Sunbroad Holdings Ltd v. A80 Paris HK Ltd ( Formerly Known As A80 Anoufa Paris HK Ltd) and Another

HCA 735/2020

[2021] HKCFI 1422

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 735 OF 2020

________________________

________________________

Before: Master Jonathan Wong in Chambers (By Paper Disposal)

Date of Plaintiff’s Written Submissions: 4 and 6 January 2021

Date of Defendants’ Written Submissions: 5 January 2021

Date of Decision: 3 June 2021

_________________________________

DECISION

_________________________________

A.   Introduction

1.By a summons dated 14 October 2020, the plaintiff (“Landlord”) seeks (1) summary judgment against the 1^st and 2^nd Defendants (respectively “Tenant” and “Guarantor”) or (2) in the alternative, interim payment in the sum of HK$493,893.96, being 50% of the principal sum claimed by the Landlord in this action. 

2.By her order dated 27 October 2020, Master Tse directed that the Landlord’s summons be adjourned to a date to be fixed for disposal on paper and gave directions for filing of evidence and lodging of submissions. 

3.The plaintiff filed two affirmations from Mr Ho Shek Tim, a director of the Landlord.  The Defendants rely on the affirmations made by Ms Ho Wai Yee Maria (“Maria 1^st”) and Mr Aviad Ben Ezra (“Ezra 1^st”). Maria is the Chief Operating Officer of the Tenant and Mr Ezra is a director of both the Tenant and the Landlord. 

4.The Landlord is represented by Mr Kevin Hon (“Mr Hon”) and the defendants by Ms Jacqueline Law (“Ms Law”), both of counsel. 

5.The Landlord is the registered owner of Shops F, G and H on the Ground Floor of No 15 Pak Sha Road, Causeway Bay, Hong Kong (“Premises”).  The Premises are located a stone’s throw away from Hysan Place, in or at the fringe of a prime shopping area frequented by tourists and local shoppers. 

6.The Guarantor is in the business of beauty equipment and supplies such as skincare and hair products.  It has acquired exclusive distribution rights and developed key partnerships with international leading brands and has built an extensive network of over 80 stores covering locations such as Hong Kong, Singapore and Macau.  At the material time, one of such brands was A80 Anoufa Paris which was a Parisian brand for hair, beauty and fashion bearing a signature colourful graffiti pattern and the Anoufa Bear icon (“Brand”). The Guarantor indirectly holds 90% shareholding in the Tenant. 

7.The Tenant was incorporated on 2 March 2018.  By a tenancy agreement dated 19 August 2019 (“Tenancy Agreement”), the Premises were let by the Landlord to the Tenant for a fixed term of three years from 26 August 2019 to 25 August 2022 at a monthly rent of HK$240,000 (exclusive of management fees, government rates and all other outgoing utilities) payable in advance on the 1^st day of each and every calendar month during the tenancy without any deduction.  The Guarantor executed a deed of guarantee dated 12 August 2019 (“Guarantee”) in favour of the Landlord.  Ms Law submits that, under the terms of the Guarantee, the liability of the Guarantor stands or falls with that of the Tenant.  Mr Hon has not submitted to the contrary. 

8.There is no dispute that the Tenant had only paid rent for the period up to and including January 2020.  The Landlord commenced these proceedings on 21 May 2020 and claims for arrears of rent, arrears of government rates and contractual interest (as a liquidated sum of HK$987,797.91 for the amounts outstanding as at 20 May 2020) and for unpaid rent and government rates (or damages) for the remainder of the term of the Tenancy Agreement (ie from 21 May 2020 to 25 August 2022). 

9.Although additional grounds are advanced in the Amended Defence, Ms Law has confined the defendants’ opposition in respect of the Tenant’s liability to three grounds.^[1] First, it is said that, in January 2020, the Landlord had offered, and the Tenant had accepted, a rent reduction of 10% (“Rent Reduction Ground”).  Secondly, the Tenant contends that the Tenancy Agreement had been frustrated by reason of what Ms Law describes as Unforeseen and Unprecedented Circumstances, namely the disruption or closure of the Tenant’s business caused by the social unrest and the COVID-19 pandemic (“Frustration Ground”).  Thirdly, although not pleaded in the Amended Defence,^[2] the Tenant argues that the Landlord has failed to mitigate its loss (“Failure to Mitigate Ground”). 

10.In assessing the three grounds of defence advanced by the Tenant, I have borne in mind the applicable (and undisputed) principles.  In gist, summary judgment is only for clear cases and ought not be applied in cases where there are material factual disputes, or a legal issue which is more than a crisp legal question fit for summary determination.  The test to be applied is (1) whether the defendants’ factual case is believable and (2) if the factual case is believable, does it amount to an arguable defence in law. 

B.   Events prior to the execution of the Tenancy Agreement

11.After the Tenant was incorporated in early 2018, it started to search for premises to operate a physical store.  A printout of the Tenant’s website shows that it also operates an online business in respect of the Brand. 

12.Between June to July 2019, the Tenant negotiated with the Landlord in respect of the Premises through a representative of Savills Hong Kong Limited, namely Mr Thomas Waterhouse (“Mr Waterhouse”).  As accepted by the Tenant, at the time of negotiation and the execution of the Tenancy Agreement, it was aware of the then ongoing social unrest and its negative impact on the retail sector generally.  The figures released by the Hong Kong Government showed an increasingly significant year-on-year decrease in the value of retail sales from June 2019 onwards: Ezra 1^st §26.^[3]  The Tenant nevertheless chose to enter into the Tenancy Agreement despite the attendant business risks, as its management made an assessment to the effect that the social unrest would not last long since the controversial Anti-Extradition Law Amendment Bill had been suspended on 15 June 2019: Ezra 1^st §23. 

13.The above matter is particularly relevant to the Frustration Ground to which I shall return below. 

14.The defendants also rely on certain pre-contractual negotiations.  At Ezra 1^st §14, the defendants contend that from the telephone conversations between Mr Ezra and Mr Waterhouse (ie not directly between the Landlord and the Tenant), the Landlord was made aware that (1) the Tenant’s business relied heavily on tourists from mainland China and overseas and only a small percentage of its business was from local customers, and the foregoing was the main reason why the Tenant was interested in the Premises which is located at the heart of Causeway Bay and (2) the Tenant would arrange an area which occupied around 30% of the Premises for the purpose of providing hair-styling and hairdressing services to its customers (who were mainly tourists from mainland China and overseas) (“Pre-Contractual Negotiations”).

15.In my view, the defendants are unable to derive any particular assistance from the Pre-Contractual Negotiations. 

16.Indeed, as I understand Ms Law’s submissions, she only relies on the Pre-Contractual Negotiations for the proposition that the purpose of the parties entering into the Tenancy Agreement was for the Tenant to set up a retail shop for the sale of its health and beauty products.^[4] 

17.However, as pointed out by Mr Hon (and accepted by Ms Law), there can be no dispute that the common intention between the Landlord and the Tenant was that the Premises were to be used as a retail store.  Under Clause 7 of Part V of the Tenancy Agreement, the Tenant was not to use the Premises “for any purpose other than a SHOP for retail sales of high-end designers’ label Beauty, Hair, Fashion and Accessories products trading under the name of “A80 ANOUFA PARIS” for the Tenants lawful business only.” 

18.Also as pointed out by Mr Hon, pre-contractual negotiation is generally inadmissible and Clause 6 of Part XI of the Tenancy Agreement contains an entire agreement clause to which Mr Law’s written submissions do not provide any adequate response. 

19.In any event, I do not regard the defendants’ evidence on the Pre-Contractual Negotiations believable or that it leads to a triable issue, for the following reasons. 

20.First and foremost, the defendants’ evidence, at its highest, only states that the Landlord was made aware of the Tenant’s unilateral views. There is no suggestion that the Landlord agreed with the Tenant’s views before the execution of the Tenancy Agreement: Ezra 1^st §14.  Thus, I do not agree with Ms Law’s characterization that the Pre-Contractual Negotiations amounted to a mutual understanding or common intention. 

21.Secondly, no particulars have been put forward by the defendants as to when and how the Landlord was made aware by Mr Waterhouse of the matters forming the subject of the Pre-Contractual Negotiations.  As is trite, the burden is on the defendants to condescend upon particulars. 

22.Thirdly, the assertion that the Tenant’s business relied heavily on tourists from mainland China and overseas is a bare one.  One would have expected that where, as here, the business to be operated by the Tenant at the Premises was a new venture (or at least at a new location), there would have been some studies into the demographics of the intended customers or projected sales.  No business plan or forecast has been adduced into evidence by the defendants.  Nor is there evidence to show that the Brand is particular well known to or popular amongst tourists from mainland China or overseas.  The Brand does not fall into categories such as jewelry or premium fashion brands whose popularity with customers from mainland China is perhaps well-known.

23.Fourthly, I do not see the relevance of the assertion that the Premises were used in part as a hair salon.  The mandatory closure set out at Ezra 1^st §62 refers to beauty parlours, not hair salons.  Under Schedule 2 of the Prevention and Control of Disease (Requirements and Directions) (Business and Premises) Regulation Cap 599F, a distinction is drawn between beauty parlours and hair salons.^[5]  It is not the defendants’ case that the Hong Kong Government had imposed mandatory closure on hair salons at the material time. 

C.    Rent Reduction Ground

24.As stated earlier, the term of the Tenancy Agreement commenced on 26 August 2019.  Thereafter, the Tenant liaised with the Landlord in respect of certain renovation works at the Premises: Exhibit ABE-5.  The Tenant commenced its business on 1^st October 2019: Ezra 1^st §28. 

25.It is the Tenant’s case that, contrary to the assessment of its management,^[6] the social unrest did not die down for months, and the business and operations of the Tenant at the Premises were gravely hit.  Many of the protest marches between October 2019 and January 2020 took place in the vicinity of the Causeway Bay, including Pak Sha Road on which the Premises were located.  To that end, the Tenant started to negotiate with the Landlord for rent reductions.  Although the Tenant had in the contemporaneous correspondence relied on the rate abatement provision in the Tenancy Agreement, it is not part of the defendants’ case in this application. 

26.The relevant chronology is as follows. 

27.At the end of October 2019, Maria had by two emails to the Landlord asked for rent reduction of up to 40%.  In her email dated 18 November 2019 to the Landlord, Maria requested for a 50% reduction. 

28.There was no substantive reply from the Landlord.  By an email dated 10 December 2019, Maria stated that although the Tenant was able to continue its business, she urged the Landlord to face the difficulties with the Tenant.

29.In the meantime, the Tenant did not pay rent for the months of November and December 2019. 

30.The Landlord gave its first substantive response on 11 December 2019.  The Landlord acknowledged that the social unrest (and the Sino-US trade war) had affected the business environment and the difficult situation faced by the Tenant.  However, the Landlord pointed out that the Tenant’s non-payment of rent was an obstacle, as one of the most important factors which the Landlord would take into account when considering rent concession was the Tenant’s track record on rental payment.  The Landlord also emphasized that any rent concession was at its discretion and recommended the Tenant to settle all outstanding rent before the issue of rent reduction would be further considered by its management. 

31.On 14 December 2020, the Tenant settled the rental payment for November 2020. 

32.Notwithstanding that the rental payment for December 2019 was still outstanding, on 19 December 2019, Maria reiterated the Tenant’s request for a 50% rent reduction.  It is pleaded in the Statement of Claim that the rental for December 2019 was paid by the Tenant on 6 January 2020. 

33.Eventually, by an email dated 21 January 2020, the Landlord stated it would grant a 10% reduction for a period of six months starting 1 February 2020 until 31 July 2020 on the terms set out in the letter attached (“21/1/20 Letter”) and reminded the Tenant to settle the outstanding rental payment for January 2020 by 24 January 2020.  The Landlord reminded the Tenant that the most important factor which the Landlord would take into consideration was the tenant’s track record for rental payment and reserved the right to withdraw the grant of rental reduction was not settled on or before 24 January 2020. 

34.The 21/1/20 Letter sets out the terms of the offered rent reduction.  It was not an unconditional offer but required the Tenant to pay rent and other charges punctually on the 1^st day of each calendar month, and if the Tenant was late in paying monthly rent for more than 15 days after the due date during the rent reduction period, the Landlord had the right to cancel the grant of rent concession and the Tenant was obliged to repay the Landlord all the rent previously deducted (“Cancellation and Recoupment Right”).  The 21/1/20 Letter requested the Tenant to acknowledge its confirmation by countersigning it with its company chop and to return the countersigned document on or before 29 January 2020. 

35.On 24 January 2020, the Tenant settled the rental payment for January 2020. 

36.It is the Landlord’s case that the Tenant never accepted its offer of 10% rent reduction.  There is no dispute that the Tenant never countersigned the 21/1/20 Letter.  However, it is the defendants’ case that Maria had accepted the Landlord’s offer orally over a telephone conversation with Mr Ho in mid-late January 2020,^[7] which Mr Ho denied ever took place. 

37.Ms Law says that there is a triable as to whether the Tenant had accepted the Landlord’s offer, which, in law, can be accepted by means other than countersigning the 21/1/20 Letter.  

38.First, Ms Law contends that business men very often continue to negotiate after they appear to have agreed to some terms.  The fact that they did do not affect the existence of the contract between them: Chitty on Contracts, 33^rd Ed §2-028. 

39.Secondly and relatedly, an acceptance that asks for some indulgence to the offeree is still effective so long as it is clear that the offeree is prepared to perform even if the indulgence is not granted: Chitty on Contracts, 33^rd Ed §2-031.  This submission is made by reference to Maria 1^st §8 at which it is stated that the Tenant was of the view that the 10% discount was too low to be of significant help to the Tenant.

40.Thirdly, Ms Law submits that the Landlord’s offer was accepted by conduct, in that the Tenant complied with the Landlord’s condition to settle the rental payment for January 2020 by 24 January 2020. 

41.Although I am prepared to accept that the Landlord’s offer does not necessarily have to be accepted by the Tenant in writing, I am not persuaded by Ms Law for the following reasons. 

42.First, it seems to me quite plain that the Tenant’s case is that it was only prepared to accept an unconditional rent reduction for a six-month period.  This is made clear at Ezra 1^st §37 where it is stated that the Cancellation and Recoupment Right was a mere suggestion. 

43.As is made clear in the various passages in Chitty on Contracts relied on by Ms Law, I am bound to look at the entire course of negotiation between the parties.  It must be remembered that throughout the course of negotiation, the Tenant was constantly late in its rental payment. The language of the 21/1/20 Letter is clear.  The Cancellation and Recoupment Right was clearly expressed to be a condition. 

44.There is simply no evidence adduced on behalf of the defendants that it accepted the Landlord’s Cancellation and Recoupment Right.  Indeed, Maria 1^st §8 does not even refer to the 21/1/20 Letter.  It reads:

“Within the next two weeks [from about 15 January], I spoke with Mr Ho on the confirm their granting of the 10% reduction and thanked them for the grant, but also expressed to him that 10% was too low to be of significant help to [the Tenant]. I was never informed later at any stage that the Landlord decided to revoke the Rental Reduction Agreement.”^[8]

45.Secondly, if the Tenant did indeed accept the Landlord’s offer, there is no explanation for its failure to countersign the 21/1/20 Letter.  Given the importance of the matter, one would have thought that the Tenant would confirm the matter in writing. 

46.Thirdly, as a matter of fact, the Tenant did not comply with the terms of the 21/1/20 Letter as it did not pay the rental payment for February by 1 February 2020.  The defendants only ceased operating at the Premises on 11 February 2020.  Whilst subsequent conduct is generally inadmissible as an aid for construction of a written contract, it is admissible where the contract (as it is on the defendant’s case) is oral or partly oral or to show whether there was a contract and what the terms of the contract were.  

47.Fourthly, as regards the inference to be drawn from the Tenant’s payment of the January 2020 rent by the Landlord’s stipulated date of 24 January 2020, it was equally consistent with the fact that the Tenant did not agree with the Landlord’s offer but was an attempt to obtain its targeted 50% reduction: Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 §§36-38.  As set out above, the Landlord had repeatedly stated that one of the most important factors in considering any rent reduction was the Tenant’s track record.  

48.For the above reasons, I am of the view that the Rent Reduction Ground does not raise a triable issue on the facts.  As such, it is not necessary for me to deal with Mr Hon’s argument that the rent reduction was not supported by any valuable consideration.

D.   Frustration Ground

49.Although the defendants rely on both the social unrest and the COVID-19 pandemic as frustration events, it seems to me that the principal factor must be the latter. 

(1)  As stated at §12 above, the social unrest was already ongoing before the execution of the Tenancy Agreement and the Tenant entered into the same based on its management’s own assessment of the situation.  

(2)  As a matter of chronology, it is the defendants’ case that the social unrest lasted until January 2020 and thereafter the effect of the COVID-19 pandemic took over.  On the defendants’ own case, the Tenancy Agreement was frustrated at the earliest in February 2020: Ezra 1^st §§24, 41 and 52.

(3)  As set out at §28 above, it is the Tenant’s own case that as at 10 December 2019 (ie during the social unrest), it was able to continue its business.  

(4)  In any event, the Tenant had already made rental payments for the period up to January 2020.  

50.As regards the effect of the COVID-19 pandemic, Ms Law relies on (1) tightened border control was implemented between mainland China and Hong Kong and transportation services were suspended between the two since around 30 January 2020, (2) enforcement of a compulsory 14-day quarantine was put in place since 8 February 2020 for visitors arriving in Hong Kong who had travelled to mainland China, (3) between April and August 2020, the Hong Kong Government had imposed further mandatory social distancing measures, which led to the complete closure of beauty parlours for at least 73 days in total and (4) in February, March and April 2020, the total number of visitors arriving in Hong Kong dropped by around 99% compared to the corresponding periods in 2019.

51.Ms Law says that the above not only affected the profitability of the Tenant, but also rendered it physically and commercially impossible to fulfil the Tenancy Agreement.  The situation was unforeseen, as it did not fall within the force majeure clause in the Tenancy Agreement or the abatement of rent clause.  The Tenant was left with no choice because the Tenancy Agreement only allowed the Premises for one purpose (ie a shop for the Brand) and the Tenant was prevented from assigning, subletting or parting with possession of the Premises: Clause 16 of Part V of the Tenancy Agreement.  Ms Law submits (and it is not disputed by Mr Hon) that Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 is an authority for the proposition that the right (or the lack thereof) to assign or sublet by the Tenant is relevant to the doctrine of frustration. 

52.As a result of the above difficulties, the Tenant decided to stop operation on 11 February 2020 for costs control concerns and for the protection of staff members’ health.  Ms Law emphasizes that the identified difficulties were expected to continue for most if not all of the remaining term of the 3-year tenancy period. 

53.Thereafter on 18 March 2020, the Tenant moved away all its good and products stored at the Premises and sought early termination of the Tenancy Agreement on 25 March 2020.  On 8 April 2020, the Tenant removed most if not all of the decorations inside the Premises and the Premises have remained vacant since.  On the following day, the Tenant repeated that it would like to terminate the Tenancy Agreement.  Later on 13 May 2020, the Tenant made enquiries about the hand-over procedures for termination of the Tenancy Agreement.  The Landlord throughout did not accede to the Tenant’s request for early termination.  

54.On the other hand, Mr Hon says that despite the difficulties identified by the Tenant, there had not been any significant change in the nature of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of the execution of the Tenancy Agreement.  Even if the part of the Tenant’s business comprising a beauty parlour had to be closed for 73 days, that duration comprised only 6.7% of the term of the Tenancy Agreement.  Save that period, there was nothing to prevent the Tenant from operating the whole of its business, and the mere fact that the Tenant was put to considerable expense and inconvenience was not enough. 

55.Both counsel rely on National Carriers Ltd v Panalpina (Northern) Limited [1981] AC 675 from which he following propositions may be derived:

(1)  Frustration of a contract takes place when there supervenes as an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from the further performance (at 700F). 

(2)  The matter must be considered as it appeared at the time is alleged to have happened.  Commercial men must be entitled to act on reasonable commercial probabilities at the time when they are called upon to make up their minds (at 706H). 

(3)  Whenever the performance of a contract is interrupted by supervening event, the initial judgment is quantitative – what relation does the likely period of interruption bear to the outstanding period of performance?  This must ultimately be translated into qualitative terms: in the light of the quantitative computation and of all other factors (from which executed performance would not be entirely excluded) would outstanding performance in accordance with the literal terms of the contract differ so significantly from what the parties reasonably contemplated at the time of execution that it would be unjust to insist on compliance with those literal terms (at 707B-D). 

(4)  The doctrine of frustration was developed as an expedient escape from injustice where such would result from enforcement of a contract in its literal terms after a change in circumstances.  It is modern and flexible and is not subject to being constricted arbitrary formula (at 701C-E).^[9]

56.Mr Hon emphasizes, by reference to National Carriers, that whilst the doctrine of frustration is, in principle, applicable to leases, the doctrine would hardly ever be applied to a lease. 

57.National Carriers is itself a summary judgment case, and the House of Lords held against the tenant on the facts, in that a 20-month disruption caused by the closure of the only access road to a warehouse was insufficient, given that the tenant could look forward to enjoyment of the warehouse for about two thirds of the remaining currency of the lease. 

58.At Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 654 §10, Judge Lok (as he then was) said that an event which causes an interruption in the expected use of the premises by the lessee would not frustrate the lease, unless the interruption is expected to last for the unexpired term of the lease, or at least for a long period of that unexpired term.  In that case, the tenant was not allowed to stay in the residential premises for ten days due to an isolation order issued by the Department of Health during SARS to evacuate Block E of Amoy Gardens.  The learned Judge held that out of a term of two years, the isolation order was insignificant in terms of the overall use of the premises. 

59.The Center (76) Limited v Victory Serviced Office (HK) Limited [2020] HKCFI 2881 is a case which deals with the effect of the social unrest and the COVID-19 pandemic.  The defendant rented the premises in question to operate a flexible workspace business.  DHCJ To rejected the defence of frustration.  At §39, he said:

“… While COVID-19 pandemic and the social disruption may be unforeseen at the time of execution of the Tenancy Agreement, none of these has fundamentally or radically changed the nature of the parties’ obligations or otherwise rendered it physically or commercially impossible to fulfil the Tenancy Agreement. The Defendant leased the Premises for the purpose of providing flexible workspace to rent to its customers. Its obligations is to pay rent and observe the covenants terms and conditions of the Tenancy Agreement. There has been no change in the nature of the Defendant’s obligation, though the social disruption and COVID-19 pandemic must have rendered its business operation more onerous and not profitable. The doctrine of frustration is not to be lightly invoked to relieve contracting parties of the normal consequences of imprudent commercial bargain or commercial risk… the Defendant has not produced any evidence to show how long the disruptive events and/or COVID-19 pandemic were expected to last during the unexpired of the tenancy or at least for a long period of that unexpired term. Furthermore, the Defendant’s conduct in holding onto the Premises instead of surrendering them is inconsistent with claim of frustration. Its refusal to deliver up possession of the Premises is evidence of its lack of good faith in this defence. It is in fact trying to hold onto the Premises and generate income without paying rent to the prejudice of the Plaintiff. There is no substance in this defence.”

60.As has been made clear in National Carriers, whether the doctrine of frustration operates is a fact-sensitive issue.  The facts of the present case are distinguishable from those in the cases referred to above, in particular The Center (76) Limited.  Unlike the tenant in The Center (76) Limited, the Tenant here did not hold onto the Premises and did not act inconsistently with its claim of frustration. 

61.Despite the force of Ms Law’s submissions, I am not persuaded that the Tenant has raised a triable issue by reason of the Frustration Ground. 

62.As submitted by Mr Hon, and consistent with DHCJ To’s observations in The Center (76) Limited, I am unable to see how the COVID-19 pandemic (or the social unrest) had fundamentally changed the nature of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of the execution of the Tenancy Agreement.  As provided in the Tenancy Agreement, the intention of the parties was for the Tenant to operate a retail shop for the Brand.  There was no restriction preventing the Tenant from doing just that, and any mandatory closure of the beauty parlour portion of the Tenant’s business did not affect the Tenant’s ability to operate a retail outlet or a hair salon.  In any event, the mandatory closure of beauty parlours only lasted 73 days (between 10 April and 7 May 2020 and then between 15 July to 27 August 2020), and the Tenant was and is not prevented from operating a beauty parlour for a significant portion of the remainder of the lease term (from 28 August 2020 to 25 August 2022).  

63.I have not overlooked Ms Law’s reliance on the drastic drop in tourist traffic, but as point out at §22 above, the Tenant has not adduced any or any sufficient evidence to support its professed heavy reliance on tourists from mainland China and overseas.  

64.For the above reasons, I do not believe that the defendants have raised a triable issue by reason of the Frustration Ground. 

E.    Mitigation Ground

65.Ms Law says that the Landlord should have mitigated its loss by seeking an alternative tenant.  On the evidence, the Landlord only attempted to arrange a viewing in around April or May 2020 (which was cancelled by the prospective tenant) and then did nothing until October 2020 and has unreasonably left the Premises vacant to date.  She says that there is a triable issue that the Landlord should not be allowed to recover any losses that it could have avoided, being the rent for the period from February 2020 (or at least from April 2020) to date (or at least until October 2020). 

66.Conversely, Mr Hon submits that the Landlord has not accepted the Tenant’s repudiation and the duty to mitigate does not arise until the Tenancy Agreement is terminated.  As I understand Mr Hon, he takes the position that the Landlord can continue to elect to keep the Tenancy Agreement alive, despite the Tenant’s continued failure to honour its payment obligations. 

67.Windsor House Limited v Legend Glory Corporation Limited & Anor [2019] HKCFI 194 is an authority for the proposition that an aggrieved landlord is entitled for damages for wrongful repudiation of a tenancy agreement, such damages as reflecting the rental, service charges, rates and reinstatement cost stipulated in the tenancy and therefore payable if the agreement is permitted to run its full course, subject always to a duty to minimize loss: §12. 

68.If a landlord, as here, does not terminate the lease, the position is less clear.  As set out at McGregor on Damages, 21^st Ed §9-030:

“[In Reichman v Beveridge [2007] 1 P&CR 20] the defendant solicitors leased premises from the claimant for a five-year term. After three years the solicitors ceased practice and upon so doing ceased paying rent. A year later the claimants, not having forfeited the lease or instructed agent to market the premises, sued successfully for the rent, now in arrears. The Court of Appeal held that to resist the claim the defendant would have to show that it was wholly unreasonable for the claimants to elect to keep the contract alive and that damages would be an adequate remedy, or that the claimants had no legitimate reason for making such an election. The defendants had not so shown; the court’s reasons for this conclusion are well set out in the concluding section of Lloyd LJ’s single judgment. One unusual, and clearly important factor in the case was the rather odd uncertainty, in the absence of decisions, whether lessors could recover damages for the loss of future rent if they terminated.”

69.At Reichman §§39-42, Lloyd LJ said:

“39. Mr Gauntlett urges on us a modern approach to the relationship between landlord and tenant, focusing on principles of contract law, and a policy approach which would not leave premises empty, after the tenants had abandoned them and while the landlord waited for the end of the lease, so as to avoid the waste of useful space and to ensure that the property is put to beneficial use…

40. Leaving aside policy issues of that kind, it seems to me that Mr Gauntlett’s submission failed to take account of the present state of English law as to the consequences of the premature termination of the tenancy, or of the very limited scope for the intervention of equity as explained in White & Carter and subsequent cases. Having regard to the way in which that has been explored and explained in the cases… it seems to me impossible to say that a tenant could successfully invoke equity in that way... Secondly, if it be the case that in 2003 the market rent was lower than that reserved by the lease, damages would not be an adequate remedy for the landlord if they terminated the lease by way of forfeiture and then relet at a lower rent, because under English law as it stands they could not recover damages to compensate for the loss of rent…

41. It is also to be noted that it is for the party in breach to establish that the innocent party’s conduct is wholly unreasonable and that damages would be an adequate remedy. Mr Gauntlett’s position seems to be that any landlord, knowing that the tenants have abandoned the premises, ought to take the steps to relet, and therefore to terminate the tenancy and look to the tenant for damages to cover any resulting loss. It does not seem to me that this could be right. They cannot follow from Lord Reid said in White & Carter. It is clear from that and the later cases that it would be extremely rare for this principal to apply, whereas Mr Gauntlett seeks to apply it to what must be a very common set of circumstances.

42. … I have come to the same conclusion as each of them did, namely that, on the present state of English law, the contention which Mr. Gauntlett wishes to advance by way of defence on quantum is not open to him.  I do not decide whether or not repudiation plays any, and if so what, part in the English law of landlord and tenant… There is, however, no case in English law that shows that the landlord can recover damages from a former tenant the respect of loss of future rent after termination, and there is at least one case which decides that he cannot. In those circumstances, either damages are not an adequate remedy for the landlord or at least the landlord will be acting reasonably in taking the view that he should not terminate the lease because he may well not be able to recover such damages…”

70.Reichman is discussed in Hong Kong Tenancy Law, 6^th Ed, Malcolm Merry at page 201:

“For a long time it was thought that the ordinary principles of repudiatory breach did not apply to leases. However, the better view, which is now firmly accepted in Hong Kong, is that a tenant repudiation (or renunciation) of the lease during its term may be accepted by the landlord. The effect of such an acceptance is that the lease ends immediately and the landlord loses the right to sue for rent but may sue for damages instead.

… Under the traditional approach, a landlord was faced with a tenant determined to abandon the premises either accepted the situation (in which case there would probably be a surrender of the tenancy) or stoically refused to compromise and insisted on the continued payment of rent. Often, for fear that compromise might be construed as consent to abandonment, the landlord would refuse to accept back the keys or try to re-let the premises. The traditional view… was reasserted by the Court of Appeal in England in 1972 and even [in Reichman] in 2007 that court was not prepared to accept that the principle no longer applied, although the attitude has recently been more receptive.

However, the Supreme Court of Canada came to a different conclusion [and held] that a landlord who had elected to treat a lease as terminated by repudiation was not prevented from seeking damages for the breach. This has been followed in Hong Kong decisions. Therefore, a “halfway-house” solution is available: the landlord can make it clear that he does not approve of the tenant abandonment of the premises and failure to pay rent, accept the breach as a repudiation of the tenancy agreement and attempt to find a substitute tenant. The attempt to re-let is not a sign of weakness or consent to the tenant’s acts: it is merely a discharge of the landlord’s obligation to mitigate his loss. The landlord cannot sue for arrears of rent, since the lease is dead, but he is entitled to damages which will usually be the difference between the old rent paid by the tenant and the new rent (if lower) paid by the substitute…”

71.The Landlord’s summons seeks final judgment which I understand to be a claim under the Tenancy Agreement (for its entire term) and not for damages to be assessed (ie relief (e) pleaded in the Statement of Claim).  There is in any event no plea that the Landlord had accepted the Tenant’s repudiation of the Tenancy Agreement before the issuance of the writ. 

72.It is therefore the case that the Landlord insists on what has been described as the traditional approach above.  Although not cited by Mr Hon, Reichman appears to encapsulate the effect of his submissions.  It seems to me that, in the light of the development in Hong Kong since Reichman set out above, there is a triable issue as to whether the Landlord ought to have, as Ms Law submits, accepted “early termination” of the Tenancy Agreement.  In any event, Reichman was considered by the Court of Appeal in Funfair Company Limited v Wong Lui Wing t/a Kwong Wing Metal Company, CACV 441 of 2006, 10 July 2007 and Tang VP (as he then was) at §20 specifically left open the issue of whether mitigation applies even in the traditional approach. 

F.    Conclusion

73.I do not believe that a triable issue has been raised by reason of the Pre-Contractual Negotiations Ground and the Frustration Ground.  Neither party has made detailed submissions on the legal position of the Failure to Mitigate Ground.  On the present material, Mr Hon has not persuaded me that the Failure to Mitigate Ground raised by the defendants ought to be rejected summarily.  I will therefore grant the defendants unconditional leave to defend.  In so far as necessary, I also rely on the limb that there are some other reasons for trial. 

74.However, I will accede to the Landlord’s application for interim payment in the sum of HK$493,893.96 being 50% of the principal sum of HK$987,787.91 (representing 50% outstanding sums due under the Tenancy Agreement for February to 20 May 2020).  As the Tenant only vacated the Premises on 8 April 2020, if the action proceeded to trial, it seems to me that the Landlord would obtain a judgment for a substantial sum (as rent or mesne profits even if mitigation were to be applicable).  I also take into account that it is the defendants’ own case that the location at which the Premises are located were affected by adverse events at the material time and the Landlord’s ability to secure an alternative tenant in mitigation would likely have been affected.  

75.Although Ms Law submits that I should give regard to the fact that the Landlord now holds a deposit equivalent to 3-months’ rent (ie HK$780,000) in considering whether to order interim payment, she has not dealt with Part IX of the Tenancy Agreement which makes provision to allow the Landlord to forfeit the Deposit as liquidated damages in the event of the Tenant’s breach of the Tenancy Agreement. 

76.I will therefore make the following orders in respect of the Landlord’s summons:

(1)  The defendants be granted unconditional leave to defend the plaintiff’s claim;

(2)  The defendants do pay to the plaintiff a sum of HK$493,893.96 by way of interim payment within 21 days;

(3)  The plaintiff do file its Reply (if so advised) within 21 days.

77.In view of relative success of the parties, I make a costs order nisi that the plaintiff is to be paid 70% of the costs of and occasioned by its summons to be summarily assessed, and the remainder to be in the cause, with a certificate for counsel.  The plaintiff is to lodge its skeleton bill of costs within 7 days and the defendants their list of objection within 3 days thereafter and I will deal with the assessment on paper. 

78.I thank counsel for their helpful assistance. 

Mr Kevin Hon, instructed by Sidney Lee & Co, for the Plaintiff

Ms Jacqueline Lew, instructed by C W Chan & Co, for the 1^st Defendant and 2^nd Defendant