CHEUNG MAN KIT v. YAU PE TAK PETER

DCCJ 4504/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4504 OF 2005

--------------------

-------------------

Dates of hearing  :  28 - 29 July 2008

JUDGMENT

Background

1.  The Plaintiff ("Mr. Cheung") let from the Defendant ("Mr. Yau") Shop A on Ground Floor of Tat Wo Building, 108 and 110 Aberdeen Main Road, Hong Kong ("Premises") for a term of 43 months.  A tenancy agreement dated 31 December 2004 (the "Agreement") was signed between the parties.  The monthly rent was stated to be $23,000 for the initial period of the tenancy from 1 January 2005 to 31 July 2006.  It is not in dispute that Mr. Cheung let the Premises in order to carry on there the business of a restaurant.

2.  In essence, Mr. Cheung claims that his landlord, Mr. Yau, was in breach of Clause 3(a) of Agreement which provides that the landlord agrees to pay the rates, government rents, management fees and outgoings of a capital and non-recurring nature payable in respect of the Premises.  He claims that as a result of Mr. Yau's failure to make payment of the management fees due from May 2000, the Incorporated Owners of Tat Wo Building ("Incorporated Owners") cut off water supply to the Premises on 9 August and 10 August 2005, and instituted proceedings against Mr. Cheung in District Court Action DCCJ 3983 of 2005 (“DCCJ 3983") for payment of the management fees due.  Mr. Cheung alleges that consequently, his restaurant was closed for 2 consecutive days, and he sustained damages.

3.    Mr. Cheung also claims that by reason of the foregoing, Mr. Yau was in breach of the covenant for quiet enjoyment contained in Clause 3(b) of the Agreement.  Mr. Cheung alleges that he was entitled, by reason of Mr. Yau's repudiatory breach, to terminate the Agreement which he did by delivering up vacant possession of the Premises to Mr. Yau on 31 August 2005. 

4.  On 13 September 2005 Mr. Cheung commenced these proceedings to seek a declaration that the Agreement had been discharged by Mr. Yau's repudiation, damages in the total sum of $90,000, and repayment of the rental deposit of $69,000 paid under the Agreement. The $90,000 represents the legal costs of $70,000 which Mr. Cheung had to pay to the Incorporated Owners when DCCJ 3983 was discontinued by way of settlement, and the further sum of $20,000 which Mr. Cheung had to pay to his own lawyers relating to DCCJ 3983.

5.  By way of defence, Mr. Yau denies that he was in breach of Clause 3 (b) of the Agreement.  He claims that any interruption of Mr. Cheung's enjoyment of the Premises was caused not by anyone claiming under or in trust for Mr. Yau, but by the unlawful acts of a third party, the Incorporated Owners.  Further or alternatively, Mr. Yau claims that he is not liable under Clause 4 (n) of the Agreement to pay any damages to Mr. Cheung for any failure in the provision of building services to the Premises which is due to or caused by any cause beyond Mr. Yau's reasonable control.  Finally, Mr. Yau claims that Mr. Cheung had wrongfully repudiated the Agreement by terminating the tenancy before 1 September 2006, and counterclaims for damages sustained by him as a result of Mr. Cheung's breach.

6.  Initially, Mr. Cheung had claimed that the Agreement was entered into by the parties' mutual mistake that Mr. Yau was the Personal Representative of the deceased registered owners of the Premises, when in fact Mr. Yau was not.  This claim was abandoned at trial.

7.  Mr. Yau admits that he was in breach of Clause 3(a) of the Agreement by failing to make payment of management fees.  However, he denies that such breach entitled Mr. Cheung to terminate the Agreement on 31 August 2005.  He further denies that it was his breach of Clause 3 (a) which had caused any interruption in Mr. Cheung's enjoyment of the Premises.

The issues

8.  The issues for determination at trial are :

(1)  Was Mr. Yau in breach of the covenant for quiet enjoyment in Clause 3 (b) of the Agreement?

(2)  If the answer to issue (1) is yes, did such breach entitle Mr. Cheung to terminate the Agreement, and was such breach accepted by Mr. Cheung?

(3)  What was the effect of Mr. Yau's breach of the covenant to pay management fees under Clause 3(a)?

(4)  Was Mr. Cheung in breach of the Agreement by wrongfully terminating the Agreement on 31 August 2005?

(5)   If the answer to (4) is yes, what are the damages payable by Mr. Cheung?

Was Mr. Yau in breach of the covenant for quiet enjoyment in Clause 3 (b) of the Agreement?

9.  Clause 3 of the Agreement provides :

" The Landlord hereby agrees with the tenant as follows :

(a)    …

(b)    That the tenant paying the rent hereby agreed to be paid on the days and in manner herein provided for payment of the same and observing and performing the covenants agreements stipulations and conditions herein contained and on the Tenant's part to be observed and performed shall peaceably hold and enjoy the said premises during the said term without any interruption by the Landlord or any person lawfully claiming under or in trust for the Landlord."

10.  It is not in dispute that the supply of fresh water to the Premises on 9 August and 10 August 2005 was cut off, not by Mr. Yau, but by the Incorporated Owners without Mr. Yau's consent or approval.  There had been some dispute between Mr. Yau and the Incorporated Owners as to the amount of management fees outstanding in respect of the Premises.  On 1 August 2005, the Incorporated Owners wrote to Mr. Yau, with copy to Mr. Cheung, to give notice that as management fees in respect of the Premises had long been outstanding, the provision of "all public/common facilities and services" to the Premises shall be suspended after 7 days "until the necessary procedures with the Incorporated Owners had been satisfactorily dealt with".  Mr. Cheung immediately notified Mr. Yau of this and asked Mr. Yau to settle the outstanding management fees.  Mr. Yau informed Mr. Cheung that he would handle the outstanding fees and deal with the Incorporated Owners.  However, on 9 August 2005, at around 7 a.m., Mr. Cheung discovered that the Incorporated owners had used a chain to lock up the main water tap of the Premises, as a result of which fresh water supply to the restaurant was terminated from 7 a.m. until 6 p.m., and restored only after Mr. Yau had sent someone to remove the chain.  Police had been called in, but to no avail.  The same thing happened on 10 August 2005, when fresh water supply to the Premises was again disconnected by the Incorporated Owners from 6 a.m. until 4 p.m., when Mr. Yau caused the chain to the water tap to be removed.  The restaurant at the Premises had to be closed for 2 consecutive days on 9 August and 10 August. 

11.  On the evidence, and in view of the fact that the Premises were used for operation of the business of a restaurant, I accept that there was substantial interference with Mr. Cheung's possession of the Premises and his ability to use the Premises for his restaurant business, and that this may constitute breach of the covenant for quiet enjoyment.

12.  However, the covenant for quiet enjoyment gives protection against the acts of persons claiming under the landlord so far as they are successors in title to the landlord, or actually have authority from him to do the acts (Halsbury's Laws of England 4th Edition, 2006 reissue, para 509).  I do not accept that the Incorporated Owners are Mr. Yau's successors in title.  Nor is there evidence that Mr. Yau authorized the Incorporated Owners to disconnect the water supply, or to institute DCCJ 3983.  To the contrary, Mr. Yau objected vehemently to the Incorporated Owners' actions, and claims that their acts of disconnecting fresh water supply to the Premises are unlawful.

13.    Counsel for Mr. Cheung argued that the Incorporated Owners are persons claiming in trust for Mr. Yau, or are his agents, by virtue of the provisions of s.16 of the Building Management Ordinance ("BM Ordinance").  S.16 provides simply that when the owners of a building have been incorporated under the BM Ordinance, the rights, powers, privileges and duties of the owners in relation to the common parts of the building shall be exercised and performed by, and the liabilities of the owners shall be enforceable against the corporation to the exclusion of the owners.  I do not agree that by virtue of these provisions, the Incorporated Owners claim under or in trust for Mr. Yau as owner of the Premises when they took steps to disconnect the fresh water supply to the Premises, or institute proceedings against Mr. Cheung for recovery of the management fees payable in respect of the Premises.  As counsel for Mr. Yau pointed out, it does not logical sense to say that the Incorporated Owners act as agent or in trust for Mr. Yau when they seek recovery of the management fees due from and payable by Mr. Yau.

14.  Even if the Incorporated Owners can in any way be considered to be persons claiming under or in trust for Mr. Yau, it is clear that the covenant for quiet enjoyment does not extend to the unlawful acts of persons even if they derive title under the landlord (Halsbury's Laws of England 4th edition, 2006 reissue, para 509).  The decision in Grace International Ltd. v. Incorporated Owners of Fontana Gardens & Ors. [1996] 4 HKC 635 clearly shows that the disconnection of water supply is prohibited under The Waterworks Ordinance without the written permission of the Water Authority, even if there should be express provisions in the Deed of Mutual Covenant purporting to confer power on a management company to cut off the water supply in the event of an owner's failure to pay management fees or contributions provided for under the Deed. Because of the wide definitions used in the Waterworks Ordinance, any disconnection of water supply to the Premises, and particularly in the manner used by the Incorporated Owners in these proceedings, necessarily involves alteration of an inside device (defined in the Waterworks Ordinance to include pipes and fittings between the Premises served and connection to the main), as to constitute an act prohibited under the Waterworks Ordinance.

15.  On the evidence, and in the light of the decision in Grace International Limited, I find that Mr. Yau's covenant in Clause 3(b) does not extend to the acts of the Incorporated Owners in cutting off water supply to the Premises.

16.  In relation to the Incorporated Owners' institution of DCCJ 3983, the claim made in those proceedings was for payment of the management fees due, and not for possession of the Premises.  Such proceedings do not constitute interference with Mr. Cheung's possession or enjoyment of the Premises, nor do they affect title to the Premises.

If the answer to issue (1) is yes, did such breach entitle Mr. Cheung to terminate the Agreement, and was such breach accepted by Mr. Cheung?

17.  This issue falls aside in view of my answering issue (1) in the negative.

What was the effect of Mr. Yau's breach of the covenant to pay management fees under Clause 3(a)?

18.  Mr. Yau admits that he was in breach of Clause 3(a) by failing to pay the management fees due in respect of the Premises.  He also admits that as a result of this breach, Mr. Cheung sustained damages as a result of DCCJ 3983 having been brought by the Incorporated Owners against him.  Mr. Yau accepts that Mr. Cheung is entitled to seek from him, as damages, payment of the legal costs incurred by Mr. Cheung and by the Incorporated Owners (which were borne by Mr. Cheung).

19.  Mr. Cheung claims that the disconnection of water supply to the Premises on 9 August and 10 August was also the result of Mr. Yau's breach in failing to pay the management fees due.  Mr. Cheung claims that as a result, he could not operate his restaurant, and this went to the root of the Agreement such that it was a breach of condition which entitles Mr. Cheung to treat himself as discharged from further performance of the Agreement.  Alternatively, Mr. Cheung seeks damages and the return of the rental deposit paid.

20.  I accept the submissions of Counsel for Mr.Yau, that the closing of the restaurant on 9 August and 10 August was caused, not by Mr. Yau's failure to pay the management fees, but by the unauthorized and prohibited acts of the Incorporated Owners in cutting off fresh water supply to the Premises.  This act is a new and independent cause. 

21.  On the facts of the present case, I do not accept that Mr. Yau's failure to pay management fees in accordance with Clause 3(a) is so essential to the nature of the Agreement, or so affects the substance of the Agreement, that his breach can be considered to be a substantial failure to perform the Agreement.  But for the Incorporated Owners' unauthorized act, Mr. Cheung could still have remained on the Premises and enjoyed the Premises without interference. In any event, on 25 August 2005, the Incorporated Owners had by their solicitors confirmed in writing that they would not disconnect water supply to the Premises.  Mr. Cheung was made aware of this, but he claims in his evidence that the Incorporated Owners might still interfere with the supply of other common facilities, such as the supply of flushing water and the use of the mailbox in the lift lobby.  Whether or not his concerns were justified, I do not accept that Mr. Cheung is entitled to terminate the Agreement by reason of Mr. Yau's breach of Clause 3(a). 

22.  Further, as can be seen from the letter dated 31 August 2005 from Mr. Cheung's solicitors, when Mr. Cheung purported to give notice of rescission of the Agreement with effect from 31 August 2005, it was on the expressed ground that Mr. Yau was not the Personal Representative of the registered owners of the Premises, and not on the ground of any repudiatory breach on the part of Mr. Yau.  There is accordingly no evidence (apart from Mr. Cheung's assertion in Court) that Mr. Cheung had treated Mr. Yau's default in payment of the management fees under Clause 3 as a breach which went to the root of the Agreement, entitling him to terminate the Agreement.  His claim in these proceedings, that he had lost confidence in Mr. Yau as a result of the events in late July and August 2005, contradicts the letter sent by his solicitors.  Whilst Mr. Cheung may deserve some sympathy for the unpleasant turn of events which occurred through no fault of his, bearing in mind that the burden of proof in these proceedings is on him to establish a breach of condition and acceptance of such repudiatory breach, I am not satisfied that he has discharged such burden.

23.  Mr. Yau does not dispute this liability to pay Mr. Cheung's damages which he says are represented by the costs incurred by Mr. Cheung as a result of the institution of DCCJ 3983.  Mr. Cheung claims that these costs amount to $90,500.  However, when Mr. Cheung's partner, Madam Ng, gave evidence in these proceedings for Mr. Cheung, she claims that she had paid half of the costs relating to DCCJ 3983.  Counsel for Mr. Yau accordingly claims that Mr. Cheung should only be entitled to recover his actual loss, namely his half share of the costs, in the sum of $45,250.  In the absence of any reply or explanation from Mr. Cheung, I accept that Mr. Yau is only liable to pay Mr. Cheung the sum of $45,250 as damages for Mr. Yau's breach of Clause 3(a).

24.  The only other claim made by Mr. Cheung by way of damages is for recovery of the rental deposit of $69,000 paid under the Agreement.  As I have found that Mr. Yau is not in breach of Clause 3(b), and further, that Mr. Cheung is not entitled to terminate the Agreement by virtue of Mr. Yau's breach of Clause 3(a), Mr. Cheung is not entitled to recover the rental deposit.  Under Special Condition 3 of the Fourth Schedule to the Agreement ("Fourth Schedule"), the parties agreed that should the tenant terminate the tenancy before the "fixed term" ( 死約 ), the landlord may forfeit the rental deposit of $69,000.

25.  Construing the Agreement as a whole and in particular the Fourth Schedule, the reference to "fixed term" can only be to the term of the tenancy from commencement up to 1 September 2006.  Special Condition 1 of the Fourth Schedule provides that the tenant may terminate the tenancy at any time after 1 September 2006 upon giving not less than 3 months' prior written notice, or paying to the landlord a sum equal to 3 months' rent as payment in lieu of notice.  As Mr. Cheung terminated the tenancy under the Agreement on 31 August 2005, Mr. Yau is entitled to forfeit the rental deposit under Special Condition 3 of the Fourth Schedule.

26.  Mr. Cheung claims that Special Condition 3 provides that the rental deposit is to be forfeited for the expressed purpose of reinstating the cockloft.  He claims that at the time when he signed the Agreement, there was no cockloft in the Premises.  According to the evidence of Mr. Yau, the Premises had first been let to another tenant, with a cockloft, which cockloft was removed by the former tenant, and it was an expressed condition that the cockloft had to be reinstated at the termination of the tenancy.  The former tenant had, with Mr. Yau's consent, terminated the tenancy on condition that the Premises be let by Mr. Yau to Mr. Cheung instead, but on the same terms and conditions.  Mr. Cheung admits that he had taken on the tenancy of the Premises from the former tenant.  He also admits that the terms and conditions of the Agreement, including the Special Conditions of the Fourth Schedule, had been explained to him.  Mr. Cheung was aware of Special Condition 3, and its references to the cockloft and the forfeiture of the rental deposit, but he did not raise any objection as he saw that there was no cockloft.

27.  As Mr. Cheung admits that he was aware of the provisions of Special Condition 3 of the Fourth Schedule, and that he had taken on the tenancy from the former tenant on the terms and conditions set out in the Agreement, his own subjective understanding of the meaning and effect of Special Condition 3 is irrelevant.  On an objective interpretation of Special Condition 3, it can only mean that upon termination of the tenancy before 1 September 2006, the rental deposit is liable to be forfeited by Mr. Yau.

Was Mr. Cheung in breach of the Agreement by wrongfully terminating the Agreement on 31 August 2005?

28.  Since I have found that Mr. Cheung has not been able to establish, on a balance of probabilities, any breach on Mr. Yau's part which entitles him to terminate the Agreement on 31 August 2005, he is in breach of the Agreement when he purported to rescind the Agreement by letter dated 31 August 2005 and by returning the keys of the Premises.

If the answer to (4) is yes, what are the damages payable by Mr. Cheung?

29.  Mr. Yau claims that as a result of Mr. Cheung's wrongful termination and repudiation of the Agreement, the Premises were vacant from 1 September 2005 until a new tenancy agreement was signed with another tenant on 15 November 2006.  Under the new tenancy agreement, the Premises were let for 2 years from 16 December 2006 at the monthly rental of $25,500.  By way of counterclaim, Mr. Yau seeks payment of the sum of $281,520, representing the lost rental income for the period from 1 September 2005 to 31 July 2006 at $23,000 (the monthly rent payable under the Agreement for such period), and from 1 August 2006 to 1 September 2006 at the monthly rent of $27,600 payable under the Agreement.

30.    In the absence of any evidence from Mr. Cheung as to the market rental during the relevant period, I am satisfied on the evidence that Mr. Yau has taken reasonable steps to mitigate his loss by putting the Premises on the market through estate agents, and eventually entering into the new tenancy agreement on 15 November 2006 at the monthly rental of $25,500. The 2 earlier offers received from the agents were far below the monthly rental payable under the Agreement, and it is reasonable not to accept such offers.  I therefore allow Mr. Yau's claim of $281,520 as damages.

31.  Mr. Cheung claims that Special Condition 3 of the Fourth Schedule should limit Mr. Yau's claim of damages to the forfeiture of the rental deposit upon his early termination of the Agreement.  As I have indicated in paragraph 27 above, on a plain reading of Special Condition 3, the rental deposit is to be forfeited to reinstate the cockloft.  There is nothing in either the Fourth Schedule or the rest of the Agreement which limits or restricts Mr. Yau's claim for damages in the event of Mr. Cheung's breach to the forfeiture of the rental deposit.  I do not accept that Mr. Yau should thus be restricted to the sum of $69,000 by way of damages.

Conclusion

32.  Judgment is entered in favor of Mr. Cheung in the sum of $45,250, as Mr. Yau accepts, being the damages payable by Mr. Yau to Mr. Cheung in respect of Mr. Yau's breach of Clause 3(a) of the Agreement.

33.  I also grant judgment in favor of Mr. Yau in respect of his counterclaim in the sum of $281,520, being the damages payable by Mr. Cheung to Mr. Yau in respect of Mr. Cheung's unlawful termination and breach of the Agreement.  After giving credit to Mr. Cheung for the amount of $45,250, the amount payable by Mr. Cheung to Mr. Yau under this judgment is $236,270.

34.  Mr. Cheung has only succeeded in a portion of his claim by original action, whereas Mr. Yau has succeeded in his counterclaim.  I will make an order nisi that Mr. Cheung is entitled to 20% of the total costs of the original action and counterclaim, with certificate to Counsel, and Mr. Yau is entitled to 80% of the total costs of the original action and counterclaim, with certificate to Counsel.  Such costs are to be taxed if not agreed.