BONNY ACE LTD v. MING YUE CHINESE CUISINE LTD

HCA 980/2019

[2022] HKCFI 3355

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 980 OF 2019

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J U D G M E N T
(on assessment of damages)

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A.   Introduction

1.  The plaintiff commenced this action by Writ of Summons issued on 4 June 2019 in respect of a commercial tenancy dispute over premises known as Shop 201 (F&B), Shop 202A (F&B) and Shop 202B (F&B) on 2/F, One Hennessy (“Building”), No 1 Hennessy Road, Hong Kong (collectively, “Premises”). 

2.  The plaintiff’s claim is straightforward.  It contends that, despite having executed a written contract agreeing to take up a 3-year lease of the Premises from it, the defendant had eventually failed or refused to do so as a result of which it has suffered loss and damage in the form of rental income, expenses and various other items. 

3.  By a judgment of Master Dick Ho dated 11 May 2020, the defendant was ordered to pay to the plaintiff damages for the defendant’s breach of the Agreement dated 10 August 2018 to be assessed and costs of this action, including the costs of and occasioned by the application for judgment to be taxed if not agreed.  

4.  The assessment of damages was fixed to be heard before me on 17 June 2022. 

5.  Despite the defendant’s absence at the hearing, I was satisfied on the affidavits of service filed by the plaintiff that sufficient notice had been given to the defendant of the hearing and it was appropriate to proceed to hear the plaintiff’s evidence and submissions. 

6.  This is my judgment on the assessment of damages. 

B.   FACTUAL BACKGROUND

7.  The plaintiff was at the material times the registered owner of the Premises. 

8.  By an offer letter dated 10 August 2018 issued by Chinachem Agencies Limited (as the plaintiff’s agent) and countersigned by the defendant on or about 17 August 2018, the plaintiff as landlord agreed to let and the defendant as tenant agreed to take up the tenancy of the Premises for use as a high-end Chinese restaurant for a term of 3 years at a monthly rent of HK$878,037.00 or 18% of gross sales turnover of the subject calendar month, whichever is higher (“Agreement”). 

9.  The Agreement provides, inter alia, as follows:-

(1)  The area of the Premises is 16,096 square feet lettable, subject to change as announced by the plaintiff from time to time (clause 4);

(2)  The tenancy shall be for an initial term of 3 years commencing from the actual date of handing over / delivery to the defendant possession of the Premises after an occupation permit or written permission is issued by the Building Authority (clauses 5 and 28), with an option to renew for a further term of 3 years (clause 9);

(3)  A rent of HK$878,037.00 or 18% of the defendant’s gross sales turnover, whichever is higher, is payable per calendar month in the initial term (clause 7), save that no rent will be charged for the 1^st, 2^nd and 3^rd months of the said term (clause 8);

(4)  The initial charge for management fee and air-conditioning will be at HK$160,960.00 per month or HK$10.00 per square foot per month lettable which shall be subject to review (clause 10);

(5)  Rent, management fee and air-conditioning charges are payable monthly in advance on the first day of each calendar month (clause 13);

(6)  Government rates will be charged to the defendant’s account quarterly in advance on the first day of January, April July and October throughout the said term; prior to formal assessment by the Rating and Valuation Department these will be charged at 5% on the monthly rent, subject to adjustment after assessment (clauses 11 and 13);

(7)  Stamp duty and registration fee shall be shared equally between the parties (clause 27);

(8)  Possession of the Premises shall be handed over and delivered to the defendant after the issuance of an occupation permit or written permission issued by the Building Authority; the plaintiff shall serve a 30 days’ prior written notice to the defendant for the handover and delivery of possession of the Premises in accordance with clause 24 of the Agreement (clause 28(a));

(9)  Within 15 days upon receipt of notice by the plaintiff that the occupation permit in respect of the Premises has been issued, the defendant is obliged to sign a formal tenancy agreement; and if the defendant fails to do so, the plaintiff is entitled to (i) proceed to stamp the Agreement and deem the grant of a new tenancy; (ii) forfeit payments made by the defendant under the Agreement; and (iii) treat the Agreement and the tenancy agreement as terminated, without prejudice to its rights to claim loss and damage (clause 29);

(10)  The defendant shall pay an initial deposit of one month’s rent upon signing of the Agreement, and two months’ rent plus three months’ management fees and air-conditioning charges as further deposit upon signing of the formal tenancy agreement (clause 12);

(11)  The Agreement is legally binding on both parties once accepted and duly executed by them (clause 30). 

10.  On 21 August 2018, the defendant paid the plaintiff’s agent the initial deposit in the sum of HK$878,037.00, pursuant to clause 12 of the Agreement. 

11.  On 14 February 2019, the Building Authority issued an occupation permit in respect of the Building. 

12.  Accordingly, on 28 February 2019, the plaintiff through its solicitors issued a written notice to the defendant, pursuant to clause 28 of the Agreement, stating that the lease of the Premises shall commence on 1 April 2019.  The plaintiff’s solicitors also requested that the defendant execute the enclosed deed of lease and return the same together with the agreed further deposits by 15 March 2019. 

13.  On 25 March 2019, the defendant’s director sent a letter to the plaintiff’s solicitors stating that the defendant was no longer interested in leasing the Premises.  The defendant did not execute any formal lease nor did it pay the further deposits as required under the Agreement. 

14.  By a letter dated 18 April 2019, the plaintiff through its solicitors informed the defendant that its failure to take up the lease under the Agreement amounted to a unilateral repudiation of the Agreement.  The plaintiff therefore accepted the defendant’s repudiation and forfeited the initial deposit paid by the defendant. 

C.   EVIDENCE

15.  For the purpose of this assessment, the plaintiff has filed a witness statement on quantum of Ms Wong Hoi Yi Vicky (“Ms Wong”) who was the Assistant Manager – Leasing of the Chinachem Group. 

16.  Ms Wong attended the assessment hearing on 17 June 2022, adopted the contents of her witness statement and provided elaborations on the relevant matters to the court. 

17.  Apart from the above background matters, Ms Wong’s evidence essentially focussed on two areas:- (i) first, the steps taken by the plaintiff in mitigation of loss; and (ii) second, the loss and damage suffered by the plaintiff.  A summary of her evidence is provided below. 

C1.  Mitigation of loss

18.  Shortly after the termination of the Agreement, the plaintiff through its solicitors wrote to the Commissioner of Stamp Revenue and explained the late stamping of the Agreement by reference to the defendant’s failure to take up a lease by 15 March 2019. 

19.  Having considered the plaintiff’s representations, the Commissioner of Stamp Revenue imposed a late-stamping penalty of HK$5,800.00 on top of the stamp duty of HK$48,248.00 which was assessed to be payable in respect of the Agreement. 

20.  As regards locating replacement tenants, the plaintiff engaged professional agents in marketing and advertising the Premises for re-letting.  These include household names such as Jones Lang LaSalle, Colliers, Centaline and Cushman & Wakefield.  The plaintiff set the asking monthly rent at HK$45.00 per square foot.  This was lower than the monthly rent of the Premises under the Agreement and other comparable premises on 1/F of the Building with asking monthly rent of HK$50.00 to HK$70.00 per square foot. 

21.  According to Ms Wong, in the period between May and October 2019, the plaintiff received 4 offers from different potential tenants.  However, all the offers were lower than the asking monthly rent of HK$45.00 per square foot.  As Ms Wong explained, since the plaintiff is a whole-building landlord, it was reluctant to set a low asking price for the Premises, which would affect the rent reviews, renewals and new lettings of other premises in the Building.  The plaintiff therefore did not accept the said offers. 

22.  Eventually, through the introduction of Colliers, the plaintiff managed to re-let the whole of the 2/F of the Building (the Premises) together with Shop 104 of the Building to Pure Fitness (LP) Limited under a Deed of Lease dated 2 April 2020 (“New Lease”). 

23.  Under the New Lease, inter alia:-

(1)  The term of lease was for a fixed term of 4 years commencing on 16 May 2020 and expiring on 15 May 2024 (both days inclusive), with options to renew for two further 3-year terms;

(2)  The monthly rental during the term is HK$886,825.00, with 6 months of rent-free period (i) from 16 May 2020 to 15 August 2020; (ii) from 16 May 2021 to 15 July 2021; and (iii) from 16 May 2022 to 15 June 2022 (all starting and ending dates inclusive);

(3)  Monthly management fee and air-conditioning charges of HK$193,460.00 shall be paid in advance on the 1^st day of each calendar month, subject to adjustment. 

C2.  Loss and damage

24.  On the above basis, and as set forth in Ms Wong’s witness statement and her oral testimony, the plaintiff has quantified the loss and damage in the manner tabulated below.  Since the New Lease covered both the Premises (16,095 sq ft) and Shop 104 (3,251 sq ft), the plaintiff apportioned the monthly rent under the New Lease to the Premises as HK$737,806.13 (ie HK$886,825.00 x (16,096 / (16,096 + 3,251)) sq ft.  

Head of Damage	Period	Calculation	Amount claimed
(A) 2/F (16,096 sq ft)
(1) Loss of rent for period left vacant (counting the 1st rent-free period under the New Lease)	1 April 2019 to 15 August 2020	HK$878,037.00 x (33/36) x (16 + 15/31) months	HK$13,267,327.90
(2) Loss of rent for the remainder term of the Agreement	16 August 2020 to 31 March 2022	HK$878,037.00 x (33/36) x (16/31 + 19) months  – HK$737,806.13 x (16/31 + 17) months	HK$2,784,385.73
(3) Loss of management fee and air-conditioning charge for period left vacant	1 April 2019 to 15 May 2020: HK$10.00 per sq ft as per clause 10 of the Agreement	HK$10.00 x 16,096 sq ft x (13 + 15/31) months	HK$2,170,363.87
(4) Loss of rates for period left vacant	1 April 2019 to 15 May 2020		No record of payment
(5) Agency fee payable for arranging the New Lease			HK$1,108,531.25
(6) Legal fees incurred for preparing the New Lease, including the half-share stamp duty paid by the plaintiff for stamping the New Lease			HK$56,009.00
(7) Stamping costs for the Agreement			HK$54,048.00
(B) SUMMARY
		Sub-total (1) - (7)	HK$19,440,665.75
		Less: Initial Deposit	(HK$878,037.00)
		Total:	HK$18,562,628.75

D.   ASSESSMENT OF DAMAGES

25.  Where a tenant fails to take up a lease as per the terms of an agreement, the landlord is entitled to recover damages representing rent, management fees and air-conditioning charges, and rates which it would otherwise have received for the term of the lease subject to the deduction of any loss it could have avoided by taking reasonable steps to mitigate: Kin Tong Land Investment Co Ltd v Capella Ltd [2019] HKDC 65 at §24; World Light Limited v MegaSuper Market Limited [2018] HKCFI 2864 at §§28-30.  

26.  The onus of proving the plaintiff’s failure to have acted reasonably in taking certain steps to mitigate its loss consequent upon the breach is on the defendant: Chitty on Contracts (32^nd ed) §§26-081 to 26- 082.  In the present landlord and tenant context, the plaintiff landlord is under no obligation to do more than reasonably necessary to market the premises: Wing Siu Co Ltd v Goldquest International Ltd. (unrep, HCA 4145/2001 & HCA 3183/2001, 18 August 2006) per Master de Souza at §15. 

D1.  Loss of rent for period left vacant

27.  The first item claimed for the Premises is the loss of rent for the period left vacant, from the date on which the defendant was obliged to take up a formal lease of 1 April 2019 up to the end of the 1^st rent-free period under the New Lease. 

28.  On the evidence, the plaintiff took around 12 months to re-let the Premises to a replacement tenant.  The defendant has adduced no evidence to take issue with the time taken by the plaintiff for the re-letting, or suggested that the terms of the New Lease were in any way unreasonable. 

29.  The plaintiff’s calculation for this item takes into account the 3 months of rent-free period under the Agreement and seeks to arrive at an effective average monthly rent as the basis of calculation.  This approach is in my view acceptable. 

30.  I agree that loss of rent over this period being left vacant is recoverable by the plaintiff.  On the plaintiff’s calculation, I accept the amount of HK$13,267,327.90 in full. 

D2.  Loss of rent for remaining term of the Agreement

31.  The second item claimed relates to loss of rent for the remainder term of the Agreement.  This represents any reduction from the effective average monthly rent under the Agreement to the rent under the New Lease. 

32.  The period claimed is from 16 August 2020 (after the expiry of the 1^st rent-free period under the New Lease) to 31 March 2022 (expiry of the term under the Agreement).  I agree that loss of rent over this period is recoverable by the plaintiff.  On the plaintiff’s calculation, I accept the amount of HK$2,784,385.73 in full.

D3.  Loss of management fee and air-conditioning charge for period left vacant

33.  Under clause 10 of the Agreement, the defendant was obliged to pay a monthly management fee and air-conditioning charge of HK$10.00 per square foot. 

34.  The period claimed is from 1 April 2019 (the supposed starting date of the term under the Agreement) to 15 May 2020 (the day before the starting date of the term under the New Lease). 

35.  I agree that the loss of these items over the said period is recoverable.  On the plaintiff’s calculation, I accept the amount of HK$2,170,363.87 in full. 

D4.  Agency fees

36.  The plaintiff further claims agency fees paid to Colliers International Agency Limited for arranging the replacement tenancy under the New Lease. 

37.  I accept that agency fees were reasonably incurred by the plaintiff for the purpose of finding the replacement tenant for the Premises.  Absent evidence to the contrary, I find the quantum claimed by the plaintiff to be reasonable and award the amount of HK$1,108,531.25 in full. 

D5.  Legal fees including half-share stamp duty for the New Lease

38.  The plaintiff next claims the legal fees incurred and the half-share of the stamp duty paid by it in respect of the New Lease. 

39.  I consider these items to have been reasonably incurred following the defendant’s breach of the Agreement and find that they are recoverable. 

40.  Absent evidence to the contrary, I hold that the quantum claimed by the plaintiff to be reasonable and award the sum of HK$56,009.00 in full. 

D6.  Stamping costs for the Agreement

41.  Finally, the plaintiff claims the stamping costs incurred in respect of the Agreement in the amount of HK$54,048.00.  This comprises the sum of HK$48,248.00 being the stamp duty assessed to be chargeable for the Agreement, and HK$5,800.00 being the late-stamping penalty. 

42.  Clause 27 of the Agreement stipulates that the stamp duty payable shall be borne by the plaintiff and the defendant in equal shares.  In these circumstances, I see no basis for the plaintiff to claim the entire stamp duty of HK$48,248.00.  The most that the plaintiff may recover is the half-share that it has paid for the defendant, ie HK$24,240.00. 

43.  On the other hand, as for the late-stamping penalty of HK$5,800.00, since this sum was only incurred by reason of the defendant’s refusal to execute a formal lease, it is reasonable that the defendant shall be made liable to bear the late-stamping penalty in full. 

44.  I allow total stamping costs in the total sum of HK$30,040.00. 

E.   CONCLUSION

45.  Taking into account the initial deposit paid by the defendant in the sum of HK$878,037.00, I therefore assess the net total amount of damages payable by the defendant to the plaintiff as HK$18,538,620.75 (ie HK$13,267,327.90 + HK$2,784,385.73 + HK$2,170,363.87 + HK$1,108,531.25 + HK$56,009.00 + HK$30,040.00 – HK$878,037.00). 

46.  The plaintiff also claims interest on the damages assessed at the rate of 1% per annum above the prime rate from the date of the Writ of Summons (ie 4 June 2019) to the date of this judgment and thereafter at judgment rate until payment in full. 

47.  I find this claim for interest to be reasonable and will so order.

48.  Finally, the plaintiff claims costs of this assessment of damages in the total sum of HK$150,437.00.  Having reviewed the plaintiff’s statement of costs for summary assessment, I consider the amount of costs claimed to be on the high side.  On a gross sum basis, I assess the plaintiff’s reasonable costs in the sum of HK$100,000.00. 

49.  It remains for me to thank Mr Pang for her assistance.