KIN TAK FUNG CO LTD v. JULION ELECTRICAL CENTRE LTD

1988, No. A5986

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The clauses if A tenancy agreement relevant for the purpose of resolving the issues between the Plaintiff ('the landlord') and the Defendant ('the tenant') in this action for recovery of possession and mesne profits read as follows:-

"1 The Landlord shall let and the Tenant shall take [the premises] for [the term of three years commencing on the 1st day of September 1985 it the calendar monthly rent of $65, 000. 00].....

4.    (a)....if the Tenant for the time being is a company and shall enter into liquidation whether compulsory or voluntary (save for the prupose of construction or amalgamation) then ... it shall be lawful for the landlord at any time thereafter to re-enter upon the said premises... and thereupon this Agreement shall absolutely determine....

6. If the Tenant shall be desirous of taking the said premises for further term of two years on the expiration of the term hereby granted and shall not less than three months before the expiration of the term hereby granted give to the Landlord notice in writing of such its desire.... then the Landlord shall let to the Tenant the said premises for a further term of two years from the 1st day of September 1988 at the monthly rent of $84,500.00....."

2. On 1st September, 1985 the tenant went into occupation of the premises, a shop on the ground floor of Kin Tak Fung Commercial Building at 467-473 Hennessy Road. The writ was issued and served on 1st September, 1988. The tenant is still in occupation.

3. The landlord contends that the tenant, having failed to exercise the option under Clause 4, should have vacated the premises at the expiration of the three year term, that is, on 31st August, 1988, and having failed to do so, the landlord is now entitled to an order for possession and mesne profits for the period of wrongful occupation .

4. The tenant contends (1) that it did exercise the option; (2) alternatively, that, as the premises were subject to the provisions of Part V of the Landlord and Tenant ordinance, the tenancy could be terminated only by, and at the expiration of, a six-month notice to quit, and that no such notice was given; and (3) that if contentions (1) and (2) fail, the quantum of mesne profits is not as great as the landlord claims.

DID THE TENANT EXERCISE THE OPTION?

5. The tenant's evidence was that that Mr. WONG Ying-lun, director and manager of the tenant company, signed a letter dated 13th April, 1988, a photocopy of a photocopy of which was exhibited as Exhibit D1. It is directed to the landlord by name but with no mention of any address. In it the tenant said that, after the expiration of the term on 31st August, 1988, it would continue to rent the shop subject to the terms of the existing agreement. Miss CHANG Pui-Kwan, an employee of the tenant, said that she drafted and typed the origianl and that after it was signed she photocopied it, placed the original in an envelope on which she had typed the landlord's registered address and, during the course of the same day on which Mr. Wong signed it, posted it duly stamped.

6. The evidence of the landlord's witnesses was that no such letter was ever received.

7. I do not accept the evidence of Miss Chang that she posted the original of Exhibit D1 in an envelope addressed to the landlord. Both Mr. Wong and Miss Chang gave me the impression that they were telling a rehearsed false story when they related the circumstances under which the original of Exhibit D1 came to be drafted, signed and posted. That impression was consistent with other evidence indicative of the falsity of the story.

8. The last day for the exercise of the option was 31st May, 1988. On 2nd June, 1988 the landlord sent a registered letter to the tenant saying that, as no notice of intention to exercise the option had been received, the landlord considered that the tenant was not interested in extending the term. On 3rd June, 1988 Mr. Wong telephoned the landlord's office and spoke to Mr. Jimmy Lee, one of the landlord's employees. The evidence of Mr. Wong and Mr. Lee was in conflict as to exactly what was said. Mr. Lee, unlike Mr. Wong, was able to refer to rough notes made at the time to refresh his memory regarding the conversation. His evidence was to the effect that Mr. Wong, far from asserting that he had already exercised the option, was pleading for an extension of time within which to exercise it. That evidence was consistent with a request made later that same day by the solicitors for the tenant. In a letter addressed to the landlord dated 3rd June, 1988 chopped 'URGENT BY HAND' the solicitors wrote:-

"We are instructed that your Mr. Lee has agreed today over the phone with Mr. Wong of our client to allow our client to exercise the option of renewal under clause 6 of the Tenancy Agreement notwithstandinq that the requisite notice has not been served in time. In the circumstances, please treat this letter as a notice required for the exercise of the said option of renewal...."

9. In evidence Mr. Wong, said that his solicitors must have misunderstood his instructions but I find it impossible to believe that, if he had in fact been insisting on 3rd June, 1988 that the option bad been exercised, he could have given the impression to two people on two separate occasions that he had not yet done so. I do not accept his evidence where it is conflict with that of Mr. Jimmy Lee regarding the telephone conversation.

10. I find that the tenant did not send the original of Exhibit D1 to the landlord and did not, at any time before 3rd June, 1988 give the landlord any notice of a desire to take the premises for a further term of two years. I accordingly find that the tenant failed to exercise the option.

WAS A NOTICE TO QUIT REQUIRED TO TERMINATE THE TENANCY?

11. By s. 122 of part V of the Landlord and Tenant Ordinance, tenancies to which the Part applies do not cease at the end of the term unless notice is served by the landlord at least six months before the end to the term. S. 121 of part V Provides:-

"(1)..............

(2) This Part shall not apply to the following--

(a) a tenancy for a fixed term of 3 years or more the agreement for which contains no provision for earlier determination of the same other than for breach of any of the provisions of the agreement [or under a provision of the tenancy allowing forfeiture or dertermination following the destruction, or partial destruction, of or damage to the premises];.............."

12. I have added the square brackets to show how the section was extended when it was amended in 1984.

13. The tenant contends that Part V applies to this tenancy by virtue of that part of Clause 4(a) of the tenancy agreement which is set but above.

14. In Winning Enterprises Ltd. v. Peking Restaurant Ltd. ([1971] HKLR 240) it was held by Briggs, J. (as he then was) that a similar clause was not "a provision for earlier determination" within the meaning of a provision identical with s 121 (2) (a) before the 1984 amendment. That decision was followed by Trainor, J. in Yue Wan Estates Ltd. v.Ding Kwei-tsoti (H.C.A. No. 932 of 1976, unreported) and his decision was upheld on appeal by a majority of the Court of Appeal (Civil Appeal No. 36 of 1976, unreported).

15. In Joseph Edward Hotung v. Jimmy's Kitchen Limited ([1982)] HKLR 196) the tenancy agreement contained one clause similar to Clause 4(a) and another which gave the Landlord an absolute right to determine the lease following the destruction, or partial destruction, of or damage to the premises. Fuad, J. (as he then was) found that he was bound by the Court of Appeal decision in Yue Wan Estates to hold that the clause similar to Clause 4(a) was not a provision for earlier determination. With regard to the other clause not covered by binding authority he held that it was a provision for earlier determination. The words I have enclosed in square brackets did not then form part of the section.

16. In trying to persuade me to hold that Clause 4(a) was a provision for earlier determination Miss Vibert faced the following two insuperable difficulties:-

(1)    the binding authority of Yue Wan Estates which says that it is not; and

(2)    the legislative history of s. 121. If the intention of the Legislature was that clauses providing for forfeiture following destruction or damage were not within the category of "earlier determination provisions" attracting the operation of part V, then the decision in the Jimmy's Kitchen Case revealed that the pre-1984 wording of s. 122 failed to express that intent. The 1984 amendment show that that was the legislative intention and the amendment remedies the drafting defect disclosed by the Jimmy's Kitchen decision. If the Yue Wan Estates decision did not accord with the true legislative intent as regards Clause 4(a) type provisions, one would have expected the Legislature, when it was revising the section in 1984, to have amended the section to rectify that drafting deficiency as well. The fact that the Legislature did not do so is a clear indication that the Legislature regards the Yue Wan Estates decision as accurately interpreting the legislative intent.

17. It is therefore impossible for me to hold that Clause 4(a) attracts the operation of Part V. I accordingly find that there was no need for the landlord to give a notice in compliance with s. 122.

MESNE PROFITS

18. Both counsel agree that the measure of damages as mesne profits is as set out in the following passage from McGiegor on Damages, (15th edition, p. 879):-

"The normal measure of damages is the market value of the property occupied or used for the period of wrongful occupation or user. There is little authority, but this measure is consonant with general principles and with the name of the action for wrongful occupation as one for mesne profits. If the rental value varies due to market fluctuations during the period of wrongful occupation, these fluctuations should be taken into account."

19. A footnote after "mesne profits" refers to Clifton v. Huntley ([1948] 2 All E.R. 283, 284) where Denning, J. (as he then was) said, in effect, that mesne profits should be assessed according to the most recently agreed rent unless there was evidence that the real value was other than that agreed rent.

20. As part of its evidence of the market value the landlord put before the court evidence of a written agreement between it and Tse Sui Luen Jewellery Company Limited ("TSL") dated 16th July, 1988. Under that agreement the landlord agreed to grant, and TSL agreed to accept, tenancy of the premises  from 1st September, 1988 for a term of three years at a monthly rent of $192,336.

21. It seems to me that that must be taken to be prima facie evidence of the market value of the premises if let for a three year period from 1st September, 1988.

22. In support of its contention that that rent was not the real value the tenant relied on the evidence of its expert valuer. He made an inspection of the premises in February, 1989 and came to the conclusion, on the basis of his analysis of other comparable premises, that the appropriate value then was "in the region of $150,000 per month", and from that valuation concluded that the value for a two-year term commencing on 1st September, 1988 was $140,000 per month. When he gave evidence he was prepared, after considering criticisms of his valuation by the landlord's valuer, to "raise the value to $142,000".

23. The landlord also called a valuer who had made an inspection towards the end of January, 1989. He said in evidence that the rent which TSL had agreed to pay was reasonable but high in relation to his valuation done using the same basis of valuation as the tenant's valuer. He though the valuation in February, 1989 was $250,000. Making allowance for the rise in rentals in that area subsequent to September, 1988 he arrived at a figure of $180,000 as his valuation as at 1st September, 1988.

24. Each valuer used four comparable properties in the vicinity for the purpose of assessing the notional value of the subject premises. Only one of those "comparable properties" was common to both valuers. That was a shop next door in the same building. Both valuers found this letting to be significant because it was so similar that it needed no adjustments in respect of two very significant factors, namely, location and time of letting. This "comparable" was let on 1st September, 1988 for a term of three years at $177,500 per month.

25. The tenant's valuer said, in his report, that this shop "should in theory provide the best guide for assessing the rental value of the subject property". In evidence, he said, that "it was best" only in the sense that, unlike other "comparables", no adjustment was needed for the location and timing of tenancy factors but that that did not mean that the agreed rental in respect of it was a fair market rent. In order to determine whether it was he needed to look at other "comparables".

26. His only other "comparable" which fronted the same side of Hennessy Road, with like advantages and/or disadvantages provided by the location, was on the ground floor of an older building next door. It had an area of 450 square feet compared with the subject premises area of 1030 square feet (according to tenant's valuer) or 1020 square feet (accoridng to the landlord's valuer) and a frontage of 14.5 feet compared with the subject premises frontage of 17 feet (according to the tenant's valuer) or 20 feet (according to the landlord's). This "comparable" had been let for two years from September, 1988 at $88,000 per month or $178 per month per square foot.

27. It one takes the lower of the two areas, and accepts that this is a true comparable needing no adjustments, the resulting notional rental for the subject premises is $182,000.

28. Both valuers agreed that this "comparable" was more efficient as a shop because of its smaller size and layout. The landlord's value thought that the tenant's valuer exaggerated the advantage of this factor, whereas the tenant's valuer thought that the frontage and age of building were of less significance than the landlord's valuer thought.

29. The landlord's valuer, howeve,r was able to demonstrate, using the tenant's valuer's appraisal of the "next door shop", that his own valuation of $180,000 was reasonable.

30. I have found it unnecessary to determine whether either of the two labyrinths of reasoning in respect of the other "comparables" provides a way to find the real value of this property for the purpose of assessing the landlord's loss. Their evidence in relation to the property both accepted as the best guide to the value of the subject premises showed that there was no reason to suspect that the rent which TSL agreed to pay, although higher than should have been agreed had both parties obeyed the ground rules by which notional "best rents" are determined by valuers, was other than a rent agreed in the open market between two parties negotiating with each other at arms' length. I find that the real value of the premises as at 1st September, 1988 for three year leasing purposes was that agreed rent of $192,336.

31. For the purpose of assessing the landlord's loss I think that some adjustment needs to be made to that figure because the landlord's loss is a short-term rental. The tenant's valuer said that, in a period of rising rentals, landlords prefer shorter rental periods so that they can take advantage of the rising market to increase rentals rapidly, whilst tenants prefer longer periods with an enhanced rental throughout in order to avail sharp increases at short intervals.

32. There is no doubt on the evidence that the agreement between the landlord and TSL was negotiated during period when the market was rising. It is highly probable, therefore, that the rent which TSL agreed to pay was enhanced by the expectation that rents would continue to rise. The tenant's values thought that parties would expect the increase to be 30% at the end of a three year period. He was strongly challenged in cross-examination about this figure but it seems to me to be a reasonable inference bearing in mind that the option clause in the agreement between the parties in this case suggests that that was their expectation in 1985. Using the methods which the tenant's valuer used to deduct this element from the long term rental in order to calculate what the short term rental would have been, I find that $192,336 was 110% of the short term value. I, therefore, find that mesne profits should be calculated at the rate of $174,850 per month.

33. I give judgment in favour of the Plaintiff for possession and mesne profits at the rate of $174,850 per month from 1st September, 1988 until the date of delivery of vacant possession. I also make an order nisi for costs against the Defendant.