MASTER YIELD LTD v. HO KAN BAU AND ANOTHER

HCA 866/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 866 OF 2008

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J U D G M E N T

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Background

1.  Mr Ho Kan Bau (“Mr Ho”), originally named the 1^st defendant and since deceased, and the 2^nd defendant were the joint owners of the premises known as Shop SLG2 (“Property”) on the sub‑lower ground floor of Westlands Gardens, 1025‑1037 Kings Road, 2‑10, 12A‑12H Westlands Road, Hong Kong (“Westlands Gardens”).  The Property was put on the market for letting, and some time in August and September 2007, representatives of the plaintiff (“Company”) were shown the Property.  Ms Carrie Yeung (“Carrie”) and Mr Vincent Yeung (“Vincent”) of the Company visited the Property and saw air‑conditioning units installed at the external wall of Westlands Gardens, including an air‑conditioning unit on the external wall above the Property.  They claim that they were led to believe that air‑conditioning units could be installed at the external wall of the Property, and on that basis entered into agreements for the lease of the Property from the defendants.  It was only after renovation works had started at the Property that the Company discovered that the Incorporated Owners of Westlands Gardens (“IO”) had obtained an injunction to prohibit the defendants and their tenants from installing air‑conditioning units on the external wall of Westlands Gardens, and that consent from the IO was required before the Company could carry out any installation of its air‑conditioning units.  The Company claims that it required 12 air‑conditioning units to be installed on the external wall of Westlands Gardens for the operation of the business of a spa at the Property, which could not be done in the absence of the IO’s approval.  It claims that it was entitled to rescind the lease agreement, and to seek damages from the owners for misrepresentation.

2.  It is pleaded in the Re‑Amended Statement of Claim that Mr Ho had impliedly, or by conduct, represented to the Company that air‑conditioning units could be installed at the external wall of the Property (“Pre‑contractual Representation”).  The Company relies on the fact that :

(1) Carrie and Vincent had, on the occasions of their visits to the Property, seen “extensive installations of air‑conditioning units at the external walls of the shop units at the sub‑lower ground floor of Westlands Garden ... including one at the external wall of the Property”; and

(2) Mr Ho, who was present at the visits, never told Carrie and Vincent that no air‑conditioning units could be installed at the external walls of the Property.

3.  The Company claims that it was in reliance on Mr Ho’s Pre‑contractual Representation that it signed a provisional agreement on 19 September 2007 (“Provisional Agreement”) for lease of the Property.

4.  It is not disputed that the IO had in fact commenced legal proceedings against Mr Ho and the 2^nd defendant (“Owners”) in relation to the air‑conditioning unit which was installed at the external wall of the Property, as being in breach of the deed of mutual covenant relating to Westlands Garden (“DMC”), and that on 8 November 2007, an order was made by the Lands Tribunal whereby the Owners and their agents and tenants were prohibited from installing any air‑onditioning unit on the external wall of Westlands Garden (“Injunction”).  The Company claims that the Owners had a duty to disclose the existence of these Tribunal proceedings to the Company (“Duty of Disclosure”), but such claim was not pursued at trial.

5.  It is the Company’s case that some time before December 2007, the Company’s estate agent, Esther Chan (“Esther”), made inquiries with Mr Ho as to whether there was a need to obtain the consent of the IO for the installation of water and electricity supply and of the air‑conditioning facilities.  Mr Ho informed Esther that the only thing which required the consent of the IO was the shop frontage or signage (“1^st Representation”).  Esther related Mr Ho’s answer to Carrie.

6.  The Company claims that it was in reliance on the 1^st Representation that it signed the formal tenancy agreement with the Owners on 5 December 2007 (“Agreement”), for the lease of the Property for a term of 2 years, at the rent of $150,000 per month.

7.  The Re‑Amended Statement of Claim refers to other subsequent representations allegedly made by Mr Ho’s daughter (“Daughter”), as to the discharge of the Injunction, and that the Company could apply to the IO for installation of the air‑conditioners on the external wall of the Property.  However, these other representations are relied upon by the Company for the purpose only of explaining why it did not take steps to rescind the Agreement before April 2008.

8.  The Company had also included a claim that the Company and the Owners had separately agreed in about December 2007 (“Further Agreement”) to secure the discharge of the Injunction and to obtain the IO’s consent for the Company’s installation of air‑conditioners at the external wall of the Property.  At trial, the claim of Further Agreement was also abandoned.

9.  According to the Company, the Pre‑contractual Representation and the 1^st Representation were both untrue, as air‑conditioning units could not be installed on the external wall of the Property, and the Owners were not able to secure the consent of the IO which was required under the DMC for the installation of the air‑conditioners at the external wall of the Property.

10.  The Owners deny that the Pre‑contractual Representation and the 1^st Representation had been made.  They claim that they had, at the Company's requests and on its behalf, made application to the IO for the installation of air‑conditioning units on the external wall of the Property, but the application was delayed by the IO.  They further claim that the Company had in any event affirmed the Agreement by requesting the Owners to make the application to the IO, and by continuing to use and occupy the Property until January 2009.

11.  The issues for determination at trial are accordingly :

(1) Was there a representation by Mr Ho’s conduct that air‑conditioners could be installed at the external wall of the Property?

(2) Was there a representation by Mr Ho that no approval was required from the IO for the installation of the air‑conditioners?

(3) Was any representation made by Mr Ho material to the Agreement?

(4) If there was a misrepresentation which induced the Agreement, did the Company affirm the Agreement or otherwise lose its right to claim damages?

(5) Did the Company mitigate its loss?

(6) What are the damages that can be claimed by the Company?

Was there a representation by Mr Ho’s conduct that air‑conditioners could be installed at the external wall of the Property?

12.  On the issue of whether the Pre‑contractual Representation can be established, Counsel for the Company relies on the test summarized in Chitty on Contracts, 30^th edition volume 1 paragraph 6-011 :

“The essential issue is whether in all the circumstances it has been impliedly represented that there exists some state of facts different from the truth. In evaluating the effects of the statement or conduct in such circumstances, a helpful test is whether a reasonable representatee would naturally assume that the true state of facts did not exist and that, had it existed, he would in all circumstances necessarily have been informed of it.”

13.  Counsel accepts that in construing the meaning of a representation, the test is objective : “viewing the communication from the perspective of a reasonable person in the position of the recipient of it” (Cartwright Misrepresentation, Mistake and Non‑disclosure 2^nd edition paragraph 3.06).

14.  The Company relies on the evidence from Esther, Carrie and Vincent that on the occasions when they had visited the Property, they had seen many air‑conditioning units installed on the external wall of the shops at the street level of Westlands Gardens on Taikoo Shing Road, where the Property is situated, and on the external wall of the shops at the street level of Westlands Gardens on Westlands Road on another side of the building.  It is claimed that Mr Ho’s conduct of showing the Property to Esther, Carrie and Vincent in these circumstances, without disclosing that air‑conditioning units could not be installed on the external wall of the Property, amounted to a representation that air‑conditioning units could be installed on the external wall.

15.  There was some dispute as to whether Mr Ho had remained on the Property after opening the door to Esther, and whether Carrie had in fact met Mr Ho on the occasions of her visits to the Property. Eventually, the Daughter accepted that it was possible that Mr Ho had come into contact with Carrie and Esther at the time of their visits and prior to the making of the Agreement.

16.  It remains disputed whether Carrie and Vincent could see the metal louvred door at one end of the shopfront at the time of their inspection of the Property, and whether it was apparent to them that that was part of the Property and was for ventilation of air‑conditioning units which may be installed within the Property.  However, I can say that this aspect of the evidence is not material to my decision.

17.  There is also some dispute as to whether the photographs taken by the Company and produced at trial to show the state and condition of the Property at the material time of their initial visits do accurately reflect the condition of the Property and the external wall of Westlands Gardens at the material time in August and September 2007.  However, even if I accept the evidence of Esther, Carrie and Vincent that they had, at the time of their visits to the Property prior to the signing of the Preliminary Agreement and the Agreement, seen the air‑conditioning units depicted in the photographs they rely upon at trial, I do not accept that there had been any representation by conduct or implied, as the Company claims.

18.  The Company’s case is that at the time of the inspections of the Property in August or September 2007, there were air‑conditioning units which can be seen above the Property, and above other shops on the street level of Westlands Gardens, on the external wall of the building.  It is claimed that these were “extensive”.  Seeing these air‑conditioning units on the external wall of the building, would an objective tenant who is interested in taking a lease of the Property perceive the situation to mean that he can install air‑conditioning units in the same way, without qualification or restriction?  Objectively, the answer is no.  If there can be any form of implied representation, it can only be that air‑conditioning units can be installed, after the consent or approval of either the landlord, or the IO or managers of the building, has been obtained.

19.  Deeds of mutual covenants which govern owners’ rights to use their property and the common parts of a building are by now commonly in use and widely known in Hong Kong.  A reasonable tenant and occupier of property in Hong Kong would know of the existence of such deeds, and would also know of the common existence of incorporated owners and their duties, rights and powers over the common parts of a building.  The reasonable man on the Shaukeiwan tram in Hong Kong is fairly sophisticated over matters concerning property in Hong Kong.  I do not consider that this reasonable man would perceive the presence of air‑conditioning units on the external walls of a multi-storey building as a right conferred on an individual tenant to install the same without the consent of the IO.

20.  The only conduct of Mr Ho that can be relied upon to constitute any implied representation, or representation by conduct, is his act of showing the Property to Esther and the Company’s representatives.  Even if I should accept the Company’s case that Esther had communicated to Mr Ho, at the time of her first visit to the Property, that the Company proposed to carry on the business of a beauty salon at the Property, and that Esther, Carrie and Vincent had seen many air‑conditioning units on the external wall of Westlands Gardens during their visits, I do not consider that Mr Ho had by his silence, or by implication or conduct represented that air‑conditioning units could be installed on the external wall of the Property.  I do not consider that Mr Ho had any duty to point out to Esther or the Company that items could not be installed on the external wall of the Property without the IO’s consent.

21.  On the facts and evidence in this case, the Owners did help the Company in January 2008 to submit its application to the IO for its consent to the Company’s proposal to install 12 air‑conditioning units on the external wall of the Property.  The IO asked for further documents but there is no evidence that the Company pursued its application after 13 March 2008, nor any evidence of the IO rejecting the Company’s application.  Even if there was some qualified representation by Mr Ho, that air‑conditioning units could be installed on the external wall of the Property with the IO’s consent, I do not accept that the Company has made out a case of misrepresentation.

Was there a representation by Mr Ho that no approval was required from the IO for the installation of the air‑conditioners?

22.  The commencement of the tenancy under the Agreement was delayed when it was discovered that the water supply to the Property had been disconnected, and had to be reconnected.  This obviously caused concern, and it is the Company’s evidence that Carrie then asked Esther to find out from Mr Ho whether “any further application” was required to be made for the installation of utility supplies or other facilities for the use of the Property.  Esther maintains at trial that she telephoned Mr Ho to ask if “any other application” had to be made by the Company for approval or consent, in relation to the utilities supply and air‑conditioning facilities, and was informed by Mr Ho that the only application or consent which was required was for the shop signage.  According to Esther, she relayed such information to Carrie.

23.  On the available evidence, I accept, on a balance of probabilities, that Mr Ho did represent to Esther that the only application, or consent, that was required from the IO was for the shop frontage or signage of the Property.  The fact that Mr Ho referred to the shop frontage or signage means that what was discussed between Esther and himself was or included application to, or approval or consent by, the IO.

24.  Counsel for the Owners argued that the evidence of Carrie and Vincent are inconsistent in the context of the alleged making of the 1^st Representation. Bearing in mind that the conversation which took place was between Esther and Mr Ho, it is natural that the focus of Carrie’s evidence would be on the problem of the water supply to the Property. Vincent’s evidence is that according to Esther, Mr Ho had indicated that application for approval was not necessary if the signage would not protrude or “stick out”.  This does not contradict the gist of Esther’s evidence, that Mr Ho informed her that other than the signage, no other approval from the IO was required.

25.  On the evidence, I find that there was a misrepresentation made by Mr Ho that approval for the installation of air‑conditioners on the external wall of the Property was not required from the IO.

Was any representation made by Mr Ho material to the Agreement?

26.  I am not satisfied that Mr Ho’s representation, that no approval or consent was required from the IO for the installation of air‑conditioners on the external wall of the Property, was material or that it had induced the Agreement.

27.  According to the Company’s evidence, the Property was the only premises which they had inspected and considered for the business which they intended to operate. According to Vincent, Carrie had operated a similar business in the vicinity of the Property.  She was familiar with the locality, and told him that the Property was available for rent and was very suitable for their purposes.  According to Carrie, she had not looked at any other shop as the location of the Property was good. She had operated a successful foot massage business in Quarry Bay, and felt there was great potential in developing the business in the Quarry Bay area where the Property was.  She saw a notice that the Property was for rent, and contacted Esther with whom she had had dealings before to arrange an inspection.  The large size of the Property suited her requirements for the business of a spa, and she would not consider any smaller premises.

28.  The Company was under legal advice, at the latest by the time when it signed the Agreement.  The Agreement clearly provided that the Company as tenant had to observe the conditions in the DMC, and further, could not exhibit or display any sign or device on the exterior of the Property.

29.  It is Vincent’s evidence that when he saw that there were air‑conditioning units on the external wall of the Property, he thought that the installation of air‑conditioning units would not be a problem.  Even taking that into account, I do not consider on the evidence available that the 1^st Representation can be objectively said to be material.

30.  On the evidence, I consider that Carrie and Vincent would have entered into the Agreement even if the 1^st Representation had not been made.  A reasonable prospective tenant in the position of Carrie and Vincent in December 2007 would not have been deterred from signing the Agreement by the fact that that the consent of the IO was required for installation of air‑conditioners on the external wall.

The other issues

31.  Having found that there was no representation by implication or conduct, and that the 1^st Representation had not induced the Agreement, the other issues fall away.  However, should I be wrong on the first 3 issues, I will deal with the remaining issues very briefly.  

32.  By asking the Owners and the Daughter to assist the Company in making application to the IO in January 2008 for approval of its plans to install the 12 air‑conditioning units on the external wall of the Property, and by delaying the matter until 22 April 2008 before it purported (on its case) to rescind the Agreement, the Company had affirmed the Agreement or led the Owners to believe that it had elected to adopt or affirm the Agreement.  It had in fact continued to retain possession of the Property until January 2009.  This was so notwithstanding the fact that by 24 December 2007, they had been notified by the solicitors for the IO of the existence of the Injunction, and on the Company’s own case, the Daughter had represented to Esther shortly after 24 December 2007 that the Company had to apply to the IO for the installation of the air‑conditioners on the external wall of the Property.

33.  It was argued on behalf of the Company that it did not take steps before 22 April 2008 to either rescind or to accept what it claims to be the Owners’ repudiatory breach of the Agreement, because the Daughter had on behalf of the Owners continued to make misrepresentations (the 2^nd Representation and 3^rd Representation referred to in the Re‑amended Statement of Claim).  I do not accept that the Company’s delay and failure to take action until April 2008 can be explained by these alleged misrepresentations.  Even on the Company’s own case, the 2^nd Representation was made on 8 December 2007 and the 3^rd Representation shortly after 24 December 2007. The alleged representations were to the effect that the Owners would pay the outstanding fees due to the IO for discharge of the Injunction, and that the Company could apply to the IO to seek installation of the air‑conditioners on the external wall.  On the evidence, no misrepresentation at all has been established.  Nor is there any justification for the Company’s decision not to take action until April 2008, which is 4 months later.

34.  The Company lost its right to rescind by virtue of its affirmation of the Agreement.  However, since the claim against the Owners is for the negligent misrepresentation of Mr Ho, I agree with Counsel for the Company that the Company is still entitled to claim damages in respect of any negligent misrepresentation that may have induced the Agreement (paragraph 6‑096 Chitty on Contracts).

35.  If the Company had succeeded on its claim of negligent misrepresentation, the correct measure of damages would have been an award which serves to put the Company into the position it would have been in if the representation had not been made.  If the 1^st Representation had not been made, it is the Company’s case that it would not have entered into the Agreement.  In such case, it should be entitled to recover the damage directly flowing from or caused by its entering into the Agreement, so far as they are not too remote.

36.  As Lord Steyn stated in his judgment in Smith New Court Securities Ltd v Citibank NA [1997] AC 254 when differentiating between the extent of the civil liability of an intentional wrongdoer and an otherwise “innocent” wrongdoer for damages, the remoteness test for negligence as laid down in The Wagon Mound is whether the loss was reasonably foreseeable.  In the case of a negligent misrepresentation, a plaintiff is entitled to recover his loss flowing from the negligent misrepresentation, as opposed to the wider test in an action for deceit, which is the recovery of loss directly flowing from the fraudulently induced transaction.

37.  On the company’s case, it would not have entered into the Agreement, and would not have entered into the transactions to decorate the Property and to acquire goods for the spa business to be carried on at the Property, if Mr Ho’s neglect misrepresentation had not been made.  Even if I was satisfied that all the Company’s damage as claimed is the direct consequence of its entering into the Agreement, causation, remoteness and mitigation are separate and equally important questions for consideration.

38.  The Owners claim that the Company has failed to mitigate its loss as it failed to take all reasonable steps to avoid the damages the Company claims it had sustained. Such items include the price it paid for purchasing products and furniture for use in the spa to be operated at the Property, salary paid to staff employed for the business from January to March 2008, and the renovation and construction costs incurred for work carried out from early December 2007 to March 2008.

39.  Dealing with the most substantial claim regarding the construction and renovation costs, in the sum of $1,446,479.14, the only evidence produced are the invoices issued with breakdown of the costs for those parts of the work completed, and an expert report dated 7 November 2008.  The expert report was produced as a result of paragraph 3 of an order of Master De Souza dated 19 July 2010 (“Order”), which records the parties’ consent that expert evidence should be “limited to the issue of the completed interior fitting out works at the Property”.

40.  At the pretrial review, I reminded the parties that the Order is the only relevant one on the issue of expert evidence in these proceedings. Neither party took issue with that.

41.  The expert report of Mr Edmond Chan (“Chan”) dated 1 December 2010 simply confirms his opinion as set out in his earlier report of 7 November 2008. Chan’s report of 7 November 2008 (“November Report”) sets out his opinion on the percentage of completion of the interior fitting out works at the Property, which works were commenced in December 2007 and suspended in March 2008.  According to Chan, many aspects of the works were wholly completed, whilst the other aspects were 50% to 90% completed.  The tempered glass door was 20% completed.  

42.  According to the Re‑amended Statement of Claim, the construction costs totaled $1,446,479.14.  This sum was itemized in Annex 1 of Carrie’s 2^nd witness statement (“Annex 1”), not by reference to the works involved and as identified in the November Report, but by reference to the invoices received.  At the trial, the Company did not elaborate further on the breakdown of damages set out in Annex 1.  Nor did the Company explain why the construction and decoration works were only suspended in March 2008.

43.  The Company’s case is that its proposed business of a spa could not be operated at the Property without the 12 air‑conditioners it proposed to install on the external wall.  If, as the Company claims, the fact that air‑conditioners could be installed on the external wall, and the fact that the IO’s consent was not required for this, were indeed material to its entering into the Agreement to lease the Property for its spa business, as soon as Carrie and Vincent learnt on or about 24 December 2007 that the IO’s consent was required before any air‑conditioners could be installed, the Company should have suspended all fitting out and decoration works, if not all other activities concerning the Porperty.  This it failed to do, but instead authorized the construction and decoration works to proceed at the Property until March 2008.  In my judgment, this was unreasonable.

44.  I consider that the Company had failed to take reasonable steps to avoid its loss.  In the absence of any evidence on the status of the construction works which had been completed at the Property by the end of December 2007, I am not in a position to decide the reasonable proportion of the construction costs that should be awarded to the Company, other than a rough percentage of one‑third of such costs, on the basis of the status of the works when they were suspended in March 2008 according to the November Report.

45.  In relation to the setup costs claimed under paragraph 19(E) of the Re‑amended Statement of Claim and particularised in Annex 1, I am not prepared to allow the costs incurred for the acquisition of the Company, as the Company can be used for other purposes.  The claim for the return of the rental deposit has not been pursued.

46.  In relation to the other items of damages particularized under (A) to (D) and (G) of Annex 1, I will only allow (subject to paragraph 47 below) those expenses which are apparent on the face of the supporting invoices or receipts to have been paid for or relate to goods purchased in December 2007.  These are set out in the schedule to this judgment.  Item (F) relates to utility expenses which on the face of the supporting documents relate to the months of January to March 2008, which I will not allow.

47.  With regard to the costs of the furniture, equipment and beauty products set out under (A) and (G) of Annex 1 which were acquired for use in the spa to be set up on the Property, it is Carrie’s evidence that she only advertised for the sale or disposal of some of these items in November 2010.  I am not satisfied that the Company had taken reasonable steps to mitigate its loss in this regard, and would only allow 50% of those sums which I have allowed.

Conclusion

48.  The Company’s claims in the action are dismissed, with costs to the Owners to be taxed if not agreed.

	Schedule
(A)	Kingstar International Trading Ltd $8,400
	Beautideal Co Ltd $6,064
(D)	Cinergy Insurance Services Ltd $17,520
(G)	Air Conditioners $91,000
	Bath tub $30,000
	Dell (server) $8,000
	PCCW (computer) $3,998
	Computer Monitor $3,580
	Computer Peripheral $300
	Keyboard $290
	Bed linen $6,296

HCA866/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 866 OF 2008

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BETWEEN

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HCA866/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 866 OF 2008

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BETWEEN

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J U D G M E N T

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1.  The plaintiff appeals against the decision of Master Kwang given on 23 February 2009 whereby the Master gave summary judgment to the defendants on the defendants’ counterclaim against the plaintiff.

2.  At the start of the hearing of this appeal, I granted leave to the plaintiff to amend its pleadings to include a plea of set-off. The initial application by the plaintiff was only to amend the Statement of Claim. When it was pointed out by counsel for the defendant that the proposed plea of set-off of the arrears of rent had no place in the Statement of Claim since the claim for arrears of rent was only raised in the defendant’s counterclaim, the plaintiff accepted that the plea of set off ought properly to be included in the Reply and Defence to Counterclaim.

3.  In the circumstances, leave was given to the plaintiff to amend both the Statement of Claim as well as the Reply and Defence to Counterclaim.

4.  Leave was also granted to the plaintiff to file two further affirmations, being the 3^rd Affirmation of Yeung Ka Yee Carrie, and the affidavit of Chan Ching May Esther.

BACKGROUND

5.  The defendants are the registered owner of Shop SLG2 on the sub-lower ground floor of Westland Garden Nos. 1025-1037 King’s Road, Nos. 2-10, 12A-12H Westland Road Hong Kong (hereinafter referred to as “the Shop”). The Shop could only be used for business purposes.

6.  On 19 September 2007, the plaintiff entered into a Provisional Tenancy Agreement with the defendant whereby the plaintiff became the tenant of the Shop taking up possession thereof as from 1 November 2007.

7.  On 5 December 2007 a formal tenancy agreement (“the Agreement”) was entered into between the parties in respect of the Shop. The term of the tenancy was to commence from 5 December 2007 until 9 December 2009 at the monthly rent of $150,000 to be paid in advance on the 10^th day of each month with a rent-free period expressly stated therein to be from 5 December 2007 until 9 January 2008. Apart from the rent, the plaintiff had also to pay the management fees, government rates as well as the sewage charges.

8.  Upon entering into the Agreement, the plaintiff had paid the first month’s rent being the first month after the rent-free period.

9.  Dispute having arisen between the parties over the tenancy, it is common ground that apart from the first month’s rent, the plaintiff had not paid any further rent to the defendant as from February 2008, nor had the plaintiff paid any management fees, government rates or sewage charges after April 2008.

10.  The Writ with Statement of Claim was issued by the plaintiff on 16 May 2008.

11.  The Defence and Counterclaim of the defendant was filed on 30 June and amended on 26 September 2008.

12.  The present application for summary judgment on the counterclaim was issued by the defendant on 26 September 2008 and was heard by Master Kwang on 23 February 2009.

13.  By the time this application was heard by the Master, possession of the Shop had been returned by the plaintiff to the defendants on 10 January 2009.

THE PLAINTIFF’S CLAIM

14.  By its Amended Statement of Claim, the plaintiff pleads misrepresentation, breach of duty of disclosure and breach of the Agreement by the defendants.

15.  It is the plaintiff’s claim that before entering into the Provisional Tenancy Agreement with the defendants, the plaintiff had inspected the Shop with estate agents and the 1^st defendant. On that inspection air conditioners were seen at the external wall of the Shop. Unknown to the plaintiff at that time, the defendants were being sued by the Incorporated Owners of Westland Gardens in the Lands Tribunal for the installation of air conditioners on the external wall. This fact was never made known to the plaintiff. The plaintiff had intended to make use of the Shop as a spa and for that would have had to install some 12 air conditioners on the external wall.

16.  An injunction order was granted against the defendants by Lands Tribunal in case no. LBDM 292/2006 on 8 November 2007 ordering the defendants to dismantle the air conditioners already installed on the external wall. The granting of the injunction order was also not made known to the plaintiff by the defendants at the time it was granted.

17.  After taking possession of the Shop, the plaintiff had started to carry out decoration works.

18.  It was only on 8 December 2007 that the plaintiff was informed by the management office of Westland Gardens of the injunction.

19.  As a result negotiations took place between the plaintiff and the defendants concerning the problem of the air conditioners, which could only be resolved with the involvement of the Incorporated Owners of Westland Gardens.

20.  One part of those negotiations concerned the payment of rent pending the resolution of the problem.

21.  It is the plaintiff’s case that by an email dated 7 March 2008 from the daughter of the 1^st defendant (acting as the agent of the 1^st defendant) agreement was reached between the parties that the rent free period would be extended until the resolution of the problem with installing air conditioners on the external wall.

22.  On this footing the plaintiff claims that it was induced by misrepresentation to enter into the Agreement and/or Provisional Tenancy Agreement when it otherwise would not have done so, as well as claiming for breach of the Agreement.

23.  By way of reliefs the plaintiff seeks declarations that the plaintiff was entitled to and has validly rescinded the Agreement and is relieved from further obligations being performed thereunder. There is also a claim for damages to be assessed for the aforesaid breaches.

DEFENDANT’S DEFENCE AND COUNTERCLAIM

24.  The defence denies any misrepresentation, breach of duty of disclosure or breach of the Agreement.

25.  By its counterclaim, the defendants counterclaim for :

(a) forfeiture of the deposit of $300,000;

(b) an order for possession; (possession of the Shop was returned by the plaintiff after the Defence and Counterclaim had been filed)

(c) $718,760.86 being arrears of rent, rates, management fees and sewage charges outstanding as at 30 June 2008; and

(d) mesne profit at the rate of $150,000 plus rates, management fees and sewage charges per month from 1 July 2008 until delivery up of possession.

APPEAL FROM MASTER’S DECISION

26.  As already indicated, the Master had given summary judgment to the defendants on their counterclaim.

27.  In this appeal against the Master’s decision, a number of points were taken by the plaintiff upon which, it was submitted, leave ought to be granted for unconditional leave to defend the counterclaim. In the alternative, it was submitted that even if judgment was to be given on the counterclaim, there should nevertheless be a stay of execution on that judgment pending the trial of the plaintiff’s claim.

28.  The matters relied on by the plaintiff are as follows :

(a) there was an agreement between the parties after the problems arose to extend the rent-free period until such problems could be resolved;

(b) failure of the defendants to comply with section 58 of the Conveyancing and Property Ordinance to give proper notice of forfeiture;

(c) if forfeited, credit ought to be given for the $300,000 deposit in respect of the other claims;

(d) equitable set-off; and

(e) stay of execution if judgment is given on the counterclaim.

29.  It would be necessary to deal with each of the points raised separately.

Agreement to extend rent-free period

30.  The Agreement expressly provides in Clause 1 that the rent-free period would be from 5 December 2007 to 9 January 2008.

31.  The plaintiff alleges that after the problem with the air conditioners was discovered by the plaintiff, and in the course of their negotiations, an oral agreement was reached between the parties that the rent-free period would be extended until that problem with the air conditioners was resolved. In this the plaintiff relies on an email dated 7 March 2008 sent by Miss Ho (the 1^st defendant’s daughter) to Miss Carrie Yeung of the plaintiff, as evidencing such oral agreement. The plaintiff also relied on the evidence of Carrie Yeung and that of Esther Chan contained in their respective affirmation/affidavit.

32.  The relevant part of the affirmation of Carrie Yeung states :

“In view of the delay in approval of the air-conditioning installations and delay in the decoration works, we did push the Defendants in allowing us a longer rent-free period. Miss Ho, on behalf of the Defendants had by her email dated 7^th March 2008 varied the terms of the Tenancy Agreement in that the rent-free period of the Property was to be extended until the final resolution in relation to the installation of air-conditioners at the meeting of the Incorporated Owners.”

33.  Esther Chan in her affidavit states :

“Carrie Yeung asked me to talk to the landlord about extending the rent-free period until the air-conditioning installation problem was resolved. I recall conveying the same message to Ms Ho and Ms Ho confirmed that she agreed that the rent-free period could be postponed and would be dealt with after the question of air-conditioning was resolved.”

34.  Looking at their evidence, I cannot see on that evidence any concluded agreement as alleged by the plaintiff.

35.  At best, from the evidence of Esther Chan there was only an agreement to defer the matter for future resolution but no agreement as such ‘to extend the rent-free period until the problem was resolved’. The evidence of Carrie Yeung relies on the email dated 7 March, the relevant part of which (from the translation agreed between the parties for the purpose of this appeal) states :

“Good day, I have contacted your decoration master, the management office requested for Registered AP to submit data and snitched that the Incorporated Owners will hold meeting very soon and will discuss in the course of the meeting, regarding rent free wait after the pass of the Incorporated Owners then discuss, but the charges below you have to pay my father first, moreover regarding electricity deposit, your refund of electricity, water supply postal address, you change it by your own.”

36.  Once again in this email, the relevant words “regarding rent free wait after the pass of the Incorporated Owners then discuss” clearly show that there was no concluded agreement as suggested by the plaintiff. All that those words showed was that the matter concerning rent-free was to be further discussed after the Incorporated Owners had met and made their decisions.

37.  On the evidence before me there is simply no evidence of any agreement reached between the parties that the rent-free period was to be extended until after the problem with the air conditioners had been resolved.

38.  The Master cannot be faulted for rejecting this part of the plaintiff’s case.

No notice of forfeiture

39.  The plaintiff points to the counterclaim of the defendants whereby it was pleaded that the defendants, by its counterclaim, forfeit the Agreement and re-enters the Shop, to say that there was no prior notice of forfeiture given by the defendants forfeiting the Agreement. Therefore it does not comply with section 58 of the Conveyancing and Property Ordinance.

40.  However, as pointed out by Mr Lo in his submission, counsel for the plaintiff has obviously overlooked sub-section 10 of section 58 which expressly provides that section 58 does not (with one exception which has no application here) affect the law relating to re-entry or forfeiture or relief in case of non-payment of rent.

41.  That is the short answer to this point raised by the plaintiff which is, with respect to counsel for the plaintiff, entirely without merit.

Whether credit to be given for the forfeiture of the deposit

42.  Clause 4(a) of the Agreement provides that if any part of the rent is in arrears for 15 days or if there is any breach of any of the agreements by the tenant, then the landlord shall be entitled to re-enter the Shop and the Agreement shall absolutely determine :

“AND the deposit paid hereunder shall be forfeited to the Landlord as and for liquidated damages….but without prejudice to the Landlord’s rights to claim any further damages which the Landlord shall have sustained or may sustain” [emphasis supplied]

43.  Clause 4(d) of the Agreement further provides that at the expiration or sooner determination of the Agreement…. subject to prior forfeiture in accordance with Clause 4(a) the Landlord will repay to the Tenant the deposit paid but without interest thereon but if there shall be any arrears of rent or other outstanding charges in connection with the enjoyment of the premises :

“the Landlord may apply such deposit towards payment of such arrears of rent and outstanding charges and if there shall be any breach of the said agreements or any of them the Landlord shall pay or apply the said deposit or such part thereof towards remedying such breach…. and shall only pay the balance (if any) of the deposit to the Tenant.”

44.  It seems clear from the above wording in the clauses cited that the deposit, if forfeited, is forfeited as liquidated damages and not as a penalty. Moreover, the Landlord is entitled to claim “any further damages” over and above the amount of such deposit forfeited.

45.  Therefore the intention between the parties must be that the forfeiture of the deposit is not absolute. When rent is in arrears, the deposit may be used to pay off such arrears of rent. It follows therefore that credit will need to be given for the forfeiture of the deposit where rent is in arrears.

46.  In Orient Bright International Ltd v Hiang Kie Hong Ltd [2005] 2 HKC 663, Le Pichon JA, faced with a similar situation, decided in that case that the landlord was entitled to forfeit the deposit without have to give any credit. However, in that case, the wording of the relevant clause in the tenancy agreement differed from the wording in the present case in that there it was provided that in the event of breach or non-observance by the tenant of any of the agreements, stipulations or conditions :

“the Landlord shall be entitled to terminate this Agreement and to forfeit the said deposit absolutely but without prejudice to the Landlord’s rights to claim from the Tenant damages or monetary loss which the Landlord may incur as a result of such non-observance or non-performance by the Tenant…” [emphasis added].

47.  There was also a further clause in the tenancy agreement in the case of Orient Bright International Ltd which provided that in no event shall the tenant be entitled to treat the deposit as payment of rent.

48.  Those two clauses referred to above in the case of Orient Bright and also their difference in wording sufficiently distinguish the decision in that case from the present case.

Set-off

49.  The plaintiff submits that even if the plaintiff is liable to the defendant for payment of the rent, the plaintiff should be entitled to set of such rent due by way of equitable set-off against the damages claimed by the plaintiff by reason of the fact that the claims of the plaintiff are so closely connected with the Agreement.

50.  The plaintiff’s obligation to pay rent is set out in Clause 1 of the Agreement which provides that the rent is :

“payable in Hong Kong currency in advance on the 10^th day of each and every calendar month without any deduction or set-off (legal or equitable) SUBJECT to a rent free period from 5^th December 2007 to 9^th January 2008 both days inclusive…”

51.  Not only is that obligation to pay rent under the Agreement not expressed to be subject to or conditional upon compliance by the defendant of its obligations under the Agreement, Clause 1 of the Agreement expressly prohibits any set-off whether legal or equitable in respect of the rent payable.

52.  It is therefore clear that the obligation to pay rent is to operate independently from the other contractual obligations of the defendants under the Agreement.

53.  The only clause in the Agreement which provides for the suspension of rent is Clause 4(f) which provides for the rent to be suspended if [the Shop] is damaged or destroyed by fire or other causes not attributable to the act or default of [the plaintiff] so as to be unfit for habitation or use.

54.  On a proper construction of the Agreement therefore, set-off, even equitable set-off, is not available to the plaintiff.

55.  The further argument put forward by the plaintiff in submitting that equitable set off is available to the plaintiff is that it was the misrepresentation by the defendant which caused the plaintiff to enter into the Agreement. But for such misrepresentation, the plaintiff would not have entered into the Agreement and would not have been bound by the terms contained in it. Since the plaintiff is now claiming that the Agreement is rescinded because of the misrepresentation, Clause 1 of the Agreement should not be engaged to prevent equitable set off from being available to the plaintiff.

56.  That submission by the plaintiff overlooks the fact that although the true facts (on the plaintiff’s case) upon which the misrepresentation claim was based became known to the plaintiff on or about 8 December 2007 when the plaintiff learned from the management office of the injunction order against the defendants, the plaintiff had retained possession of the Shop until 10 January 2009, well after the defendants had served its counterclaim in which it claimed for possession.

57.  The only basis which would have enabled the plaintiff to have retained possession of the Shop until the plaintiff delivered up possession on 10 January 2009 was the Agreement.

58.  In those circumstances, I cannot really see how the plaintiff can resile from being bound by the terms of the Agreement.

59.  Accordingly, I am of the view that the Master was correct not to have acceded to the plaintiff’s contention of equitable set-off.

60.  That would still be the same position even if the plaintiff could show that both the claim and the counterclaim arises out of the same transaction and are so closely related to each other.

61.  I am therefore not persuaded that the plaintiff is entitled to equitable set-off in this case.

Stay of Execution

62.  Given the circumstances of this case as already set out above, I am of the view that the plaintiff’s claim based on the misrepresentation and/or failure to make full disclosure is sufficiently closely connected with the Agreement entered into between the parties to warrant there to be a stay of execution of the judgment obtained by the defendant on the counterclaim pending the trial of the plaintiff’s claim.

CONCLUSION

This appeal is therefore allowed to the following extent :

(a) in respect of the amount of the judgment ordered on the counterclaim, credit will need to be given for the amount of the deposit paid by the plaintiff; and

(b) there will be a stay of execution of the judgment on the counterclaim pending the trial of the plaintiff’s claim.

In all other respects, the substantive order of the Master (with the exception of the costs order) is to stand.

Costs

63.  In view of the fact that this appeal from the Master’s order has been allowed in part, the parties are to lodge written submissions as to costs within 14 days from the date of handing down of this judgment. The submission as to costs to be lodged is to include the costs of this appeal as well as to the cost below.

64.  Upon receipt of such written submissions on costs, I will give a further written ruling on costs to be handed down in due course.