TOP TALENT DEVELOPMENT LTD v. TOP SYSTEM INVESTMENTS LTD

HCA2098/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2098 OF 2006

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REASONS  FOR  JUDGMENT

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1. The plaintiff, as landlord, entered into a provisional tenancy agreement dated 10 January 2003 with the defendant as the tenant.  The premises comprised the basement, ground floor entrance and the 1^st to the 4^th floors of the building in Wan Chai Road called Lucky Centre.  The formal tenancy agreement (“Tenancy Agreement”) was dated 30 January 2003, for four years, from 1 February 2003 to 31 January 2007.

2. In this action the plaintiff claims that the defendant committed the following breaches of the Tenancy Agreement :

(1)  non-payment of rates for the periods of 01/06–03/06 and 07/06–09/06, i.e. the 1^st and 3^rd quarters of 2006; and

(2)  non-payment of interest which the defendant was required to pay under the Tenancy Agreement due to late payment of rentals and other charges of various dates as particularized.

3. Accordingly the plaintiff claims for vacant possession of the premises and mesne profit until the delivery of the said vacant possession. 

Rates

4. In respect of non-payment of rates, the defendant said that the plaintiff, without the consent and knowledge of the defendant, changed the practice of the defendant paying its own rates directly to the Government, to levying rates on the defendant after the plaintiff paid the rates for the whole building directly to the Government. 

5. In the course of the trial it is apparent that the defendant did not deny that it had not paid the rates for the aforesaid two quarters. 

It is quite clear from the evidence before me that the defendant has no defence for the non-payment of rates other than the excuses that its own accounts department was slow and tardy in this respect.  The rates for the premises for the said 1^st quarter was $51,900 and the plaintiff had already paid the same to the Government on 5 January 2006.  In respect of the rates for the said 3^rd quarter, the amount was $56,550 and the plaintiff had paid the same to the Government on 17 July 2006.

6. In fact when the defendant was first billed by a monthly statement together with other charges, the amount stated was only $30,300.  However a copy of the demand note for rates was included and the various items concerning the various units of the premises were clearly stated.  One could easily work out the total amount.  Strangely enough the defendant, even up to this day, could not explain why the 2^nd quarter for the amount of $56,550 was paid in spite of the fact that the monthly statement stated again the wrong figure of $30,300.  The defendant did not pay the amount at all : not on the date of the monthly statement, not on the date when the writ was issued and not at all up to the date of the trial.  There is absolutely no reason why these two amounts should be let outstanding for such a long time. 

Interest

7. The defendant’s liability to pay interest at the monthly rate of 1.5% under Clause 2(f) of the Tenancy Agreement is quite clear.  Even the defendant’s witness, Mr Chung Tsi Kuen, agreed that there were clear provisions for the same.

8. However only in the final submission of the defendant it was submitted that :

“An interest purportedly charged at 1.5% monthly (i.e. 18% per annum), in the absence of contrary evidence, is simply a penalty instead of genuine estimate of damages suffered by P, irrespective of the terms chosen to describe it.”

9. However this penalty point should have been raised in the pleading according to Order 18, rule 8(1)(a).  Thus this point cannot be taken by the defendant otherwise the plaintiff would have had prepared evidence to meet this point at the trial and would lead evidence to show why the parties agreed the interest rate at 1.5% monthly.

10. During the cross-examination of the plaintiff’s 1^st witness, Miss Ku Shing Lan, Miss Ku had honestly admitted that if the defendant had paid the rental and other charges within the month of the monthly statement, the plaintiff would not have charged interest thereon.  That was the practice of the plaintiff even in its monthly statement.  However when the matter was in the hands of their lawyers, they charged interest from the due date of the payment.  For example, rental was payable on the first day of each month, and interest would run from the second day.  Miss Ku conceded that it was still her position that interest should run from the first day of the next month.  I find Miss Ku to be a very honest witness.

11.  There were other concessions made by counsel for the plaintiff as a result of the witnesses’ evidence before the court as follows :

(1) in respect of maintenance fee of the air-conditioning ground, the plaintiff was willing to regard the same was due on the last day of each calendar month;

(2) in respect of rates, the plaintiff was willing to regard that the same was due on the due date specified by the Government; and

(3)  in respect of any item which the plaintiff had no way in timing the settlement date, the plaintiff waived interest on those items.

12. Based on the aforesaid position of the plaintiff, the plaintiff came up with a table of calculations and came up with a total figure of $159,026.78 for late payments of rental, air-con and government rates.  The interest on the two separate items of outstanding government rates for the 1^st and 3^rd quarters of 2006 was $7,039.31, making a total of $166,066.09 for outstanding interest.

Flushing water

13. The defendant in its Defence and Counterclaim raised this issue of flushing water.  It happened in this way.  According to Miss Ku, in or about mid-February 2006, the plaintiff discovered that the defendant had not installed its own meter to measure the quantity of flushing water used in the toilet of the premises.  The plaintiff had been paying all the charges for the defendant’s uses of flushing water in the premises. 

14. Accordingly, on 16 February 2006, the plaintiff wrote to the defendant that the plaintiff would arrange a contractor to enter the premises to install a flushing water meter on 17 February 2006.  However the defendant did not allow the plaintiff’s contractor to enter the premises to install the meter.  In the circumstances the plaintiff cut off the supply of flushing water to the premises.

15. The defendant, in its counterclaim, contended that by cutting the supply of flushing water to the premises, the plaintiff was in breach of Clause 3(b) and Clause 13(c) of the Tenancy Agreement.  These two clauses provided that the tenant should have peaceful enjoyment of the premises and the building management services for the premises including … toilets are to be provided by the landlord from the basement to the 4^th floor.  

16. However the plaintiff relied on Clause 2(r) and Clause 2(s) which provided that the tenant had to pay and discharge all … outgoings of an annual or recurrent nature … to be imposed or charged by … or other lawful authority upon the said premises. 

17. Under Clause 2(s), the tenant covenanted to pay/discharge all charges for … water … consumed on or in the said premises which are operated from the tenant’s own meter supply. 

18. As a matter of construction, it cannot be said that since the toilets are to be provided by the landlord, it would include the flushing water.  Similarly the landlord also provided all the taps and connecting pipes for water, it cannot be said that the landlord also provided water to the premises.  A sensible commercial construction is that flushing water is one of the “outgoing of an annual or recurrent nature … charged by [the Water Authority] upon the premises”.  Accordingly the defendant has the obligation to pay for the same. 

19. The defendant submitted that there was no evidence showing that the plaintiff had paid for the flushing water and they said flushing water should be free of charge.  This, I must say, is again another item of positive allegation of fact.  As a matter of pleadings the defendant had never raised a positive case that flushing water was free of charge.  The evidence of Miss Ku is to the contrary.  If flushing water is free of charge, why should the defendant refused to allow the plaintiff’s contractor to enter the premises to install a meter for the same?

20. Eventually the defendant instructed its own contractor to connect the drinking water to flush the toilet.  Why should the defendant incur $3,900 by such connection in September 2006?  This is illegal and unlawful under section 28 of the Water Works Ordinance, Cap. 102.

21. As submitted by counsel for the plaintiff, there is a mystery which Mr Chung has not satisfactorily explained as to why the defendant did not allow the plaintiff to install a meter inside the premises to measure the amount of flushing water consumed.  If flushing water is free as suggested by Mr Chung, there is no reason to refuse the contractor of the plaintiff to install the meter.  Why should Mr Chung instead choose to use the drinking water which is not free but illegal and unlawful to use the same to flush the toilet?  I must say that the defendant’s behaviour is just ignorant or unexplainable. 

Forfeiture and relief against forfeiture

22. Before the commencement of this action by two letters dated 19 August 2006 and 4 September 2006, the plaintiff’s solicitors demanded the defendant to pay the outstanding rates and interests within seven days.  Those letters constituted the required notice under section 58(1) of the CPO.  No payment was made and the writ was issued on 21 September 2006. 

23. The defendant submitted that even if the court is to rule that the plaintiff had established its claim, the defendant sought the court to grant its relief against the plaintiff’s claim for forfeiture of the demised premises.  The defendant relied on section 58(2) of the Conveyance and Property Ordinance, Cap. 219 (“CPO”) which provides that :

“(2)   Where a lessor is proceeding, by action or otherwise, to enforce such a right of re-entry or forfeiture, the lessee may, in the lessor’s action, if any, or in any action brought by himself, apply to the court for relief; and the court may grant or refuse relief, as the court, having regard to the proceedings and conduct of the parties under the foregoing provisions of this section, and to all the other circumstances, thinks fit; and in case of relief may grant it on such terms, if any, as to costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future, as the court, in the circumstances of each case, thinks fit.”

24. Thus this court will have to pay regard to the proceedings, the conduct of the parties and all the other circumstances.  The defendant submitted that the rates were not paid but did not have an explanation as to the non-payment.

25. In respect of the interests for late payments, the defendant contended that the defendant had not been clearly and consistently invoiced and pursued by the plaintiff during the course of the tenancy.  The breach is also easily remediable.  I suppose this applies to the non-payment of rates as well. 

26. The application for relief against forfeiture was made in conjunction with the defendant’s right of the first option to renew the tenancy at a slightly increased rental.  This is very beneficial to the defendant since the tenancy was entered into at the SARS period when the market was at its lowest level.  However, the plaintiff, in reply to the application for relief against forfeiture and the option for renewal of the tenancy, relied on the aforesaid breaches of the defendant in addition to the defendant’s unlawful sub-letting or parting with possession of part of the premises.  In other words, although the plaintiff did not amend the Statement of Claim by adding an additional cause of action for forfeiture on the ground of unlawful sub-letting, the plaintiff relied on the same as an answer to refuse the defendant’s application for relief against forfeiture and also the rights to renew the tenancy.  I shall first of all deal with the sub-letting issue. 

Sub-letting

27. It is common ground between the parties that the Tenancy Agreementprovided that the tenant should not sub-let or otherwise part with the possession of the premises or any parts thereof to any body corporate in any way.

28. It was only after the commencement of this action that the plaintiff discovered the defendant had parted with possession of part of the premises as follows :

(1) the basement game centre was run by one Global Way Investment Limited; whereas

(2) the hotel was run by one Friendson International Limited.

29. The defendant says that these companies were controlled by the Chung’s brothers and therefore did not constitute any breach of Clause 2(g).  Mr Chung who gave evidence for the defence alleged that the plaintiff has had agreed the premises can be used by any company or companies controlled by Mr Chung and his family members.  Mr Chung said in evidence that, although he had never met Mr Ho Sau Ki, director of the plaintiff, he nonetheless through Mr Wong, the estate agent, passed the documents of Friendson comprising Friendson’s Certificate of Incorporation and its annual return at Tag 16 of Bundle C.  That was during the negotiation between the parties in early 2003.  However, the aforesaid annual return was dated 15 May 2006 and, thus, those documents could not be sent to Mr Ho.  Mr Chung and his witness Mr Wong eventually agreed to that.  (I do not accept Mr Chung’s evidence in so far as they contradicted the evidence of the plaintiff’s two witnesses.)

30. Further in the previous proceedings in another High Court action, Mr Chung said in his affirmation that the two hotel licences were granted to the defendant by the Hotel and Guest House Accommodation Authority.  There was no mention of Friendson here.  Further, in a letter dated 13 October 2004, the defendant wrote to the plaintiff and said that the defendant’s company were to operate the Billiard Centre and the hotel were applying for the lighted box signage at the rear street of Lucky Centre.  This conveyed to the plaintiff that the operator of the hotel was the defendant itself. 

31. Mr Chung further said that there were four important vital conditions precedent which he had asked Mr Wong to convey to Mr Ho.  One of the four conditions was : apart from the amusement game centre business with a new partnership to be incorporated, there will be other businesses of a guesthouse and a billiard establishment run by Friendson or Top System. 

32. However Mr Wong, who had drafted the provisional tenancy agreement, said he had put all the conditions which were important to the defendant in the PTA.  There was no such condition incorporated.  I therefore accept the submission of the plaintiff that it is doubtful whether such request has been conveyed to Mr Ho through Mr Wong. 

33. In fact in the PTA Mr Ho added Clause 18(e) which prohibited the tenant from sub-letting.  Mr Wong said when he witnessed the signing of the PTA by Mr Ho, he had conveyed the additional clause to Mr Chung who signified his acceptance of such an additional clause.  Should there be any negotiation leading to an agreement that the defendant is free to run its businesses at the premises by any company of the Chung’s brothers, such an important clause should be put into the PTA and later on the formal TA which was prepared by solicitors with a number of corrections before the final version was agreed upon.  In fact when the plaintiff’s counsel put to Mr Chung that the plaintiff had never permitted the defendant to share the possession of the premises with any other companies, Mr Chung agreed. 

34. The defendant further referred to the application for amusement game centre licence which was supplied by one Mr Tam Wai Lok and signed by Miss Ho Ka Po Shirley for and on behalf of the plaintiff.  In fact that was dated 10 February 2003 and the same was replaced by another application dated 20 February 2003 where the applicant was one Miss Tse Yuen Mei.  Again Miss Ho also signed for and on behalf of the plaintiff on the application form.  This was approved by the Government in December 2003.  However, this is not evidence that the plaintiff knew at that time the amusement game centre would be run by another person because in both applications the applicant was making the application for and on behalf of the defendant.  

35. Lastly, Mr Chung alleged that the defendant had submitted documents relating to Friendson and Global Way to Mr Cheung, the supervisor of the building.  However, Mr Cheung said that throughout the years, all the documents received by him from the defendant were in Tags 46–50 of Bundle B.  All these documents do not bear the names of Friendson or Global Way or appears to be somehow related to them.  Mr Chung was unable to refer to any documents in support of his allegation.  

36. Further Mr Cheung under cross-examination said he had entered the premises.  He knew that it was necessary to apply for a licence for the operation of a game and amusement centre, a hotel, or a snooker centre.  But he had never seen such licences.  That answer was never further challenged by the defendant’s counsel.  Thus the defendant cannot establish any defence of waiver or estoppel albeit these two defences were never pleaded by the defendant.  (I also accept Mr Cheung’s evidence for the plaintiff.)

37. In conclusion the defendant was in breach of the Tenancy Agreement in terms of sub-letting or otherwise parting with possession to a corporation other than the defendant. 

38. In light of the breaches of the defendant in the following manners :

(1)  failure to pay two quarters of rates;

(2)  failure to pay the stipulated interest;

(3)  failure to allow the landlord to install a meter for flushing water; and

(4)  parting with possession of part of the premises to corporations other than the defendant,

the defendant is not entitled to any relief against forfeiture.

39. Further the defendant, in light of the aforesaid breaches, is not entitled to exercise its option to renew the tenancy. 

Conclusion

40. By reasons of the aforesaid matters, I have given judgment for the plaintiff as follows :

(1) order for vacant possession of the premises to be delivered by the defendant to the plaintiff;

(2)  judgment for the plaintiff for the following sums :

(i)  $108,450.00 being rates for the 1^st and 3^rd quarters of 2006;

(ii)    interest on the above sum at the rate of 8% per annum from the date of the Writ until the date of judgment;

(iii)  the amount of interest in the sum of $166,066.69;

(iv) mesne profit of $309,477.00 per month from 1 September 2006 to 31 January 2007 together with rates as levied by the government for the aforesaid period; and

(v)   mesne profit of $355,073.00 per month from 1 February 2007 until delivery of vacant possession of the premises together with rates as levied by the Government for the aforesaid period.

(3)    the defendant’s counterclaim is dismissed; and

(4)    costs of the action and the counterclaim including all costs reserved be to the plaintiff to be taxed on solicitor bases if not agreed. 

41. There should be stay of execution on the order of possession until 30 June 2008 on condition that the judgment sums in paragraphs (2)(i) to (v) are paid by the defendant to the plaintiff within 21 days hereof. 

42. It is further directed that the time for appeal shall run from the day of handing down the Reasons of Judgment herein.