HARKSING INVESTMENT LTD v. TOPLINK HOLDINGS LTD t/a MY PLACE AND OTHERS

HCA 219/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 219 OF 2008

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BETWEEN

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J U D G M E N T

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Introduction

1.  This is an action on a written guarantee provided by the 2nd defendant, Madam Chan Ching-mui, to the plaintiff company (“the landlord”) of premises on the Ground and 1st Floor, Glory Royal Complex Centre in Kowloon (“ the premises”) which were being operated by the 1st defendant as a restaurant.  Under the terms of the guarantee, Madam Chan, as I will refer to her, purported to guarantee all of the 1st defendant’s obligations under its lease with the plaintiff. 

2.  Judgment has already been entered against the 1st defendant, (“the tenant”) as it has against the 3rd defendant, it being a company that had entered into possession of the premises in the unfulfilled expectation, as I will recount in a moment, of having the balance of the tenant’s term under its lease granted to it under a new lease to itself.

3.  The claim against the tenant now reflected on Madam Chan as guarantor is in two parts:  firstly, in the sum of $2,518,400, being for loss of rent and service charges - that is to say $150,000 and $7,400 a month respectively - from January 2008 until 30 April 2009 inclusive when the landlord, was able to re-let the premises to another tenant.  The second part of the claim is for $1,104,500, being the cost of replacing damaged parts and equipment at the premises. 

4.  It had been expected that the real contest in the trial would be centred on the issue of whether the tenant had effectively surrendered its tenancy as at 31 December 2007 and whether the 3rd defendant had been granted a binding tenancy of the premises immediately thereafter.  Wisely, it seems to me, having listened to the evidence, Mr Maurice Chan on behalf of Madam Chan has not sought to press that issue at all.  It seems to me that had he done so he would, as a matter of law on the evidence, have failed.  He has closed his case by submitting that there was a variation of the principal agreement, that is to say the tenancy between the landlord and the tenant, the effect of which is that the guarantor, Madam Chan, must as a matter of law be discharged from the guarantee.

5.  This has given rise to two challenges from Mr Lam on behalf of the landlord, the first being that there has been no variation, and secondly, that this point has not been pleaded and is therefore not available to Mr Chan.

6.  In respect of the pleading point, Mr Chan says that whilst his point averring a discharge of the guarantee by variation of the principal contract is not set out explicitly in this way, the essential facts appear in the defence which therefore allows him to take the point.

7.  For my part, and I have no doubt Mr Lam has the same sense of it, this point has come as a complete surprise.  It is not pleaded in terms or otherwise and unsurprisingly was never developed in the course of the evidence through the witnesses, either in-chief or in cross-examination.  Mr Chan, perfectly reasonably, had stuck to his guns in the course of the trial, the three days of the evidence, based on the defence as pleaded, that there had been a valid surrender of the tenancy by the tenant and a validly created tenancy in favour of the 3rd defendant, only to abandon this at the close in the way that I have just described.

Can variation by discharge be raised now?

8.  This would be a classic defence to be raised by a guarantor on an action based on a written guarantee, as in this case.  The plea would be central to the defence and spelt out in terms and no doubt come with pleaded particulars of the variation.  The plaintiff would then deal with the plea, either by reply - almost certainly by reply - and if need be, by amendment of its statement of claim. Witness statements would then be drafted to specifically address this issue. Even before that happened, discovery would be given on both sides relating to this pleaded issue.  None of this has happened in this case. 

9.  I am not going to permit Mr Chan to raise this sort of point now in his final speech.  I am not going to entertain the point at all and I do not think that this would be an occasion at the very last moment to permit an amendment of his pleadings to put the matter right.

10.  As to whether the facts are sufficiently pleaded to enable him to address me as he has done, in my view, these are at best oblique references but no more than that.  To allow this issue to proceed in this way would be tantamount to condone an ambush of the plaintiff at the very last moment.  Nothing further will be heard of this point.

Chronology

11.  Now that Mr Chan has let go his main pleaded case of surrender and new lease to the 3rd defendant, the trial must reduce itself to whether the landlord has been able to prove its case and the damages that it seeks.  I will review the evidence as briefly as I need to and then come to my conclusions on this evidence.

12.  Much of the background and history of the dealings between Madam Chan and the landlord are not in dispute.  The documents in the evidence speak for themselves. 

13.  I can begin in March 2003, when Madam Chan executed a guarantee in writing dated 26 March 2003 in favour of the landlord to guarantee the obligations of a company called Victory Express Limited which leased the premises from the landlord to operate a restaurant from there.  The guarantee is at C359 and is in the same form as the one sued on in this action.  The term of the lease was from 1 May 2003 until 30 April 2006.  This lease was further renewed from 1 May 2006 until 30 April 2010.  The relevant documents are at C400 to 402 and the tenancy agreement is at C403 to 436.

14.  Shortly thereafter, on 30 September 2006, a deed of surrender was entered into between the landlord and Victory Express Limited, Madam Chan, having signed the deed on its behalf surrendering the lease.  This deed is at C437 to 442.  This having been done, the premises were let to the tenant, under a tenancy agreement dated 5 January 2007 (C453 to 485), being the agreement on which this action is based.  The term was from 1 October 2006 to 30 September 2009.  In respect of this lease, Madam Chan again signed a guarantee on which she is now sued dated 18 October 2006 (C445).  Under this guarantee, Madam Chan agreed to, “In case of default on the rent by the tenant and other ‘violations’” - counsel are agreed that the better expression is ‘breaches’ - “of the tenancy agreement during the term of the tenancy, I am willing to indemnify the landlord for all the losses.” 

15.  What happened next is that the tenant was finding it tough to make a profit at the premises.  The tenant wrote to the landlord on 13 December 2007 (C490), requesting the landlord to consent to an early termination of its lease as from 31 December 2007 and to put in its place the 3rd defendant as tenant, it being a restaurant operator run by Mr Lai Wai-ming.  At that point it appeared that the landlord might be agreeable to this. 

16.  A document was prepared by the landlord, being a letter of instruction to its solicitors and a memorandum containing the essential terms of the new lease, to prepare a new lease to be granted to the 3rd defendant.  This is at C496.  This was for a term of 1 year and 9 months, being the balance of the tenant’s lease under this proposed new lease.  Madam Chan was also to continue as guarantor of the 3rd defendant’s obligations. 

17.  This letter of instruction and memorandum was marked ‘subject to contract’, the words used were “everything shall be subject to the tenancy agreement of the solicitors’ firm” which counsel are agreed means the same thing.  This type of letter/memorandum had previously been used by the landlord and I was shown other examples of it for the previous tenancies in which Madam Chan stood as guarantor.  The plaintiff’s letting manager, a Madam Ng, who gave evidence on its behalf, says that the procedure was that this letter would be signed first, then the guarantee by the guarantor, followed only then by the tenancy agreement. 

18.  In the expectation that the new guarantee would be signed and the lease to the 3rd defendant would follow as had happened in the past,  the tenant parted with possession of the premises and let the 3rd defendant in, who then proceeded to make alterations to the premises to suit the restaurant that it was going to operate from there.  It is these alterations which are the subject of the second limb of the claim for damage caused to the premises.

19.  The tenant had jumped the gun by having parted with possession.  Nothing that is legally binding had been signed by the landlord. Once the landlord discovered that the tenant had parted with possession putting it in breach of the lease, it considered, as it was entitled to, that this was a repudiation of the tenancy and it accepted that repudiation and demanded vacant possession be given to it.  In short, what had really happened was that the landlord had changed its mind about granting a tenancy to the 3rd defendant, a company which was unknown to it, even with Madam Chan as its guarantor. 

20.  I have no doubt that it was entitled to take the course that it did.  Everything was at that point “subject to contract” and without a signed deed of surrender, the terms of the tenancy agreement continued to bind the tenant.

Conclusions

21.  The pleaded contest, now abandoned, was that there had been a validly executed tenancy granted to the 3rd defendant by virtue of the letter of instruction and memorandum (C496). Plainly where this was a document “subject to contract”, unsigned on the landlord’s part, it had no legal effect.  There also was no deed of surrender on this occasion determining the tenant’s lease. Accordingly, there is no question that the terms of the lease dated 5 January 2007 continued to regulate the occupation of the premises with the plaintiff as landlord and the 1st defendant as tenant until the repudiation of the tenancy by parting of possession was accepted by the landlord by its solicitors’ letter of 16 January 2008 (C501).

22.  Mr Maurice Chan has bravely attempted to say that somehow Madam Chan can avoid liability in these circumstances, this apart from his point as to discharge by variation, but I cannot see how this can possibly be right.  This claim is unanswerable.  It is highly regrettable that the 3rd defendant and the tenant and Madam Chan did not wait until the landlord had signed a new lease with the 3rd defendant and a deed of surrender in favour of the tenant.  Mr Jimmy Wong, the principal of the landlord, is said by Madam Chan and her witness and associate, Madam Leung, to have “eaten his words”.  I am afraid to say that, from their point of view, he was entitled to do so.

Damages

23.  I have no doubt that the first limb of the claim for rent and service charges until the premises were re-let has been proved.  These amounts remain the responsibility of the tenant as guaranteed by Madam Chan.  She is bound by her guarantee and I will therefore enter judgment against her in the sum of $2,518,400.

24.  As to the second limb, the landlord has simply failed to prove its case.  It has called no evidence, save for adducing invoices for the amounts claimed.  I would have expected something more compelling than this, such as evidence of a surveyor detailing the damage and relating it to the terms of the lease.  This has been left far too vague.  The case is not proved and this limb of the claim must be dismissed.

25.  So judgment will be to the plaintiff- landlord on the first claim for rent and service charges, and judgment will be to Madam Chui on the claim for damage to the premises.

26.  As I am delivering judgment and counsel are present, I will now hear them on the question of interest and in respect of the costs of the action.

Costs and Interest

27.  So far as interest is concerned, I think I have a general discretion.  Although interest is pleaded under the High Court Ordinance,  the tenancies here, it regulates the relationship with the parties and there will be interest in accordance with Part 8 of the lease which deals with default and that is under paragraph 1(b), which is at C475. 

28.  The appropriate calculations are now going to have to be done and the rate of interest that is there will also apply from the date of judgment, that is to say from today until payment, in accordance with those rates.

29.  So far as costs is concerned, the plaintiff, as Mr Lam recognises, has won two-thirds of everything that it was claiming but the fact is that the part that it lost has hardly occupied the court at all. 

30.  I am going to take an overall view of this and I am going to say - and I think this reflects the defendant’s success in respect of this which, as I say, took no time at all - the plaintiff will have 90 per cent of its costs in this action, to be taxed on a common fund basis. 

31.  I had thought that perhaps Mr Lam had made out a good case for an indemnity costs taxation but I take the view that perhaps a more, almost merciful, approach may be appropriate in this case.  That means that with a common fund taxation the plaintiff will be slightly more generously compensated than it would on the usual party and party taxation.