EASTFORM INDUSTRIES LTD v. MAN TAT CO LTD AND ANOTHER

IN THE HIGH COURT OF THE HONG KONG SAR

COURT OF FIRST INSTANCE

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JUDGMENT

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1. In late 1995, while the Plaintiff company ("the Landlord") was in the course of buying at an auction, the premises on the Ground Floor and Cockloft of Mei Wan Building, No. 46-52 Po Heung Street, Taipo, New Territories (hereinafter referred to as the "Shop Premises"), the 1^st Defendant company ("the Tenant") approached the Landlord and expressed an interest in taking a tenancy of the Shop Premises from the Landlord. The Shop Premises consisted of the Ground Floor and the Cockloft. The Cockloft however has no independent entrance and access to the Cockloft could only be gained from the Ground Floor through internal stairs leading from the Ground Floor.

2. In the course of negotiating for the tenancy of the Shop Premises, it is alleged by the Landlord that there was a discussion between Mr. Lam Wai Mo, a director of the Landlord ("Lam") and Mr. Lei Heng Leong, a director of the Tenant ("Lei") in which the Landlord made it very clear to the Tenant that under no circumstances, was the Tenant to sublet or part with the possession of any part of the Shop Premises and that the tenancy agreement to be granted by the Landlord to the Tenant was to contain such a provision of no subletting. It is alleged at the hearing that the Tenant agreed very clearly to the express stipulation of no subletting of any part of the Shop Premises and not permitting any one to use the Shop Premises. A tenancy agreement in Chinese dated 1^st December 1995 ("Agreement") was then entered into between the Landlord and the Tenant which contained in Clause 2 the following provision according to the translation submitted to the Court:-

"It is agreed that the Tenant shall not sub-let or transfer the tenancy to other persons ....."

The Agreement was for a lease period of 3 years with an extension and the monthly rent provided by the Agreement was $48,000 adjusted to $58,000 for the two year extension period.

3. In December 1996, Lam of the Landlord noticed from the shop sign outside the Shop Premises that a different shop seemed to be operating there. The shop which the Tenant was supposed to be running was Price Down Houseware Centre selling household products but the new shop which was set up in December 1996 was Ginseng USA selling ginseng and Chinese herbal medicine (see the photographs at pages 11 and 12 of the Bundle). Lam instructed solicitors to write to the Tenant complaining of this breach of the Agreement and a letter dated 16^th December 1996 was sent by the Tenant's Solicitors to the Tenant. There was no answer from the Tenant to this letter. It was probably shortly thereafter that Lam went to the Shop Premises which was occupied by the 2^nd Defendant. The staff of the 2^nd Defendant allowed Lam to look around including going up to the Cockloft where Lam saw Chinese herbal medicine goods and packaging of the 2^nd Defendant being stored in the Cockloft. It was on this basis Lam told the Court that he was sure that the whole of the Shop Premises had been let to the 2^nd Defendant by the Tenant.

4. By letter dated 2^nd January 1997 (wrongly typed 1996), Solicitors of the Landlord wrote to the Tenant saying that the whole of the Shop Premises had been wrongfully let to the 2^nd Defendant and that therefore the Agreement was terminated for this serious breach. Still there was no response from the Tenant. In mid January 1997, Lam's evidence is that he managed to leave a message for Lei about the unlawful sub-letting and Lei telephoned Lam and admitted to Lam that the Tenant had indeed unlawfully sublet the whole of the Shop Premises to the 2^nd Defendant and said he knew it was unlawful but asked for indulgence from the Landlord. Lee told Lam that he was receiving $100,000 per month from the sub-tenant. At the end of this telephone conversation, Lam demanded that the Tenant took immediate steps to have the 2^nd Defendant sub-tenant evicted. But this was close to the Chinese New Year holidays, which was of course the best time of the year in Hong Kong for business and profits. It was therefore not surprising that the 2^nd Defendant continued in occupation of the Shop Premises until March 1997. It was hardly likely with Chinese New Year merely days away, that in mid or late January 1997, the Tenant would evict the sub-tenant which was paying very good money to the Tenant or that the Tenant would agree to go.

5. A further letter was written in February 1997 by Solicitors for the Landlord to the Tenant demanding possession which led to subsequent correspondence and eventually the present proceedings which was commenced on 17^th February 1997. When the trial started, a number of minor issues had fallen away and the following issues required resolution by the Court:-

CREDIBILITY OF WITNESSES

6. Three witnesses gave evidence at the Trial, namely Lam for the Plaintiff, Lei and a Chui Ching Shing for the Tenant 1^st Defendant.

7. Lam is a Chinese gentleman of the old school who struck me as being a man who believed in the traditional standard of being honourable rather than merely financially profitable. I am impressed by Lam as a witness and although his evidence was not always totally coherent, I have no doubt that he was a man of truth and that his evidence can be relied on. I accept his evidence except where in this Judgment I indicated otherwise and I far more prefer his evidence to the evidence given on behalf of the 1^st Defendant Tenant.

8. Lei on the other hand is a modern man and with all the negative values attached to this new world, such as greed, aggressiveness, willingness to sacrifice truth and principle for success. Lei struck me as obviously sharp but not a man of truth. I reject his evidence where it is material and I do not find him a witness of truth.

9. Chui Ching Shing ("Chui") was euphemistically called a property consultant but is known in many parts of the world as a property broker. Chui made his living from the property transactions generated by big clients such as the 1^st Defendant and its group of companies. He was a smooth witness and had all the appearance of someone telling something plausible. As a salesman (to push properties) I am sure he would be convincing but I have serious doubts that he is a man who cared about principle or truth. He would advance whatever it would be in his interest to advance and I have no doubt that in giving evidence to this Court he was only interested in advancing the interests of the 1^st Defendant and that he would distort whatever might be the evidence to suit the convenience of the 1^st Defendant. I reject Chui as a witness of truth and I also reject in large measure his evidence.

SUBLETTING OR LICENSE

10. The photograph of the Ginseng USA Shop sign produced at the Trial clearly indicated that the use and occupation of the Shop Premises had been given to the 2^nd Defendant. The Tenant justified this occupation by the 2^nd Defendant by relying on the evidence of Lei and Chui and the documentary evidence of a so called Property License Memorandum dated 27^th November 1996. So far as the evidence of Lei and Chui are concerned, I have indicated earlier I do not accept them as truthful witnesses and I have therefore no difficulty in rejecting their evidence that there was no subletting but only a license. As for the so called Property License Agreement, I do not accept that document as being genuine or came into existence in late November 1996. It is to be noted that the original of this Chinese document was produced neither by Lei nor by Chui nor by Mr. Chan of 2^nd Defendant who of course did not give evidence.

11. It seems to me that the truth is what Lam said in his Witness Statement, namely that in mid-January 1997, Lei of the Tenant had confessed to Lam of the subletting being unlawful and asked for the Landlord's indulgence. I have no doubt that in substance and in reality, there was a subletting in late November or early December 1996 by the Tenant to the 2^nd Defendant for a very substantial consideration of a rental payment of $100,000 per month (which is nearly double the rent under the Agreement). I find as a fact that there was a subletting by the Tenant which was prohibited by the Agreement.

SUBLETTING WHOLE OR PART OF PREMISES

12. Again here my findings of the credibility of the witnesses decide the Issue. As stated earlier, I reject the evidence of Lei and Chui about the making of the so called Property Licence Memorandum. I accept the evidence of Lam that the Cockloft was also included in the sublet to Ginseng USA by the Tenant. Lam was subjected to a great deal of intensive cross examination on his photographs and I accept his explanation about the photographs, which I do not find in any way diminish the value of his oral evidence. I also reject the document of the Property Licence Memorandum produced by Lei which document purported to say that only the Ground Floor possession was given to Ginseng USA but not the Cockloft. I do not accept the genuineness of that document and in my view it made no sense for Ginseng USA to pay $100,000 per month but was not given all the Shop Premises. It might well be that the Tenant was allowed to leave some of its furniture there in the Cockloft but nevertheless Ginseng USA rented the whole of the Shop Premises not merely the Ground Floor. To suggest that Ginseng USA would agree to pay that kind of money but allow the Tenant to go in and out and to go through the Ground Floor to the Cockloft or allow the Cockloft to be locked up by the Tenant is not believable to me in the circumstances. Mr. Chan of Ginseng USA did not give evidence nor was the original of the so called Property licence Memorandum document produced. Further, I just do not believe any genuine document would contain a genuine one day notice for termination. I do not accept the hearsay assertion by Chui that these were all acceptable to Chan of Ginseng USA. On the totality of the evidence before me, I therefore find that the Shop Premises had been sublet the Tenant wholly and not partly to Ginseng USA.

SUBLETTING IN BREACH OF AGREEMENT

13. On the basis of my finding under Issue I that there was a subletting (not a license) and under Issue 2 that the whole of the Shop Premises (not part) had been sublet, it follows that I am satisfied that there was a breach of the Agreement and that therefore the Landlord Plaintiff is entitled to possession of the Shop Premises.

14. In the course of the argument during the hearing, a number of matters were canvassed such as the proper construction of the no subletting Clause 2, the correctness of Cook v Shoesmith [1951] 1 K.B. 752 and other related authorities, whether oral evidence of Lam about pre-contract representations of Lei was admissible to explain or expand on Clause 2. But as I have found in favour of the Landlord on the essential Issue I and Issue 2, it is unnecessary for me to consider any of these many interesting points and I make no determination about them and I do not rely on them to decide against the Defendant Tenant.

15. There shall be an Order for possession of the Shop Premises against the 1^st Defendant. The Plaintiff shall have the costs of the Action against the 1^st Defendant.