HUA CHIAO COMMERCIAL BANK LTD. v. EMPIRE ONE TRADING LTD. AND OTHERS

HCA15441/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.15441 OF 1998

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J U D G M E N T

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1. This is an appeal by the 7th and 8th defendants against an order made by Master Lok on 27 November 1999. Master Lok had ordered that the 7th and 8th defendants make interim payments for their use and occupation of a property described as Shop No.1, Ground Floor, First Floor and Second Floor of Kam Pui Building, No.14 Shek Man Path, Kwai Chung, New Territories. This property is described as "the 2nd Mortgaged Property" in the Statement of Claim. The 7th and 8th defendants do not now dispute liability to make interim payment although they query the amount ordered by the master.

2. The master had ordered interim payments under two paragraphs of his order. First, within five days from the date of the order, the sum of $704,838.70 as mesne profits at the rate of $115,000 per month for the period from 28 January 1999 to 31 July 1999; and secondly, periodical payments starting from 1 August 1999 at the rate of $115,000 per month up to January 2000, thereafter at the rate of $143,750 each month. 28 January 1999 is the date when the plaintiff obtained the court's order for possession of this 2nd Mortgaged Property. The 7th and 8th defendants did not apply for a stay of execution of Master Lok's order which has not been fully complied with, and there is still a sum outstanding of just over $725,000.

3. The plaintiff's application was supported by an affirmation of Kung Mee Chi. Somewhat curiously, perhaps, the 7th and 8th defendants did not file any evidence before the master to oppose the plaintiff's application although a defence was filed on their behalf. Some evidence, filed very late, but which I allowed, is now before me.

The law

4. The relevant rule of court governing interim payment applications is Order 29, rule 12(b) of the Rules of the High Court. It is in the following terms :

"If the hearing of an application under rule 10, the court is satisfied - ... (b) that the plaintiff's action includes a claim for possession of land and if the action proceeded to trial, the defendant would be held liable to pay to the plaintiff a sum of money in respect of the defendant's use and occupation of the land during the action even if the final judgment or order were given or made in favour of the defendant. The court may, if it thinks fit, invite prejudice to an contentions of the parties as to the nature or character, of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely."

The plaintiff's case

5. The plaintiff relies on a legal charge dated 9 October 1997 under which the 2nd defendant in these proceedings as mortgagor charged the 2nd Mortgaged Property to the plaintiff to secure lending to the 3rd defendant. The second legal charge was subject to a tenancy agreement made between the 2nd defendant and the 6th defendant. This has been referred to by Mr Li, for the plaintiff, as the 2nd Tenancy Agreement. The 3rd defendant defaulted in making repayment of the secured indebtedness and the plaintiff's case is that the 2nd Tenancy Agreement is void as against it because of its non-registration.

6. The plaintiff says, and this is not in dispute, that the 7th and 8th defendants have occupied and used the 2nd Mortgaged Property. Mr Li also made the point in his skeleton argument that their use of the Property as a nursing home is in breach of the relevant Deed of Mutual Covenant and Occupation Permit.

7. As I have said earlier, the plaintiff has obtained an order for possession of the 2nd Mortgaged Property, and Mr Li says there is no reason that the 7th and 8th defendants should not make interim payments to the plaintiff for their use and occupation of the Property. The issue as to whether they are trespassers does not have to be resolved at this juncture before interim payment can be ordered, and the master, says Mr Li, was fully entitled to order interim payment at the rate that he did.

The case for the 7th and 8th defendants

8. These defendants have filed a defence. They have now filed evidence before me which does not add a great deal to the defence which appears to amount to this :

(1) The 8th defendant had entered into a tenancy agreement of the 2nd Mortgaged Property dated 22 January 1996 with a company called Eagle Fair Development Limited ("Eagle Fair") for a lease of six years at the monthly rent of $115,000 for the first four years and $143,750 for the last two years. (Mr Li refers to this as the "Hong Yee Tenancy Agreement".)

(2) The 8th defendant claims that it had agreed with Eagle Fair to reduce the monthly rent to $80,000 per month as from 1 April 1997 to 31 January 2000 and to $100,000 per month from 1 February 2000 to 31 January 2002.

(3) The 6th defendant purchased the 2nd Mortgaged Property from Eagle Fair subject to the Hong Yee Tenancy

(4) Relying on what is said to be (on what is in my view clearly the flimsiest ground,) fraudulent misrepresentation on the part of the 6th defendant, the 8th defendant signed a notice to surrender the Hong Yee Tenancy Agreement.

(5) It is also alleged that the 7th defendant signed a new tenancy agreement of the 2nd Mortgaged Property with the 6th defendant dated 7 October 1997 for a term of 52 months from 1 October 1997 to, I am assuming, 31 January 2000, at the monthly rent of $80,000 and from, again I am assuming, 1 February 2000 to 31 January 2002 at a monthly rent of $100,000. The dates in the document are a bit confusing, but I do not think that they are particularly material.

9. In other words, putting in the 7th and 8th defendants' case at its highest, a fraud has been committed on them so that the notice of surrender and the new tenancy agreement are invalid and, on their pleading, the Hong Yee Tenancy Agreement is still valid and binding on the plaintiff.

10. Mr Ting, who had said everything that could possibly be said on behalf of these defendants, submitted that it is this reduced rent which should be the basis of the interim payment.

11. Although I was not impressed with the defence, seeing that it was not exactly detailed or particularised, especially as to the allegation of fraud, I had to proceed on the assumption that the evidence and pleaded defence constituted the basis on which this appeal ought to be decided. In my judgment, there is no defence to the plaintiff's application for interim payment and the master was fully entitled to make the orders, and for the sums, which he did.

12. First of all, there was evidence before him of the open market rental of the Property in a valuation report of Jones Lang La Salle of $120,000 per month. This was unchallenged. Master Lok calculated the interim payment on the basis of a monthly mesne profit initially of $115,000 and subsequently of $143,750 which are the rentals payable under the Hong Yee Tenancy Agreement. This seems to me to be not only logical but also correct. The defendants' pleaded defence is based on the Hong Yee Tenancy Agreement. I only need to refer to paragraphs 2, 15, 17 and 28 of the defence. The sums ordered mirror those payable under the Hong Yee Tenancy Agreement. Secondly, there is no evidence to suggest that the plaintiff knew about the alleged rental reduction. I am unable to see how the plaintiff can be said to have had constructive notice of any reduction. Thirdly, Mr Li for the plaintiff says that there is no very good evidence to support the existence of any rental reduction agreement any way. Fourthly, Mr Li says that the agreement was not made in writing in accordance with section 3 of the Conveyancing and Property Ordinance, Cap.219, Law of Hong Kong, although I am not entirely sure that it cannot nonetheless avail the defendants by way of defence. Fifthly, Mr Li makes the point that the letter which is said to contain the alleged rental reduction agreement is actually subject to contract. There is thus no evidence of any binding contract on the reduction. This seems to be correct. Lastly, Mr Li says the alleged rental reduction agreement was never registered, so that even if there had been such an agreement, the same is not binding on the plaintiff whatever its state of knowledge. Mr Li referred to a number of authorities and to section 3 of the Land Registration Ordinance. He says, with fair plausibility, that because the tenancy in question was for a term in excess of three years, the agreement is a registerable instrument, and failure to register renders the agreement void as against the plaintiff.

13. These are interesting issues. I can rest my conclusion on the, I hope, secure foundation of the first two of the points adverted to.

14. In the circumstances, despite Mr Ting's valiant efforts, the appeal must be dismissed with costs.