CHAN SING HOI ENTERPRISES LTD v. VYKON MEDIA TECHNOLOGY LTD AND OTHERS

HCA 1604/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1604 OF 2006

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J U D G M E N T

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1.  Not long into a tenancy of three years the tenant stopped paying the rent and then surrendered the premises to the landlord.  The landlord was unable to relet and sues to recover the outstanding rent, other amounts due and damages from the tenant, the 1^st defendant, and its directors who guaranteed performance, the 2^nd and 3^rd defendants.  This is the action.  The landlord, the plaintiff, I shall call Chan Sing Hoi.  The tenant shall be Vykon, and its directors Messrs Yeung and Welcon Chan.  Other parties are K Y Chan, a director of the plaintiff, and C H Yuen, the letting agent responsible for getting the parties together.

2.  The case has all the hallmarks of a straightforward claim for rent due and outstanding and damages to be assessed.  That was how a Master found it when on an Order 14, RHC application he gave summary judgment in favour of the landlord, Chan Sing Hoi.

3.  But it is the defence’s position that it is not straightforward; the tenancy and guarantee are tainted with illegality and are unenforceable; alternatively, Vykon was entitled to terminate contractually.  They have appealed the Master’s order, asking instead for unconditional leave to defend.

4.  This is the appeal, by rehearing.

Background

5.  At all material times Chan Sing Hoi has been the owner of 1^st floor premises at 74 Percival Street (front and rear portions) and the adjacent 76 Percival Street, Causeway Bay.  76 Percival Street is in fact on the crossroads of Percival Street and Russell Street which at most hours day and night is crowded with pedestrians.  Those crossing the roads on the pedestrian crossing towards this particular corner could not avoid facing and observing advertising signboards attached to the façades of Chan Sing Hoi’s premises on both streets.

6.  An existing feature however was that the mobile communication company Sunday, which occupied premises having street frontage on the ground floor of 76 Percival Street, had had erected a signboard advertising its product, built on the Percival Street façade.  This was a vertical sign which stretched from the 3^rd floor to the 2^nd floor, presumably by commercial arrangement with the owner or owners of those premises.  But the tail end of it encroached over the 1^st floor premises belonging to Chan Sing Hoi.

7.  I have seen photographs depicting the signboard.  Its cross section, looking down from above, is rectangular, and it is affixed to the façade by rods running to the short side.  The result is that it protrudes several feet out into the space above Percival Street.

8.  It is common knowledge that before these signboards may be constructed the approval of the Building Authority (BA) is required, for appropriate levels of safety and soundness have to be satisfied.  The fitting up of a signboard without such approval runs the risk of the board being declared an illegal structure and liable for demolition.

9.  A further feature of these premises was that they were designed only for residential use.

Vykon Commits to a Tenancy

10.  Vykon was set up by Messrs Yeung & Welcon Chan in 2001.  Its primary business is to install and maintain outdoor advertising signs in Hong Kong.  An example of its work is the prominent LED television wall erected on Queen’s Theatre in Queens Road Central, that faces the entrance to d’Aguillar Street.

11.  Vykon had in the years prior to the purchase by Chan Sing Hoi of the premises obtained a licence from the then owner, called Hau Ming, to construct and maintain signboards on the façade of the 1^st floor of 76 Percival Street.  In fact when Mr Hau sold the premises to Chan Sing Hoi (completion was in July 2005) he did so subject to the licence.

12.  There followed after this sale negotiations between the new owner represented by the letting agent Mr Yuen and the licensee for a more permanent relationship.

13.  Vykon’s priority was to have the use of the façades of 74 and 76 Percival Street for its advertising signs.  But its directors were also attracted to the availability of the internal premises.  They proposed to convert these by internal partitioning into boutique shops or a mini-shopping mall and the like.  In turn Chan Sing Hoi’s directors were attracted to the prospect of having a single tenant occupy all the available rentable space both inside and outside.

14.  Two matters engaged the attention of the parties and their solicitors were instructed to deal with these in the documentation.

15.  The first was the encroachment onto the external façade of 76 Percival Street from above by the Sunday sign; the second was that the internal premises were authorized for residential and not commercial use.

16.  The parties negotiated and settled the terms which resulted in a tenancy for three years from 1November 2005 at $177,500 (but with a rent free period of two months) with a right of renewal for a further two years.

17.  The primary document was the Tenancy Agreement.  This was signed up in September 2005 and Vykon paid as agreed a deposit equivalent to three months rent as security against future performance under the tenancy. 

18.  The second document was the Guarantee, by which Messrs Yeung and Welcon Chan guaranteed Vykon’s performance under the tenancy to pay the rent and otherwise comply with its terms.

19.  The third document was called the Side Letter also completed at the same time.  Details of this follow shortly.

20.  The Tenancy Agreement contained all the usual terms including an entire agreement clause, which expressly excluded all prior expressions of intent and understanding whether oral or in writing in relation to the letting of the premises.  In its preamble it stated that the Tenant agreed to use the premises only for the purposes set forth in the Third Schedule.  The Third Schedule provided “for residential purposes only”.  There was also incorporated into the Fourth Schedule a number of special conditions.  Some of these are relevant, a précis of which follow:

(2)	No warranty is given by the Landlord that the premises are fit for use for any purposes intended by the Tenant, which may not terminate the tenancy in the event that it may not be entitled to use them in an intended way;
	…
(6)	the Landlord will permit the external façades to be used for the installation of signboards but without warranting the right to do so; the burden is on the Tenant to have ascertained such matters before committing to the tenancy;
(7)	the Tenant shall not install signboards without first obtaining all necessary approvals, in particular from the BA;
(8)	the installation and maintenance of the signboards shall be undertaken in accordance with all statutory requirements, and be fully insured;
(9)	the Tenant shall comply at its expense with any Government or Court ordered demolition;
(10)	the Tenant shall comply with all statutory requirements and without nuisance to neighbours and the general public;
	…
(12)	the Tenant has the right to sub-lease the internal areas of the premises.  As the premises are residential, the sub-tenants must acknowledge that in any sub-tenancy, without warranty from either the Landlord or Tenant that they are fit for any other purpose.  If there be a Government order calling for cessation of any unauthorized use the sub-tenant shall be required to comply without compensation;
	…
(15)	the Landlord shall ask for the removal of the encroaching Sunday sign, but gives no warranty as to when or whether it will be removed.

21.  The Side Letter by its terms was to be treated as supplemental to the tenancy.  It has two clauses.  The first concerns a prospective sale by the Landlord of the premises during the term of the tenancy and is not relevant.  What is is clause 2 which I now reproduce in full:

“	(2)	In case of any complaint of breach of the user restriction of the Premises and/or in the event that the Government or the Court shall at any time during the Term of Tenancy require or order the cessation of any unauthorized use of the Premises or any part(s) thereof, the Tenant shall use its best endeavours to rectify such breach and/or to comply with such requirement or order and the Landlord shall use its best endeavours to assist and co-operate with the Tenant to carry out such rectification and/or compliance.  If the relevant breach shall not be rectified and/or if the relevant requirement or order shall not be complied with before any deadline or within any period prescribed by the Government, the Court or any competent authority, either party shall then be entitled to terminate the Tenancy Agreement forthwith at any time thereafter by giving to the other party a written notice to such effect and in such event, neither party shall have any claim against the other for any loss, damages or compensation of whatsoever nature resulting from such termination but without prejudice to any claim by either party to the other for any antecedent breach of the terms and conditions of the Tenancy Agreement and Provided That upon such termination, the Tenant shall be responsible for reinstating the Premises in accordance with the provisions of the Tenancy Agreement and the deposit paid by the Tenant to the Landlord under the Tenancy Agreement shall be refunded to the Tenant in accordance with the said Tenancy Agreement.
		It is further agreed by the parties hereto that in case of conflict between the terms and conditions of the Tenancy Agreement and the terms and conditions herein contained, the terms and conditions herein contained shall prevail.”

22.  A month after this documentation was completed the parties negotiated revised, enhanced terms, because it came to be agreed that for due consideration Vykon should take over Chan Sing Hoi’s rights under licences from Sunday and Smartone concerning mobile communication equipment installed on the premises.  So it was that the rent was increased to $198,000 per month and the deposit by $61,500.

23.  There was a further, final adjustment agreed in January 2006.  Vykon having carried out certain internal decorating to facilitate the prospective letting of the internal areas of the premises had nevertheless failed to interest anyone, including in the rear portion of 74 Percival Street, and it was agreed that this be returned to Chan Sing Hoi.  That resulted in a reduction in the rent from 15 February 2006 to $177,500 per month.

Vykon Gives Up the Premises

24.  When the rent for May 2006 fell due for payment on 1 May 2006 Vykon failed to pay, and did likewise as at 1 June for the month of June.  On 27 June its directors delivered up the keys and surrendered the premises to Chan Sing Hoi.  Shortly afterwards, Chan Sing Hoi accepted its wrongful repudiation of the Tenancy Agreement, took possession and began this action.

25.  By its pleaded defence Vykon claimed to be entitled to terminate the Tenancy in the following terms:

(1)	It was in the contemplation of the parties that one of the purposes of the Tenancy Agreement was to enable signboards to be installed on the façades of the premises;
(2)	the façade of 76 Percival street was partially obstructed by the Sunday signboard;
(3)	Vykon was entitled to install its own signboards free from such obstruction;
(4)	the Sunday signboard remained undisturbed;
(5)	Vykon erected inter alia a signboard that by a half circle went around the outside of the Sunday signboard, but without seeking or obtaining approval of the BA to do so;
(6)	On 12 April the BA issued an order calling for its demolition;
(7)	Vykon called upon Chan Sing Hoi to comply with clause 2 of the Side Letter and use its best endeavours to rectify the breach by seeking the removal of the Sunday signboard;
(8)	By virtue of its refusal to do so, Vykon was entitled to terminate the Tenancy Agreement pursuant to clause 2 of the Side Letter, upon the ground that Vykon’s signboards as contemplated could not have complied with requirements as prescribed by the BA.

The Application for Summary Judgment

26.  This was supported by an affirmation from Chan Sing Hoi’s director Mr K Y Chan, who provided particulars of Vykon’s default in meeting the rent and consequential losses sustained.

27.  This was met, somewhat lately, by an affirmation in opposition made by Mr Welcon Chan, in which he claimed that Vykon and thus its guarantors had valid defences to put before a trial judge.  The primary one is that by reason of the circumstances in which the Tenancy Agreement was concluded, it is tainted with illegality.  In this respect he exhibited a draft-amended defence incorporating this ground.  The second was that already pleaded; that clause 2 of the Side Letter permitted termination without penalty.

28.  I shall deal with these separately.

Tainted with Illegality?

29.  Mr Welcon Chan said that prior to the parties committing, he had discussed with Mr Yuen, Chan Sing Hoi’s agent in the letting process, the matter of the encroaching Sunday signboard.  I repeat verbatim what he said about this:

“	14.	I expressed our concern to Mr Yuen during our meetings in August 2005.
		(i)	I asked whether the Plaintiff could see to it that the Sunday Lightbox or at least the obstructing portion of it be removed.
		(ii)	If it could not be removed, the 1st Defendant would have no choice but to erect a signage that would project over and cover the lower part of the Sunday Lightbox so as to conceal it from sight.
		(iii)	I told Mr Yuen that the installation of signage at the Façade would require the prior approval of the Building Authority.  I also told him that from my experience the Building Authority would reject outright any such application if the signage comprised the projected portion because:
			(a)	The Sunday Lightbox would be regarded as an illegal structure by the Building Authority.
			(b)	Under the prevailing policy of the Building Authority, if any existing illegal structure (in this case, the Sunday Lightbox) would be in any way obstructing the construction of a proposed new structure (in this case, the projected portion of the signage), the existing illegal structure must be removed prior to an application for the new proposed structure was submitted.
	15.	Mr Yuen noted my concern:
		(i)	He told me that the Plaintiff would endeavour to negotiate with the owner of the Sunday Lightbox for its removal.  However, there would be no guarantee to that.
		(ii)	I then told Mr Yuen that in the event that the Sunday Lightbox was not removed, the 1st Defendant would proceed to erect the advertising signage with the projected portion without seeking any approval from the Building Authority.”

30.  He professed at the same time to be concerned about the consequences of subletting the premises to commercial tenants when they were classified residential.  He said of this:

“	16.	Our second concern about the potential leasing arrangement related to the subletting of the said Premises to commercial tenants.
		(i)	Mr Yuen expressed to me on more than one occasion that the user of the said Premises was restricted to residential use only.
		(ii)	He stressed that the Plaintiff would want me to acknowledge this restriction in any future legal documents that we would sign.
		(iii)	This of course was a concern to me.  I expressed my worry to Mr Yuen that I did not want to violate any law by renting the said Premises for commercial use when I knew that it was prohibited.
		(iv)	Mr Yuen then reassured me that it was a prevalent practice in Causeway Bay that residential flats were used illegally as commercial premises.
		(v)	I have now been advised by the legal advisers to the Defendants and I verily believe that the said Premises are indeed subject to a residential user restriction. …
	17.	After several rounds of negotiations with Mr Yuen, we came to the consensus that:
		(i)	A tenancy agreement could be reached on the basis that the Plaintiff would not give any warranty to the 1st Defendant as to whether:
			(a)	The Sunday Lightbox would be removed;
			(b)	In the event that it was not, the projected portion of any future signage put up by the 1st Defendant would be granted the requisite approval by the Building Authority; or
			(c)	The said Premises could be sublet to commercial tenants.
		(ii)	However, both parties contemplated that:
			(a)	In the event that the Sunday Lightbox was not removed, the 1st Defendant would nonetheless go ahead to erect signage with a projected portion without even applying to the Building Authority for the requisite approval (as it would not be forthcoming); and
			(b)	The 1st Defendant would look for potential commercial tenants with a view to subletting the said Premises to the same.
		(iii)	In other words, the Plaintiff would not stop the 1st Defendant from any prohibited or illegal use of the said Premises.  But at the same time the Plaintiff would owe no liability to the 1st Defendant by reason of any such prohibition.
		(iv)	Of course I needed to make sure that the 1st Defendant would not lose out under this arrangement.  Therefore I said to Mr Yuen that if there was any action taken by the government which would prevent the 1st Defendant from using the said Premises as contemplated and if the Plaintiff was not then able to help the 1st Defendant to continue such use, the 1st Defendant would be able to ‘get out of the deal’ by terminating the tenancy agreement with immediate effect.”

31.  It was upon this basis that the parties proceeded to negotiate and commit to the tenancy and guarantees.

32.  Subsequently he designed and had erected the signboard that projected out over the Sunday signboard having taken no steps to seek approval from the BA.

33.  Furthermore, Vykon proceeded to renovate the interior of the premises into a commercial arcade, whilst no steps had been taken to apply for a change of use.

34.  He went on to state:

“	30.	I have been advised by the legal advisers to the Defendants that by reason of the circumstances in which the Tenancy Agreement was concluded,
		(i)	The Plaintiff cannot now seek to enforce it against the 1st Defendant as it was tainted with illegality.  In this connection, I have been advised that it is appropriate for the Defendants to seek leave of the Court in due course to amend the Defence and Counterclaim dated 24 October 2006 to incorporate the defence of illegality.”

35.  I should say before considering this ground that Mr Yuen in an affirmation has taken issue with the nature of the communications referred to by Mr Welcon Chan; but that is neither here nor there.  This is not the forum for determination of a dispute of facts.  I shall assume that the discussions did take place as attested to.

36.  Does this scenario give rise to triable issues because the Tenancy Agreement is tainted with illegality?

37.  On the basis of the signboard the answer is clearly ‘No’.

38.  The parties are committed to the terms of the Tenancy Agreement, to the exclusion of all prior communications, negotiations and so on.  That is the purpose of the entire agreement clause.

39.  The element of illegality concerning the erection of the signboard was Vykon’s unilateral decision to do so without approval in breach of the Building Ordinance and of clauses 6, 7 and 8 of the Fourth Schedule of the Tenancy Agreement.  There is nothing to indicate that Chan Sing Hoi or its officers connived in these breaches either in the format of the Tenancy Agreement or in its performance.

40.  Vykon alone was liable for its breach and had to rectify the same.

41.  I come now to Vykon’s steps taken to redecorate the interior of the premises.  Does this raise triable issues?

42.  Again the answer is ‘No’.

43.  Again one goes to the Tenancy Agreement to determine what the parties committed to and their rights and obligations.

44.  The combination of the preamble and Third Schedule shows that Vykon agreed to use the premises for residential purposes.  There is no provision permitting commercial use.  In any event, whatever Vykon was hoping to achieve with or without application to the BA, there had in fact been no change of use, for the premises had throughout remained vacant.

45.  And in any event there is no evidence in the Tenancy Agreement as to its terms or in the performance that Chan Sing Hoi connived in any prospective unauthorized change of use.

46.  Vykon and its guarantors have not been able to demonstrate that there are triable issues upon the basis that the Tenancy Agreement is or may be unenforceable.

Clause 2 of the Side Letter

47.  This concerns the pleaded defence.

48.  By the ordinary meaning of the words it presupposes a scenario where the premises restricted to residential use are put to an unauthorized use, and there has been a complaint about that, or the BA or other Government Department having jurisdiction or a Court orders the cessation of that unauthorized use.

49.  Clause 2 cannot be called into play, because with the units remaining vacant there has not been any use let alone unauthorized use.  And of course no complaint or Court order or Government direction to stop any such use has been forthcoming.

50.  Clause 2 does not concern the unauthorized signboard as contemplated by the pleadings.  The erection thereof did not go to unauthorized use.  But even if, doing violence to the ordinary meaning of clause 2, it did refer to the erection of the signboard, the order for removal emerged because Vykon had wilfully and unilaterally declined to apply for permission to put it up.

51.  It cannot, having committed that wrong, benefit from it by walking away from its obligations under the Tenancy Agreement.

52.  There is no defence under this ground as well.

Conclusion

53.  The defendants have not raised any defence which is arguable at trial.

54.  Chan Sing Hoi is entitled to its judgment summarily ordered by the Master.

55.  This appeal is dismissed with costs (nisi) to the plaintiff.