GOODSUN INDUSTRIES LTD. v. YANION CO. LTD.

No. A.5973 of 1987

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U G D M E N T

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Introduction

1. This case is concerned with the second floor of Seven Seas Industrial Centre in Kwai Chung. It used to be called Wing Fu Industrial Building but the name was changed to its present name when the Plaintiff acquired the building in October 1986. The Plaintiff is a limited company controlled by a Mr Lok Ka-shing. The Defendant is also a limited company controlled by a Mr Leung Wah-chai. The Defendant was the tenant of the second floor under a tenancy agreement dated 25 April 1985 expiring on 1 October 1987. The rent payable by the Defendant under the tenancy agreement was $52,000 per month exclusive of rates. Seven Seas Industrial Centre is a seven-storied industrial building built in 1971. The second floor has a gross floor area of about 31,000 square feet. On 3 March 1987 the Plaintiff's solicitors served a notice of termination on the Defendant requiring the Defendant to quit and deliver up possession of the second floor premises to the Plaintiff upon expiration of the tenancy. There is no doubt that this was an effective notice served in accordance with the provisions of the Landlord and Tenant (Consolidation) Ordinance. Hence the Defendant became a trespasser if it remained in occupation of the premises beyond 1 October 1987.

The Defence

2. It is the Defendant's case that by virtue of a number of conversations between its representative Mr Leung Wah-chai and a Mr Poon representing the Plaintiff, the legal effect of the notice of termination became suspended. Its legal effect, it is submitted by counsel for the Defendant, only became revived upon receipt by the Defendant of a letter from the Plaintiff's solicitors dated 14 August 1987 which reminded the Defendant of the notice of termination, warning the Defendant that failure to deliver vacant possession on 1 October 1987 would result in legal proceedings being brought against the Defendant. I said that was the Defendant's case, by that I mean the case as finally presented on the Defendant's behalf by Mr Leong, counsel for the Defendant. On the pleadings the case is slightly different: by paragraph 13 of the Defence it is said that the Plaintiff had by its conduct waived altogether 'its rights under the notice of termination"; by paragraph 14 it is said that the Plaintiff was estopped or precluded from relying on the notice and by paragraph 15 it is alleged that the Plaintiff had agreed to vary the terms of the tenancy agreement as to duration for 'such a period beyond 31 October 1987 as would allow enough time for the Defendant's alternative accommodation to be ready for occupation and a production line installed thereat'. At the hearing counsel for the Defendant expressly abandoned reliance upon paragraph 15, so we are left with acquiescence and estoppel, as counsel for the Defendant maintains by way of defence, and to the extent as I have indicated earlier. The Plaintiff as I have said is a limited company. It can only act by its duly authorised agents. The person who took care of the day-to-day management of the affairs of the plaintiff company as far as the Seven Seas Industrial Centre building was concerned was at all times a Mr Poon. It is not alleged that Mr Poon made any representations to the Defendant's representative, Mr Leung, which misled anyone nor is it alleged that any statements as such made by Mr Poon led the Defendant to change its position to is detriment: The equity it is said, arises from the Plaintiff's silence.

The Facts

3. What happened was this. After the notice of termination was received by the Defendant there were a number of conversations between Mr Leung and Mr Poon concerning the premises. Mr Poon told Mr Leung very early on that the owner wanted to recover the premises for their own use. The Defendant must therefore have realised that there was no prospect of a renewal of the tenancy and they therefore went out and bought for themselves premises in another industrial building in Tsuen Wan. They signed an agreement to purchase those premises in late March 1987 and expected to take possession of those premises in July 1987. However, there was some delay in getting possession of those premises. It is not clear from the evidence when the Defendant first knew of the prospect of such delay. At any rate in about June 1987 Mr Leung told Mr Poon on the telephone that it was unlikely that the Defendant would be able to vacate the second floor premises by 1 October 1987. It is plain from the evidence that the attitude of the plaintiff company at that stage was not a totally uncompromising one: Mr Poon was instructed by the managing director, Mr Lok, to suggest to the Defendant that they (the Defendant) should deliver vacant possession of half the second floor by 1 October 1987, meaning obviously that the Plaintiff would permit the Defendant to retain possession of the other half until the Defendant was ready to move out to their new premises. This war communicated to Mr Leung but the Defendant objected to the proposal. They wanted to remain in the premises on the second floor of Seven Seas Industrial Centre until such time as suited their own convenience.

4. The evidence is unclear as to what happened thereafter. Mr. Poon and Mr Leung were both giving their evidence according to their own recollections of things said on the telephone in about July 1987; neither had kept a note of what was said (at any rate, there was no evidence that either of them had kept a note). Such recollection as they had of what was said could only, at best, be a matter of imperfect recollection. Mr Poon said that in several telephone conversations he told the tenants that his boss wanted to recover possession of the premises (Mr Poon was then dealing with a number of other tenants in the building besides the Defendant) and he, Mr Poon, thought he must have told Mr Leung that as well.

5. Mr Leung's evidence was to this effect: in a telephone conversation in August 1987, he (Mr Leung) told Mr Poon that due to delay in construction of the new building he could not get possession of his new premises until the end of the year or early next year. Mr Leung then said in his evidence

'Mr Poon again said he would relay my views to his boss'.

Mr Leung said that thereafter he had no further contact with Mr Poon. He said that after he received the letter of 14 August 1987 from this Plaintiff's solicitors, he left the matter of a reply to his own solicitors. And as to Mr Poon's boss, Mr Leung said than he asked his wife to contact Mr Poon to get Mr Poon to see his boss. Mr Leung's wife gave no evidence in these proceedings, but Mr Poon's boss (that is Mr Lok Ka-shing) said in evidence that he (Mr Lok) was never contacted by the Defendant: so in September 1987 he entered into a tenancy as regards half the second floor with a related company Solarmate Dyeing Works Limited for two years at a rent of $48,870.

6. Mr Leung said his impression that the Plaintiff had acquiesced in the Defendant remaining after 1 October 1987; but it is not clear from Mr Leung's testimony when he allegedly formed that impression. On his own evidence it could not have been much earlier than about July 1987. Upon what basis such an impression was formed I know not: Certainly not on anything said by Mr Poon. Such an impression is totally contrary to the clear and unequivocal statements in the notice of termination. And, by 14 August 1987, any such impression was dispelled when the Defendant received the letter of that date from the Plaintiff'a solicitors. I therefore reject Mr Leung's evidence in this regard.

7. Upon these facts, there is no room for the application of any equitable doctrine such as estoppel or acquiescence, although I was referred to the law in this regard. I do not know how the Defendant can even begin to make out a case, on these facts, that they were mistaken as to their own legal position, or thought somehow that the Plaintiff did not intend to give full effect to the notice of termination of 3 March 1987. There is nothing unusual about this case. After a notice of termination has been served in relation to industrial premises, informal contact between the parties is often made. Such contact took place on the telephone in this case. But the legal rights of the parties are created by instruments in writing: here, the tenancy agreement and the notice of termination. It is not even alleged that after the service of the notice of termination anything said on the telephone by anyone had misled the Defendant: what is said is that, by silence, the Plaintiff had somehow 'acquiesced', or was assumed by the Defendant to have 'acquiesced'. That proposition is wholly untenable. What happened was that the Defendants, to suit their own needs, and in breach of the Plaintiff's rights, simply retained possession of the second floor of Seven Seas Industrial Centre until such time as it suited their own convenience to move out. It follows that the Defendant is liable to the Plaintiff in damages.

Damages

8. The Court is concerned here with the period of seven months from 1 October 1987 to 30 April 1988 when the Defendants vacated the premises.

9. Plainly, the proper measure of damages is the market value of these premises as at the beginning of October 1987, and evidence as to what the Plaintiff actually did with these premises after 30 April 1988 can only be of marginal relevance. The Writ was issued on 6 October 1987 and assuming that the Action had been tried in, say, April or May 1988. there might not even have been then available such evidence of the lettings as Mr Leong, on behalf of the Defendant, now wishes to rely upon. It cannot be that if the Action ware tried in April or May 1988 one measure of damages would be taken, and if tried in January 1989 as happens here another measure is taken.

10. In my judgment the proper measure of damages is the open market value of the premises at the beginning of October 1987. I should add, for the sake of completeness, that lettings of the premises by the Plaintiff to associated companies controlled by Mr Lok, after the 30 April 1988, can afford little evidence of what the open market value of the premises was at the relevant time.

11. The primary material I rely upon is the opinion evidence of two experts: Mr Eric H K Chan of C F & Associates, chartered surveyors, and Mr J S Lai of Messrs Mansions Surveyors Limited. Mr Chan based his opinion essentially on one comparable transaction which took place on the third floor of the same building in December 1987 when, in respect of a floor of an identical size, the monthly rental for a six months tenancy, with an option to renew for a further six months, was $109,585, which worked out at $3.50 per square foot gross. After adjustments for (i) what Mr Chan called `tenant inertia' (the tenant on the third floor was a sitting tenant who would therefore be inclined to pay a slightly higher rent), (ii) the fact that the comparable transaction took place in December (after the stock market crash of 19 October 1987) and (iii) the fact that a higher floor tends to command a lower rent in an industrial building, Mr Chan computed the market value of the second floor at $3.80 per square foot gross. Therefore, in his view, the open market rental of the suit promises in October 1987 was $119,000 per month. Mr Chan said he had checked this figure against other comparables but those other comparables were never produced and this Court has no means of ascertaining whether those comparables were suitable or not. Effectively therefore Mr Chan's opinion is based upon a single comparable transaction. This necessarily leaves a court with a sense of disquiet. Moreover, there were features about the tenancy on the third floor, used as a comparable, which suggest that it was something rather special.

Firstly, it was a renewal of an existing tenancy.

Secondly, it was for a short term.

Thirdly, in the second six months, the tenant had the right to terminate upon two months notice, which lends colour to the suggestion that the transaction is not by any means typical of the tenancies one might expect to find in the open market.

12. All these factors I have mentioned tend to make the rent payable for the third floor higher than what one might otherwise expert.

13. I turn than to the opinion evidence of Mr J S Lai. Mr Lai, as the basis of his opinion, took three comparable transactions, two in a nearby industrial building called Mai Shun Industrial Building, and one in a hear by building called Kwai Shing Industrial Building. Both buildings were of about the same age as Seven Seas Industrial Centre although the floor heights were slightly lower and the floor loading capacity somewhat less (Seven Seas had a loading capacity of 200 pounds per square foot; the other two buildings had a loading capacity of 150 pounds per square foot).

14. Given the respective approaches of Mr Chan on the one hand and Mr Lai on the other, I would have, normally speaking, preferred the approach of Mr Lai with his three comparables, rather than that of Mr Chan with his one. But one factor weighs in the scales against Mr Lai. His report, though dated 15 October 1988, was not made available to the solicitors for the Plaintiff until last Friday, even though there is an Order of Master Chan dated 3 May 1988 requiring the Defendant to disclose within 21 days any valuation reports made on their behalf. I cannot understand how the solicitors for the Defendant could have lapsed from their duty, as they appear to have done, by not providing a copy of Mr Lai's report as soon as it was received. It was said on their behalf by Mr Leong that they were waiting for Mr Lai to produce the schedule of comparables: but the Report, and the opinion of Mr Lai, were available from mid-October 1988. The result of this unfortunate lapse is that the Plaintiff has had no opportunity of independently examining the basis of Mr Lai's opinion: this is something which I must therefore put in the scales against the Defendants. They have only their own solicitors to blame in this regard.

15. In relation to the two comparables in Mai Shun Industrial Building, adjustments had to be made for the fact that the floor areas let were much smaller than that of the suit premises: they were less than 4,000 square feet as compared with over 30,000 square feet in South Seat Industrial Centre. The lettings in Mai Shun Industrial Building were on much higher floors (Mr Lai had therefore to adjust by adding onto the rental value 2% per floor) and, generally, speaking, Seven Seas Industrial Centre is a better building in terms of ceiling height, floor loading and carparking facilities. Using the Mai Shun comparables, the rental value of the suit premises works out to $3 per square foot gross as at October 1987.

16. Mr Lai also took as a comparable a letting at Kwai Shing Industrial Building but this was a tenancy of five years, and it was entered into some four months or so before the relevant date.

17. The adjustments for the Kwai Shing Industrial Building comparable (both plus and minus) made by Mr Lai came to 57%. It can therefore be seen that within the computation, there were many assumptions and estimates which give enormous latitude to the accuracy of the ultimate conclusion. Moreover, the letting in Kwai Shing was also of a relatively small area: 4,000 square feet, and this comparable, after the adjustments totalling 57%, also works out to $3 per square foot gross in respect of the suit premises.

18. The point which particularly concerns me regarding the use of Mr Lai's comparables is the question of size. Mr Lai's view is that a smaller area tends to command a higher rent: the landlord, Mr Lai says, would tend to ask for a higher rent if, for example, a floor of 30,000 square feet were carved up into ten smaller units and individually let. Mr Chan's view is the opposite he thought that as the supply of larger units was limited the demand for such areas was great at the time, and the fact that the suit premises measured over 30,000 square feet should command a premium, as compared to the lettings in Mai Shun and Kwai Shing Industrial Buildings. I do not find it easy to resolve this difference of opinion: and yet an adjudication on one side or the other on this issue would make an enormous difference to the final result.

19. In my judgment the fairest way of dealing with this matter is to look at it broadly. The figure given by Mr Chan, $3.80 per square foot gross, is suspiciously high, having regard to the comparables produced by Mr Lai. But I am not prepared to accept the figure of $3 per square foot either: there are too many uncertainties in Mr Lai's computation to make that a wholly reliable figure. I also take into account the fact that Mr Lai's re port, having been given to the Plaintiffs so late, the Plaintiffs have had no opportunity of a detailed examination of those comparables, nor have they had the chance of visiting the premises Mai Shun and Kwai Shing Industrial Buildings. In my judgment the open market value of the suit premises in October 1987 is in the region of $3.30 per square foot gross. With 31,310 square feet gross, the monthly rental would work out to $103,323 per month. I will round off this figure to $103,000 per month.

20. It has been agreed between the parties that there should be deducted from any judgment I give the sum of $104,000 by way of deposits, and that $3,300 should be added to the judgment sum for the rates paid by the Plaintiff.

21. The judgment in favour of the Plaintiff is therefore 7 x $103,000 and with the deduction and addition as I have mentioned, there will be judgment for the Plaintiff in the rum of $620,300.

22. In the Plaintiff's claim there is a declaration sought to the effect that the Defendant is liable to indemnify the Plaintiff for any damages which the Plaintiff might be required to pay to Solarmate Dyeing Works Limited in respect of the tenancy for the half floor at $48,870 per month. But I see no reason why the Court, in the exercise of its discretion, should make such a declaration. The fact is that Solarmate, up to the present time, has not sued the Plaintiff. They are, I am told, associated companies. If the Plaintiff should be sued the Plaintiff can bring the Defendant in as third parties to those proceedings, and any question of indemnity as between the Plaintiff and the Defendant can be adjudicated upon at that stage. The case of Trans Trust SPRL -v- Danubian Trading Company Limited [1952] 2 QB 297 at 303 and 307 cited by Mr Leong is authority for the proposition that a court should be slow to grant declarations of this kind. I therefore refuse to make the declaration sought.

23. I will now hear counsel on the question of interest on the judgment I have just pronounced and costs.