Afh Hong Kong Stores, Ltd v. Fulton Corporation Ltd

HCA 2103/2017

[2021] HKCFI 873

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2103 OF 2017

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BETWEEN

(by original action)

AND BETWEEN

(by counterclaim)

______________

Before: Hon K Yeung J in Chambers

Dates of Hearing: 7 September and 2 November 2020

Date of Decision: 31 March 2021

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DECISION

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A. Introduction

1.This is the hearing of the Summons dated 26 July 2019 and amended on 6 September 2019 (the “Order 14A Hearing” and the “Order 14A Summons”) taken out by the Plaintiff (by original action) (“AFH”) and the 2^nd Defendant (by counterclaim) (“Abercrombie”, and collectively “A&F Group”) pursuant to Order 14A for:

(a) the determination of 3 Questions (the “1^st Question”, “2^nd Question”, “3^rd Question”, and collectively the “Order 14A Questions”); and

(b) should the Order 14A Questions be answered in favour of A&F Group, summary judgment against the Defendant (by original action) and the Plaintiff (by counterclaim) (“Fulton”) and dismissal of its Counterclaim.

2.Fulton and AFH used to be landlord and tenant.  Disputes have developed between them as to the extent of AFH’s obligations to reinstate the leased property when it moved out.  The roots of the disputes are their different interpretations of several important clauses of the lease.  The Order 14A Questions primarily relate to the construction of those clauses, and several letters issued by Fulton.

3.On 2 December 2019, A&F Group took out another summons (the “Expunge Summons”) to expunge the 4^th and 5^th sentences of §8 of, and the exhibit marked “HWS-4” to, the affirmation of Ho Wai Shing dated 25 October 2019 (the “Pre-Contractual Materials”).  The Expunge Summons was before me on 9 July 2020 (the “Expunge Summons Hearing”).  Fulton was represented by Ms Bonnie Cheng.  Having heard parties, I ordered, inter alia, that leave be granted to Fulton to place the Pre-Contractual Materials before me on a de bene esse basis during the Order 14A Hearing, but only for the purpose of establishing the matters identified by Ms Cheng at section D of her submissions of 7 July 2020 (“Fulton 7/7/20 Submissions”).  I refer to my decision of 9 July 2020[1] (the “9/7/2020 Decision”).  I need therefore also rule on the admissibility of the Disputed Materials together with the Amended Summons[2].

4.The A&F Group is represented by Mr Patrick Fung SC leading Mr Justin Lam.  Fulton is represented by Mr Victor Dawes SC leading Ms Bonnie Cheng and Mr Keith Chan.

B. The pleadings

5.The Statement of Claim (“SOC”) was filed on 13 September 2017, the Defence and Counterclaim on 19 December 2017 (subsequently re-amended on 27 August 2019, the “RADCC”), and the Reply and Defence to Counterclaim on 18 May 2018 (subsequently amended and refiled on 6 September 2019, the “ARDAC”).

C. Relevant factual background

6.AFH is a limited company incorporated in Hong Kong and carries on the business of retail sale of fashion wear under the trade name of Abercrombie & Fitch and/or Abercrombie.

7.Fulton is a Hong Kong company and is the registered owner and landlord of Pedder Building, No 12 Pedder Street, Hong Kong (the “Building”).

8.By a lease dated 17 March 2011 made between AFH as tenant and Fulton as landlord (the “Lease”), and amended or supplemented to by a Supplemental Agreement dated 1 November 2011, Fulton agreed to let to AFH the whole of Lower Ground Floor, Mezzanine Floor, First Floor, Second Floor and Portion of the Ground Floor of the Building (the “Premises”).

9.Abercrombie was not a party to the Lease.  It has been joined and being counterclaimed only as the guarantor under a Deed of Guarantee and Indemnity dated 26 October 2011 (“Deed of Guarantee”) in relation to the performance of AFH under the Lease.  Abercrombie otherwise has no role to play in relation to the Lease.

10.I summarize below the relevant terms of the Lease and their effects:

(a) Part II of the First Schedule described what the Premises were.  It then proceeded to provide that:

“ … (which Premises are shown for the purpose of identification only on the Floor plans attached hereto and thereon delineated and coloured Orange).”

(b) Those floor plans (the “Floor Plans”) were annexed as Annexure D of the First Schedule.  They identify the original layout of those floors before the Lease (the “Original Layout”);

(c) Clause 1.1 and Part III of the First Schedule provided that the term of the Lease was to be 9 years;

(d) The Second Schedule provided that the rent would comprise base rent in the monthly sum of HK$9,800,000 (the “Base Rent”) plus turnover rent calculated according to certain specified formulae;

(e) Clause 11 of the Third Schedule[3] was a “Break Clause”.  It gave AFH the option to effect an early termination by giving 6 months’ prior written notice to Fulton.  It provided inter alia that:

“ The Tenant shall have the right to terminate this Agreement after 5 years from the Commencement Date by serving not less than 6 months’ prior written notice to the Landlord (i.e. a minimum term of 5 and ½ years) Provided that the Tenant shall compensate the Landlord with a sum equivalent to 12 months’ Base Rents for the next succeeding 12 months period (‘the Compensation’) … Subject to payment of the Compensation as aforesaid and subject to the delivery of vacant possession of the Premises by the Tenant to the Landlord in accordance with such notice and upon compliance of all other terms and conditions of this Agreement up to the date of delivery of vacant possession of the Premises to the Landlord, this Agreement shall terminate at the expiry of such early termination notice and the parties shall enter into a Deed of Surrender to reflect the early termination of this Agreement and the release of the rights thereby created (save for antecedent breach).”

(f) Clause 9.1 and Part IV of the First Schedule required AFH to pay deposit in the sum of HK$31,076,317 (the “Deposit”), which AFH did;

(g) Clause 9.3 required Fulton to return the deposit within 30 days after the expiration or sooner determination of the Lease;

(h) Clause 3.4[4] related to AFH’s obligations to maintain the interior of the Premises, that:

“ Upon completion of the fitting out works to be submitted by the Tenant and approved by the Landlord, to keep all the non-structural parts of the interior of the Premises and all relevant structural parts of the Premises if they have been constructed and/or altered by the Tenant including the flooring and interior plaster or other finishing material or rendering to walls floors and ceilings and the Landlord’s fixtures and fittings therein and all additions (whether of the Landlord or the Tenant) thereto including all doors, windows, electrical installations and wiring, elevators, light fittings, suspended ceilings, fire fighting apparatus and air-conditioning plant and ducting, and the external walls and signages in good clean tenantable substantial and proper repair and condition (fair wear and tear latent inherent structural damages not caused by or attributable to the acts of defaults of the Tenants excepted) and as may be appropriate from time to time properly painted and decorated and so as to maintain the same at the expense of the Tenant, and at the expiration or sooner determination of the said term, to deliver up the same to the Landlord in the condition set out in this Agreement in good clean and tenantable repair and condition (fair wear and tear latent inherent structural damages not caused by or attributable to the acts of defaults of the Tenants excepted).”

(i) Clause 3.27[5] related to AFH’s obligations to yield up and reinstate.  It is important for the purpose of this application.  I reproduce it in full.  I also, as Mr Dawes has done at §11 of his written submissions, break the contents up into their constituent parts for ease of presentation and reference:

“ To yield up the Premises in a ‘bare shell’ good clean state of repair and condition (fair wear and tear latent inherent structural defects not caused by the act or default of the Tenant excepted) at the expiration or sooner determination of this Agreement in accordance with the stipulations herein contained (‘Part 1 of Clause 3.27’)

Provided That the Landlord reserves the right subject to not less than 9 months’ prior written notice being given by the Landlord to the Tenant (‘Part 2 of Clause 3.27’)

(i) EITHER to require the Tenant to leave all fixtures and fittings or any part thereof which have been affixed to the Premises by or on behalf of the Tenant and which have become part of the Premises (except trade fixtures and fittings which the Tenant may remove subject to making good all damages caused by the removal thereof at the Tenant’s own cost) and yield up the Premises together with such alterations fixtures and additions thereto and all additions erections alterations and improvements or any part thereof which the Tenant may have made to the Premises with or without the consent of the Landlord (‘Part 2(i) of Clause 3.27’)

(ii) OR at the discretion of the Landlord, to require the Tenant to reinstate remove or do away with any additions, alterations or improvements to the Premises, including the Staircase, elevators, air-conditioning system and the signages (both inside or outside of the Premises) and make good all damages caused thereby in a proper and workmanlike manner at the Tenant’s sole costs and expense before delivering up the Premises to the Landlord.” (‘Part 2(ii) of Clause 3.27’)

(j) Clause 13 of the Third Schedule[6] (“Clause 13/3^rd Sch”) also related to AFH’s obligations to yield up and reinstate.  Its effects were similar to Clause 3.27, though the wording was slightly different.  I again set it out in full, and similarly break the contents up:

“ Upon the expiry of this Agreement or sooner determination of the said term, the Tenant shall return the Premises to the Landlord in a ‘bare shell’ good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord (‘Part 1 of Clause 13/3^rd Sch’)

The Landlord shall have the right, subject to giving to the Tenant not less than 9 months’ prior written notice, to require the Tenant (‘Part 2 of Clause 13/3^rd Sch’)

(i) to leave all or any part of the fixtures and fittings which have been affixed to the Premises by or on behalf of the Tenant or which have become part of the Premises (including but not limited to the staircases, elevators, air-conditioning system and signages) and all additions erections alterations and improvements or any part thereof which the Tenant may have made to the Premises with or without the consent of the Landlord (save and except the trade fixtures and fittings of the Tenant that brand the Premises as an Abercrombie & Fitch store, which the Tenant shall remove subject to making good all damages caused by the removal therof at the Tenant’s own cost) (‘Part 2(i) of Clause 13/3^rd Sch’)

(ii) OR at the discretion of the Landlord, to require the Tenant to remove any additions, alterations or improvements to the Premises (including but not limited to the staircases, elevators, air-conditioning system and signages (both inside or outside of the Premises)) and make good all damages caused thereby at the Tenant’s sole costs and expenses to the satisfaction of the Landlord and the Manager in accordance with the applicable laws and subsidiary legislation.” (‘Part 2(ii) of Clause 13/3^rd Sch’)

11.Upon commencement of the Lease, pursuant to Clause 5 and §(2) of the Third Schedule of the Lease, and with Fulton’s consent, AFH carried out structural and fit-out works to the Premises.  Those works  included[7] (a) demolition of the entire mezzanine floor and part of the ground, first and second floors of the Premises, (b) installation of a passenger lift and internal staircases between the second floor and basement floor of the Premises, (c) removal of washrooms and moving of fire exit stairs, (d) removal of original air-conditioning system, (e) reconfiguration of external façade of the Premises facing Pedder Street and Theatre Lane, (f) reconfiguration or removal of lobbies and partition walls and (g) reconfiguration of essential building services.

12.By letter dated 11 November 2016, and in exercise of its rights pursuant to the Break Clause, AFH delivered to Fulton written notice of termination of the Lease with effect from 11 May 2017 (hence 6 months’ written notice), and at the same time paid the compensation required by the Break Clause[8].

13.Then followed a chain of written exchanges between the parties on the scope of AFH’s obligations to reinstate under the Lease.  The three important ones are (the “3 Letters”):

(a) letter in reply from Fulton of 2 December 2016[9] (the “Fulton 2/12/16 Letter”) which relevantly contained the following contents:

“ In the meantime, we would like to draw your attention to Clause (13) of the Third Schedule to the Lease which provides that the Tenant shall return the Premises to the Landlord in ‘bare shell’ good clean state of repair and condition ‘on each floor of the Premises’ to the reasonable satisfaction of the Landlord. You are therefore required to reinstate the Premises (including the reinstatement of demolished floors or any part thereof) in accordance with their original layout as at the date of handover of the Premises to you (unless otherwise agreed by us) prior to return thereof to us on 11 May 2017 in accordance with your letter dated 11 November 2016 in which you have exercised your right to terminate, inter alia, the Lease on 11 May 2017 pursuant to Clause (11) of the Third Schedule thereto.” (Original emphasis)

(b) letter from Fulton of 12 December 2016[10] (the “Fulton 12/12/16 Letter”), which relevantly contained the following contents:

“ Whilst we agree with you that the ordinary meaning of ‘bare shell’ means ‘unfurnished and undecorated’, this can only mean the removal of furnitures, movable fittings and decorations. It is totally inconceivable that the term ‘bare shell’ can mean you are allowed to return the Premises to us without the need even to reinstate any structural alterations made by you or the floors you have demolished. If your argument is adopted, you need only deliver to us an empty structure with no ceilings and floors, which no landlord would accept.

In addition, Clause (13) of the Third Schedule to the Lease requires you to return the Premises in ‘bare shell’ condition ‘on each floor of the Premises’. As the Premises comprise over four floors, it is clear that by specifically referring to each floor of the Premises in the Clause, it would mean the Premises must be returned with ALL the original floors reinstated so that if any part of these floors has been demolished, it must be reinstated and returned in bare shell condition at the end of the lease.

In view of the above, we reiterate our stance and demand in our email dated 2 December 2016. You are therefore reminded to seek and obtain the relevant Government approvals to the necessary reinstatement works and proceed with the same without further delay so that the Premises can be returned to us in accordance with the terms of the Lease on 11 May 2017.” (Original emphasis)

(c) letter from Deacons, solicitors for Fulton, of 26 January 2017 (the “Fulton 26/1/17 Letter”), which relevantly contained the following contents:

“ To substantiate our client’s claim, our client’s emails on 2 and 12 December 2016 to yours requiring your client to reinstate the Premises (including the reinstatement of demolished floors or any part thereof) in accordance with their original layout as at the date of handover to your client constitute the written notice to your client to remove the alterations or improvements to the Premises and make good all damages caused thereby under Clause 13.

Further, subsequent to the telephone conference between our respective clients and their architects on 20 December 2016 going through generally the removal/reinstatement works to be carried out by your client at the Premises, our client’s architect, the Oval Partnership (‘Architect’), has sent a finalised Scope Summary of Reinstatement Works in writing to your client via email on 22 December 2016. The said email, which was dispatched on behalf of our client, can also constitute the written notice to your client under Clause 13.

Hence, your client has up to 9 months from, at the latest, 22 December 2016 to complete such reinstatement although our client would of course welcome such reinstatement to be duly completed earlier i.e. by the lease termination date on 11 May 2017 if practicable.  However, if the reinstatement works cannot be completed by 11 May 2017, your client is still obliged to pay our client the existing rent of the Premises (i.e. at HK$9,800,000 per month) and other charges payable under the Lease during the period after 11 May 2017 until such time when such reinstatement is duly completed (but in any event not later than 22 September 2017) and the Premises can be returned in accordance with the terms of the Lease to our client’s reasonable satisfaction.”

14.At §11.6 of the RADCC, Fulton refers to an email dated 22 December 2016 (the “22/12/16 Email”).  It is pleaded that Fulton’s architect provided thereby to AFH a “Consolidated List” which set out the reinstatement works that AFH was required to carry out to restore the Premises to the Original Layout to the extent permitted by the Building Plans.  While that Consolidated List was referred to by Deacons in the Fulton 26/1/17 Letter, it is not Fulton’s case that it itself amounted to a valid notice to reinstate.

D. Parties’ cases

15.As can be seen from the exchanges and the parties’ pleadings, the crux of their disputes is the meaning of the phrase “bare shell” state.  That term was not defined in the Lease or any contractual documents between the parties. The A&F Group’s position is that it simply means “unfurnished or undecorated without fixtures, fittings or furniture”[11]. Fulton does not agree.  Fulton’s stance is that (i) AFH was required to restore the Premises to the Original Layout to the extent permitted by the general building plans approved by the Building Department concerning the Premises (the “Building Plans’) whether or not Fulton gives written notice to that effect[12]; and in any event (ii) each of the Fulton 2/12/16 Letter, Fulton 12/12/16 Letter and Fulton 26/1/17 Letter amounted to valid notice under Part 2(ii) of Clause 3.27 and Clause 13/3^rd Sch[13].

E. The Order 14A Questions

16.The 3 Order 14A Questions are as follows:

(a) The 1^st Question:

“ Whether, on a true construction of Clause 3.27 and Clause 13 of the Third Schedule of the Lease, AFH is required to restore the Premises to the Original Layout to the extent permitted by the Building Plans, absent any notice given by Fulton.”

(b) The 2^nd Question:

“ Whether, on the true construction of Clause 3.27 and Clause 13 of the Third Schedule of the Lease, Fulton’s letters of 2 December 2016, 12 December 2016 and 26 January 2017 amounted to valid notices requiring AFH to carry out the works set out in the Consolidated List and/or to restore the Premises to the Original Layout to the extent permitted by the Building Plans.”

(c) The 3^rd Question:

“ Whether, on the true construction of the Lease and/or by reason of an implied term(s) therein, Fulton’s said letters, even if they amounted to valid notices as aforesaid, could impose an obligation on AFH to carry out the works set out in the Consolidated List and/or to restore the Premises to the Original Layout to the extent permitted by the Building Plans, in light of the fact that the termination of the Lease and the delivery up of vacant possession would have to take place on 11 May 2017 (i.e. before the expiry of the obligatory 9 month notice period prescribed under the Lease).”

17.I consider the 3 Order 14A Questions in turn.

F. The 1^st Question

F.1. Parties’ stances

18.Mr Fung’s submissions in gist[14] are that the plain construction of Clause 3.27 and Clause 13/3^rd Sch only requires AFH to return the Premises in a bare shell good clean state of repair and condition, which means, as accepted by Fulton[15], “unfurnished or undecorated”.  It does not require AFH to restore the Premises to the Original Layout to the extent permitted by the Building Plans.

19.Mr Dawes summarizes Fulton’s stance at §4.1 of his written submissions, that upon proper interpretation of the Part 1 of Clause 3.27 and Clause 13/3^rd Sch, AFH is required to restore the Premises to a “pre-lease’ bare shell, meaning that “it must restore the Premises to the Original Layout to the extent permitted by the Building Plans, even without any notice having been given by Fulton”.  For ease of reference, I will use below the term “Fulton’s Interpretation” to denote the italicized words.

F.2. Discussion

20.The law on interpretation of contract is not in dispute.  I have been referred to a number of authorities, which include Sinoearn International Ltd v Hyundai-CCECC Joint Venture (2013) 16 HKCFAR 632, Arnold v Britton [2015] AC 1619, and Jumbo King v Faithful Properties Ltd (1999) 2 HKCFAR 279.  I apply the principles explained in those and other authorities cited to me. 

21.I begin with the language used — see Eminent Investments (Asia Pacific) Ltd v DIO Corp [2019] HKCA 606, per Cheung JA at §7.4.

22.According to Part 1 of Clause 3.27 and Part 1 of Clause 13/3^rd Sch, the obligation of AFH was to yield up or return the Premises “in a ‘bare shell’ good clean state of repair and condition” or “in a ‘bare shell’ good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord”.  The express obligation was not to yield up the Premises as per Fulton’s Interpretation.

23.The wording of Clause 3.4 should also be noted.  It imposes upon AFH the obligation to “keep all the non-structural parts of the interior of the Premises and all relevant structural parts of the Premises if they have been constructed and/or altered by the Tenant including the flooring … and at the expiration or sooner determination of the said term, to deliver up the same to the Landlord in the condition set out in this Agreement in good clean and tenantable repair and condition”.  The express obligation again was not to yield up the Premises as per Fulton’s Interpretation.

24.The structure of Clause 3.27 and Clause 13/3^rd Sch supports Mr Fung’s interpretation.  Part 1 is the default position.  Part 2 reserved upon Fulton the right to serve notice requiring AFH to do certain things.  Under Part 2(i), Fulton might require AFH to leave all or part of the fixtures and fittings affixed by AFH.  Under Part 2(ii), Fulton might require AFH to reinstate, remove or do away with any additions, alterations or improvements to the Premises.  I accept Mr Fung’s submissions that those terms formed part of the scheme contained in the Lease, as well as the factual matrix, that the parties had agreed upon and decided to deal with the issue of possible reinstatement.  Part 1 should objectively be viewed accordingly. It is not a “surplusage” argument as suggested by Mr Dawes.

25.The plain language of Clause 3.27, Clause 13/3^rd Sch and Clause 3.4, and the structure of the relevant clauses, in my view support Mr Fung’s contention.

26.There is on the other hand no express provision amongst the terms of the Lease which impose an obligation on AFH to reinstate according to Fulton’s Interpretation.

27.Fulton’s Interpretation is uncertain, and begs the questions as to what the Original Layout was, what the “Building Plans” were, and what the term “to the extent permitted by the Building Plans” means. 

28.If the intention were that AFH should reinstate to the Original Layout, one would objectively expect that parties would have agreed expressly upon what the Original Layout was.  But the Premises are shown on the Floor Plans “for the purpose of identification only”.  I accept Mr Fung’s submissions that the Original Layout of the Premises never featured as part of the operative terms of the Lease.

29.Mr Dawes does not dispute that “bare shell” generally means “unfurnished” or “undecorated”[16]. He points to the reference of “on each floor” at Part 1 of Clause 13/3^rd Sch. 

30.I accept Mr Fung’s submissions in this regard that no matter how one interprets the words “on each floor”, the language does not overcome the otherwise clear language of the terms as discussed above, and could not be construed as meaning to impose the onerous obligations on AFH as per Fulton’s Interpretation.

31.Mr Dawes submits that the “pre-lease” bare shell interpretation gains support from other relevant clauses, the overall factual matrix, as well as the context and purpose of the Lease.  He places particular emphasis on the fact that substantial fitting out works were contemplated and undertaken by AFH, which had resulted in demolition of parts of the floors and loss letable areas. He submits that Fulton’s Interpretation is commercially more sensible.

32.I do not accept Mr Dawes’ submissions in this regard:

(a) as has been pointed out by Mr Fung, in both Clause 3.27 and Clause 13/3^rd Sch where the term “bare shell” appears, it is prefaced by the indefinite article “a”.  AFH’s obligations thereunder was to return or yield up the Premises in “a bare shell” state;

(b) what “a bare shell” state means is not ambiguous;

(c) with respect, the effect of Mr Dawes’ submission is to:

(i) rewrite those terms as imposing upon AFH an obligation to return or yield up the Premises in “the pre-lease bare shell” state;

(ii) replace the indefinite article “a” with the definite article of “the”; and

(iii) add to the relevant clauses words “to the extent permitted by the Building Plans” that are not there; 

(d) As has been explained by Ribeiro PJ in Sinoearn at §§74-79 Leggatt LJ in Merthyr (South Wales) Limited v Merthyr Tydfil County Borough Council [2019] EWCA Civ 526 at §27, the consideration of “commercial common sense”, while important as an interpretation aid, has its limits in the face of the clear and natural meaning of the contractual provisions concerned.  Where the parties have used unambiguous language, the court must apply it and cannot rewrite the same — Rauny Sky SA v Kookmin Bank [2011] 1 WLR 2900, at §23;

(e) It is also material to note that the Lease was a professionally drafted document with the assistance of lawyers on both sides;

(f) Further, on the evidence, I am not satisfied that Fulton’s Interpretation necessarily has better commercial common sense.  Whether it does would be dependent upon factors like eg the prevailing market rent at the time of the Lease, and whether AFH had in fact paid as part of the package to Fulton any premium for the right to do the fitting out works without any need of reinstatement to the pre-lease state in the absence of notice.  In the absence of such evidence, I accept Mr Fung’s invitation to proceed on the basis that there is simply no evidence on these postulations concerning commercial senses one way or the other.

F.3. The Pre-contractual Materials

33.Mr Dawes seeks to rely on the Pre-Contractual Materials.

34.As I have explained in the 9/7/2020 Decision, the Pre-Contractual Materials are produced as “HWS-4” in Ho Wai Shing’s affirmation dated 25 October 2019.  Whilst the 4^th and 5^th sentences of §8 of that affirmation are also in dispute, those sentences are nothing more than introductory, and have no consequence.

35.“HWS-4” comprise 3 short emails, and 2 draft leases attached thereto.  Those 3 emails are:

(a) email[17] from JS of AFH to Nick Bradsheet of Savills Hong Kong (A&F Group’s broker) dated 13 December 2010 (the “JS Email”);

(b) email[18] from Karen Yan (“Karen Yan”) of Baker McKenzie (who were AFH’s lawyers) to Irene Tai (“Irene Tai”) of Iu, Lai & Li (who were Fulton’s lawyers) dated 12 January 2011 enclosing a draft of the Lease (the “Karen Yan Email”) ; and

(c) email[19] from Irene Tai to Karen Yan and Priscilla Yu of Baker McKenzie dated 31 January 2011 enclosing a revised draft of the Lease (the “Irene Tai Email”).

36.The JS Email is said to be relevant to the 1^st Question[20], whereas the Karen Yan Email and the Irene Tai Email are said to be relevant to the 2^nd and 3^rd Questions[21].

37.Negotiations and previous drafts are not admissible in aid of construction of the agreement — see Bond Speed Ltd v Goodwell Sam Chong Grocery Co Ltd, unrep, CACV 90/2010, 26 May 2011 at §9, Jumbo King at 296H; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at§§40 to 42.

38.As explained by Hoffmann in Chartbrook:

“ 42. The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

…

45. … It is true that evidence may always be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning.  This is the ‘private dictionary’ principle, which is akin to the principle by which a linguistic usage in a trade or among a religious sect may be proved: compare Shore v Wilson (1842) 9 Cl & F 355.  For this purpose it does not matter whether the evidence of usage by the parties was in the course of negotiations or on any other occasion.  It is simply evidence of the linguistic usage which they had in common.”

39.At §§34.1 and 34.2 of his written submissions, Mr Dawes seeks to justify the admission of the Pre-Contractual Materials on the basis that they demonstrate that AFH and Fulton knew and contemplated that AFH intended to carry out extensive structural alterations to the Premises, and shed light on the genesis and aim of the transaction.

40.In my view, those grounds do not justify the admission of the Pre-Contractual Materials.  As submitted by Mr Fung[22], which I accept, those matters have never been in dispute.  I agree with Mr Fung that this excuse to have the Pre-Contractual Materials admitted should be rejected.

41.In so far as the “private dictionary” principle being relied upon to justify the admission of the JS Email[23], I accept Mr Fung’s submissions that that one single email is not sufficient to establish any habitual use.

42.In any event, even if I were wrong above and that the JS Email should be admitted, I do not accept as a matter of contents that it supports the proposition put forward by Mr Dawes[24] that it establishes that the parties had in the course of negotiations habitually used the term “bare shell” in a specific sense to mean “pre-lease” bare shell:

(a) Fulton seeks to rely on §4 as set out in the JS Email, which reads:

“ 4) 13- Tenant is willing to return the Premises in a bare shell condition after removing improvements that brand the Premises as an Abercrombie & Fitch store. Landlord wants the right to give notice six (6) months prior to expiration directing Tenant to leave all improvements (except trade fixtures) or to remove all improvements (including staircase, escalators, air-conditioning system and signages) and reinstate to prior condition.” (emphasis added)

(b) At §11 of his affirmation dated 10 January 2020, Ho Wai Shing for Fulton claims that:

“ As seen in paragraph 4 of AFH’s email cited above, it is AFH’s understanding that:

(i) ‘bare shell condition’ means ‘removing improvements that brand the Premises as an Abercrombie & Fitch store’; and

(ii) ‘improvements’ include ‘staircase, escalators, air-conditioning system and signages’.”

(c) Ho Wai Shing’s reading of the JS Email is in my view incorrect. He has conspicuously omitted the words “all” which I have bolded and underlined above;

(d) Viewed objectively, §4 of JS Email reasonably conveys the meaning that:

(i) tenant was willing to return the Premises in a bare shell condition after removing improvements that brand the Premises as an Abercrombie & Fitch store;

(ii) the word “improvements” used there covered only those “that brand the Premises as an Abercrombie & Fitch store”;

(iii) landlord wanted the right to give notice to remove all improvements and reinstate to prior condition;

(iv) All improvements would include staircase, etc;

(v) “bare shell” on its own did not require AFH to “reinstate to prior condition”;

(e) Viewed as such, and if I had decided to admit it, I would have regarded the JS Email as actually reinforcing AFH’s interpretation.

F.4. Conclusion on the 1^st Question

43.For the above reason, I answer the 1^st Question in the negative.

G. The 2^nd Question

G.1. Parties’ stances

44.Mr Fung submits that none of the 3 Letters amounted to a valid notice under Clause 3.27 and Clause 13/3^rd Sch (i) for failing to give “not less than 9 months’ prior notice written notice” and (ii) in any event did not substantively constitute notice by Fulton to exercise its discretion to require AFH to reinstate the Premises in the manner claimed by Fulton.

45.Mr Dawes summarizes his stance at §4.2 of his written submissions as follows, that each of the 3 Letters amounted to valid notice under Part 2(ii) of Clause 3.27 and Part 2(ii) of Clause 13/3^rd Sch, requiring AFH to carry out the works set out in the Consolidated List of reinstatement works, and thereby restore the Premises to the Original Layout to the extent permitted by the Building Plans.  He relies on Mannai Investment Limited v Eagle Star Life Assurance Co Ltd [1997] AC 749.  He submits that a reasonable recipient of those letters would have understood that AFH was required to effect the reinstatement works within 9 months from the dates when they were issued.  In the course of the hearing, he accepted that even though those letters were not perfect, it is a question of sufficiency.

G.2. Discussion

46.I have considered Mannai.  I have in particular considered the propositions stated by Lord Steyn at pp 767D to 768H.  That case concerned the validity of the notices given by the tenant to terminate the leases.  In construing that the notices, the inquiry is an objective one.  As explained by Lord Steyn at pp 767G to 768C:

“ The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene. The approach in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (trading as H. E. Hansen-Tangen) [1976] 1 W.L.R. 989, which deals with the construction of commercial contracts, is by analogy of assistance in respect of unilateral notices such as those under consideration in the present case. Relying on the reasoning in Lord Wilberforce’s speech in the Reardon Smith case, at pp. 996D-997D, three propositions can be formulated. First, in respect of contracts and contractual notices the contextual scene is always relevant. Secondly, what is admissible as a matter of the rules of evidence under this heading is what is arguably relevant. But admissibility is not the decisive matter. The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in. Thirdly, the inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of clause 7(13) the question is simply how the reasonable recipient would have understood such a notice.”

47.In Mannai, the relevant leases commenced on 13 January 1992.  Each contained a clause that the tenant could determine the lease by serving not less than six months’ notice in writing to expire “on the third anniversary of the term commencement date”, which would be 13 January 1995.  By letters of 24 June 1994, the tenant gave notices to the landlord to determine both leases on 12 January 1995.  The House of Lords by majority held that the notices were valid.  The purpose of the notices was to inform the landlord of the tenant’s decision to determine the leases in accordance with the break clauses.  A reasonable recipient with knowledge of the terms of the leases and of the third anniversary date would have been left in no doubt that the tenant wished to determine the leases on 13 January 1995 but had wrongly described it as 12 January 1995.  The notices were therefore effective to determine the leases.

48.I have been cited a number of other subsequent authorities.  The basic approach as explained in Mannai has been followed and applied.  The results of those cases were however facts sensitive.

49.There are two features about the notice which Fulton could give under Clause 3.27 and Clause 13/3^rd Sch which I regard as important:

(a) under Parts 1 of both Clause 3.27 and Clause 13/3^rd Sch, the notice period was not fixed.  It was “not less than 9 months”.  A longer period could be given.  Unless so informed, AFH would not know what deadline to meet; and

(b) under Parts 2(ii) of both Clause 3.27 and Clause 13/3^rd Sch, Fulton had a discretion to require AFH to remove what additions, alterations or improvements. Unless so informed, AFH would not know what to remove[25].

50.The above two features are to be contrast with for examples:

(a) the notices simply to determine the two leases in Mannai which were to expire on a particular date;

(b) the notices to exercise the option to require the defendant to purchase shares in Kou Lau Ru Ling & Ors v Tse Sui Luen [2000] 2 HKC 644 where the contractual conditions for a valid exercise of the option had all duly been complied with, and where the essential purpose of the notices was to inform the defendant that each of the plaintiff was invoking their option right;

(c) the schedule of dilapidations making reference to the lease but not certain licences in Westminster City Council v HSBC Bank plc [2003] 1 EGLR 62, where the court held that a reasonable recipient would understand the schedule to be referring also to reinstatement under the licences.

51.In the present case:

(a) in relation to the Fulton 2/12/16 Letter:

(i) it required AFH to reinstate “prior to return thereof to us on 11 May 2017”;

(ii) less than 9 months’ notice was given;

(iii) a reasonable recipient could not simply have substituted a period expiring 9 months from that letter, as a longer period could indeed be given.  There is further the difficulty that that 9-month period would have taken AFH’s occupation of the Premises beyond the termination date of 11 May 2017, but that there had been neither discussion nor agreement between the parties on the financial implications of that;

(iv) Part 2(ii) of Clause 13/3^rd Sch was not mentioned.  This is not just a matter of form.  As submitted by Mr Fung[26] which I accept, Part 2(ii) of Clause 13/3^rd Sch gave Fulton a discretion to decide what additions alterations or improvements AFH would be required to remove.  In order for AFH to meaningfully comply with the reinstatement notice, it falls on Fulton to specify the precise list of additions, alterations and improvements to be removed.  In neither of the Fulton 2/12/16 or Fulton 12/12/16 Letters did Fulton specify a consolidated list of additions, alterations and improvements which Fulton required AFH to remove.  What AFH was required to reinstate by the Fulton 2/12/16 Letter was not clear.  I note in particular the words “unless otherwise agreed by us”;

(b) in relation to the Fulton 12/12/16 Letter:

(i) it required AFH to proceed with the reinstatement works “so that the Premises can be returned to us in accordance with the terms of the Lease on 11 May 2017”;

(ii) again less than 9 months’ notice was given;

(iii) again a reasonable recipient could not simply have substituted a period expiring 9 months from that letter, as a longer period could indeed be given;

(iv) similar to the 2/12/16 Letter, Part 2(ii) of Clause 13/3^rd Sch was not mentioned, and the precise scope of reinstatement not specified;

(c) In relation to the Fulton 26/1/17 Letter:

(i) Deacons sought to rely on the Fulton 2/12/16 and 12/12/16 Letters as valid notice.  I repeat my views on those 2 Letters;

(ii) Deacons then referred to and sought to rely on the 22/12/16 Email and the Consolidated List.  It is not Fulton’s case that that Email itself amounted to a valid notice to reinstate;

(iii) Fulton itself did not intend the Fulton 26/1/17 Letter to be itself a notice under Clause 13/3^rd Sch.  It made implied reference to the 22/12/16 Email and said that “your client has up to 9 months from, at the latest, 22 December 2016 to complete such reinstatement”;

(iv) If the 26/1/17 Letter was meant to be the notice, less than 9 months’ notice was given;

(v) Further, Fulton demanded licence fee from AFH at the existing rent of HK9,800,000 per month during the period beyond 11 May 2017, a highly controversial stance to take to say the very least.  In the course of the hearing, Mr Dawes confirmed that he was not contending that extra licence was required to be paid, and he was not supporting that stance;

(vi) In the circumstances, a reasonable recipient simply could not have told what the notice period was going to be, and what deadline AFH was required to meet.

52.In the light of the above, I hold that none of the 3 Letters constituted any valid notice.  In my view, this is not a case of the basic purpose of the notice having been ascertained so that the Court could ignore immaterial errors — compared with Mannai.  Nor is this Court, in holding that none of the 3 Letters constituted any valid notice, permitting technical objections to take precedence over commercial reality — compared with Westminster City Council §45.  The objections in the present case are not technical.

G.3. Conclusion

53.I answer the 2^nd Question in the negative.

H. The 3^rd Question

54.Given my views on the 1^st and 2^nd Questions, the 3^rd Question is not engaged and it will not be necessary to consider the same[27].

55.In deference to submissions made, I make only the following observations.

56.Mr Fung’s stance in gist is that even if any of the 3 Letters amounted to a valid notice, it could not have imposed any obligation on AFH to restore the Premises in the manner claimed by Fulton, as the Lease was terminated on 11 May 2017.

57.Mr Dawes submits that the existence of obligation on the part of AFH to reinstate beyond the termination date of the Lease poses no conceptual difficulty.

58.On the strength of the authority placed before me, which included Reynolds and Dowding, Dilapidations: The Modern Law and Practice (6^th ed), §§16-06 and 16-07, Matthey v Curling [1922] 2 AC 180, 239-240, Plummer v Ramsey (1934) 78 SJ 175 and Scottish Mutual Assurance Society Ltd v British Telecommunications plc (unreported by discussed at [388] of Reynolds and Dowding), though not wholly clear, I would have accepted Mr Dawes’ submissions on the related point of law.  As discussed at §16-06 of Reynolds and Dowding:

“ …But what happens when the landlord gives the notice too late to enable the tenant to complete (or, in an extreme case, even start) the relevant work before lease expiry?

Absent an express provision, there are three possible answers.

The first is that the notice may be given at any time up to the term date, and the tenant is entitled to remain in occupation for such period thereafter as is reasonably required in order to complete the works …

…

Such authorities as there are suggest that the first possibility will ordinarily be the correct answer.  However, the position is not wholly clear.”

The Expunge Summons

59.I have touched on the matter above.

60.The JS Email is said to be relevant to the 1^st Question. I have expressed my view on the same.

61.The Karen Yan Email and the Irene Tai Email are said to be relevant to the 2^nd and 3^rd Questions.  But in Mr Dawes’ written submissions, he does not rely on them in relation to the 2^nd Question. The 3^rd Question is not engaged.

62.In any event, as has been pointed out by Mr Fung, the Karen Yan Email was marked “Subject to Contract”, and the Irene Tai Email was not only marked “Subject to Contract”, but that the draft lease was expressly forwarded “[o]n a subject to contract basis”.  The reference and reliance upon those two emails take us nowhere.  I accept Mr Fung’s submissions in this regard.

63.In the circumstances, I make an order in terms of §1 of the Expunge Summons.

I. Judgment to be entered

64.Parties are in dispute as to whether AFH is obliged to pay rent, rates and management fees for 11 May 2017. 

65.11 May 2017 was the last day of the Lease.  AFH is obliged to pay rent, rates and managements fees for that day.  I do not accept Mr Fung’s submission that AFH is not liable to do so merely because Fulton has never issued any statement to AFH requesting those payments.  As submitted by Mr Dawes which I accept, none of the covenants in the Lease governing payment of rent, rates and management charges is dependent on notice having been given by Fulton.

66.Having answered the 1^st and 2^nd Questions in the negative in favour of AFH, this Court grants judgment in favour of A&F Group in the following terms:

(a) Fulton do repay the Deposit in the sum of HK$31,076,317 to AFH;

(b) Fulton do repay the overpaid rent, rates and management charges in the sum of HK$7,080,148.92 to AFH;

(c) An interest order nisi that Fulton do pay pre-judgment interest to AFH on the aforesaid sums at the rate of prime plus 1% from 10 June 2017 up to the date of the judgment;

(d) An interest order nisi that Fulton do pay post-judgment interest to AFH on the aforesaid sums from the date of judgment up to the date of full payment;

(e) Fulton’s counterclaim be dismissed; and

(f) A costs order nisi that the costs of this Action (including the costs of the Order 14A Summons and the Expunge Summons and all costs reserved therein) be paid by Fulton to A&F Group with certificate for two counsel.

Mr Patrick SC Fung SC, leading Mr Justin Lam, instructed by Dentons Hong Kong LLP, for the Plaintiff (by original action) and the 1^st and 2^nd Defendants (by counterclaim)

Mr Victor Dawes SC, leading Ms Bonnie YK Cheng and Mr Keith Chan, instructed by Deacons, for the Defendant (by original action) and the Plaintiff (by counterclaim)