BOTTCHER INVESTMENT LTD v. NG PAK YUEN

1989 No. A2412

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF DAMAGES

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1. This matter arose out of a breach of a tenancy agreement under which the Plaintiff was the landlord and the Defendant was the tenant. The assessment came on for hearing on 1st November 1989. With the consent of the parties, decision was delivery on the same day at the conclusion of the assessment with detailed reasons reserved. I now give the detailed reasons for my decision.

2. By a tenancy agreement dated 14th August 1987, the Defendant took up a two year tenancy of the premises at Shop Unit No.2, ground floor, Cheung Wah Commercial Building, Nos. 3-5, Saigon Street, Kowloon, from the Plaintiff. Monthly rental for the first year (2nd July 1987 to 1st July 1988) was at $28,000.00 exclusive of rates. For the second year (2nd July 1988 to 1st July 1989), monthly rental was to be at $31,625.00 exclusive of rates. Since April 1988 the Defendant had persistently fallen in arrears of rents. Vacant possession of the premises was obtained by the Plaintiff on 2nd December 1988. Present proceedings were commenced on 9th May 1989, and on 26th July 1989 the Plaintiff obtained final judgment for all arrears of rents and various other charges and interest upon a default of defence. The Plaintiff also obtained interlocutory judgment for damages to be assessed. Damages were assessed on 1st November 1989 and it was held that the Plaintiff failed to prove any damages attributable to the Defendant's breach.

3. On 24th October 1989, the Plaintiff unsuccessfully sought an order for leave to adduce evidence at the assessment by way of affidavit in addition to oral testimony. Only one witness was called to testify on behalf of the Plaintiff. A bundle of documents was placed on the bench table when I entered and remained so until the end of the hearing without any reference being made to the contents of the same by either solicitors for the Plaintiff or the witness, save a casual reference by Plaintiff's solicitors to the tenancy agreement. Most of the documents contained in the bundle are, however, the subject matter of a hearsay notice dated 16th October 1989. The said hearsay notice fell just outside the 21 days prescribed by Order 38 Rule 21. However, the Plaintiff's evidence on the placing of the advertisements was not challenged and the claim for advertisement costs was waived. The Defendant did not give evidence or call any witness.

4. Kok Tuna Ming, the administrative assistant of the marketing section of the Plaintiff company, said the Plaintiff had tried without success to let out the said premises after recovery of possession on 2nd December 1988. Advertisements were placed in the Sing Tao Yat Po, which has a large section devoted to properties, usually once a week. Posters were also put up at the office of the Plaintiff by the leasing officer. The Plaintiff was minded to let the premises out for a three year term. The asking rental was initially fixed at $57,000.00 per month. As no enquiry was received at all in response the rental was subsequently reduced to $55,000.00. It would appear from the cony advertisements in the bundle that the reduction took place on 23rd May 1989. On 21st July 1989, after the expiration of the tenancy in question, the Plaintiff received a counter-offer of $45,000.00. Despite the said counter-offer, the premises was still vacant at the time of the assessment. The asking rental was fixed by reference to the "expected selling price" of the premises. The Plaintiff after considering the market price "according to the property transactions" would take the monthly rental at 1% of such sum.

5. The Defendant in an attempt to give evidence during his submission said it was unreasonable for the Plaintiff to ask for such high rentals in view of the fact that; (i) the premises is only 300 odd sq.ft. in size, and (ii) all three cinemas in the vicinity had been demolished and it will take a long time for new ones to be nut up again. I will not take account of such allegations as evidence since the same were not given on oath.

6. The Plaintiff must, when faced with a breach which would terminate the tenancy, make an election whether to uphold the tenancy despite the breach and claim for arrears of rental at the expiration of the term; or to forfeit the tenancy, re-enter and claim for damages. If the Plaintiff claims damages, he bas then elected to be bound by the rules relating to remoteness and mitigation of damages. The burden of establishing causation of the alleged damages lies with the Plaintiff, while the burden of establishing a failure to mitigate lies with the Defendant.

7. The Defendant has in fact raised both issues of remoteness and a failure to mitigate in his submission. No objection was made by the Plaintiff, or indeed could be made at all, as to the lack of pleadings raising the issue of a failure to mitigate since judgment was obtained on the ground of default of a defence.

8. The Plaintiff must establish that the alleged damages were caused by or flows naturally from the Defendant's breach. The Plaintiff has alleged that its attempts to let out the premises were fruitless and thus the Defendant ought to be liable to compensate the Plaintiff for the loss of rental and rates for the unexpired term of the tenancy i.e. [$31,625.00 (contractual rent) + $1,140.00 (rates)] x 7 months (2nd December 1988 to 1st July 1989) = $229,355.00. Prima facie, if the Plaintiff could not let out the premises for the said unexpired term, it is entitled to he compensated by the Defendant for such loss. However, if the inability to let out was not due to prevailing market condition but as a result of a novus actus or nova cause interveniens, the damages would be too remote and unrecoverable. Has there been such an intervening act or event in the present case?

9. The contractual rent for the period in question under the said tenancy was $31,625.00 per month, i.e. about $3,625.00 or a 12.95% increase on the contractual rent for the first year of the tenancy. Such progressive rate rentals for a fixed term tenancy is not uncommon and is to cater for matters like inflation and appreciation in property value. The rents asked for by the Plaintiff in the advertisements were about $23,375.00 - $25,375.00 or 73.91%- 80.24% more than the contractual rent of $31,625.00, and was a 96.43% - 103.57% increase on the rental of $28,000.00. Rentals no doubt represent part of the return for the landlord on his investment in the property (in addition to appreciation in value). And to this extent, it is riot surprising for the landlord to wish to link the rate of return in direct proportion to the value of his investment i.e. market value of the property. However, the desired rental is very often affected by the prevailing market condition. Quite apart from the "supply and demand" factor, the economic and political factors are of particular importance in Hong Kong. The "1% of the expected selling price" may or may not be a reasonable rate of expected return for a landlord. There is no evidence adduced, expect or otherwise, to establish such is a reasonable rate of return acceptable to a commercial landlord. The reasonableness and the propriety of it has not been established by any evidence at all. Further, the basis of the rate i.e. the market value, has not been established by any satisfactory evidence at all. There was no expert evidence. The only evidence was a very vague statement that the Plaintiff had reviewed "the property transactions". The scope and extent of the alleged review, and the source and nature of the materials reviewed are entirely unknown. On the other hand, the said asking rental was on the face of it a remarkably substantial increase from the contractual rate for the same period. Further, it was a flat rate for an intended term of 3 years. A flat rate would no doubt be higher than a progressive rate in respect of the first part of the tenancy as it is usually based on an average of the rates over the whole term. The tenancy with the Defendant was only for 2 years and at a progressive rate. The intended tenancy was, according to the Plaintiff's witness, for a term of 3 years and at a flat rate. It is of course not unreasonable for the Plaintiff to wish to let the premises out for a term of longer than the unexpired 7 months of the said tenancy at an increased rental. It is, however, suite different when the Plaintiff was asking for a 3 year term at a very substantially increased rent at flat rate. Such a rate of increase, even by Hong Kong Standard, can't be said to be ordinary and usual. It cries out for justification. The Plaintiff waited for 6 months before it was prepared to concede a nominal $2,000.00 (3.5%) on the asking rental. The response made to the advertisements only came after the reduction of the asking rental. The counter-offer was for $45,000.00 only, substantially less than the asking rate. It is not known as to why such negotiation came to no avail, as Mr. Kok never bother to give any detail of the said enquiry or what became of it. All he said was that "the offer was only for $45,000.00". All these are indicative of the Plaintiff's attitude in its attempts to let out the said premises.

10. Despite the fact that the Plaintiff only chose to translation part of the Chinese advertisements, I noted that the advertisement was placed through an estate agent No evidence was led as to this aspect of the case. No corporate link was established between this estate agent and the Plaintiff. In the premises, on the face of it, the evidence given by Mr. Kok as to the enquiry and the lack of it must necessarily be hearsay. Further, most of the photostat copies of Chinese advertisements are totally illegible. No attempt was made to make available to the Court the originals or typed transcripts of the photostat copies at all. Further, the translations were not certified at all. Such a state of affairs is hardly desirable to allow to exist in a case where the culpable party is legally represented. It is, however, not necessary for me to take account of matters in this paragraph against the Plaintiff in coming to a conclusion on the assessment.

11. On the available evidence before me, I am not satisfied that the Plaintiff's inability to re-let the said premises flows naturally from the Defendant's breach. I am not persuaded that the asking rentals of the Plaintiff are at fair market rates at the relevant period. I am satisfied that the Plaintiff's predicament was due to its own arbitrary and inflexible approach in its attempts to let out the said premises; rather than a natural consequence of the prevailing market condition. It appears the Plaintiff would rather hold on to its desired rate of return than to come to terms with the market condition and sentiments.

12. The failure of the Plaintiff to be flexible on its attempts to re-let the premises on alternative terms also, in addition to the matters already considered supra, brought about a failure on its part to mitigate loss. The Plaintiff may perhaps not be expected to go below the contractual rate of $31,625.00, or even below a reasonable increase over such a rate. But it is very different for the Plaintiff to say that it is entitled to only contemplate letting the premises out for a 3 year term and at an increase rate of at least 73.91% over the contractual rental (which was already at a progressive rate under the said tenancy). The Plaintiff is under a duty to act reasonably. It would be reasonable for the Plaintiff to consider available alternatives to minimise loss. Alternatives such as a lower, but still reasonable, rental for a shorter term. I find the Plaintiff also to have been guilty of a failure to mitigate loss.

13. For the reasons given above, the Plaintiff has failed to prove any recoverable damages against the Defendant. As the Defendant informed the Court that he would not ask for costs, I have ordered that there be no order as to costs of the assessment.