Best View Medical Co Ltd v. Richermen International Investments Ltd
Read the full judgment text of DCCJ 1080/2015 on BabelCite. This District Court judgment was delivered on 10 February 2017.
1. This is a landlord and tenancy dispute. The plaintiff, being the tenant, commenced the present action against the defendant, being the landlord, for , inter alia , return of the security and renovation deposits as well as rents and management fees in the total sum of HK$601,730.00. At the end of the trial, the plaintiff abandoned parts of its claim such that they only sought to have the security deposit of HK$361,800 and decoration deposit of HK$20,000 refunded. The defendant counterclaime
Cites 2 cases
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DCCJ 1080/2015 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO 1080 OF 2015 -------------------------
--------------------- JUDGMENT ---------------------- Introduction 1.This is a landlord and tenancy dispute. The plaintiff, being the tenant, commenced the present action against the defendant, being the landlord, for, inter alia, return of the security and renovation deposits as well as rents and management fees in the total sum of HK$601,730.00. At the end of the trial, the plaintiff abandoned parts of its claim such that they only sought to have the security deposit of HK$361,800 and decoration deposit of HK$20,000 refunded. The defendant counterclaimed for, inter alia, the forfeiture of the security deposit of HK$361,800 as liquidated damages. The subject premises (the “Premises”) were known as the whole of 10th Floor of Wincome Centre, Nos 39 and 41 Des Voeux Road Central, Hong Kong. Background 2.On 24 November 2014, the plaintiff accepted a tenancy offer issued by the defendant in respect of the Premises. On or around 30 December 2014, the plaintiff and the defendant entered into a formal tenancy agreement dated 30 December 2014 (the “Tenancy Agreement”) in respect of the Premises. A floor plan was annexed to the Tenancy Agreement to identify the Premises. Basically, except the lift lobby (the “Lift Lobby”), the whole 10th Floor was enclosed by walls constituted the Premises. There were partition walls erected between the Premises and the Lift Lobby, on one of which was a door to the Premises. Under the Tenancy Agreement, the defendant was to operate the Premises as a clinic and endoscopy centre, the only user permitted by the defendant. 3.Pausing here, Mr Chai, counsel for the plaintiff, contended that given that the description of the Premises in the Tenancy Agreement was “the whole of the 10th Floor”, the meaning was clear enough to mean the whole floor including the Lift Lobby, and the plan annexed to the Tenancy Agreement was not reliable. I disagree. If Mr Chai is correct, the plan would be redundant. The description of the Premises was in fact “the whole of the 10th Floor …… and for identification purpose only is shown coloured Yellow on the Plan annexed hereto” (emphasis added). While the plan may not give the exact measurements, it was “for identification purpose” - to identify the relative location of the Premises on the 10th floor. So, the description of the “whole of the 10th floor” has to be understood with the plan “for identification purpose”. 4.The term of the tenancy was 2 years, running from 1 January 2015 to 31 December 2016 (both days inclusive), with a rent-free period from 1-31 January 2015 and 16-31 December 2016. The Tenancy Agreement provided that the defendant shall reinstate the Premises to their original conditions before yielding up the Premises. 5.The monthly rent was HK$107,200. The air-conditioning charges and management fees were HK$13,400 per month. Thus, each month, the plaintiff would have to pay HK$120,600. On 19 December 2014, pursuant to the Tenancy Agreement, the plaintiff paid the defendant a security deposit (the “Security Deposit”) of HK$361,800, that is, 3 months’ payments. 6.As usual, the tenant (the plaintiff) would like to carry out renovation and construction works before moving in. It was these works that led to the present dispute. Before I describe these works, it is useful to set out the relevant provisions in the Tenancy Agreement concerning such works. Provisions concerning the plaintiff’s proposals of decoration works 7.Clause (26) of Section III of the Tenancy Agreement provided that: -
The decoration deposit (the “Decoration Deposit”) was HK$20,000. It is common ground that the plaintiff had paid the defendant. 8.Section V: Restrictions and Prohibitions of the Tenancy Agreement included the following provisions: -
I shall refer to this reinstatement deposit as the “Reinstatement Deposit”. 9.In the event of any plaintiff’s breach or non-observance of the Tenancy Agreement, by Clause (4)(a) of Section II of the Tenancy Agreement (the “Forfeiture Clause”), the defendant may forfeit the Security Deposit by way of liquidated damages; further, by Clause 1(a) of Section VIII of the Tenancy Agreement, the defendant may terminate the Tenancy Agreement and re-enter on the Premises. The plaintiff’s proposals and reinstatement deposit and charges 10.The plaintiff engaged one Tonic Design For Karass Ltd (the “plaintiff’s Contractor”) for the design of the Premises. The communication concerning the renovation works of the Premises was made between the plaintiff’s Contractor for the plaintiff and Wincome Property Management Company (the “Management Company”) for the defendant. (Both the defendant and the Management Company belonged to Wincome Group.) On 15 January 2015, by email to Ms Sandra Chan of the Management Company, the plaintiff’s Contractor sent a design plan for comment and approval. On 21 January 2015, the plaintiff’s Contractor emailed the Management Company a revised plan for comment and approval. In that email, the plaintiff’s Contractor asked the Management Company to “quote the work and reinstatement for the lobby and door entrance issue.” On 22 January 2015, the plaintiff’s Contractor and the Management Company conducted a joint site meeting to facilitate the approval process. Also, on the same day, the plaintiff’s Contractor emailed some more plans to the Management Company. 11.What exactly were talked about at the joint site meeting were not beyond dispute. But even according to the plaintiff’s own evidence (paragraph 13 of the Witness Statement of Kwan Tin Yin Cannas), while the defendant approved the proposed works, the defendant “further indicated that the defendant would ask for certain deposit for the works”. 12.Carrying out the works pursuant to the aforesaid plans would need the defendant’s approval pursuant to Section V of the Tenancy Agreement. Further, part of the works would involve alteration and constructions in the Lift Lobby, which was the common area of the building outside the Premises. (A footnote must be put here that “common parts” or “common areas” here are strictly speaking the parts and areas reserved to the sole registered owner of the whole building. For convenience sake and consistent with the Tenancy Agreement, I shall still use expressions “common parts” or “common areas”.) 13.On 2 February 2015, Management Company not having responded to the plans, the plaintiff’s solicitors issued a chaser for the approval. In the chaser, the plaintiff’s solicitors recorded that the plaintiff had already paid HK$90,000 as the Decoration Deposit (HK$20,000 as mentioned above) and the Reinstatement Deposit. 14.On 3 February 2015, Ms Sandra Chan emailed the plaintiff’s Contractor. She referred to the plan submitted on 22 January 2015, and wrote: -
15.In the email she set out the breakdown as follows: -
16.On 4 February 2015, the plaintiff’s solicitors issued a letter to the Management Company. In the letter, the plaintiff’s solicitors focused on the HK$195,000 non-refundable reinstatement charge (the “Reinstatement Charge”) only. They wrote: -
17.The Reinstatement Charges were to be payable to the Management Company as opposed to the Reinstatement Deposit to be payable to the defendant. Further, in the aforesaid solicitors’ reply letter of 4 February 2015 just referred to above, the plaintiff only queried why the Management Company but not the defendant was entitled to charge the Reinstatement Charges. That said, paragraph 11(i) of the Defence and Counterclaim pleaded that it was the defendant who demanded both the Reinstatement Deposit and the Reinstatement Charges. Mr Ho, counsel for the defendant, only advanced a submission that he could not say on whose behalf the demand was made. I accept Mr Chai’s submission that in the plaintiff’s solicitors letter of 4 February 2015, the plaintiff was simply asking why the Management Company would be entitled to charge the Reinstatement Charges on behalf of the Defendant. 18.In its reply letter of 5 February 2015, the Management Company explained: -
19.On 9 February 2015, the plaintiff’s solicitors wrote back: -
20.By its reply letter dated 10 February 2015, the Management Company highlighted the condition upon which the consent was given, namely, payment of reinstatement charge to the Management Company and payment of reinstatement deposit to the defendant. Further, it wrote: -
21.After some further correspondence, by its letter of 14 February 2015, the plaintiff’s solicitors submitted another design plan, alleging that this new plan would not involve any alternation to the common areas. This revised plan would involve an alteration to the location of the main door and inevitably, for the relocation, the demolition of the walls originally separating the Premises for the Lift Lobby and then erection of new walls. 22.Not having heard from the defendant or the Management Company, the plaintiff’s solicitors issued a chaser on 23 February 2015, alleging that the plaintiff would commence the decoration works without further notice unless consent for the relevant decoration works would be given by 5pm on 25 February 2015. 23.Just before the deadline, on 24 February 2015, the Management Company wrote back: -
24.One immediately notes that only the first sub-item under Item 2 was related to the partition wall between the Premises and the Lift Lobby. The remaining 3 sub-items were respectively related to (1) the access control system fixed on the partition wall and serving exclusively the Premises, (2) the air-conditioning system within the Premises and (3) the fire service system within the Premises. As shall be seen, whether these 3 sub-items were common parts or parts of the Premises will have ramification on whether the defendant was entitled to demand the Reinstatement Charges under the Tenancy Agreement. 25.On or around 28 February 2015, the plaintiff’s Contractor, without payment of any reinstatement deposit and/or reinstatement charge, demolished the ceiling and at least part of the wall partitioning the Premises. Thus, on 3 March 2015, the defendant’s solicitors issued a demand letter for the payment of the reinstatement deposit of HK$60,000 to the defendant and the reinstatement charge of HK$136,000 to the Management Company. Further, on 4 March 2015, in response to the plaintiff’s Contractor’s enquiry of when they could commence work, the Management Company emailed the plaintiff’s Contractor reiterating “the pre-condition of our granting of the consents for the works by paying the reinstatement deposit and reinstatement charge to Landlord and Management Company respectively.” 26.On 9 March 2015, having received no such payments, the defendant’s solicitors issued a letter to re-enter on the Premises and to terminate the Tenancy Agreement. On the same day, the plaintiff’s solicitors replied that because the defendant had unreasonably failed and/or refused to give the consent for the relevant renovation works and the defendant had asked the plaintiff to pay reinstatement charges which were unreasonable and grossly excessive, the defendant had repudiated the Tenancy and the plaintiff accepted the repudiation. The plaintiff further demanded return of all money and/or deposits paid to the defendant. 27.In the whole correspondence exchange, the plaintiff never raised any issue on the reasonableness of the Reinstatement Deposit of HK$60,000. Payments made by the plaintiff to the defendant 28.It is not in dispute that the plaintiff paid the defendant the following items in the total sum of HK$601,730 pursuant to the Tenancy Agreement or the defendant’s requests: -
Parties’ respective claims and issues 29.The plaintiff’s claim, in essence, is that: -
30.The defendant’s defence, in essence, is that: -
31.During the closing submissions, very sensibly, albeit late, the plaintiff abandoned its claim that the Forfeiture Clause was a penalty clause, and limited its claim for damages to the refund of the Security Deposit and the Decoration Deposit. Thus, the issues before me are: -
Whether or not demand for the Reinstatement Charges constituted breach of the Tenancy Agreements 32.The Reinstatement Charges were non-refundable, while Clause (1)(c) of Section V of the Tenancy stipulated that the Reinstatement Deposit was refundable. Thus, if the Reinstatement Charges concerned the Premises as contended by the plaintiff but not the common parts as contended by the defendant, the payment of the Reinstatement Charges as a condition for the commencement of the works would constitute breach of Clause (1)(c). As noticed above, there were 4 sub-items under this Item of Reinstatement Charges, namely, (1) the partition walls between the Premises and the Lift Lobby; (2) the control access system; (3) the air-conditioning system in the Premises; and (4) the fire-services system in the Premises. I shall anaylse each of them in turn in relation to whether they were common parts or parts of the Premises. Before I do so, I shall deal with one point raised by the defendant first. 33.There was no deed of mutual covenant. Nor did the Tenancy Agreement define “common parts” or “common areas”. The defendant referred me to Schedule 1 to the Building Management Ordinance (Cap 344) (the “BMO”) as a starting point. Schedule 1 provided, inter alia, that the following are common parts: -
34.As the defendant accepts, the Schedule only serves at most as a starting point only. It does not apply to the Tenancy Agreement. It is the Tenancy Agreement that should prevail. 35.In respect of the partition wall between the Premises and the Lift Lobby, Clauses (3) and (6) of Section V of the Tenancy Agreement appeared to regard the exterior as a common part. They provided that the plaintiff agreed: -
These clauses seem to suggest that the exterior and the common areas belonged to the same class. The plaintiff contended that the exterior here only referred to the exterior facing outdoors but not the exterior facing the Lift Lobby. However, I do not see why the Clause would make such distinction. Having considered Schedule 1 of the BMO as the starting point and the above clauses, I find that the partition wall was a common part. 36.As regards the control access system, it was a system on the exterior of the partition wall controlling entry into the Premises. It is neither part of the Premises because it was by its nature outside the Premises. Nor was it really any common parts because it did not serve any other areas than the Premises exclusively. However, given that it was fixed on the exterior of the partition wall, the demolishment and the erection of the partition wall inevitably would lead to the relocation of this control access system. Thus, I regard this sub-item as part and parcel of the reinstatement of the partition wall. 37.As regards the air-conditioning system and the fire services system within the Premises, they would benefit the Premises only but not other parts of the building. Insofar as the defendant suggested that the use of the two systems in the Premises may affect the whole system serving the whole building, Clauses (15) and (27) of Section III of the Tenancy Agreement would ensure that this would not happen without consequence. Clauses (15) and (27) provided that: -
38.Further, these two clauses are consistent with the contention that the air-conditioning system and the fire services system in the Premises were under the exclusive control of the plaintiff. It was because of the exclusive control that it was necessary for the defendant to ensure that the plaintiff would take up the responsibility concerning the two systems. These two clauses in fact were premised on an assumption that the plaintiff had a certain degree of control; otherwise, there was nothing for these clauses to regulate. That these two systems in the Premises were parts of the Premises also makes sense, because if it were the defendant who retained the exclusive possession of the systems, the defendant would have to enter the Premises from time to time for maintenance and repair, despite that the Premises were in the exclusive possession of the plaintiff. The other alternative would be for the defendant to authorize the plaintiff to exercise the control on its behalf. However, these two clauses were not framed in such a way that the defendant authorised the plaintiff to exercise control over the systems on its behalf. 39.That these two systems were parts of the Premises is also consistent with Schedule 1 of the BMO – paragraphs 10 and 11 of the Schedule concern the apparatus that benefit the building as a whole while the air-conditioning system and the fire services system in the Premises would only benefit the Premises. Indeed, if applying paragraph 11 of Schedule 1 literally, and if the defendant were right in saying that the air conditioning system and the fire services system were common parts, the Premises would also become a common part. This would be absurd.40.In the circumstances, I find that the air-conditioning system and the fire services system were parts of the Premises. It follows that demand for the Reinstatement Charges in respect of these two systems should in fact be part of the Reinstatement Deposit which by virtue of Clause (1)(c) of Section V of the Tenancy Agreement should be refundable. Whether or not there were the implied terms as alleged, and if so, whether there were any breaches 41.As mentioned above, the plaintiff contended that the following terms should be implied into the Tenancy Agreement: -
The defendant denied such implied terms in its Defence and Counterclaim and apparently in its written opening submissions. The defendant, at the oral opening submissions, seemed to accept that the amount of the Reinstatement Deposit had to be reasonable. At the closing submissions, the defendant “in principle” agreed to the notion of implying such terms. For prudence sake, I shall give my ruling on this issue. 42.The legal principles in relation to when a term would be implied are well established. In Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 at §23, Bokhary PJ, on behalf of the Court of Final Appeal, adopted Lord Simon’s 5 requirements in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283. Those 5 requirements are: -
43.Recently, in Marks & Spencer plc v BNP Paribas Securities Services [2016] AC 742 at §21, Lord Neuberger PSC, giving the unanimous judgment of the UK Supreme Court, explained these 5 requirements: -
44.In the present case, without the qualification of reasonableness, the defendant (1) would be able to withhold consent without any reason, or (2) would be able to purport to give consent but then demand such a large reinstatement deposit which no or no reasonable tenant would accede to, meaning that the purported consent actually would be a mirage only. As a result, the mechanism provided in Clause (1) of Section V of the Tenancy Agreement envisaging situations where the plaintiff could carry out the works with the defendant’s approval would be frustrated. This result, placing the plaintiff totally at the defendant’s arbitrary disposal, lacks any commercial and practical coherence within the Clause, and would simply make the Clause ineffective. 45.On the contrary, the implied qualification of reasonableness as contended by the plaintiff satisfies the 5 requirements in BP Refinery recently explained by Lord Neuberger PSC. Thus, I find that the following terms were implied in the Tenancy Agreement: -
46.However, was there any breach of the implied terms by the defendant? The defendant did not object to the proposed works within the Premises, and expressly reminded the plaintiff that the plaintiff could abandon the works relating to the common parts, but just demanded that before the commencement of the works, the Reinstatement Deposit should be paid (and of course if the plaintiff would still proceed with the works relating to the common parts, the Reinstatement Charges should also be paid as well). Therefore, the issue is whether the Reinstatement Deposit was reasonable. Since it is the plaintiff who alleged that the defendant breached this implied term by demanding unreasonable Reinstatement Deposit, the burden lies on the plaintiff to prove such unreasonableness. 47.In determining the reasonableness, I should not adopt too arithmetic an approach. First, it is impossible to come to any exact figure of what would cost for the reinstatement at the end of the terms of the Tenancy Agreement. Second, if taking the exercise too arithmetically, the Court would plunge itself into an unnecessarily difficult situation of looking for justification for dollars and cents. Instead, in the exercise, I should bear in mind that there would bound to be many variants and uncertainties, and thus the range of reasonableness may be wide. Further, I should look to the Tenancy Agreement as a whole for the context against which the reasonableness is to be assessed. 48.In the present case, the Reinstatement Deposit concerning the ceiling, as set out above, was HK$60,000, for “Reinstate the gypsum board ceiling with light boxes, spotlights and down lights at 10/F premises”. The plaintiff relied on a quotation given by the plaintiff’s Contractor on 9 March 2015, when the dispute had already arisen between the parties. According to this quotation, the plaintiff’s Contractor would only charge HK$18,000, less than one-third of HK$60,000. 49.Ms Karen Ng, account director of the plaintiff’s Contractor having about 15 years of experience in the field, was called to give oral evidence as a factual witness. In her witness statement, she did not give any explanation of how she arrived at HK$18,000. Nor did she say that the HK$60,000 was unreasonable. The only unreasonableness she commented with was on the Reinstatement Charges because they were non-refundable. 50.During her oral evidence, she explained for the first time that the HK$18,000 did not include the removal costs, which would be around HK$10,000. Thus, in total, for the reinstatement of the ceiling works, it would be HK$28,000. She also mentioned that there were some uncertainties in her quote, including inflation and insurance costs. For the inflation, she said that it would be around 5% per year, while the insurance costs would not be significant. From her evidence of 5% per year, the reinstatement costs would be about HK$30,000 at the end of the Tenancy Agreement. She opined for the first time that HK$60,000 was excessive and unreasonable. 51.In evidence, neither Ms Sandra Chan of the Management Company nor Ms Marine Kwok of the Senior Sales and Leasing Manager of Wincome Group had any knowledge of how this HK$60,000 was arrived at, because this figure came from the Project Department of Wincome Group, from which no one came forth to give evidence. They of course would not agree that the Reinstatement Deposit was excessive and unreasonable. 52.What the factual witnesses opined are not conclusive. Whether or not the Reinstatement Deposit was reasonable is a question for me. I should also look at other evidence available to me to assess the reliability of the evidence. As clear from the history of the correspondence between the parties set out above, the plaintiff never complained that the Reinstatement Deposit concerning the ceiling was unreasonable. The quotation was given by the plaintiff’s Contractor with the knowledge that there already had been dispute between the plaintiff and the defendant over the amounts of the Reinstatement Deposit and the Reinstatement Charges. In addition, given that Ms Karen Ng’s evidence in relation to the reasonableness of the amount of the Reinstatement Deposit was proffered only for the first time during the trial, I give little weight to such evidence. 53.The amount of the Reinstatement Deposit was a figure for the reinstatement work to be carried out 2 years later. There bound to be uncertainties. Also, the qualities of various contractors would vary and so would the prices. Having considered all the above, I am not satisfied that HK$60,000 was excessive or so excessive as to be unreasonable for the purpose of the implied terms. 54.However, as regards the Reinstatement Charges concerning the air-conditioning system and the fire services system which I have already held should be part of the Reinstatement Deposit, although for similar reasons, I do not find them to be excessive or so excessive, the fact that they were non-refundable was contrary to Clause (1)(c) of Section V of the Tenancy Agreement. Further, I cannot see why it had to be non-refundable, given that the charges must be based on some estimates only but not the actual prices to be paid at the expiry of the 2 years’ term of the tenancy. Considering all these, I find that the demand for the Reinstatement Charges concerning the air-conditioning system and the fire services system was unreasonable, and constituted a breach of the implied terms. Quiet enjoyment 55.Ms Cannas Kwan, director of the plaintiff, accepted that even without the renovation works to the common parts, the plaintiff could still operate as a clinic and endoscopy centre. That said, the plaintiff was denied carrying out the renovation work. It begs the questions which I have already answered above in favour of the plaintiff. It follows that there was a breach of quiet enjoyment. Damages 56.Given my conclusion above, the defendant wrongfully terminated the Tenancy Agreement by its letter of 9 March 2015, and by its solicitors letter of the same date, the plaintiff duly accepted the repudiation and terminated the Tenancy Agreement. The plaintiff has since been relieved from all the future obligations thereunder. In the premises, the Security Deposit of HK$361.800 should be refunded to the plaintiff 57.As regards the Decoration Deposit of HK$20,000, by virtue of Clause (26) of Section III of the Tenancy Agreement, the plaintiff would be entitled to a refund “should there be no debris and/or construction waste materials left in the common areas of the Building as a result of and relating to the partitioning decoration or construction work”. There is neither plea nor evidence of any such debris or waste materials left in such common areas. Indeed, I would expect the defendant to make such a complaint if there were any such debris or waste materials. In the circumstances, I find that the plaintiff is also entitled to a refund of the Decoration Deposit of HK$20,000. Conclusion 58.In the circumstances, I shall allow the plaintiff’s claim to the extent of the refund of the Security Deposit of HK$361,800 and the Decoration Deposit of HK$20,000 to the plaintiff, and dismiss the defendant’s counterclaim. Since the plaintiff abandoned parts of its claim at the end of the trial, but those abandoned parts took very little time during the trial, I shall make a costs order nisi that the defendant do pay the plaintiff 90% costs on party-and-party basis, with certificate for one counsel, to be taxed if not agreed.
Mr Michael Chai, instructed by Hoosenally & Neo, for the plaintiff Mr Martin Ho, instructed by Vivien Chan & Co, for the defendant | ||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under DCCJ 1080/2015