BEST VIEW MEDICAL CO LTD v. RICHERMEN INTERNATIONAL INVESTMENTS LTD

CACV 176/2017

[2018] HKCA 288

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 176 OF 2017

(ON APPEAL FROM DCCJ 1080/2015)

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J U D G M E N T

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Hon Cheung CJHC:

1.  This is the defendant’s appeal from the judgment of Deputy District Judge Gary CC Lam dated 10 February 2017.

The facts

2.  Very briefly, the defendant is the owner of the entire commercial building known as Wincome Centre situated at Nos 39 and 41 Des Voeux Road Central, Hong Kong.  By a tenancy agreement dated 30 December 2014, the defendant agreed to let the 10^th floor of the building to the plaintiff for a period of 2 years commencing on 1 January 2015. Amongst other things, a refundable security deposit of $361,800 was paid by the plaintiff to the defendant pursuant to the provisions of the tenancy agreement.  Section V of the tenancy agreement, “Restrictions and Prohibitions”, provided:

“The Tenant hereby agrees with the Landlord as follows: -

(1)(a) Not without the previous written consent of the Landlord to erect install or alter any fixtures partitioning or other erection or installation in the Premises or to make or suffer or permit to be made any alterations or additions to the electrical wiring installations air conditioning plant or ducting and lighting fixtures or any part thereof nor without the like consent to install or permit or suffer to be installed any equipment apparatus or machinery including any safe which imposes a weight on any part of the flooring in excess of that for which it was designed. The Landlord shall be entitled to prescribe the maximum weight and permitted location of safes and other heavy equipment and to require that the same stand on supports of such dimensions and material to distribute the weight as the Landlord may deem necessary.

(b) …

(c) Prior to the Landlord’s giving the written consent under sub-clause (a) above, the Landlord is entitled to request the Tenant to make a deposit of such sum as may be required by the Landlord as the reinstatement deposit.  Such reinstatement deposit shall only be refunded to the Tenant without interest within thirty days of completion of the reinstatement works of the Premises upon expiration or early termination of the tenancy herein, to the complete satisfaction of the Landlord. In addition, the Tenant is required to bear all fees or expenses incurred by the Landlord in connection with the giving of consents hereunder, if any.”

3.  The plaintiff duly applied to the defendant for consent to carry out various items of renovation work on the 10^th floor.

4.  On behalf of the defendant, the management company of the building, a company within the group of companies to which the defendant belongs, demanded the payment of a refundable reinstatement deposit of $60,000 and a non‑refundable reinstatement charge in the sum of $136,000, the former to the defendant and the latter to the management company, as condition for the landlord’s consent to the proposed renovation works.  As is evidenced by the contemporaneous correspondence, the rationale for the two sums was that for those items of work falling within the demised premises, a refundable deposit payable to the landlord was required (obviously on the basis of clause (1)(c)), whereas for those falling outside the demised premises but within the common areas of the building, a non‑refundable charge payable to the management company responsible for the management of the building was required.  According to the management company, four of the proposed items of work concerned the 10^th floor lift lobby which was a common area not demised under the tenancy agreement.

5.  The plaintiff refused to pay the reinstatement deposit and charge, arguing that it was unreasonable for the reinstatement charge to be non‑refundable, apart from also suggesting that the amounts were excessive.  Underlying this dispute was another dispute between them that according to the plaintiff, the entire 10^th floor, including the 10^th floor lift lobby, was let under the tenancy agreement, and therefore the basis for requiring a non‑refundable reinstatement charge (instead of a refundable deposit) was absent.  The parties could not agree, and the plaintiff went ahead to commence the reinstatement works without making payment of the deposit and charge, and that eventually led to the defendant terminating the tenancy agreement on the basis that by its conduct, the plaintiff had committed repudiatory breaches of the agreement, which the defendant accepted.

6.  The plaintiff commenced the action below claiming for various items of relief including the return of the security deposit of $361,800 which, for reasons that I need not go into, became the only relief granted by the deputy judge when giving judgment for the plaintiff.  The defendant, on the other hand, counterclaimed for the forfeiture of the security deposit as liquidated damages pursuant to the provisions of the tenancy agreement (or alternatively, damages to be assessed).

The judgment below

7.  In a detailed judgment given three days after the conclusion of the two‑day trial, the deputy judge found that the 10^th floor lift lobby was not let under the tenancy agreement but was a common area. However, he also found that only two out of the four items covered by the non‑refundable reinstatement charge related to the lift lobby, that is, the partition walls between the premises and the lift lobby, and the control access system fixed on the exterior of a partition wall in the lift lobby.  The other two items, that is, the air‑conditioning system and the fire services system, in fact related to the demised premises.  According to the deputy judge, clause (1)(c) in section V of the tenancy agreement only entitled the landlord to demand a refundable reinstatement deposit for giving consent to the tenant’s proposed renovation works within the demised premises.  The defendant was not entitled to ask for a non‑refundable charge as a condition for granting such consent.  Demanding a non‑refundable charge would therefore constitute a breach of the tenancy agreement.  (For those proposed items of work not within the demised premises and therefore not covered by the tenancy agreement, the deputy judge had no problem with the defendant as landlord demanding a non‑refundable reinstatement charge.)

8.  In paragraph 54 of the judgment, the deputy judge said:

“However, as regards the Reinstatement Charges concerning the air-conditioning system and the fire services system which I have already held should be part of the Reinstatement Deposit, although for similar reasons, I do not find them to be excessive or so excessive, the fact that they were non-refundable was contrary to Clause (1)(c) of Section V of the Tenancy Agreement.”

9.  This brings me to the further point considered by the deputy judge.  Earlier in the judgment, he had already accepted the argument, not challenged on appeal, that the consent provision in clause (1)(a) for the carrying out of renovation works was subject to the requirement of reasonableness by way of an implied term to the tenancy agreement.  In this regard, the burden was on the plaintiff to satisfy the court that the condition to consent requiring the payment of the refundable reinstatement deposit and non‑refundable reinstatement charge respectively was unreasonable.

10.  As regards the refundable reinstatement deposit, the deputy judge was not satisfied that the sum of $60,000 was excessive or so excessive as to be unreasonable for the purpose of the implied term.  This is not challenged on appeal.

11.  As regards the non‑refundable reinstatement charge, as mentioned, the deputy judge focused his attention on the two items of work that he found to be related to the demised premises (rather than the lift lobby).  The deputy judge, for reasons not challenged on appeal, did not find the relevant part of the reinstatement charge attributable to these two items of work to be excessive or so excessive as to be unreasonable for the purpose of the implied term (paragraph 54).  However, he took the view that “the fact that they were non‑refundable was contrary to Clause (1)(c) of Section V of the Tenancy Agreement” (paragraph 54).  He carried on in the same paragraph:

“Further, I cannot see why it had to be non-refundable, given that the charges must be based on some estimates only but not the actual prices to be paid at the expiry of the 2 years’ term of the tenancy. Considering all these, I find that the demand for the Reinstatement Charges concerning the air-conditioning system and the fire services system was unreasonable, and constituted a breach of the implied terms.”

12.  That being the case, the deputy judge found that the defendant had unreasonably withheld consent in breach of the implied term, and was itself in repudiatory breach of the tenancy agreement when it purported to terminate it.  Accordingly, he gave judgment for the plaintiff for the return of the security deposit and dismissed the defendant’s counterclaim.

The defendant’s arguments on appeal

13.  With leave granted by Lam VP, the defendant appealed from the deputy judge’s judgment. Mr Victor Dawes SC (Mr Martin Ho with him), for the defendant, essentially argued that the deputy judge was wrong in deciding that the demand for a non‑refundable reinstatement charge by the defendant as a condition to giving consent was in breach of clause (1)(c) in section V of the tenancy agreement, and rendered the refusal of consent for non‑payment of the reinstatement charge by itself unreasonable.  He asked the court to focus on whether the implied term, that is, that the defendant must not unreasonably withhold consent, was breached, and not whether the reinstatement charge was consistent with clause (1)(c).

14.  As to whether it was unreasonable for the defendant to demand the payment of a non‑refundable reinstatement charge, Mr Dawes argued that the plaintiff, as tenant, would be obliged to reinstate the premises upon its vacation of the premises.  The only real difference between the non‑refundable reinstatement charge and the refundable reinstatement deposit, according to the unchallenged evidence, was that the former operated as a liquidated sum of money charged by the defendant for the reinstatement works, in which case the defendant as landlord would bear any excess in reinstatement costs, whereas for the latter, if there was any fund remaining after the reinstatement works were done, the surplus would be refunded to the plaintiff.  Mr Dawes also emphasised that the proper focus of the deputy judge’s inquiry should be on whether the reinstatement charge was so excessive as to render the withholding of consent unreasonable.  In this regard, Mr Dawes pointed out the deputy judge made an express finding that the reinstatement charge was not excessive.  Therefore, counsel argued, there was no factual basis for the deputy judge to find that the defendant was in breach of the implied term in unreasonably withholding consent.

15.  Mr Dawes also took a pleading point that the non‑refundable nature of the reinstatement charge was never pleaded as part of the plaintiff’s case in alleging that the defendant had acted unreasonably in withholding consent.  The focus of the plaintiff’s pleaded case was on the alleged excessiveness of the amount of reinstatement charge. Mr Dawes argued that as a result, the defendant was deprived of a chance to adduce evidence on whether there was any factual justification for the defendant to ask for a non‑refundable reinstatement charge as opposed to a refundable one in the circumstances of this particular case.  Counsel suggested there might be legitimate reasons why a non‑refundable reinstatement charge was asked for, such as commercial desirability and the need of stipulating with clarity the reinstatement costs at the outset prior to the renovation works being conducted, rather than subjecting the reasonableness of the reinstatement costs to debate when the tenant asked for a refund of the reinstatement deposit/charge after the expiration of the tenancy.

The plaintiff’s arguments

16.  Mr Robert Pang SC (Mr Michael Chai with him), appearing for the plaintiff, contended that the deputy judge was right in concluding that the demand for a non‑refundable reinstatement charge was inconsistent with clause (1)(c).  He argued that the tenancy agreement was to be construed contra proferentem and in accordance with the maxim expressio unius est exclusio alterius.  In essence, counsel argued that the express mention in clause (1)(c) of a refundable deposit excluded any entitlement to charge a non‑refundable reinstatement charge.  The defendant had no right to demand a non‑refundable reinstatement charge for its consent; in other words, consent was unreasonably withheld in breach of the implied term by reason of the defendant’s insistence on a non‑refundable reinstatement charge.

17.  Further, counsel argued, the deputy judge’s conclusion of the plaintiff’s breach of the implied term was based on an evaluation of the facts before the court.  They included, amongst other things, the consideration that the reinstatement charge was an estimate only of costs which were to be incurred two years (or more) later when the term of the tenancy was to expire, in relation to which there were bound to be uncertainties; and the fact that no one from the project department of the defendant was called to give evidence on how the individual amounts comprising the reinstatement charge were arrived at – even though in view of the uncertainties, the deputy judge could not be satisfied that the reinstatement deposit and reinstatement charge were excessive or so excessive as to be unreasonable for the purpose of the implied term.

18.  Mr Pang argued that it being the trial judge’s evaluation of the facts and evidence before him by reference to the yardstick of reasonableness, this court should be most slow to, and indeed, should not, disturb the deputy judge’s finding.

19.  Initially, the plaintiff had put in a respondent’s notice, without leave of the court, to challenge the deputy judge’s finding on the actual premises demised under the tenancy agreement.  The purported cross appeal was not pursued at the hearing.

The commercial setting

20.  In my view, Mr Pang was correct with his primary submission, that is, clause (1)(c), on the proper construction of the tenancy agreement, precluded the landlord from requiring a non‑refundable reinstatement charge as a condition for consent to renovation works within the demised premises.  What we have here is a detailed tenancy agreement obviously prepared by lawyers or someone with legal background for the landlord who owns the entire commercial building in Central.  Clause (1) is found in section V which deals comprehensively with restrictions and prohibitions of what the tenant can or cannot do.  Clause (1) itself is an elaborate provision prohibiting the tenant from carrying out works within the demised premises without the written consent of the landlord; restricting the tenant’s manner of carrying out any approved works in that it must obey and comply with all instructions and directions from the landlord; and, most importantly for the purpose of this appeal, providing specifically that the landlord is “entitled” to ask for the payment of a refundable deposit (to be refunded without interest and so forth) for the landlord’s consent to any renovation works within the demised premises.

21.  In short, the tenancy agreement provided for an elaborate and self‑contained regime to deal with renovation works within the demised premises.  It specifically provided for the payment of a deposit to secure the landlord’s position when giving consent to the renovation works.  It expressly provided that the deposit was to be refundable.  It was obviously a serious agreement between two commercial entities dealing with the letting of the entire floor of a commercial building right in the Central District of Hong Kong.

Expressio unius est exclusio alterius

22.  It is against this background that one reads the authorities referred to us by Mr Pang.  First, counsel referred us to the general principles summarised in Lewison, The Interpretation of Contracts (6^th ed), 381, where the learned author said:

“Where the contract expressly mentions some things, it is often to be inferred that other things of the same general category which are not expressly mentioned were deliberately omitted. Similar principles apply to the express inclusion of obligations dealing with a particular area of application.”

23.  Lewison cited on the same page a passage from Willes J’s judgment in North Stafford Steel Iron and Coal Co (Burslem) Ltd v Ward (1868) LR 3 Exch 172:

“But the ordinary rule, that if authority is given expressly, though by affirmative words, upon a defined condition, the expression of that condition excludes the doing of the act under other circumstances than those so defined: expressio unius est exclusio alterius.”

24.  Likewise, in SCN Pty Ltd v Smith [2006] QCA 360, para 7, McPherson JA said:

“… it is hardly necessary to clothe the thought in authority or Latin garb. If one alternative is expressly and specifically mentioned, it rationally tends to exclude the implication of another or of any other.”

25.  Lewison also drew attention to what Waller LJ said in Shell UK Ltd v Total UK Ltd [2010] 3 All ER 793:

“We believe that the right approach is to consider the language used in the various agreements. We say straight away, we are not inclined unless driven to it to contemplate that where detailed agreements are drawn up, one will have been tacitly extended or by implication extended. We suggest that where parties have drawn up a series of detailed agreements and the draftsmen have expressly dealt with negligence, a more significant canon of construction is that which would suggest that where it has not been expressly referred to that would be likely to be a deliberate decision by the draftsman to exclude negligence.”

26.  Mr Pang also placed emphasis on an old landlord and tenant case, Webb v Plummer (1819) 105 ER 537, in which the court, in light of a specific payment provision contained in the lease, held that an out‑going tenant was not entitled to an allowance for foldage from the in‑coming tenant, despite a well‑established custom of the country to that effect.  Abbott CJ said (at p 539):

“There are, therefore, certain payments specified, which the in‑coming tenant is to make, but no payment for foldage is mentioned. It must therefore be considered as wholly excluded by the lease. Upon the whole, I am of opinion, that by the express terms of the lease, which specifies certain particular payments to be made on quitting the premises, the custom of the country, as to the payment for foldage, is waived, and, therefore, that the plaintiff is not entitled to recover.”

The other three judges were of the same view.  For instance, Holroyd J said:

“… inasmuch as it provides for the payments which the in‑coming tenant is to make, it seems to me that its language is equivalent to this, that the in‑coming tenant shall pay for such things as are specified, and no more. For the rule expressio unius est exclusio alterius applies. Then as the parties have provided for all the payments that were to be made, and as they have not mentioned foldage, it follows that the plaintiff is not entitled to any compensation for it, and that the verdict must be entered for the defendant.” (pp 539‑540)

Best J’s judgment was in the same vein (p 540):

“Here the parties have made some stipulation as to the terms of quitting, and if they had intended that this or any other payment should be also made, they would have introduced them into the lease.”

27.  Of course, as Lewison pointed out (at pp 382‑383), the principle under discussion is not a rule of law, but merely a principle of interpretation which like all other such principles, is no more than a guide to the true meaning of the contract; even at its highest, it can be no more than a presumption.  Yet on the facts of the present case as outlined above, the deputy judge must be right in concluding that clause (1)(c) precluded the landlord from requiring a non‑refundable reinstatement charge from the tenant as a condition for its consent to proposed renovation works within the demised premises.

Real purpose of clause (1)(c)

28.  When advocating for a contrary construction that clause (1)(c) did not provide for an exclusive regime for what could be required by way of condition to the landlord’s consent (in terms of a deposit), Mr Dawes had to accept a suggestion from the bench that the only conceivable advantage to the landlord for the inclusion of clause (1)(c) in the tenancy agreement, under his construction of the clause, was to preclude any subsequent argument by the tenant that the mere fact of the landlord requiring the payment of a refundable deposit was unreasonable.  Apart from this, one simply could not see any purpose to be served by the inclusion of clause (1)(c) in section V, if Mr Dawes’ interpretation was correct.

29.  But this so‑called advantage is, in the commercial context of the present case, wholly unreal.  The mere requirement for the payment of a refundable deposit could not conceivably be suggested by the tenant as unreasonable.  After all, the tenancy agreement itself provided for the payment of several refundable deposits; so apart from the initial security deposit, one has in clause (26) under section III a requirement for the tenant to pay a refundable decoration deposit.  This being the case, the suggestion that clause (1)(c) in section V was introduced in order to preclude any future argument that the requirement of a refundable deposit was of and in itself unreasonable in terms of withholding consent is entirely unreal.

30.  It was argued before the deputy judge at the leave to appeal stage that if clause (1)(c) constituted an exclusive regime, it would render the requirement for the payment of a non‑refundable reinstatement charge of even $1 a breach of contract.  This argument, repeated in the written submissions before us but not pursued by Mr Dawes at the oral hearing with any enthusiasm, was rightly rejected by the deputy judge. There are several good answers to this extreme, unreal example of a $1 non‑refundable reinstatement charge.  A short answer is that the label “non‑refundable” in the example is meaningless because the reinstatement costs were bound to exceed $1, so in substance, the landlord was not demanding something that was potentially non‑refundable irrespective of the actual costs of reinstatement.

31.  In short, the only sensible way to read and understand clause (1)(c) is that it provided for an exclusive regime in terms of reinstatement deposit or charge (no matter how the sum was to be called) for the giving of consent to proposed renovation works within the demised premises.  Of course, it did not preclude the landlord from imposing other (reasonable) requirements not involving the payment of a monetary sum as security.

History of the matter

32.  This understanding of mine accords well with the history of the whole matter.  As mentioned, throughout the landlord’s and the management company’s position was that for those items of work concerning the demised premises, a refundable deposit was payable; the non‑refundable reinstatement charge was only required of those items which the management company thought related to the lift lobby.  The contemporaneous correspondence, as well as the pleadings, the witness statements and counsel’s respective written openings at the trial before the deputy judge, were all based on that distinction.  That explained why the parties argued hotly as to whether the demised premises under the tenancy agreement included the 10^th floor lift lobby, an issue which the defendant had to succeed on, which it did. Where the defendant’s case went wrong was when the deputy judge found, however, that only two out of the four items which the management company thought were related to the lift lobby (rather than the demised premises), actually concerned only the demised premises.

33.  That finding of the deputy judge (which is not challenged on appeal) gave the defendant a problem in that it suddenly had to justify the requirement of a non‑refundable reinstatement charge as a condition for its giving consent to the carrying out of those two items of work within the demised premises.

34.  The parties’ understanding of clause (1)(c) is of course irrelevant to its true interpretation.  Nonetheless, it confirms the court’s understanding of the commercial background and business sense behind the tenancy agreement, against which it should be interpreted.  In my view, for the above reasons, there can be no doubt that on a true and proper construction of the tenancy agreement and in particular clause (1)(c), the defendant as landlord had no right to demand the payment of a non‑refundable reinstatement charge for the two items of work relating to the demised premises.  To do so as the defendant did was unreasonable, rendering it in breach of the implied term that consent cannot be unreasonably withheld.

Miscellaneous arguments

35.  This really disposes of this appeal.  It is therefore quite unnecessary to deal with the further reason given by the deputy judge that in any event, it was unreasonable to demand a non‑refundable charge as the reinstatement costs could be higher or lower than the non‑refundable charge, particularly when there was no meaningful breakdown of the reinstatement charge demanded by the landlord.  Nor is it necessary to deal with Mr Dawes’ argument that despite what appears to be the effect of the non‑refundable reinstatement charge (as understood by the deputy judge), according to the evidence of one witness called by the landlord, the non‑refundable reinstatement charge was supposed to operate as a liquidated sum such that whether there was to be any surplus or deficit of reinstatement costs at the end of the day, once the charge was paid, the tenant was not responsible for the reinstatement costs of those items of work covered by it afterwards.  In other words, even if there were to be a deficit, the landlord would not be entitled to go after the tenant for the difference.  It is not necessary to deal with this piece of evidence, save to note that it only represents one witness’ understanding of how the non‑refundable reinstatement charge was supposed to operate, and that this understanding was never communicated to the plaintiff in the contemporaneous correspondence.

36.  Also given my conclusion above, it is unnecessary to deal with the pleading objection raised by Mr Dawes.  The pleading objection would only become relevant if clause (1)(c) did not by itself preclude the landlord from demanding a non‑refundable reinstatement charge.  In any event, given the history of the matter where right from the beginning and up to and including the trial, a distinction was drawn by everyone involved between those items of work concerning the demised premises and those which did not (or were thought to be not) as the reason for demanding a refundable deposit for the former and a non‑refundable charge for the latter, the pleading objection is, in my view, rather unreal.

Disposition

37.  For all these reasons, in my view, the deputy judge was right in giving judgment for the plaintiff and dismissing the defendant’s counterclaim.  I would dismiss the appeal, and formally dismiss the purported cross‑appeal lodged without leave.  I would make an order nisi that the defendant shall pay the costs of the appeal to the plaintiff, with a certificate for two counsel.  I am not sure how much costs (if any) have been incurred by the defendant’s side in response to the purported cross‑appeal, but costs should follow the event.  I would order, on a nisi basis, that the costs of the purported cross‑appeal be paid by the plaintiff to the defendant.

Hon Cheung JA:

38.  I agree with the judgment of the Chief Judge.

Hon Yuen JA:

39.  I agree with the judgment of the Chief Judge.

Hon Cheung CJHC:

40.  Accordingly, we dispose of the appeal in terms of paragraph 37 above.