and observance of the terms covenants and conditions on the 1st Defendant's part.

6. Pursuant to the tenancy agreement, the 1st Defendant paid to the Plaintiff on 8 October 1997 the sum of $90,240 being four months of management and air-conditioning charges. The Plaintiff also received the bank guarantee executed by The National Commercial Bank Ltd. ("the bank") and dated 8 October 1997 in favour of the Plaintiff to the extent of $752,000 ("the bank guarantee") and the personal guarantee executed by the 2nd Defendant in favour of the Plaintiff also dated 8 October 1997 ("the personal guarantee").

7. The 1st Defendant also paid the Plaintiff the first month's rental and air-conditioning and management charges in the sum of $210,560. There is no dispute that thereafter, the 1st Defendant has not paid any rent or charges. The Plaintiff, therefore, called upon the bank to pay under the bank guarantee and the bank has duly discharged its obligations to the Plaintiff thereunder.

8. The evidence, which I accept, shows clearly that the bank discharged its obligations by three separate payments.

9. The 1st payment was for the sum of $309,918 made up as follows :

(a)	management and air-conditioning charges for the period from 8/11/1997 to 7/3/1998	$ 90,240
(b)	Utility charges	$ 178
(c)	Rates for the period from 1/1/98 to 31/3/98	$ 31,500
(d)	Rent for the period from 11/2/98 to 10/3/98	$ 188,000
	Total	$ 309,918
		========

This sum was paid to the Plaintiff by a cashier's order dated 18 February 1998.

10. The second payment was for the sum of $210,588 made up as follows :

(a)	management and air-conditioning charges for the period from 8/3/98 to 7/4/98	$ 22,560
(b)	Utility charges	$ 28
(c)	Rent for the period from 11/3/98 to 10/4/98	$188,000
	Total	$210,588
		=======

This sum was paid to the Plaintiff by a cashier's order dated 16 March 1998.

11. Those two payments totalled $520,506. The bank guarantee was to the extent of $752,000. The bank was therefore still liable for the balance of $231,494. The 3rd payment made by the bank was for the sum of $231,494. The amount due by the 1st Defendant at that time was $237,560 made up as follows :

(a)	management and air-conditioning charges for the period from 8/4/98 to 7/5/98	$ 22,560
(b)	Rates for the period from 1/4/98 to 30/6/98	$ 27,000
(c)	Rent for the period from 11/4/98 to 10/5/98	$188,000
	Total	$237,560
		=======

12. As the bank was only liable for the remaining balance of $231,494, this sum was paid by the bank also by a cashier's order. That left a balance of $6,066 owing to the Plaintiff by the 1st Defendant at that time.

The claims

13. The balance of $6,066 is part of the claim in the 1st action. In the 1st action the Plaintiff also claims the sum of $210,560 made up of $22,560 being management and air-conditioning charges for the period from 8 May 1998 to 7 June 1998 and $188,000 being the rent for the period from 11 May 1998 to 18 June 1998. The sum claimed in the 2nd action is $210,560 made up of $22,560 being management and air-conditioning charges for the period from 8 June 1998 to 7 July 1998 and $188,000 being the rent for the period from 11 June 1998 to 10 July 1998.

The pleaded defences

14. The defences which have been raised in the Re-amended Defence and Counterclaim in the 1st action are as follows :

（1） by para. 5, that the pre-contractual offer made on behalf of the Plaintiff was on the condition that the Plaintiff was responsible for transferring the restaurant licence to the 1st Defendant upon signing the tenancy agreement.

（2） by paras. 10 and 15, that the Plaintiff by clause 10(a) of the tenancy agreement expressly covenanted that it undertook to transfer the restaurant licence to the nominee of the 1st Defendant upon signing the tenancy agreement and that despite demands, the Plaintiff "failed by any reasonable endeavour to transfer the restaurant licence to the 1st Defendant".

（3） by para. 14, that it was an express alternatively, implied covenant of the tenancy agreement that the premises were reasonably fit for the purpose of operation as a high class Shanghainese restaurant and that the Defendants were informed by its consultant that the premises were not fit for that. It is alleged in para. 17 that as a consequence the 1st Defendant was entitled to rescind the tenancy agreement alternatively, that the Plaintiff repudiated the tenancy agreement by failing to perform its contractual duty and that the 1st Defendant was discharged from its obligations under the tenancy agreement.

（4） by para. 22, that the Plaintiff failed to mitigate its loss.

（5） by paras. 18 and 19, that the 2nd Defendant was discharged from his obligations under the personal guarantee due to the Plaintiff's repudiation of the tenancy agreement alternatively, that the personal guarantee was void by operation of law.

15. Identical defences have been raised in the 2nd action. The Defendants also counterclaim for rescission of the tenancy agreement, a declaration that the personal guarantee is void ab initio and the return of the sums which have been paid to the Plaintiff.

16. I shall deal with each of the defences raised.

Pre-contractual offer

17. No evidence has been adduced in support of the assertion that the pre-contractual offer was on the condition that the Plaintiff was responsible for transferring the restaurant licence to the 1st Defendant upon the signing the tenancy agreement.

18. Quite apart from that, the tenancy agreement makes it plain that the tenancy agreement was the entire agreement between the parties. Clause 11 is clear and provided that :

“This Agreement sets out the full agreement reached between the parties hereto and no other representations have been made or warranties given relating to the Landlord, the Tenant, the Premises or the Building and if any such representation or warranty has been made, given or implied the same is hereby waived.”

19. In my judgment, the Defendants cannot rely on any condition contained in the pre-contractual offer. There is no merit in the defence.

Obligation to transfer the restaurant licence

20. As Mr Leung, counsel for the Plaintiff, has pointed out, by clause 4(a) of the tenancy agreement, the 1st Defendant agreed to use the premises only for the purpose of a high class Shanghainese restaurant. The 1st Defendant was responsible for obtaining all necessary permits from the appropriate Government authorities for the user of the premises. The Plaintiff was not liable in any way to the 1st Defendant for 1st Defendant's failure to obtain licences.

21. Also, by clause 2(t) of the tenancy agreement, the 1st Defendant agreed not to carry on any business at the premises which may be declared to be illegal or offensive under the Public Health and Urban Services Ordinances and to conduct such business or undertaking which is duly authorised, licensed or approved by the competent Government authorities.

22. It was by Special Condition 10(a) that an obligation was imposed on the Plaintiff. This provided as follows :

"The Landlord shall procure the existing licencee of the restaurant licence to transfer the licence to the nominee of the Tenant at the costs and expenses of the Tenant. The Landlord does not warrant that the licence can be successfully transferred. Nothing herein shall release the Tenant from its obligations under clause 2(t) of this Agreement."

23. Mr Samuel Ko Man Lung ("Ko"), the hotel manager of Ramada Hotel, gave evidence that the restaurant licence applicable to the premises was previously registered in the name of Wong Kin Kit of the previous tenant of the premises. On the early termination of the previous tenancies, the restaurant licence was transferred to Ko and to be temporary held in his name pending the takeover of the same by a new tenant or disposal otherwise. Ko also gave evidence about the steps to be taken on an application for the transfer of the restaurant licence which included the transferor and transferee attending the licensing office in person where they would be interviewed.

24. The evidence shows that the 1st Defendant appointed Mr Lam Pak Shu ("Lam") to handle the application for liquor and restaurant licence for the Shanghainese restaurant. Ko received a copy of the board resolution of the 1st Defendant dated 22 October 1997 appointing Lam. At that meeting, the 2nd Defendant acted as Chairman. Ko said that he spoke to Lam who said that he was familiar with the procedure for the application for the licence to be transferred. Ko also gave evidence that after the possession of the premises were delivered to the 1st Defendant, he noticed that some of the decoration and partitioning walls of the premises were demolished by workers. He reminded Lam that if there were to be any alteration to the premises, he should prepare the plans and send copies to the Plaintiff and to the Licensing Office. Lam assured him that he knew that he was required to submit the plans.

25. Ko heard nothing from Lam about the transfer of the restaurant licence. He tried to speak to Lam several times but was unable to contact him. Despite his attempts, he was unable to get the 1st Defendant to proceed with the transfer of the restaurant licence.

26. By letter dated 19 November 1997 from the Plaintiff's then solicitors to the Defendants' then solicitors, a copy of Exhibit P5 was sent to the 1st Defendant. This was a letter from the Urban Services Department to Ko informing him that if business was not resumed at the premises within six months from the date of the letter, the restaurant licence would be cancelled. The 1st Defendant was also reminded that the Plaintiff was able and willing to comply with its obligations under Special Condition 10(a) of the tenancy agreement and the Plaintiff's then solicitors asked the 1st Defendant's then solicitors to let them know if there were any documents which the 1st Defendant required the existing licensee to execute. But the 1st Defendant did not proceed with the transfer of the restaurant licence. To keep the restaurant licence valid and effective, Ko applied for and was granted a renewal of the licence until 23 December 1998.

27. I accept the evidence of Ko. It is plain that the 1st Defendant did not proceed with the matter of the transfer of the restaurant licence even though Lam was appointed to deal with the matter on 22 October 1997. That is not surprising as, on the evidence of Mr Raymond Chan Chi Wan ("Chan") which I also accept, towards the end of October 1997, the 1st Defendant was no longer interest in running a restaurant at the premises.

28. Chan is a real estate agent with Jones Lang Lasalle formerly known as Jones Lang Wootton ("JLW"). Chan was an agent involved in the letting of the premises to the 1st Defendant. He followed up the matter of the restaurant licence a few days after the tenancy agreement was entered into by sending the fax dated 17 October 1997 to San Kong Development (HK) Ltd, the 1st Defendant's representative at that time asking for details about the transfer of the restaurant licence. It was after this that the Plaintiff received the details about the appointment of Lam as the person appointed by the 1st Defendant on 22 October 1997 to deal with the matter. Chan also gave evidence that the 2nd Defendant telephoned him telling him that he intended to terminate the tenancy agreement. He said that this took place between 20 and 30 October 1997. This must, in my view, have taken place after 22 October 1997 as on that date the 1st Defendant had appointed Lam to handle the liquor and restaurant licence presumably, on the basis that as at that date, the 1st Defendant was still going to operate the restaurant. There was obviously a change of mind after 22 October 1997. Chan said that the 2nd Defendant said something about a possible crash in the stock market and that he and the other directors had no mood to operate the restaurant. He was prepared to lose the four months' rental deposit in the form of the bank guarantee and also the four months management and air-conditioning charges. He wanted to terminate the tenancy.

29. Chan passed on the 2nd Defendant's request to the Plaintiff. He also assisted the 2nd Defendant to contact the Plaintiff. It is plain from the cross-examination of Chan by the 2nd Defendant that the 1st Defendant had already held a meeting and decided that the 1st Defendant was not going to operate a restaurant at the premises. Chan remembered that the 2nd Defendant had told him that he had to help him because they had already held a meeting and decided that they were not going to operate a restaurant. Chan spoke several times to the 2nd Defendant towards the end of October 1997. He informed the 2nd Defendant that the Plaintiff's view was that the tenancy agreement was still valid. He also said that the Plaintiff would consider accepting a replacement tenant as suggested by the 2nd Defendant. The 2nd Defendant suggested to Chan that JLW should try to find a replacement tenant but Chan told him to find a replacement tenant himself. Subsequently, Chan did meet with the 2nd Defendant and his proposed replacement tenant. He did tell the Plaintiff about the particulars of the proposed replacement tenant and the terms demanded by him. After that, he did not follow up the matter. Chan also said that during the time that he had those conversations with the 2nd Defendant, the landlord was very insistent that the tenancy agreement was still valid. I accept the evidence of Chan.

30. There is no evidence that the Plaintiff ever arrived at an agreement whereby the 1st Defendant could surrender its tenancy which was to be taken over by the proposed replacement tenant. I find that the tenancy agreement was a valid tenancy agreement. I also find that shortly after 22 October 1997, the 1st Defendant changed its mind about operating a restaurant there and tried to back out of the tenancy agreement. The 1st Defendant wanted to terminate the tenancy agreement. It was prepared to lose the four months' rental deposit and four months air-conditioning and management charges. It found a replacement tenant in an endeavour to persuade the Plaintiff to release it from its obligations under the tenancy agreement. However, although there were some negotiations, no agreement was ever reached as to the terms on which the replacement tenant could take on a tenancy and on which the 1st Defendant could be released from its obligations under the tenancy agreement. In the circumstances, I find that the 1st Defendant was obliged to perform its obligations under the tenancy agreement.

31. As the 1st Defendant was no longer interested in running a restaurant at the premises shortly after 22 October 1997, it is not surprising that it never proceeded with the application of the transfer of the restaurant licence. In my judgment, that was the reason why the restaurant licence was not transferred to Lam.

32. The Plaintiff has done all it reasonably could to transfer the licence to the nominee of the 1st Defendant and has performed its obligation under the tenancy agreement. There is no breach on the part of the Plaintiff. There is also no merit in the defence raised.

Purpose of a high class Shanghainese restaurant

33. It is alleged that it was an express alternatively, implied covenant in the tenancy agreement that the premises were reasonably fit for the purpose of operation as a high class Shanghainese restaurant and that the Defendants were informed by its consultant that the premises were not fit for the said operation.

34. There has been no evidence adduced that the premises were not fit for operation as a high class Shanghainese restaurant. There is a bare allegation in the letter dated 11 November 1997 from the 1st Defendant's former solicitors to the Plaintiff's then solicitors that the premises could not comply with the new fire regulation in order to obtain or renew the restaurant licence. I would observe that such allegation was only made on 11 November 1997 by which time the 1st Defendant had already decided not to operate the restaurant at the premises. I have no hesitation in rejecting this as an invalid excuse in an attempt to permit the 1st Defendant to back out of its obligations under the tenancy agreement. The fact that Ko was able to renew the restaurant licence until 23 December 1998 also demonstrates that the allegation made on 11 November 1997 was an invalid excuse. In any event, this allegation is not even supported by any evidence and I reject it.

35. Quite apart from that, there is no such express term as alleged to be found in the tenancy agreement. And at common law, there is no implied warranty on the part of a landlord that the premises would be physically or legally fit for the tenant's purposes. (Elder v Auerbach [1949] 1 KB 359; Hill v Harris [1965] 2 QB 601).

36. Furthermore, as a matter of contract, a term will not be implied if it would be inconsistent with the express wording of the contract (para. 13-009 Vol. 1 Chitty on Contracts 28th Edn.). In my view, the alleged implied covenant is clearly inconsistent with the express terms of the tenancy agreement, in particular clauses 2(t) and 4(a).

37. In my judgment, the Plaintiff has not been in breach of the tenancy agreement and has not repudiated the agreement as alleged. The 1st Defendant was not discharged from its obligations under the tenancy agreement. By not paying the rent and the management and air-conditioning charges, the 1st Defendant has been in breach its obligations under the tenancy agreement and has repudiated the tenancy agreement.

Is there a duty to mitigate?

38. I accept Mr Leung's submission that the ordinary contractual principles of repudiation and acceptance of repudiation applies to a tenancy agreement. This is evident from the authorities that were cited, namely, Highway Properties Ltd. - v - Kelly, Douglas & Co. Ltd. (1971) 17 D.L.R. (3d.) 710; Hop Woo Cheung Enterprises Ltd. v Intergroup Industries Ltd. [1982] HKC 436 and Silver Source Development Ltd. v Time Century Ltd. [1992] 1 HKC 366.

39. I am satisfied that the Plaintiff, as the innocent party, could elect to continue on with the tenancy agreement rather than to accept the 1st Defendant's repudiation as terminating the tenancy agreement and sue for damages.

40. Furthermore, by clause 4(c) of the tenancy agreement the Plaintiff was also expressly given the option to elect to affirm the tenancy and not to terminate it.

41. The evidence shows clearly that attempts by the 1st Defendant to surrender the tenancy were rejected by the Plaintiff through its then solicitors in the correspondence between solicitors in February and May 1998. There can be no doubt, in my judgment, that the Plaintiff did not accept the 1st Defendant's repudiation. That being so, the Plaintiff was, in my judgment, entitled to insist on the continuation of the tenancy and to insist, as it did, that the 1st Defendant should perform its obligations under the tenancy agreement. In such circumstances, there can be no question of any duty on the part of the Plaintiff to mitigate its loss by accepting a replacement tenant. It is only after the Plaintiff has accepted the Defendant's repudiation and claims damages that a duty to mitigate its loss can arise.

Personal guarantee

42. Clause 1 of the personal guarantee signed by the 2nd Defendant as guarantor and provided to the Plaintiff as landlord provided as follows :

"In consideration of the obligations of the Landlord under the Tenancy Agreement, the Guarantor, as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantee to the Landlord the due and punctual payment to the Landlord of all sums payable now or in the future by the Tenant under the Tenancy Agreement as and when the same shall become due and the due performance and observance of all the Tenant's covenants therein contained and undertake with the Landlord that whenever the Tenant fails to make payment when due of any sum whatsoever under the Tenancy Agreement, the Guarantor shall, upon demand, pay and make good to the Landlord any sum so due together with any loss damages costs and expenses thereby arising or incurred by the Landlord for which the Tenant is liable to the Landlord under the Tenancy Agreement."

Clause 10 also provided as follows :

"In addition to the guarantee contained herein and separate therefrom the Guarantor hereby irrevocably agrees to indemnify the Landlord against all proper and reasonable expenses (including legal expenses) which it may incur in proceeding against the Tenant.

43. The defence raised is that the 2nd Defendant was discharged from his obligations under the personal guarantee due to the Plaintiff's repudiation of the tenancy agreement. As I have found that the Plaintiff has not repudiated the tenancy agreement, this defence fails. The alternative defence is that the personal guarantee was void by operation of law. I fail to see any reason why it could possibly be said that the personal guarantee was void by operation of law and this defence is also rejected.

44. The Plaintiff also claims interest under Clause 14 of the tenancy agreement at an annual rate equivalent to 1.5% per month i.e. 18% per annum on the sums unpaid and costs on an indemnity basis under clause 4(f) of the tenancy agreement. The 1st Defendant is liable to pay the same under the tenancy agreement and by the personal guarantee, the 2nd Defendant is also liable. These are matters of contract between the parties and I see no reason why the Plaintiff should not be entitled to this.

45. The Plaintiff is entitled to judgment against both Defendants. The counterclaims are dismissed.

46. I give judgment to the Plaintiff against both Defendants for :

1. The sum of $6,066 with interest thereon @18% per annum from 11 April 1998 until judgment.

2. The sum of $210,560 with interest thereon @18% per annum from 11 May 1998 until judgment

3. The sum of $210,560 with interest thereon @18% per annum from 11 June 1998 until judgment.

4. Costs of the actions and counterclaims against both Defendants to be taxed, if not agreed, on an indemnity basis.