TSE SIU HOI v. LEE DICK GOLD AND JEWELLERY LTD

LDPE 1132/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 1132 OF 2014

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DECISION ON COSTS
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Introduction

1.  This is an application by the applicant to vary the costs order nisi (“the Costs Order Nisi”) which I made on 27 August 2015 when I ordered in the applicant’s favour in that the respondent is not entitled to remain in possession of the Premises after 30 June 2014 as a lawful tenant.

2.  This case arose when the applicant claimed possession of the premises at Shop B, No 66 San Hong Street, Sheung Shui, New Territories (“the Premises”) when, according to the applicant, the tenancy agreement between the applicant’s predecessor in title and the respondent (“the 2012 agreement”) expired on 30 June 2014.

3.  On the other hand, the respondent submitted that the 2012 agreement contained an option to renew for another 2 years or alternatively the applicant was bound by such a renewal as a matter of law.

4.  Subsequent to a trial for two days, I handed down my judgment dated 27 August 2015 (“the Judgment”) ruling in favour of the applicant on all issues in dispute, ordering the respondent to deliver vacant possession of the Premises to the applicant, pay the applicant arrears of mesne profits at the rate of $67,500 per month from 1 October 2014 until delivery up of vacant possession and pay costs to the applicant on District Court scale.

5.  It is the case of the applicant that he had issued two letters dated 8 June 2015 which together comprise a sanctioned offer (“the Sanctioned Offer") which, inter alia, required:

(1) the respondent to deliver vacant possession of the Premises on or before 31 July 2015;

(2) the respondent to pay mesne profits to the applicant for occupation of the Premises from 1 October 2014 to 31 July 2015 at the sum of $67,480 per month; and

(3) there be no order as to costs between the applicant and the respondent, including all costs reserved and the costs of mediation and valuation.

6.  More particularly, by a summons issued on 8 September 2015, the applicant now requests this Tribunal to vary its order on costs on indemnity basis such that:

“The respondent do pay the applicant’s costs of the application to be taxed at District Court scale if not agreed with certificate for counsel. Furthermore, the respondent do pay the applicant’s costs on indemnity basis (with certificate for counsel) from 9 July 2015 onwards, to be taxed, if not agreed.”

Order 22, rule 24(3)& 24(4) RHC

7.  The applicant is relying on Order 22 rule 24 of the Rules of the High Court which provides that:

“(3) The Court may also order that the plaintiff is entitled to-

(a) his costs on the indemnity basis after the latest date on which the defendant could have accepted the offer without requiring the leave of the Court; and

(b) interest ……

(4) Where this rule applies, the Court shall make the orders referred to in paragraphs (2) and (3) unless it considers it unjust to do so.

(5) In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3), the Court shall take into account all the circumstances of the case including-

(a) the terms of any sanctioned offer;

(b) the stage in the proceedings at which any sanctioned offer was made;

(c) the information available to the parties at the time when the sanctioned offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated. ”

Chronology of Events

8.  For the purposes of illustration, I summarise hereunder the sequence of events that might lead to this argument on costs, some of which are repeated from the Judgment itself[1]:

Date		Particulars
5 Feb 14		The respondent received a notice to quit issued by Raymond Chan on behalf of Silver Joyce stating that the 2012 agreement would be determined on 30 June 2014.
17 Feb 14		The respondent instructed Messrs David YY Fung & Co (“David YY Fung”) to rebut by letter that clauses 2 and 12 together provided it an option to renew the tenancy for another 2 years. The letter also stated: “Pursuant to the Agreement, we hereby on behalf of our client give you on behalf of your client, notice that our client hereby exercises the said option and/or its rights to renew the tenancy for another 2 years, namely from 1st July 2014 to 30th June 2016. Please let us have your draft Tenancy Agreement for our approval in compliance with Clause 2 of the Agreement.”
3 Apr 14		The applicant entered into a provisional sale and purchase agreement with Silver Joyce to buy G/F, 1/F, 2/F & Rooftop, 66 San Hong Street (ie including the Premises) which is registered vide memorial 14050202140012 in Land Registry.
8 Apr 14		David YY Fung sent a letter to Raymond Chan alleging that “Mr L(i) and Mr Y(ang), the respective representatives of our respective clients, did on 7th April 2014 over the telephone confirm that the existing tenancy as to the Premises between our respective clients be renewed for 2 years, namely from 1st July 2014 to 30th June 2016, at a monthly rent of HK$57,000.00 while the other terms and conditions of the existing tenancy agreement remain unchanged.”
17 Apr 14		Letter apparently signed by Mr Yang of Silver Joyce reminding the respondent that the fixed term under the 2012 agreement would expire on 30 June 2014 and Silver Joyce would resume the Premises on 1 July 2014.
10 May 14		David YY Fung sent a letter to Raymond Chan re-stating that the respondent had exercised the option to renew the 2012 agreement for another 2 years and requested to have a draft Tenancy Agreement for approval.
20 May 14		Raymond Chan sent a letter to David YY Fung, inter alia, denying the existence of an option to renew under the 2012 agreement.
21 May 14		David YY Fung sent a letter to Raymond Chan, inter alia, reaffirming the contents of its letter of 10 May 2014.
23 Jun 14		Raymond Chan sent a letter to David YY Fung, inter alia, demanding vacant possession of the Premises on 30 June 2014 and “the alleged option shall in all respect be void”.
27 Jun 14		David YY Fung sent a letter to Raymond Chan, inter alia, re-stating the respondent had duly exercised the option to renew the 2012 agreement.
4 Jul 14		Raymond Chan sent a letter to David YY Fung stating that “our client exercised its rights to terminate the said tenancy such that your client must deliver vacant possession” of the Premises to Silver Joyce.
10 Jul 14		Raymond Chan sent a letter to David YY Fung purporting to respond to a letter from the latter dated 8 July 2014 (the contents of which is not provided) and stating, inter alia, its position as of the letter dated 4 July 14.
11 Sep 14		The applicant became the owner of the Premises by an Assignment vide memorial 14100802410129 registered in Land Registry on 8 October 2014.
16 Sep 14		Messrs Tam & Partners, Solicitors (“Tam”) issued a “Final Notice” to the respondent requiring the latter to quit and deliver up vacant possession of the Premises to its landlord on or before 22 September 2014.
19 Sep 14		David YY Fung sent a letter to Tam, inter alia, repeating the respondent’s stance that it had duly exercised the option to renew the 2012 agreement.
23 Sep 14		Tam sent a letter to David YY Fung stating that “there is no ‘option to renew’” under the 2012 agreement and the tenancy had already expired.
27 Sep 14		David YY Fung sent a letter to Tam, inter alia, repeating the respondent’s stance that it had duly exercised the option to renew the 2012 agreement.
29 Sep 14		Tam sent a letter to David YY Fung stating that this was a notice to quit and requesting the respondent to give vacant possession of the Premises to the applicant on or before 1 November 2014. In paragraph 5 of the letter, “Our client is determined to obtain vacant possession of the Premises and would not accept any payment from your client except mesne profits through our firm.”
		On the same day, Tam sent a letter to David YY Fung stating, inter alia, that it only received the latter’s letter of 27 September 2014 on that day.
30 Sep 14		David YY Fung sent a bank draft to Tam purporting as rent for the Premises for the period of 1 October 2014 to 31 October 2014. Tam refused to accept and the bank draft was returned to David YY Fung on that day. This bank draft was sent to Tam again on the same day.
3 Oct 14		Tam returned the bank draft to David YY Fung.
31 Oct 14		Tam sent a letter to David YY Fung demanding the respondent to deliver vacant possession of the Premises to the applicant on or before 1 November 2014.
18 Nov 14		The applicant commenced the application for recovering possession.
25 Nov 14		The respondent filed the Notice of Opposition dated 24 November 2014.
15 Dec 14		Hearing before HH Judge K W Wong who gave directions on (1) filing and service of Notice of Reply; (2) Mediation; (3) filing of witness statements; and (4) interim payment of $60,000 per month by the respondent to the Tribunal.
2 Jan 15		Notice of Reply filed by the applicant.
30 Jan 15		Mediation.
13 Feb 15		Mediation.
2 Apr 15		Filing and exchange of witness statements of the applicant and the respondent.
13 Apr 15		Hearing before HH Judge K W Wong who gave directions on instructing a single joint expert on the market rent of the Premises for the period under dispute.
27 May 15		Filing of report by single joint expert stating the market rent of the Premises on 1 October 2014 was $67,500 per month.
4 Jun 15		Without prejudice letter from respondent via its solicitors proposing that: (1) Vacant possession be delivered on 30 June 2016; (2) Mesne Profits at $60,000 per month.
8 Jun 15		The Sanctioned Offer was made and it is undisputed that the respondent received it on 9 June 2015.
11 Jun 15		Hearing before H H Judge K W Wong who ordered, inter alia, trial scheduled to commence on 3 August 2015 and a pre-trial review on 10 July 2015. There was also conversation/discussion between applicant’s solicitors and respondent’s solicitors.
7 Jul 2015		The last day for the respondent to accept the Sanctioned Offer without leave of the Tribunal.
3 & 13 Aug 15		Hearing on the trial took began.
27 Aug 15		The Judgment was delivered.

Position of the Respondent

9.  The respondent objects to the applicant’s application, submitting that costs consequence of Order 22, rule 24 would not be triggered in the present case on the grounds that:

(1) the Sanctioned Offer was not advantageous or better than the Judgment (ie the Judgment on the mesne profits);

(2) terms of costs should not be considered as part of the Sanctioned Offer (ie the costs order).

10.  Alternatively, the respondent objects to the applicant’s application on the ground that it is unjust in this case to order indemnity costs against the respondent, because:

(1) the timing of the Sanctioned Offer, ie it was only after the respondent’s without prejudice offer and at a very late stage;

(2) the $20 per month difference in mesne profits is too small to be considered as a genuine offer; and

(3) the respondent has responded to the Sanctioned Offer.

Whether the Sanctioned Offer was advantageous or better than the Judgment (ie the Judgment on the mesne profits)

11.  Mr Lee Ming Wai (“Mr Lee”) of David Y Y Fung, the solicitors for the respondent, submits that the spirit of sanctioned offers in Hong Kong was modelled on and is “almost on all fours” with its counterparts in the United Kingdom and therefore the application of English cases on such issues relating to Part 36 Offers in the United Kingdom should be highly persuasive, if not directly applicable, to similar issues relating to sanctioned offers in Hong Kong.

12.  In this regard, Mr Lee refers to Huck v Robson [2002] EWCA Civ 398, [2002] 3 All ER 263 (“Huck”), where all three judges of the English Court of Appeal agreed that if the Part 36 Offer was only used as a tactical step, indemnity costs should not be ordered. Mr Lee is referring to the concession of mere $20 per month in mesne profits in the Sanctioned Offer being too small to be considered as a genuine and realistic attempt by the applicant to resolve the dispute by agreement. Mr Lee accuses the applicant of making a mere concession on costs in the Sanctioned Offer.

13.  As acknowledged by Mr Lee, Huck was a personal injury case where the quantum on liability was in issue. Jonathan Parker LJ stated in §63 that:

“it is in my judgment implicit in r 36.21 that, consistently with the philosophy underlying Pt 36 (to which I have already referred), in order to qualify for the incentives provided by paras (2) and (3) of the rule, a claimant’s Pt 36 offer must represent at the very least a genuine and realistic attempt by the claimant to resolve the dispute by agreement. Such an offer is to be contrasted with one which creates no real opportunity for settlement but is merely a tactical step designed to secure the benefit of the incentives. That is not to say that the offer must be one which it would be unreasonable for the defendant to refuse; that would be too strict a test, and would introduce considerations of punishment and moral condemnation which (on the authority of Petrotrade Inc v Texaco Ltd [2001] 4 All ER 853, [2002] 1 WLR 947 and McPhilemy v Times Newspapers Ltd (No 2) [2001] 4 All ER 861, [2002] 1 WLR 934) are irrelevant in the context of para (3) of r 36.21. Indeed, the terms of the offer may reflect a degree of optimism and confidence on the part of the claimant/offeror. Provided only that the offer represents a genuine and realistic offer to resolve the dispute by agreement, it is for the claimant to decide at what level to pitch his offer. In some cases, an offer which allows only a small discount from 100% success on the claim may be a genuine and realistic offer; in other cases, it may not. It is for the judge in every case to consider whether, in the circumstances of that particular case, and taking into account the factors listed in paragraph (5) of rule 36.21, it would be unjust to make the order sought.”[2]

14.  Even Mr Lee agreed that there was no definite mechanism to measure the smallness of the margin between the offer and the outcome. Therefore, whether or not the offer was a tactical step should be decided on a case by case basis. In contrast with Huck, in the present case, the main plank of the applicant was that the 2012 agreement between the applicant’s predecessor in title and the respondent expired on 30 June 2014. The quantum on mesne profits was only a consequential issue and especially by the time the Sanctioned Offer was made on 8 June 2015, it was determined by single joint expert at $67,500 per month[3].

15.  In the meantime, Mr Lee is aware of Antwerp Diamond Bank N V v Brink’s, Incorporated and others, CACV 282/2012 (unreported, 14 August 2015) (“Antwerp Diamond Bank N V”) in which the plaintiff’s offer by way of a sanctioned offer at a discount of 0.27% off its claim was still upheld to justify the triggering of Order 22 rule 24. The Court of Appeal said that:

“19. In Kai Min Fashion (HK) Limited v Fond Express Logistics Limited and anor [2013] 1 HKC 563, a misdelivery case (like the present) where a discount of 2% was offered, Recorder Jat SC said (at paragraph 14 of his judgment):

“ … Huck v Robson was a traffic accident case and in that type of cases [sic] issues of contributory negligence often arise, making it uncertain as to the extent of the parties’ respective responsibility for the accident. Thus making a sanctioned offer of the kind described by Tuckey LJ may be seen as a tactical move. This case, on the other hand, is what may be called a “mis-delivery” case and claimants in such cases are often, and justifiably, confident of success if the carrier has delivered the goods without production of the original bills of lading. I do not see why the Plaintiffs should not offer a small discount in this type of case to reflect their reasonably justified confidence in the strength of their claims.”

20. In the present case, the extent of the discount offered is even less than that in Kai Min Fashion. But it does not follow that it would therefore be unjust to make orders of the sort envisaged by Order 22 rules 24(2) and (3). Just as in Kai Min Fashion, the Plaintiff here could well have genuinely regarded its claim as an extremely strong one (and there is no reason to suppose that it did not). We therefore do not think that the smallness of the discount offered of itself renders it unjust to make the orders which the Plaintiff seeks on the basis that the offer was to be castigated as merely “tactical”. Moreover, in this regard, we would, with respect, agree with the observations of Norris J in Wharton v Bancroft [2012] EWHC 91 at paragraph 22 that:

“The concept is not an easy one to apply. All Part 36 offers are tactical in the sense that they are designed to take advantage of the incentives provided by Part 36. A low offer in a case in which the offeror considers that the offeree’s position has no merit cannot be written off as self evidently ‘merely a tactical step’.”

21. In this connection, there is no reason why a recipient of a sanctioned offer of a relatively small discount to the claim should not give it serious consideration. Such consideration may lead the recipient to respond with (from his point of view) a more realistic sanctioned offer or sanctioned payment.  If this is done, the party who put forward the original sanctioned offer would have to give serious thought to this counter sanctioned offer or counter sanctioned payment.  The process may go on and it may take several rounds of offer and counter offer before one gets to a point where an offer acceptable to both sides emerges.  Even if that point is not reached, the process would have driven the parties (together with their lawyers) to give serious and realistic consideration to the possible options of settlement as opposed to the ordinary adversarial mindsets which unfortunately have a tendency to dominate the thinking of those involved in litigation.  To that end, the whole process initiated by the original sanctioned offer can achieve what the sanctioned offer and sanctioned payment regimes are designed to achieve.”

16.  Mr Lee submits that Antwerp Diamond Bank N V or Kai Min Fashion (HK) Limited on which Mr Lam Siu Wah Joseph (“Mr Lam”), counsel for the applicant, seeks to rely in his submission must be distinguished from the present case because of the following reasons:

(a) The ratio of Antwerp Diamond Bank N V seems to be, inter alia, that in a case where the claimed amount is very clear and the evidence is very straightforward, ie on a “mis-delivery” case, the slightest discount would justify the triggering of the costs consequences under Order 22 rule 24, which is not the case in the present proceedings;

(b) The situation of this case is that the Sanctioned Offer does not induce the respondent to settle or to conduct further negotiations, but rather led to a breakdown of negotiation only less than 2 months before trial;

(c) If I follow the decision of Antwerp Diamond Bank N V and order indemnity costs on the basis that “the smallness of the discount offered of itself” would not “render it (ie a sanctioned offer) unjust to make the orders which the applicant seeks on the basis that the offer was to be castigated as merely “tactical”, and accepts that the $20 difference could justify the triggering of Order 22 rule 24, then the decision would go against the very core notion of Order 22 Sanctioned Offer;

(d) There are practical difficulties for practitioners or even judges to determine whether the cases before them are “extremely strong”. The facts under Antwerp Diamond Bank N V were peculiar. In the present case the applicant’s case is not “extremely strong”  and the respondent’s case had a decent chance of success at trial (even though the respondent’s submissions at trial were not accepted and the respondent chose not to appeal);

(e) The potential abuse envisaged in Huck that a sanctioned offer used as a tactical step would, unjustly, trigger costs consequences would become a reality and that this case could become precedent that plaintiffs/claimants may submit sanctioned offers incredibly close to their actual claim at the time of the filing of the Writ and/or the Statement of Claim, in the hope that if they would be successful at trial, costs following the event claimed on an indemnity basis could be justified.

17.  Despite the forceful submission by Mr Lee at first glance, I am not persuaded. As mentioned in §14 above, the quantum on mesne profits was only a consequential issue and especially by the time the Sanctioned Offer was made on 8 June 2015, it was determined by single joint expert at $67,500 per month. There could be little concession that the applicant would reasonably make. I echo with what Recorder Jat SC said in Kai Min Fashion (HK) Limited (and CEP Limited v Wuxi Jiacheng Solar Energy Technology Company Limited [2014] 4 HKLRD 44 to which Mr Lam also refers) and ask why the applicant should not offer just a small discount to reflect their reasonably justified confidence in the strength of its claim for vacant possession of the Premises.

18.  In the present case, by the time the applicant made the Sanctioned Offer, there had also been Notice of Reply filed by the applicant, exchange of witness statements, etc. I agree with the Court of Appeal inAntwerp Diamond Bank NV that “there is no reason why a recipient of a sanctioned offer of a relatively small discount to the claim should not give it serious consideration .…”

19.  In addition, I consider the applicant had good reason for his “confidence in the strength of (its) claim” and his case was “extremely strong”. In §52 of the Judgment, I stated:

“it is neither reasonable nor obvious to a reasonable bystander there exists an option in favour of the respondent in the 2012 agreement. There is simply no mechanism for the exercise as spelt out in the 2012 agreement. The renewal at $57,000 per month as alleged for the open tenancy by the respondent, save for the telephone conversation as alleged on 7 April 2014 which I have dealt with in §41 above, has not ever appeared in the 2012 agreement. I agree with Mr Lam’s submission that if the respondent’s allegation as regards the negotiation of the 2012 agreement were correct, it would have been a very simple job for Ms Chan to write down the agreed rent for the period from 1 July 2014 to 30 June 2016 like what happened in the 2008 agreement.”

Then I ruled that the open tenancy agued by the respondent was unenforceable for being uncertain and the 2012 agreement took effect as creating a tenancy for only two years and nothing more.

20.  I do not consider my ruling here would become any precedent in any event because “(i)t is for the judge in every case to consider whether, in the circumstances of that particular case, and taking into account the factors listed in paragraph (5) of rule 36.21, it would be unjust to make the order sought.”

Whether Terms of Costs can be considered as part of the Sanctioned Offer (ie the Costs Order)

21.  The applicant admits that the concession contained in the Sanctioned Offer is mainly on costs. Mr Lee cites Gill Ajmer Singh v Wah Hing Scaffolding Engineering Limited and another, DCEC 348/2010 (unreported, 13 November 2013) (“Wah Hing Scaffolding”) where Deputy District Judge R Lai ruled that an offer requiring the other side to discontinue one’s claim and pay costs was only a tactical step and indemnity costs was not granted to the successful party.

22.  While Mr Lee suggests that the Sanctioned Offer is of similar nature, with respect, I do not agree because in the present case, the Sanctioned Offer requires “no order as to costs”. Indeed, the Sanctioned Offer corresponds with Chan Kwing Chiu and another v陳志球also know as Johnnie C K Chan, CACV 209/2012 (unreported, 3 October 2013) discussed in Wah Hing Scaffolding where Deputy District Judge R Lai termed the sanctioned offer by the defendant there was a “drop hands” basis with no order as to costs and tended to agree that costs on indemnity basis should be awarded for the post-offer costs to the successful defendant.

23.  Also, Mr Lee relies on Mitchell and others v James and others [2002] 2 All ER 1064 (“Mitchell”) which suggests that a “no order as to costs” terms contained in a Part 36 Offer must not be construed as part of the Part 36 Order and therefore must not be taken into account in determining whether the costs term is more advantageous to the costs order following judgment.

24.  Mr Lee then also refers to Chen Tek Yee & others v Chan Moon Shing and another, HCA 954/2010 (unreported, dated 11 June 2015) and argues that although Deputy High Court Judge Marlene Ng held that a sanctioned offer containing a term of costs should be regarded as valid, she upheld the logic and reasoning behind Mitchell and Sunbeam Investments Limited v The Incorporated Owners of Villa Veneto, LDBM 370/2007 and LDBM 175/2009 (unreported, dated 7 September 2010) in which Mitchell was applied:

“23.  In Hong Kong, H H Judge Wong in dealing with the applicant’s offer in Sunbeam Investments Limited rejected the applicant’s attempt to distinguish Mitchell & ors on the basis that Order 22 rule 21(1) of the RHC contained the proviso “unless the Court otherwise orders” (“Otherwise Proviso”) absent in Parts 36.13(1) and 36.14 of the Old CPR and/or Part 36.10(1) of the New CPR.  H H Judge Wong alluded to the practical difficulty “where a party offers an actual amount of costs to the other side, and the court would have to assess whether the amount offered is the right amount, and hence there would be a taxation or assessment exercise in costs……” The learned judge did not think that the provisions on sanctioned offers in Order 22 of the RHC were to include terms as to costs so as to create such practical difficulty.

……

26. Mr Chan submitted that Central Management Ltd was unhelpful because details of the sanctioned offer were unclear and hence it was not known how the judgment was more advantageous to the plaintiff.  He also argued “[it] is not clear whether to what extent did the Court reach the decision to order indemnity costs on the basis that the [trial judge’s] cost order beat the offer for no order as to costs contained in the sanctioned offer”.  I am not persuaded by these arguments.  In my view, irrespective of these concerns, it was obvious from the judgment of Cheung JA (with whom Rogers VP and Le Pichon JA agreed) in Central Management Ltd that the plaintiff’s offer contained terms as to costs, but such offer was still regarded as a valid sanctioned offer that attracted the costs consequences under Order 22 rule 24(4) of the RHC.  Mitchell & ors was not referred to, but the ratio of the decision in Central Management Ltd to award indemnity costs on the strength of a judgment that was “more advantageous” than the plaintiff’s sanctioned offer that contained terms as to costs plainly contradicted the decision in Mitchell & ors.

27. I also drew counsel’s attention to the subsequent first instance decision (in 2012) in The Procter & Gamble Co v Svenska Cellulosa AB SCA & anor. Mitchell & ors was again not referred to, but this case clearly reflected modern judicial concern about excluding terms as to costs (at least) in claimant’s Part 36 offers.”

25.  I cannot but concur with Deputy High Court Judge Ng that a sanctioned offer containing a term of costs should be regarded as valid when I take into account Central Management Limited v Light Field Investment Limited and others [2011] 2 HKLRD 34 which is a judgment of the Court of Appeal and therefore binding on this Tribunal. Deputy High Court Judge Ng also referred to Eiles v London Borough of Southwark [2006] EWHC 2014 (TCC), where Ramsey J, although following Mitchell, alluded to the important objectives of encouraging settlements and giving incentives for claimant’s Part 36 offers.

26.  I have earlier remarked in §17 that there could be little concession that the applicant would reasonably make as regards the mesne profits. In addition, as submitted by Mr Lam, by 8 June 2015, the case had dragged on for more than 6 months since the present application and the applicant had incurred legal expenses in attending the hearings on 15 December 2014 and 13 April 2015, the two mediations as well as expenses in appointing the single joint expert in determining the amount of mesne profits. I consider the Sanctioned Offer containing a term of costs was a genuine and realistic attempt by the applicant to achieve settlement.

Whether it is unjust in this case to order costs against the Respondent

27.  Again Mr Lee refers to Huck where LJ Schiemann said:

“77. The crucial question to be addressed by the judge in the present case was that posed in Part 36.21(4): will it be unjust to award the claimant his costs on an indemnity basis? It is important to bear in mind that this is the way the question is phrased. The question is not: will it be unjust not award the claimant his costs on an indemnity basis?”

28.  Mr Lee submits the answer should be “yes” in the present case because

(a) the timing the Sanctioned Offer, ie it was only after the respondent’s without prejudice offer and at a very late stage;

(b) the $20 difference in mesne profits is too small to be considered as a genuine offer.

29.  I do not consider the timing of the Sanctioned Offer has any problem. I note the respondent also chose to make its without prejudice offer on 4 June 2015 which indeed made no concession at all as regards the main issue on the expiry date of the 2012 agreement when it proposed only to deliver vacant possession be delivered on 30 June 2016. Neither do I consider the Sanctioned Offer was late as it was right before the hearing on 11 June 2015 and the trial day had not been fixed yet.

30.  As regards the second concern (b), I have dealt with it in §§ 17-20 above and I am not going to repeat myself here except to say a sanctioned offer for a nominal (or very small) concession would not, in itself, unreasonable. I agree that I should take into account all the circumstances of this case by reference to Order 22, rule 24(5).

31.  As per Note 1 to this rule 24, the provisions of Order 22, rules 23 & 24 “are designed to provide important incentives to encourage plaintiffs to make, and defendants to accept, settlement offers at appropriate levels. Such an incentive would be deprived of effect unless the non-acceptance of an offer, which subsequently proves to have been a sufficient offer, ordinarily will advantage the plaintiff in the manner foreseen in the rules. ” I agree that the Sanctioned Offer is a “sufficient offer” in this sense as explained above, taking into accounts matters stipulated in Order 22, rule 24(5).

32.  Note 2 further states that the enhancement provisions as to costs … in Order 22 rule 24(3) are new provisions and are designed to redress any perceived unfairness if there was to be no difference between acceptance and non-acceptance. This is particularly pertinent to the Sanctioned Offer here and the respondent failed to respond to it. See for instance §8 of 2^nd Affirmation of Yuen Sau Chun Betty of Tam, the solicitors for the applicant[4].

33.  As stated by Deputy Judge Grace Chin in CLP Power Hong Kong Limited v Kong Chung Sang, DCCJ 2775/2010, [2012] HKEC 1232:

“18. Further, a defendant is perfectly entitled to reject the sanctioned offer. But in so doing, a defendant has to accept that he has to bear the inherent risk of the plaintiff being able to prove its case successfully or his defence being rejected by the court at trial, leading to the consequential risk of having to pay the enhanced interest, indemnity costs and interest on costs specified in the said Order 22 rule 24. This is what we call the risk of litigation.”

34.  In the 2^nd letter of 8 June 2015, the respondent was specifically warned that if it did not accept the Sanctioned Offer but be held liable for more than the proposals contained in it, or if the judgment against it be more advantageous to the applicant than the proposals contained in it, it would be the applicant’s intention to rely on Order 22 rule 24.  Whereas I have in the Judgment ordered the respondent do pay the applicant’s costs of the application to be taxed at District Court scale, I find what the applicant is able to achieve at the hearing must be more advantageous than the Sanctioned Offer in June 2015. I do not consider it unjust to order that the applicant is entitled to his costs on indemnity basis after the latest date on which the respondent could have accepted the Sanctioned Offer without requiring the leave of the Tribunal. Otherwise there was to be no difference between acceptance and non-acceptance of the Sanctioned Offer.

Orders

35.  Having heard the submissions by the parties, I vary the Costs Order Nisi and grant a costs order absolute as sought by the applicant that is:

The respondent do pay the applicant’s costs of the application to be taxed at District Court scale if not agreed with certificate for counsel. Furthermore, the respondent do pay the applicant’s costs on indemnity basis (with certificate for counsel) from 9 July 2015 onwards, to be taxed, if not agreed.

Costs

36.  As for costs of the Costs Summons, I make a costs order nisi that the respondent do pay the applicant’s costs to be taxed at District Court scale if not agreed, with certificate for counsel.

37.  This is a costs order nisi.  The aforesaid costs order nisi is on party and party basis.

[1] See §12 of the Judgment.

[2] Although Jonathan Parker LJ was the dissenting judge in the above case, his aforesaid view was shared by other Law Lords in that case.

[3] I am surprised that in the without prejudice offer of 4 June 2015, the respondent suggested the $67,500 was on the high side, ie disagreeing with the opinion of the single joint expert.

[4] Page 344 of Bundle.

LDPE 1132/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 1132 OF 2014

_________________

_________________

__________________

JUDGMENT
__________________

Background

1.  This is an application in which the applicant is applying for

(i) recovery of possession of Shop B, No 66 San Hong Street, Sheung Shui, New Territories (“the Premises”); and

(ii) order for mense profits from 1 October 2014 to the date of vacant possession.

2.  By a tenancy agreement in English which was prepared by Messrs Raymond Chan, Kenneth Yuen & Co, Solicitors (hereinafter referred to as “Raymond Chan”) dated 11 June 2004, the Premises were let by Silver Joyce Investment Limited (“Silver Joyce”), the predecessor in title of the applicant, to the respondent for a term of 4 years from 25 June 2004 to 24 June 2008.

3.  When the tenancy agreement above referred to expired, Silver Joyce and the respondent entered into a new tenancy agreement dated 10 July 2008 (hereinafter referred to as “the 2008 agreement”), this time prepared by Lung Sum Estate Agency. This tenancy agreement in Chinese appears in a standard form and contains, inter alia, the following provisions:

「(一) 甲方將上水新康街66號B舖…租與乙方雙方訂定租金每月港幣貳萬捌仟元正(收租時另發租單為憑)訂明租用兩年由二ΟO八年六月二十五日起至二O一O年六月二十四日止規定租戶在租用期內不得退租否則按照所餘租期之時間計算租金;

(二) 訂明乙方不得分租或轉租與別人除所租用之樓宇外其他地方不得佔用租約期滿住客如若繼續租賃或退租須於壹個月之前以書面通知(續租則另訂新約方生效力);

……

  (十二) 備註双方同意由2010年6月25日至2012年6月24日每月租金為港幣$30,000元正。」

4.  That is, according to clause 1, although the 2008 agreement was expressed to be for a term of two years from 25 June 2008 to 24 June 2010 at a monthly rent of $28,000, clause 12, the contents of which were added, according to the respondent, by a Ms Chan of Lung Sum Estate Agency (“Ms Chan”), stated there would be a renewal of the term for two further years from 25 June 2010 to 24 June 2012 at a monthly rent of $30,000. On the other hand, a summary of the 2008 agreement at the back stated the tenancy agreement was for a term between 25 June 2008 to 24 June 2012.

5.  Clause 2 of the 2008 agreement may be classified as tenant’s covenants

(i) not to sublet, assign;

(ii) not to use other areas apart from the Premises;

(iii) to inform (the landlord) by a 1-month prior written notice of its intention to renew or surrender the tenancy upon its expiry (any renewal being effective only upon formulation of a new tenancy agreement).

6.  It is undisputed that, despite the latter provision, there was no new written tenancy agreement when 25 June 2010 arrived.

7.  Subsequently, Silver Joyce and the respondent only entered into a new tenancy agreement dated 17 July 2012 (hereinafter referred to as “the 2012 agreement”), again in Chinese and in standard form prepared by Lung Sum Estate Agency, according to the respondent, through Ms Chan but of a slightly different version.

8.  By reference to the copy of the 2012 agreement provided by the respondent (which is not disputed), clause 1 states the tenancy agreement was for a term of two years from 1 July 2012 to 30 June 2014 at a monthly rent of $55,000; the summary at the back as regards the length of the term has been left blank however[1]. Clause 2 is the same as that of the 2008 agreement. In contrast to the 2008 agreement, however, clause 12 of the 2012 agreement is as follows:

「(十二) 備註: 租約為兩年梗約兩年生約。」

9.  That is, the 2012 agreement was stated to be for a term of 2 years fixed and 2 years open the meaning of which becomes now the subject of dispute between the applicant and the respondent. Of particular difference from the 2008 agreement, this clause 12 is standard printed save the words “兩” ie “two” which were inserted in handwriting.

10.  Also, a clause 13 has been added in handwriting as follows:

「(十三) 上述租約條件同舊租約一樣。」

11.  In English, I translate it as “the above term(s) of the tenancy should be the same as in the previous one”.

12.  Then the following events occurred leading to the present application:

Date	Particulars
5 Feb 14	The respondent received a notice to quit issued by Raymond Chan on behalf of Silver Joyce stating that the 2012 agreement would be determined on 30 June 2014.
17 Feb 14	The respondent instructed Messrs David YY Fung & Co (“David YY Fung”) to rebut by letter that clauses 2 and 12 together provided it an option to renew the tenancy for another 2 years. The letter also stated: “Pursuant to the Agreement, we hereby on behalf of our client give you on behalf of your client, notice that our client hereby exercises the said option and/or its rights to renew the tenancy for another 2 years, namely from 1st July 2014 to 30th June 2016. Please let us have your draft Tenancy Agreement for our approval in compliance with Clause 2 of the Agreement.”
3 Apr 14	The applicant entered into a provisional sale and purchase agreement with Silver Joyce to buy G/F, 1/F, 2/F & Rooftop, 66 San Hong Street (ie including the Premises) which is registered vide memorial 14050202140012 in Land Registry.
8 Apr 14	David YY Fung sent a letter to Raymond Chan alleging that “Mr L(i) and Mr Y(ang), the respective representatives of our respective clients, did on 7th April 2014 over the telephone confirm that the existing tenancy as to the Premises between our respective clients be renewed for 2 years, namely from 1st July 2014 to 30th June 2016, at a monthly rent of HK$57,000.00 while the other terms and conditions of the existing tenancy agreement remain unchanged.”
17 Apr 14	Letter apparently signed by Mr Yang of Silver Joyce reminding the respondent that the fixed term under the 2012 agreement would expire on 30 June 2014 and Silver Joyce would resume the Premises on 1 July 2014.
10 May 14	David YY Fung sent a letter to Raymond Chan re-stating that the respondent had exercised the option to renew the 2012 agreement for another 2 years and requested to have a draft Tenancy Agreement for approval.
20 May 14	Raymond Chan sent a letter to David YY Fung, inter alia, denying the existence of an option to renew under the 2012 agreement.
21 May 14	David YY Fung sent a letter to Raymond Chan, inter alia, reaffirming the contents of its letter of 10 May 2014.
23 Jun 14	Raymond Chan sent a letter to David YY Fung, inter alia, demanding vacant possession of the Premises on 30 June 2014 and “the alleged option shall in all respect be void”.
27 Jun 14	David YY Fung sent a letter to Raymond Chan, inter alia, re-stating the respondent had duly exercised the option to renew the 2012 agreement.
4 Jul 14	Raymond Chan sent a letter to David YY Fung stating that “our client exercised its rights to terminate the said tenancy such that your client must deliver vacant possession” of the Premises to Silver Joyce.
10 Jul 14	Raymond Chan sent a letter to David YY Fung purporting to respond to a letter from the latter dated 8 July 2014 (the contents of which is not provided) and stating, inter alia, its position as of the letter dated 4 July 14.
3 Jul 14	The respondent deposited $57,000 into the account of Silver Joyce.
2 Aug 14	The respondent deposited $57,000 into the account of Silver Joyce.
29 Aug 14	The respondent deposited $57,000 into the account of Silver Joyce.
11 Sep 14	The applicant became the owner of the Premises by an Assignment vide memorial 14100802410129 registered in Land Registry on 8 October 2014.
16 Sep 14	Messrs Tam & Partners, Solicitors (“Tam”) issued a “Final Notice” to the respondent requiring the latter to quit and deliver up vacant possession of the Premises to its landlord on or before 22 September 2014.
19 Sep 14	David YY Fung sent a letter to Tam, inter alia, repeating the respondent’s stance that it had duly exercised the option to renew the 2012 agreement.
23 Sep 14	Tam sent a letter to David YY Fung stating that “there is no ‘option to renew’” under the 2012 agreement and the tenancy had already expired.
27 Sep 14	David YY Fung sent a letter to Tam, inter alia, repeating the respondent’s stance that it had duly exercised the option to renew the 2012 agreement.
29 Sep 14	Tam sent a letter to David YY Fung stating that this was a notice to quit and requesting the respondent to give vacant possession of the Premises to the applicant on or before 1 November 2014. In paragraph 5 of the letter, “Our client is determined to obtain vacant possession of the Premises and would not accept any payment from your client except mesne profits through our firm.”
	On the same day, Tam sent a letter to David YY Fung stating, inter alia, that it only received the latter’s letter of 27 September 2014 on that day.
30 Sep 14	David YY Fung sent a bank draft to Tam purporting as rent for the Premises for the period of 1 October 2014 to 31 October 2014. Tam refused to accept and the bank draft was returned to David YY Fung on that day. This bank draft was sent to Tam again on the same day.
3 Oct 14	Tam returned the bank draft to David YY Fung.
31 Oct 14	Tam sent a letter to David YY Fung demanding the respondent to deliver vacant possession of the Premises to the applicant on or before 1 November 2014.
18 Nov 14	The applicant commenced the present application.
25 Nov 14	The respondent filed the Notice of Opposition dated 24 November 2014.
15 Dec 14	Upon the preliminary hearing, H H Judge K W Wong made an order that the respondent do pay interim payment at the rate of $60,000 per month into the Tribunal commencing from October 2014 for occupation of the Premises.

Issues for determination by the Tribunal

13.  The parties agree the primary issue of this application is whether the respondent is entitled to remain in possession of the Premises until 30 June 2016 as a lawful tenant.

14.  Then the parties agree the following secondary issues:

(i) Whether the 2012 agreement was validly reached by Silver Joyce and the respondent?

(ii) Whether the 2012 agreement contained an option to renew?

(iii) Whether Silver Joyce and/or the respondent had validly exercised the option to renew in the 2012 agreement that created a new tenancy?

(iv) If the renewal did come into existence, whether the applicant should be bound by the said renewal that entitles the respondent to have exclusive possession over the Premises as a lawful tenant until 30 June 2016?

(v) In case the renewal in question does not come into existence, how much should be paid to the applicant by the respondent as mesne profits?

Whether the 2012 agreement was validly reached by Silver Joyce and the respondent?

15.  In fact, the applicant does not contend the 2012 agreement was not validly reached. He only contends that the 2012 agreement was only from 1 July 2012 to 30 June 2014 and no more.

Whether the 2012 agreement contained an option to renew?

16.  As I stated in §9 above, the real dispute between the parties is the interpretation of clause 12 of the 2012 agreement: 「兩年梗約兩年生約。」

17.  In Hui Fung v Lau Kin [1995-2000] HKCLRT 472 (“Hui Fung”), each tenancy in dispute contained a clause 1 similar to the 2012 agreement:

“The Tenant hereby rents from the Landlord … [particulars of the subject premises] … from 7 January 1999 to 6 January 2001, with one year being fixed tenancy and the other year being open tenancy「一年死約一年生約」(for a total of 24 months), at a rent of HK$15,180 per month payable in advance, and the rental does not include rates at $497 per month and management fees at $552. (In case of adjustment, the adjusted figure will prevail.)”

18.  At §8 of the judgment, Leong JA affirmed the Tribunal’s view that the term of each tenancy in dispute was a fixed-term tenancy commencing on 7 January 1999 and expiring on 6 January 2001. Although the tenancy agreement referred to “one year being fixed tenancy and the other year being open tenancy”, the agreement expressly stated that the term of the tenancy was 24 months.  He came to this view because he found clause 18 of such tenancy provided a break clause giving the tenant the right to terminate the tenancy before its expiry, on condition that, 12 months after the commencement of the rental period, the tenant could in advance give one month’s notice or pay rent in lieu of notice.

19.  Cheung J (as he then was) agreed at §51 of the judgment that each tenancy is for a term of 24 months from 7 January 1999 to 6 January 2001 which was manifestly clear in the agreement. He also remarked that the terms “fixed tenancy” and “open tenancy” are commonly used terms as opposed to legal terms that bear specific legal meanings. He explained further that the so-called “open tenancy” meant that the tenant was entitled to terminate the tenancy 12 months after the commencement of the rental period; that is to say, the tenancy could be terminated after 7 January 2000 if the tenant gave one month’s notice or makes one month’s payment in lieu of notice. Basically the tenancy was still for a term of two years.

20.  Although Woo JA (as he then was) dissented, his view that the tenant was entitled to apply for a new tenancy under section 119A of the Landlord and Tenant (Consolidation) Ordinance[2] was based on a note to clause 1 which stated: “The parties agree that, during the rental period from 6 January 2000, the tenant was entitled to fix a new rent with the landlord, and the rent cannot exceed $15,180”. Woo JA however commented that this note did not ensure that the parties would reach an agreement on the new rent. At §35, he remarked “(a)t law, this condition subsequent may be regarded as unenforceable for being uncertain, with the result that the remaining one-year term of the tenancy is rendered invalid. It follows that the agreement takes effect as creating a tenancy for only one year as opposed to two years …”

21.  Woo JA also had an another view that the open term in clause 1 was in conflict with clause 18 (which is lacking in the 2012 agreement here). He tended to modify clause 18 so that the tenant was entitled to give one whole month’s notice in advance on or before 6 December 1999 so as to terminate the tenancy on 6 January 2000 being 12 months after the commencement of the tenancy.

22.  In Itec Food Limited v Gleeville Company Limited [2001] 1 HKLRD 850 (“Itec Food”), there was a provisional tenancy agreement which stipulated as follows:

"Term of tenancy from 16 December 1999 to 15 December 2003 (首兩年為死約，尾兩年為生約)."

23.  Thereafter, when the formal agreement was further negotiated between solicitors for both parties, a break clause was inserted so that after first two years had lapsed, the tenant could give a six months' notice of termination in writing and put an end to the tenancy. But then the landlord changed its mind and intended to amend the clause so that that the tenancy was for a term of two years only, after which, the tenant would have an option to renew the tenancy for another two years at market rental. The term of the tenancy was amended in turn to two years, commencing from 16 December 1999 and expiring on 15 December 2001.

24.  When this case was heard before Yam J in the Court of First Instance, counsel for the landlord referred to certain evidence of the tenant's agent, a Mr Yau and submitted that the original intention was for two years with an option to renew for another two years. Yam J first held that this piece of evidence was not admissible and the parties should stand or fall on the wordings of the provisional tenancy agreement. In any event, the evidence of Mr Yau actually supported the tenant's version as the original draft was "from 16th December 1999 to 15th December 2001 (死約)" (which meant fixed term) and "from 16th December 2001 to 15th December 2003 (生約)" (which meant a break clause in favour of the tenant the plaintiff herein for the second two years of lease). Yam J affirmed that the dominant rule of interpretation was to take the natural meaning of the words. There was no indication in the provisional agreement that the tenancy was a two-year tenancy with an option to renew. The term of the tenancy was stated to be from 16 December 1999 to 15 December 2003, making it a four-year tenancy. Therefore, it could not be interpreted as entitling the landlord either to charge or to re-negotiate the tenancy for a market rental after the expiration of the first two years. The term "死約" meant the tenant could not terminate the tenancy and the term "生約" on the contrary meant the tenant was entitled to terminate by giving notice.

25.  Then in鄭秀枝及另一人v陳愛玲, HCSA 44/2002 (unreported, dated 18 December 2002) (“Cheng Sau Gee”), the tenancy in dispute was for a term of 2 years from 1 September 2000 to 31 August 2002 during which the tenant could not determine the tenancy. However, the tenancy agreement also stipulated that one year was fixed term and the other year was open term, the rental for the two years remaining unchanged「一年實約，另一年生約，兩年租金不變」. Deputy High Court Judge Andrew Cheung (as he then was) considered the terms「實約」,「死約」or「生約」are not new to the property rental market; he considered terms such as「實約」and「死約」 meant the tenancy term should be fixed whereas the term 「生約」meant the tenancy term would be flexible and subject to early termination.

26.  In this case, there was a clause stating that: 「租客在租期期滿，如欲繼續租用物業，必須給予業主一個月之事前書面通知續租，另訂新租約方能生效」, a clause which is very similar to clause 2 of the 2012 agreement where I translate in §5 above as upon expiry of the tenancy term, should the tenant wish to continue to rent the property, he has to inform the landlord by a 1-month prior written notice, but any renewal being effective only upon formulation of a new tenancy agreement. Deputy Judge Cheung considered this clause only applied when the two-year (ie including both the fixed and open term) expired but would not affect the early termination during the open term. See §13 of the judgment.

27.  In Cheung Chung Wing v Chan Oi Ling, HCSA 59/2002 (unreported, dated 16 July 2003) (“Cheung Chung Wing”), the tenancy in question stated that the term was for 2 years from 5 June 2000 to 4 June 2002. Following this, like Cheng Sau Gee, supra, there was also a statement: 「一年實約，另一年生約，兩年租金不變」. Similarly, it had a clause 2 which stated:

「(二) 租客不得分租或轉租與別人, 除所租用之樓宇外, 租客不得佔用其他地方。 租約期滿, 住客如若繼續租賃或退租, 須於壹個月之前以書面通知 (續租則另訂新約方生效力) …… 」

which is nearly the same as that in the 2012 agreement or very similar to that in Cheng Sau Gee, supra.

28.  Deputy High Court Judge Johnson Lam (as he then was) concurred with Deputy Judge Cheung in Cheng Sau Gee, supra, as regards the interpretation of such clause. (See §11 of the judgment.)  Deputy Judge Lam also concurred with Yam J in Itec Food, supra, as regards the term 「生約」 which should mean conferring upon a right to terminate a tenancy during the open term. (See §14 of the judgment.)  Nevertheless, Deputy Judge Lam found conflicting terms in the tenancy agreement and therefore concluded that a contract and the contractual terms must be construed by reference to the relevant background against which the contract was made, citing, for instance, Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at p 912-913.

29.  There was also a case before the District Court in 陳火光v周建邦經營常春藤書店, DCCJ 4975/2005 (unreported, dated 28 July 2006) (“Chan For Kwong”) where the above cases were referred to and analysed.  In this case, the provisional tenancy provided the first two years of the tenancy were fixed whereas the further two years of the tenancy were open (租期:首兩年為“吉約”，次兩年為“生約” with the following rentals:

Fixed tenancy:
(i) 15 January 2001 – 14 January 2002	$45,000
(ii) 15 January 2002 – 14 January 2003	$50,000
Open tenancy:
(i) 15 January 2003 – 14 January 2004	$55,000
(ii) 15 January 2004 – 14 January 2005	$55,000

30.  According to the applicant in this case, when the fixed term expired and if the tenant would like to take up the open term, once the option was made, he should abide by the full term with no further right to determine the tenancy.

31.  At §137 of the judgment, Deputy District Judge K W Wong (as he then was) considered the tenancy did not expressly state the term was for 4 years and at §138, he remarked that if the open term was interpreted as providing the tenant with the right of termination, there was no provision as to how this could be done. Moreover, there was a remark no (2) that should the tenant wish to continue to rent the property, he was given the pre-emption. Therefore, the term “open tenancy” there could not be interpreted as conferring upon the tenant the right to determine as he had argued. Deputy Judge Wong gave judgment in favour of the landlord.

32.  More lately, in 張佩芳v劉少珊, LDPD 1304/2011 (unreported, dated 29 July 2011) (“Cheung Pui Fong”), the tenancy provided for a term of 2 years subject to one year being fixed and the other being open「一年梗約、一年活約」. There was no provision as to how the open tenancy could be terminated. The applicant relied however on the verbal agreement and the interpretation of the estate agent to suggest that either party could give a 1-month notice to the other party to determine the open tenancy. Member Lo of the Lands Tribunal agreed that such interpretation was correct because this was the common parlance in the property market.

33.  Having reviewed the above precedents, the open term as stated in the 2012 agreement can have the following meaning:

(1) either party could give a 1-month notice to the other party to determine the open tenancy, as in Cheung Pui Fong; or

(2) the tenant was conferred upon a right to renew the tenancy for another 2 years when the fixed term expired, as in Chan For Kwong.

34.  At first glance, the first interpretation appears to be the correct answer, especially as Member Lo said in Cheung Pui Fong, the term「兩年梗約兩年生約」would usually be given such a meaning in the property market. This is particularly supported by the majority view in Hui Fung, the rulings in Itec Food and Cheng Sau Gee.

35.  However in Hui Fung, the tenancy was expressed to be for the full term and there was a clause 18 that provided a break clause giving the tenant the right to terminate the tenancy before its expiry. In comparison, the 2012 agreement only provides a term of 2 years instead of a term of 4 years; neither does it include a break clause.

36.  In Itec Food, the landlord did argue that open term conferred upon the tenant a right to renew the tenancy but Yam J found otherwise from evidence. Once again, the tenancy there was expressed to be for a full term of 4 years. The latter was also the case in Cheng Sau Gee.

37.  More particularly in Cheung Chung Wing, although Deputy Judge Lam concurred with Yam J in Itec Food that the term 「生約」 would usually mean conferring upon a right to terminate a tenancy during the open term, he concluded that a contract and the contractual terms must be construed by reference to the relevant background against which the contract was made. In the end, Deputy Judge Lam referred the case back to the Adjudicator of the Small Claims Tribunal for clarification.

38.  In the present case, I find the terms of the 2012 agreement are conflicting as in Cheung Chung Wing. Firstly, as I mentioned above, the tenancy was stated for a term of 2 years only but another clause stated there would be 2 years fixed and another 2 years open. This renders the direct application of Hui Fung, Itec Food, Cheng Sau Gee and Cheung Pui Fong not so apparent. This is particularly the case when the additional clause 13 suggests the tenancy should read the same as in the previous one, probably the 2008 agreement. 

39.  As stated in §4 above, the 2008 agreement also expressed the tenancy was for 2 years but the summary at the back of the agreement stated the term was as much as 4 years; clause 12 of the 2008 agreement stated clearly the rental for the later 2 years. All these are lacking in the 2012 agreement.

40.  In giving evidence, Mr Li Kang Chi (“Mr Li”), the alter ego of the respondent, said during the negotiation of the renewal in 2012, he had intended the 2012 agreement to be the same as the 2008 agreement and written on a label[3] provided by Ms Chan that, like that in the 2008 agreement, in the second term, ie during the open tenancy, the rental would be $57,000 per month, ie an increase of $2,000. He alleged that when signing the 2012 agreement, Mr Yang was in a hurry and therefore such term was not added because of oversight.

41.  It is trite that the one who alleges a certain thing exists should shoulder the burden of proof and it is regretted that neither Mr Yang of Silver Joyce nor Ms Chan are called to give evidence. It is also the case that pre-contract negotiations between the parties are not usually admissible as evidence, a view expressed by Yam J in Itec Food and by Lord Hoffmann sitting as a Non-Permanent Judge of the Hong Kong Court of Final Appeal in Jumbo King Limited v Faithful Properties Limited & Others (1999) 2 HKCFAR 279 at 296. Although the respondent tries to rely also on the letter of 8 April 2014sent by David YY Fung to Raymond Chan that alleged a telephone agreement for a renewal for 2 years, namely from 1^st July 2014 to 30^th June 2016, at a monthly rent of HK$57,000.00, such an agreement is inconsistent with what happened during the relevant period:

(i) A notice to quit was sent by Silver Joyce to the respondent on 5 February 2014 against the background that Silver Joyce was negotiating for a sale of the property including the Premises;

(ii) Chung Wai Wing on behalf of the applicant gave evidence that during the negotiation for purchase, he had reminded Mr Yang of Silver Joyce not to enter into new tenancies with the existing tenants;

(iii) An agreement for Sale and Purchase of the property including the Premises was entered into on 3 April 2014, ie only 4 days before the alleged telephone agreement occurred;

(iv) On 17 April 2014, Mr Yang of Silver Joyce sent a reminding letter to the respondent stating that the fixed term under the 2012 agreement would expire on 30 June 2014 and Silver Joyce would resume the Premises on 1 July 2014.

42.  Mr Ko for the respondent places significant emphasis on clause 2 of the 2012 agreement (which is the same as clause 2 of the 2008 agreement) that there was an option exercisable by the respondent to renew or surrender the tenancy upon its expiry. However, I agree with the submission by Mr Lam for the applicant that clause 2, reading as whole, merely states the obligation of tenant to inform which at most is equivalent to an invitation to treat; it is not a right to be given to the respondent. Indeed, in Cheng Sau Gee, supra, Deputy Judge Cheung considered such a clause only applied when the full tenancy expired but would not affect the early termination during the open term in that case.

43.  Recently, in Hung Cho Hing v趙麗紅, LDPE 190/2015, (unreported, dated 29 June 2015) (“Hung Cho Hing”), Deputy Judge Kot of this Tribunal arrived at a similar view on a clause similar to clause 2 of the 2012 agreement. She said at §24 of her judgment as follows:

“在本案的該租約中第二條條款，明顯地要求作為租客的答辯人，在打算續租時，須在一個月以前以書面通知申請人，而雙方即使同意續約，也須另訂新約方可生效。故此在決定答辯人曾否行使其續租權時，不能只以業主是否已收取租金為依據，因為這並不符該租約的規定，不能如 Gardner一案般，以此結論為已行使了續租權並已成功續約。” (underline added)

44.  To the extent that the open tenancy is argued as conferring upon a right to the respondent to renew the tenancy for another 2 years when the fixed tenancy expired, the 2012 agreement does not provide for a remark no (2) as in Chan For Kwong, supra.

45.  Should there be a requirement for implying such an option clause into the 2012 agreement, I bear in mind the 5 conditions set out by Lord Simon in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20 (“BP Refinery”) at 26D:

“Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express.  In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied : (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

46.  This statement was applied by Ribeiro PJ in the Court of Final Appeal in Kensland Realty Limited v Whale View Investment Limited (2001) 4 HKCFAR 381 at §59.

47.  In recent years, the courts have approached the implication of a term as part of the process of the interpretation of the contract as a whole.  In AttorneyGeneralof Belize v Belize Telecom Limited [2009] 1 WLR 1988, Lord Hoffmann, giving the opinion of the Privy Council, adopted the same approach. 

48.  Although Lord Hoffmann was dealing with the question of whether a term should be implied into the articles of association of a company, rather than into a contract, he was clear that the process was the same for both and indeed for any written instrument. 

49.  At §§16-17 of the judgment, Lord Hoffmann said:

“17. The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

18. In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.” (underline added)

50.  He stressed at §21 that the implication of a term is an exercise in the construction of the instrument as a whole so that the central question for the Court is whether the implication “would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean”

51.  Then at §§26-27, Lord Hoffmann referred to the five conditions set out by Lord Simon in BP Refinery and said that the list should be “best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so”.

52.  In my view, it is neither reasonable nor obvious to a reasonable bystander there exists an option in favour of the respondent in the 2012 agreement. There is simply no mechanism for the exercise as spelt out in the 2012 agreement. The renewal at $57,000 per month as alleged for the open tenancy by the respondent, save for the telephone conversation as alleged on 7 April 2014 which I have dealt with in §41 above, has not ever appeared in the 2012 agreement. I agree with Mr Lam’s submission that if the respondent’s allegation as regards the negotiation of the 2012 agreement were correct, it would have been a very simple job for Ms Chan to write down the agreed rent for the period from 1 July 2014 to 30 June 2016 like what happened in the 2008 agreement. Having agreed to a contract through its own lack of prudence or failure in exercising due diligence, the respondent cannot turn around and argue that the 2012 agreement is not complete because there should be another term to be added.

53.  In any event, Mr Lam pointed out that this allegation is inconsistent with paragraph 6 in the Notice of Opposition dated 24 November 2014 where the respondent suggested that Silver Joyce was not entitled to any increase rent for the renewal term. This paragraph is recited as follows:

“Notwithstanding that the Respondent has, as it was entitled to, duly exercised the Option to renew the tenancy pursuant to the Tenancy Agreement and that the Landlord was not entitled to increase rent for the said renewed term, on about 7^th April 2014, Mr Li and Mr (Yang) on behalf of the Respondent and the Landlord respectively confirmed over the telephone that the monthly rent for the said renewed tenancy would be HJ$57,000 (the “New Rent”) while the other terms and conditions of the Tenancy Agreement would remain unchanged.” (underline added)

54.  In light of the above, I would adopt the view of Woo JA in Hui Fung that the open tenancy “may be regarded as unenforceable for being uncertain”, following which the remaining two-year term of the 2012 agreement is rendered invalid. I hold that the 2012 agreement takes effect as creating a tenancy for only two years and nothing more.

55.  I also agree with Mr Lam for the applicant that “續租則另訂新約方生效力” at the end of clause 2 contradicts the suggestion by Mr Ko that clause 2 itself provides any implication of an option exercisable by the respondent to renew or surrender the tenancy upon its expiry. This finding concurs with that of Deputy Judge Kot in Hung Cho Hing, supra.

56.  I do not consider clause 13 of the 2012 agreement can assist the respondent because what “上述租約條件” (the above terms of the tenancy) refers to is not clear from the document itself. If the phrase is referring to the length of the agreement, it is noted that the tenancy agreement in 2004 was for a fixed term of 4 years whereas the 2008 agreement was for 2-year fixed plus 2-year open. If the phrase is referring to clause 12 of the 2008 agreement, firstly the rental amount for the 2-year fixed tenancy is different; more importantly, it was silent on the amount of rental for the open tenancy. Inserting the renewal at $57,000 per month in the open tenancy is tantamount to re-writing it[4].

57.  Thus, I answer to the issue posed in the negative.

Whether only the respondent had validly exercised the option to renew in the 2012 agreement that created a new tenancy?

58.  As I have held that there is no option to renew as incorporated in the 2012 agreement, this is sufficient to dispose of this issue. See particularly §42 of the above. The respondent is a trespasser after 30 June 2014.

59.  Even If I am wrong in respect of the above, I agree with Cheung Pui Fong that it is market practice that either party could give a 1-month notice to the other party to determine the open tenancy.

60.  Furthermore, Mr Lam submits that if an option to renew otherwise exists in the 2012 agreement as alleged by the respondent, the demand for draft Tenancy Agreement by David YY Fung for the respondent is not compatible with an exercise of an option, a view similarly found in Polykote Coatings Manufacturing Company Limited v Grace Rehabilitaion Centre Limited, HCA 1477/2013 (“Polykote Coatings”). Here, To J said at §35 and §37 of his judgment dated 24 August 2015 that the letter intending to exercise an option must be precise and clearly understood by the recipient. In the present case, the last sentence of the letter of 17 February 2014 send by David YY Fung to Raymond Chan stated: “Please let us have your draft Tenancy Agreement for our approval in compliance with Clause 2 of the Agreement.” If an option to renew otherwise exists in the 2012 agreement as alleged by the respondent, why should the message conveyed in this letter suggested the respondent still wants to see if the terms of the renewal are agreeable. There should be nothing needed for approval. In this regard, I follow the judgment of To J in Polykote Coatings that the letter of 17 February 2014 cannot be construed as an exercise of an option to renew a pre-existing tenancy.

Whether the acceptance of the respondent’s rental payments after expiry of the tenancy amounted to a waiver?

61.  The respondent puts in evidence it had continued to deposit $57,000 per month into the account of Silver Joyce after 30 June 2014. However this does not necessarily amount to a waiver by Silver Joyce.

62.  It is trite that there can be no waiver by the acceptance of rent which had already accrued prior to the forfeiture. Ever since Price v Worwood (1859) 4 H & N 512 at 516 :-

"A receipt of rent, to operate as a waiver of a forfeiture, must be a receipt of rent due on a day after the forfeiture was incurred. The mere receipt of the money, the rent having become due previously, is of no consequence, and for the very plain reason that the entry for a condition broken does not at all affect the right to receive payment of a pre-existing debt."

63.  In Dreamgate Properties Ltd v. Arnot [1998] 76 P&CR 25 (“Dreamgate”),Dreamgate acquired the freehold of business premises from Eton College. The premises had been subject to a series of leases to Mr Arnot, the last of which was one dated 20 May 1983 but would have expired in September 1993 prior to the sale by Eton College to the plaintiff in January 1994. However, after the expiry, Eton had demanded and accepted a quarter’s rent from Mr Arnot. In proceedings for possession, Mr Arnot argued that a new tenancy had been created as a result of Eton College’s demand for and acceptance of rent for the quarter following the lease’s expiry. Mr Arnot relied upon the following matters:

1) The property had been sold subject to the 1983 lease;

2) In a letter dated 16 March 1994, Dreamgate had sought to rely upon one of the landlord’s rights contained in the 1983 lease; and

3) A notice to quit had been served by Dreamgate in March 1994 expressly referring to Mr Arnot as a quarterly tenant.

64.  However, the English Court of Appeal did not consider that this was sufficient to infer the creation of a new tenancy. It considered it relevant that the rent demand had been generated by a computer rather than as a result of any conscious decision and, therefore, did not indicate that landlord’s intentions. Mr Arnot failed to provide evidence of a new lease. Moreover, Eton would not have imperilled a sale to a third party by granting a new lease. The referral in the notice to quit to Mr Arnot as a quarterly tenant could not assist Mr Arnot if in fact no such tenancy had been granted. I consider the same rationale should be applied to the present case.

65.  Another similar incidence occurred in Shun Ho Energy Development Company Limited & Others v Golden Crown Industries Limited, CACV 161/2014 (unreported, dated 30 June 2015) where after the expiry the tenancies on 12 August 2013, the tenant held over and the landlords issued debit notes to the tenant for, inter alia, “rental” of the Premises for September 2013 and outstanding “rental” for 13 to 31 August 2013, at a new rate. The tenant did pay by cheques which were cashed by the landlords on 9 September 2013. The Court of Appeal, affirming the decision of this Tribunal that there was no estoppel, held that for there to be estoppel, the tenant must show a clear and unequivocal representation that there was a new tenancy agreement on the expiry of the old tenancies on 12 August 2013.

66.  Also in Chan Kei Cheung Lloyd v Honest World Limited, DCCJ 576/2014 (unreported, dated 15 August 2014), Deputy District  Judge Josephine Chow at §31 cited Halsbury’s Laws of Hong Kong, Vol 17(1), 2007 Reissue, [235.180] which stated that:

“Questions of so called ‘waiver’ usually arise when some act is done by the landlord after the expiration of a notice to quit which either necessarily or prima facie imports the recognition of an existence tenancy…… In other cases it may be possible to show that the landlord’s act was done with some other intention; and when the evidence is offered, it must be determined, as a question of fact, whether the act was intended to create a new tenancy. …… Payment and acceptance of rent so accrued due implies, however, the concurrence of both parties and may operate to create a new tenancy. The crucial question is always with what intent the rent was paid and accepted, that is to say, whether it was with mutual intention of creating a new tenancy.”

67.  In the present case, I cannot find any evidence of mutual intention of the parties to create a tenancy. The unilateral act of the respondent to deposit $57,000 per month into the account of Silver Joyce after 30 June 2014 cannot amount to unequivocal evidence of a new tenancy. Neither did the David YY Fung’s notice to Silver Joyce on 17 February 2014 expressing the respondent’s intention to continue the tenancy entitle it to have a new/extended tenancy if he has no such right in the first place. Dreamgate is particularly comparable to the present case in that Dreamgate, like the applicant here, acquired the premises in question from the predecessor in title. Following the English Court of Appeal in that case, the notice to quit dated 29 September 2014 sent by Tam to David YY Fung could not assist the respondent if in fact no such tenancy had been granted.

68.  I hold that there is no waiver by Silver Joyce for accepting such payments by the respondent.

If the renewal did come into existence, whether the applicant should be bound by the said renewal that entitles the respondent to have exclusive possession over the Premises as a lawful tenant until 30 June 2016?

69.  Again if I am wrong so that a renewal did come into existence by virtue of the respondent’s exercise on 17 February 2014, the respondent has become a tenant in equity pursuant to the option.

70.  However, section 3(2) of the Land Registration Ordinance provides :

“ All such deeds, conveyances, and other instruments in writing, and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser … for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes:

Provided the nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.”

71.  If therefore the option exists, the 2012 agreement would have become a registrable instrument and it had not been registered. In PC Fortune Company Limited & Another v Mastermind Asset Management Limited, CACV 89/2014 (unreported, 12 February 2015), the Court of Appeal, citing Markfaith Investment Limited v Chiap Hua Flashlights Limited [1990] 2 HKLR 84, [1991] 2 AC 43, held that the proviso of section 3(2) would not apply to an instrument insofar as the instrument created an option that extended the tenancy beyond 3 years.

72.  The respondent here does not dispute that the applicant was a bona fide purchaser for valuable consideration but submits that the respondent’s equity interest was created before the applicant acquired his equitable interest through the agreement for sale and purchase on 3 April 2014.

73.  In Power Alliance Investment Limited v Lau Kai Pui, HCA 815 of 2005 (unreported, dated 23 November 2005), a similar situation arose where the predecessor in title of the plaintiff granted to the defendant a 3-year tenancy plus an option to take a tenancy for a further term of 3 years. Recorder Benjamin Yu, SC (“Mr Yu”) held the view that the exercise of the option before the date of the provisional agreement for sale and purchase created a new legal relationship and therefore it would be arguable that the proviso should not be narrowly construed and could apply to an agreement for a lease for a term of not more than 3 years. Mr Yu however stated a caveat, ie had that predecessor in title entered into an agreement to grant a further 3-year lease at market rent before entering into a provisional agreement to sell….

74.  While Mr Yu said that “it would be arguable”, I consider the exercise of the option relates back to the tenant’s prior option which, according to the Court of Appeal in Wellmake Investments Ltd v Chan Yiu Tong [1996] 2 HKLR 44, [1996] 1 HKC 528 (“Wellmake Investments”) , was ‘null and void to all intents and purposes’ as under section 3(2) of the Land Registration Ordinance for want of registration prior to the date of the registration of the subsequent agreement for sale to the purchaser. A fortiori, when the option was exercised, it remained as an agreement for tenancy, which was an unregistered equitable interest. It is therefore also arguable that the purchaser is not bound by anything deriving from the unregistered option or the unregistered agreement for lease when the sale and purchase agreement or the assignment thereafter was subsequently registered; actual notice or constructive notices of the agreement for tenancy is irrelevant as per Wellmake Investments, supra and Kwok Siu Lau v Kan Yang Che [1913] 8 HKLR 52.

75.  Notwithstanding the above, in the present case, both parties have by agreement appointed a valuation expert who has given his opinion that the market rents of the Premises were:

(i) $67,000 per month as on 1 July 2014; and

(ii) $67,500 per month as on 1 October 2014.

76.  Thus, the rent of $57,000 alleged by the respondent under the option or the agreement for tenancy was some 15% lower than market rent and in my opinion, should not be regarded as rack rent for the purpose of the proviso to section 3(2) of the Land Registration Ordinance.

77.  Also, under section 5(1)(a) of the Conveyancing and Property Ordinance,

“no equitable interest in land can be created or disposed of except by writing signed by the person creating or disposing of the same, or by his agent thereunto lawfully authorized in writing, or by will, or by operation of law”

78.  Whereas under section 6(2) of the Ordinance,

“Nothing in section 3 or 5 or in subsection (1) shall affect the creation by parol of leases taking effect in possession for a term not exceeding 3 years (whether or not the lessee is given power to extend the term) at the best rent which can be reasonably obtained without a premium.”

79.  The purported agreement for tenancy alleged by the respondent cannot satisfy this requirement of section 5(1)(a) and is not exempted by section 6(2) of the Ordinance because I consider the $57,000 per month alleged by the respondent is not the best rent.

Mesne Profits

80.  Here, the respondent agrees that if this Tribunal finds in favour of the applicant and rules that the respondent is a trespasser after 30 June 2014, the respondent would not dispute the mesne profits as assessed by the jointly appointed valuation expert.

81.  Therefore, I hold that the respondent has to pay the applicant mesne profits at the rate of $67,500 per month from 1 October 2014 until delivery up of vacant possession.

Orders

82.  Having heard the submissions by the parties, I determine that the respondent is not entitled to remain in possession of the Premises after 30 June 2014 as a lawful tenant. Therefore I make the Orders as follows :   

(1) The respondent do deliver vacant possession of the Premises to the applicant;

(2) The respondent do pay the applicant arrears of mesne profits at the rate of $67,500 per month from 1 October 2014 until delivery up of vacant possession;

(3) The interim payment made by the respondent pursuant to the Order of this Tribunal on 15 December 2014 be released to the applicant as part payment for the mesne profits in (2) above.

Costs

83.  As regards costs, this tribunal fails to see why costs should not follow the event. I also hold that the last day of the trial on 13 August 2015 was useful in allowing the parties to clarify their positions and respond to the written closing submissions provided 3 days earlier.

84.  Accordingly, I make a costs nisi that the respondent do pay the applicant’s costs of the application to be taxed at District Court scale if not agreed, with certificate for counsel.  This is a costs order nisi.  Unless any of the parties apply by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days. 

[1] Page 156 of Bundle.

[2] This section or part of the Ordinance has been repealed by section 3 of the Landlord and Tenant (Consolidation) (Amendment) Ordinance 2004.

[3] Such label as alleged has not been produced by the respondent.

[4] The increase from $28,000 per month to $30,000 per month in the 2008 agreement represents an increase of 7.14% but an increase from $55,000 to $57,000 alleged by the respondent represents only an increase of 3.64%, ie something half of the increase specified in the 2008 agreement.