Vember Lord Ltd v. The Swatch Group (Hong Kong) Ltd

HCA 1113/2020
& HCA 1114/2020
(Heard Together)

[2022] HKCFI 279

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 1113 & 1114 OF 2020

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Before:  Deputy High Court Judge Le Pichon in Chambers

Date of Hearing:  4 January 2022

Date of Decision:  20 January 2022

______________________

DECISION

______________________

1.The Swatch Group (Hong Kong) Limited (“the defendant”) is the lessee of (a) Shop G1 and (b) Shops G3-G5 in China Building, Central (collectively “the Shops”), under tenancy agreements (“the agreements”) with Vember Lord Limited (“the plaintiff”) for a term of 3 years commencing 16 June 2018 for Shop G1 and 4 January 2019 for Shops G3-G5 for the sole purpose of operating two retail shops under the brand names of “Swatch” and “Blancpain”.

2.The defendant operated the Shops until 18 June 2020 and returned vacant possession to the plaintiff on 31 July 2020.

3.The plaintiff commenced HCA 1113/2020 in respect of Shop G1 and HCA 1114/2020 in respect of Shops G3-G5 (respectively “HCA 1113” and “HCA 1114”) for arrears of rent and other charges payable under the agreements as well as for damages for breach of the same.

4.The plaintiff obtained summary judgment from Master Rebecca Lee on 23 June 2021:

(a)  for HCA 1113, the sum of $2,009,222 and damages to be assessed; and

(b)  for HCA 1114, the sum of $2,658,878, rent or mesne profits, management fees, air-conditioning charges, extra air-conditioning charges, and damages to be assessed.

5.These are appeals by the defendant. At the conclusion of the hearing, the decision was reserved which I now give.

Background

6.The parties and the nature of the issues in dispute in both actions are the same.

7.The rent payable for Shop G1 comprised a basic rent of $1.35 million per month and a turnover rent being the amount by which 15% of the gross turnover for each calendar month during the term exceeds the basic rent for that calendar month. The rent for Shops G3-G5 was $1.8 million per month.

8.Commencing December 2019, without seeking the consent of the plaintiff, the defendant unilaterally began paying sums equivalent to only 70% of the monthly rent payable under the agreements.

9.According to the defendant[1], it was made known to the plaintiff by letter dated 2 April 2020[2] from the defendant’s solicitors, King & Wood Mallesons (“K&WM”) that the payments made by the defendant as from December 2019 reflected payments of 70% of the monthly rent payable under the agreements.

10.The defendant asserted that the abatement of rent clause contained in Section VII of the agreements had been triggered for the reasons set out in §16 below.

11.The defendant further asserted that the percentage of 70% was more than a fair proportion of the rent as required under Section VII but no explanation as to the basis for the 30% reduction was given.

12.The plaintiff did not accept that the matters the defendant relied on triggered the abatement of rent clause.

13.Thereafter the following events occurred:

(i)  on 28 April 2020, the defendant was given notice that if it failed to pay rent and other charges outstanding, the supply of air-conditioning services to the premises would be discontinued on 7 May 2020;

(ii)  on 7 May 2020, air-conditioning services to the premises were discontinued;

(iii)  on 13 May 2020 the defendant’s solicitors, K&WM alleged that the plaintiff was in breach of clause 4 (a) of Section IV of the agreements by discontinuing air-conditioning services causing the defendant loss and damage as a result of which the defendant would only pay 50% of the rent from June 2020 onwards;

(iv)  the plaintiff commenced distraint proceedings on 29 May 2020 for arrears due under the agreements and, upon execution of the warrants of distress on 18 June 2020, the defendant paid the sums payable thereunder; ceased to conduct business at the Shops and started demolition works; and

(v)  on 31 July 2020, on completion of the demolition works, the defendant returned the keys of the Shops to the plaintiff.

14.It is to be noted that the defendant continued to operate the Shops without interruption until the warrants of distress were executed by the bailiff on 18 June 2020. There is no evidence that the Shops were subject to any mandatory closure order at any time during the respective terms.

THE ISSUES

15.The issues are whether the wholly unprecedented social unrest from June 2019 to 2020 and Covid-19 pandemic from January 2020 to date:

(A)  engaged the abatement of rent clause; and further or alternatively,

(B)  caused the agreements to be frustrated as a matter of law.

A. The abatement of rent clause (“the provision”)

16.The provision in each agreement is identical. For convenience, the provisions and agreements will hereafter be referred to in the singular. The provision reads as follows:

“SECTION VII

ABATEMENT OF RENT

If the Premises or any part thereof shall be rendered [1][3] unfit for use or inaccessible by fire, typhoon, act of God, force majeure or any other cause beyond the control of the Landlord (other than on account of the Tenant’s act neglect or default) and the policy or policies of insurance effected by the Landlord shall not have been vitiated or payment of the policy monies refused in whole or in part in consequence of any act or default of the Tenant or [2] if the Premises shall be condemned as a dangerous structure or [3] a demolition order or closing order shall become operative in respect of the Premises then the Rent or a fair proportion thereof according to the nature and extent of the damage sustained or order made (the determination of which by the Landlord shall be final and conclusive and be binding on the Tenant) shall, after the expiration of the then current month, abate and cease to be payable until the same shall have been again rendered fit for use and accessible PROVIDED …”

17.Mr Bernard Man SC, leading counsel for the defendant, submitted that the provision had been triggered by reason of extraordinary circumstances including the effects of the unprecedented social unrest from June 2019 to 2020 (“social unrest”) and the Covid-19 pandemic from 2020 to date (“the pandemic”), with associated travel restrictions and public health measures (“Government measures”) (collectively “the extraordinary circumstances”).

18.Turning to the language used in the provision, Mr Man highlighted the fact that unlike “standard” abatement clauses where the keywords are “damaged or destroyed” (thus confining the clause to occasions of physical damage), the operative conditions in the present case are different.

19.The provision was said to be “unique” and, on proper construction, it is engaged if the Shops are rendered (i) unfit for use or inaccessible (ii) by any cause beyond the plaintiff’s control, those being the operative conditions and no physical damage or destruction is required.

20.As stated in Hong Kong Tenancy Law 6^th edition at 104:

“It is not unusual to find a clause in the lease suspending or abating payment of rent in the case of destruction of or damage to the premises by a variety of calamities including fire, landslide, flood and typhoon ...

The standard sort of clause...[4] also applies where the premises are rendered inaccessible by the calamity. In addition, it may extend to cases of orders for closure of the building and the like by the Building Authority.”

21.The Appendix to Hong Kong Tenancy Law provides examples of leases. A rent suspension clause can be found in Examples 2 and 3 from which the following provisions are extracted:

“In the event of the said Premises or any part thereof being damaged or destroyed by reason of fire typhoon earthquake or white ants or subsidence or any cause for which the Tenant shall not be responsible …[5]”; and

“If the said premises or any part thereof shall be destroyed or so damaged or shall be rendered inaccessible or unfit for use and occupation by fire, typhoon, act of God, force majeure or any other cause beyond the control of the Landlord and not attributable directly or indirectly to any act or default of the Tenant ...[6]”.

22.It is apparent from the wording used in Example 3 that there is but a slight difference in phraseology with the provision under consideration in that the words “destroyed or so damaged” have been omitted. Whether or not such an omission renders the agreements atypical or non-standard is perhaps debatable. Clearly, it is the proper construction of the provision that matters.

23.A useful reminder of the correct approach to be adopted to the interpretation of contractual provisions can be found in Arnold v Britton [2015] AC 1619 at §§14-23 where Lord Neuberger emphasised 7 factors. For present purposes, it suffices to refer to the 1^st and 3^rd factors, namely, the importance of the language of the provision and that commercial common sense is not to be invoked retrospectively as it is relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.

24.The defendant’s case on construction is along the following lines:

(1)  physical damage is not a requirement because the operative conditions are not “damage or destruction” invariably found in the usual or standard rent abatement clause;

(2)  the extraordinary circumstances which caused the premises to be “unfit for use or inaccessible” are matters beyond the landlord’s control;

(3)  “damage” covers pure economic loss.

25.The defendant’s construction largely focuses on the first of the 3 classes[7] or categories that can trigger the provision. Its starting point is that the requirement that the premises be rendered “unfit for use or inaccessible” is not constrained or qualified by “damage or destruction”. The need to show physical damage thus became a major bone of contention.

26.The Shops are said to be commercial retail premises in prime areas, selling high-end[8] luxury products. The defendant submitted that the court should bear in mind the contractual context in interpreting the provision, including the following[9]:

(a)  its purpose is essentially to relieve the tenant of the burden of paying rent in circumstances where the tenant is unable to use the premises due to some event or circumstance that is beyond either party’s control;

(b)  the circumstances justifying relief would depend in large part on the purpose and intended use of the premises which was within the contemplation of the parties at the time they entered into the agreement;

(c)  the parties “understood and contemplated” that the premises would benefit from significant numbers of international customers and customers from mainland China when they entered into the agreement; the rent was negotiated and agreed on the basis that there would be significant numbers of such customers during the term and that the high rent would be viable only if the defendant benefited from the constant inflow of customers from abroad and mainland China[10];

(d)  where events or circumstances occurred which were outside the contemplation of the parties and which fundamentally undermined the aforesaid understanding between them, the parties would not have intended the tenant to be left without any form of rent relief as this would undermine the entire basis and the viability of the agreement.

27.In his affirmation dated 17 November 2020 (“the defendant’s affirmation”), Mr Stephen DeLucchi, a Country Manager of the defendant stated (at §28) that:

“... at the time the parties entered into the Agreement, they contemplated that the Premises would benefit from significant numbers of international customers and customers from Mainland China. The commercial terms of the Agreement, in particular the amount of rent to be paid, were negotiated and agreed by the parties on the basis that there would be significant numbers of international and Mainland China visitors coming to Hong Kong during the term of the Agreement ...”

He then made an express reference to the fact that the amount of rent (for Shop G1) was partially dependent on gross turnover[11], implicitly suggesting that the rent was partially premised on there being significant “foreign tourist footfall”.

28.At the hearing, in response to the court’s inquiry as to whether it is the defendant’s case that there had been express discussions between the representatives of the parties to found the allegation of “understanding and contemplation” at the time the agreement was negotiated, Mr Man acknowledged and accepted that there is no evidence of any such discussion between the parties.

29.In the circumstances, the alleged common understanding and contemplation of the parties has no evidential basis and is simply irrelevant in ascertaining the intended use of the Shops.

30.As the plaintiff submitted, there is no connection between the number of tourists and/or visitors and the fitness of the Shops for use and accessibility. That the former would have an impact on the defendant’s business carried on in the Shops does not and cannot render the Shops unfit for use or inaccessible.

31.The defendant’s affirmation related in considerable detail the extraordinary circumstances resulting in a substantial drop in the number of tourists and visitors to Hong Kong and a substantial fall in its sales.

32.However, there were no mandatory closure orders in respect of the Shops (or the building in which they are situated) imposed by the Government. Indeed, the defendant was able and willing to carry on business even after the outbreak of social unrest in June 2019 and the pandemic in early 2020. Even in mid-May 2020[12] it evinced a willingness to carry on its business operations[13] albeit at a reduced rent.

33.Insofar as the defendant has experienced a substantial fall in sales, that does not automatically translate into an operating loss. In any event, there is no evidence that the defendant was operating at a loss prior to vacating the premises. It may well be that the business was less profitable but that is another matter.

34.Mr C Y Li SC, leading counsel for the plaintiff, disagreed with the defendant’s construction. He referred to Bank of New York Mellon (International) Limited v Cine-UK Ltd [2021] EWHC 1013 (QB), a case concerning, inter alia, a long lease of a cinema. The landlord sought summary judgment for non-payment of rent which had fallen due during the pandemic. One of the issues was whether the rent cesser clause in that case only operates where there is physical damage.

35.The language of the rent cesser clause was as follows:

“In case the Property ... shall at any time during the Term be destroyed or damaged by any of the Insured Risks so as to render the Property unfit for occupation or use ...” (emphasis added)

36.The rival contentions are set out in §§116-119 and the reasons for finding for the landlord appear from the following extract from the judgment of Master Dagnall:

“127. Thus, in terms of the competing iterations of construction of the Rent Cesser clauses and, in particular:

a. In relation to the Tenant’s construction that they are triggered by non-physical disadvantage to the Premises (said to result in the Premises being “damaged”):

i. That is not the natural meaning of the words either on their own or in context, and involves a breach of the consistency principle

ii. They are consistent with a possible commercial purpose but do not represent the main thrust of the provisions

iii. They are not required to protect the Tenant in a commercial sense, in that alternative protections by way of turnover BII policies were always potentially available

iv. They are somewhat novel in that it has not been suggested previously that these standard-form clauses can be triggered by purely non-physical matters

b. In relation to the Landlord’s construction that they are only triggered by physical damage to or destruction of the relevant Premises:

i. This is the ordinary meaning of the words used both on their own and in context and accords with the consistency principle

ii. They are consistent with a possible commercial purpose. Although it can be argued that there are possible anomalies it is, at worst, unclear that they are really anomalies

iii. They are consistent with the general thrust of these provisions which are to deal with the “bricks and mortar” and “property owner” aspects of the matter where the Landlord and Tenant interests combine and align.”

37.The defendant dismissed the relevance of that case based on the fact that the operative condition there was “destroyed or damaged”. However, its relevance is in the context of whether the parties contemplated the provision to cover pure economic loss.

38.In the present case, the provision (read in its entirety) envisages 3 main groups or categories of specific instances affecting the premises that would engage its operation, namely, when the premises [1][14] are rendered unfit or inaccessible … or [2] condemned as a dangerous structure or [3] a demolition/closing order becoming operative. Once any of those 3 groups applies, the rent or a fair proportion thereof abates until the same shall have been again rendered fit for use and accessible. There followed an agreed abatement procedure and a proviso enabling either party to terminate the agreement in prescribed circumstances.

39.The subject matter of the provision is the ‘premises’. The expression “rendered unfit for use or inaccessible” was followed by specific instances envisaged as falling within that expression. The real question for determination is not whether physical damage must be shown but whether the defendant is able to show that the extraordinary circumstances upon which it relies trigger one of the specific instances.

40.As I understand it, it is not the defendant’s case that it is invoking force majeure (one of the specific instances) but the concluding specific instance, namely, “any other cause beyond the control of the Landlord” considered in §§48-52 below. For present purposes, whether physical damage is a necessary element of force majeure and whether according to the defendant there are 2 concepts associated with that expression are not relevant considerations.

41.A more pertinent question is whether, on its proper construction, the provision extends to and encompasses pure economic loss suffered by the defendant.

42.In the event of the provision being triggered, the rent or a fair proportion thereof shall abate and cease to be payable after the expiration of the then current month until the premises shall have been again rendered fit for use and access. The extent of the abatement is to be determined by the landlord, such determination (being final and conclusive and binding on the tenant) must accord with the nature and extent of the damage sustained or order made[15].

43.Where the damage sustained is pure economic loss on the part of the tenant, it is not evident how that part of the provision can work in practice. Where the damage sustained has a connection with the premises (described as the “bricks and mortar” and “property owner” aspects in the Bank of New York Mellon case), it is likely to be a matter readily within the purview of the landlord and amenable to a determination or assessment.

44.It is worth remarking that in December 2019 the defendant, unilaterally, arrogated to itself the right (which under the terms of the provision was accorded to the plaintiff) to make a determination of the rate of rent abatement without as much as requesting the plaintiff to do so or informing the plaintiff of such abatement until April 2020.

45.A landlord is not privy and has no access to financial information of the tenant’s business conducted at the premises, specifically its profitability. Such information is necessarily sensitive and confidential. If (as appears to be the effect of the defendant’s interpretation of the provision) pure economic loss was within the parties’ contemplation, one would expect the provision to contain some workable mechanism enabling the landlord to make that determination. It is telling that there is none.

46.It is difficult to see how the landlord can be expected to make a determination of the extent of the damage to the tenant in the form of a business downturn said to result from a drop of overseas visitors when such determination must accord with the extent of the damage.

47.In my view, the impossibility or difficulty of practical application of this part of the provision is a good indicator of the viability or otherwise of the construction put forward.

48.Turning to the expression “any other cause beyond the Landlord’s control”, a similar provision[16] was considered in Tandrin Aviation Holdings Limited v Aero Toy Store LLC [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 668.

49.Hamblen J held (at §46) that

“(a)The expression “any other cause beyond the Seller’s reasonable control” cannot sensibly be construed to include matters with which the seller was never expected to be concerned …

(b)Instead, the expression “any other cause beyond the Seller’s reasonable control” should be construed to comprise only those matters which have some connection with the seller’s obligations under the agreement and/or with which the seller would have been expected to be concerned …

(c)To construe the clause as if it were worded “any other cause beyond the Purchaser’s control”, or “any other cause beyond either party’s control”, would be wrong because:

(a)it would give no meaning to the words “the seller’s”;

(b)it would fundamentally change the meaning of the phrase.

(d)[17] If the clause were to be construed as [the purchaser] contends, i.e. as if it applied to matters over which the seller could never be expected to have any influence, it would have an unacceptably wide ambit.

(e)if, as [the purchaser] contends, it is entitled to rely on force majeure events beyond the seller’s rather than [the purchaser’s] control, it would mean that it could rely on force majeure events which were not beyond its control, which would be an absurdity.”

50.The nature and purpose of the agreement was nothing more than the letting and taking of the premises[18]. It was not a joint venture to carry on a specific business. The plaintiff’s obligations under the agreement are those typically given by the landlord such as quiet enjoyment, ensuring the structural parts and main drains are in good condition, the provision of specified services, proper maintenance of air-conditioning and water sprinkler systems relating to air-conditioning. None of its obligations is out of the ordinary.

51.The extraordinary circumstances upon which the defendant relies as falling within that expression are matters that are beyond the control of both parties[19] and not only of the plaintiff. Applying the reasoning in Tandrin, it is not evident how it can be said that the expression “any other cause …” was triggered.

52.Although the defendant suggested that applying the Tandrin approach would lead to an absurd result, there was no elaboration as to why that would be so.

53.In my view, when construing the provision, one should have regard to its entirety and how it is structured. The plaintiff submitted that all 3 categories contemplated physical damage. The defendant disagreed, submitting that “a closing order” is not something which necessarily arises out of dangerous structures and gave the example of such an order being imposed following a conviction of operating a vice establishment.

54.It is unclear how that example assists in the construction exercise. Were such a closing order imposed on the premises, inability to use would have been caused by the tenant’s own breach of its covenant to operate a luxury retail shop for watches.

55.Looking at the structure of the provision, a common thread running through the entire provision is that the triggering event is something that affects the premises themselves, impinging on their use and/or accessibility. It is in that context that the “bricks and mortar” and “property owner” aspects mentioned in the Bank of New York Mellon case are apposite.

56.Financial Conduct Authority v Arch Insurance (UK) Limited and others [2021] AC 649 (“the FCA case”) involved consideration by the Supreme Court of “inability to use” and “prevention of access” clauses in insurance policies which provided cover for business interruption losses resulting therefrom due to restrictions imposed by a public authority. It held that an inability of use has to be established; not an impairment or hindrance in use. The requirement is satisfied either if the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities. In both those situations there is a complete inability of use.

57.An example considered in the FCA case was the closure of a bookshop which catered for walk-in customers (representing 80% of its income) as well as to customers who ordered online or by telephone. In that example, one can readily see that selling books to walk-in customers was a discrete business activity.

58.The defendant suggested that the extraordinary circumstances resulted in an inability to use the premises to serve a discrete part of its business activities, namely, selling to overseas visitors and tourists. However, there is simply no evidence to show that its business was divided into discrete sectors, one serving overseas visitors and tourists and the other local clientele or that part of the premises was used exclusively to cater to its overseas visitors and tourists. That was never the defendant’s case.

59.The defendant also submitted that by virtue of the fact that the provision envisaged a ‘sliding scale possibility’, the parties must have contemplated that it could be engaged even if there is no total annihilation of suitability or removal of utility. On that basis, it was contended that the provision was not a force majeure clause.

60.But, as Mr Li observed, force majeure is a description of the type of clause that excuses or suspends performance or contractual obligations on the occurrence of a specified event: see Lewison, The Interpretation of Contracts, 7^th edition at §13.01. Further, such clauses “invoked to remove or modify obligations of performance ought at least in general to receive a strict construction”: per Bokhary and Chan PJJ in Goldlion Properties Ltd v Regent National Enterprises Limited (2009) 12 HKCFAR 512 at §6.

61.The plaintiff submitted that the extraordinary circumstances merely caused some hindrance to the defendant’s operation of its business and they do not equate to unfitness for use or inaccessibility. It is clear from the FCA case (at §§144 and 151) that it must be an inability of use or of access rather than hindrance or disruption.

62.In that connection, it is to be noted that at the hearing the defendant considered that it was on stronger ground on the “unfit for use” (as distinct from the “inaccessible”) part of the 1^st operative condition. For the reasons explained, the defendant has not adduced evidence in support of a case based on unfitness for use.

63.It should be mentioned that the defendant sought to rely on Star Win Enterprises Ltd v The One Property Ltd [2021] HKDC 922 in support of its submission that summary judgment in a case such as the present is not appropriate. Star Win also concerned the construction of rent abatement clause similar to the provision. The judge decided that the court should make a ruling only after it has heard all the evidence and refused summary judgment.

64.However, that case was not an application by the landlord for summary judgment but an application by the tenant who failed to establish the requisite factual matrix in support of its case which is very different.

Conclusion

65.In my view, for the reasons stated above, the defendant has failed to show that it has an arguable defence for abatement of rent based on the provision.

B. Frustration

66.The defendant’s alternative case is that the extraordinary circumstances caused the agreement to be frustrated by 18 June 2020.

67.It is common ground that the application of the doctrine of frustration requires a “multi-factorial approach”: see per Rix LJ in The Sea Angel [2007] 2 All ER Comm 634 at §111.

68.The defendants submitted, inter alia, that

(1)  the doctrine of frustration can apply to leases; National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675;

(2)  frustration takes place where there supervenes an event which so significantly changes the nature of the outstanding contractual rights and/or what obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of the stipulations in the new circumstances: National Carriers;

(3)  the contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transformed the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract: Tak Shing Investment;

(4)  the question is whether performance was “fundamentally different in a commercial sense”: Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, 119, Chitty on Contracts (34^th ed) §§26-001 and 26-014;

(5)  the consequence of frustration is that the contract is discharged automatically: National Carriers at 712G;

(6)  frustration of purpose occurs when there is no physical destruction of the subject matter of the contract but its “commercial purpose” has been frustrated: Krell v Henry [1903] 2 KB 740; Chitty, §26-033.

69.The thrust of the defendant’s case is that there was a shared common (commercial) purpose between the parties that the premises would be operated as luxury retail stores for watches. That common purpose was said to have been frustrated by the extraordinary circumstances.

70.Pausing here, it is to be noted that a key component of the contextual background giving rise to that common purpose, namely, the alleged “understanding and contemplation” of the parties at the time of the agreement considered in §§28-29 above, has no evidential basis.

71.Be that as it may, it was contended that the shared common purpose is to be inferred from the positive provision as to use contained in §1 of section III[20] of the agreement and that the user restriction gives rise to a common purpose. The defendant sought to distinguish Canary Wharf (BP 4) T1 Limited v European Medicines Agency [2019] L&TR 14 (where (at §244) the court found no common purpose beyond the purpose to be derived from a construction of the lease, confirmed by the negative provision regarding user[21] with no positive provision as to use) because of the positive provision as to use.

72.Assuming that the shared common purpose was that the premises would be operated as luxury retail stores for watches, there was nothing that prevented their operation beyond 18 June 2020. The real complaint is discernible from §59.4 of the defendant’s submissions where it is stated that: such stores “would only be viable if the premises benefited from a steady stream of high-spending customers and visitors, in particular those from Mainland China and also from abroad” (emphasis added).

73.In other words, the defendant is really complaining about the adverse impact of the extraordinary circumstances on the ‘profitability’ of its business operations. But “the mere incidence of expense or delay or onerousness” is “not sufficient[22]” for invoking the doctrine. It is a complaint that it “had made what was, in retrospect, a bad bargain[23]”.

74.In so far as it is suggested that the shared common purpose was frustrated in the Krell v Henry[24] sense, that cannot be correct. In that case, the taking place of the coronation processions on the days originally fixed was regarded by both contracting parties as the foundation of the contract. That was the common purpose. Here, there is no evidence that carrying out the common purpose (whether (as is my view) the letting and taking of the premises or for the Shops used as luxury retail shops for watches) was rendered impossible.

75.The extraordinary circumstances have been relied on unsuccessfully by tenants in recent cases: see The Centre (76) Limited v Victory Serviced Office (HK) Ltd [2020] HKCFI 2881 (where it was held (at §39) that the nature of the tenant’s obligation (to pay rent and observe the terms of the lease) had not changed though the extraordinary circumstances must have rendered its business operations more onerous and unprofitable); Holdwin Limited v Prince Jewellery and Watch Company Limited [2021] HKCFI 2735 at §§33-35; and Sunbroad Holdings Limited v A80 Paris HK Limited [2021] 5 HKC 394.

76.Turning to the frustration of leases, while the doctrine is in principle applicable to leases, the cases to which it could properly be applied must be extremely rare[25]. In his speech, Lord Hailsham remarked that he was “struck by the fact that there appears to be no reported English case where a lease has ever been held to have been frustrated[26]”. That remains the current position.

77.Although the defendant considered that there are at least 2 instances of frustration affecting land, one of the cases, UMNV 205-207 Newbury LLC v Caffe Nero Americas Inc (Mass. Sup. Court, February 8, 2021, 284CV01493-BLS2) (the “Caffe Nero” case) is a US decision (see §§84-86 below). The other (Krell v Henry) “was not a demise of the rooms, or even an agreement to let and take the rooms. It is a licence to use the rooms for a particular purpose and none other[27]”.

78.In response to the Court’s question as to the date of the supervening event giving rise to frustration, the defendant’s stance was that it is sufficient for its case that frustration had occurred by 18 June 2020. It would appear that reliance was upon the ‘continuum’ of events, commencing in June 2019 with social unrest and overlapping with the pandemic which commenced in early 2020.

79.When frustration occurs, typically there would be a supervening event transforming the obligation to perform into a radically different obligation from that undertaken at the time of entry into the contract, a ‘there and then’ situation. Where, as here, it is a ‘wait and see’ situation, the approach to be adopted is that set out in The Sea Angel at §120[28].

80.The doctrine of frustration only applies if the obligations are ‘radically different’. Rix LJ explained the importance of that test (at §111):

“In such circumstances, the test of ‘radically different’ is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”

81.The obligation of the plaintiff as landlord was to make the Shops available for use and the defendant’s obligation as tenant was to pay the rent due. As earlier noted, despite the extraordinary circumstances having commenced in June 2019, the defendant was able to and did continue to operate its business. Indeed, even in mid-May 2020 the defendant evinced every intention of continuing its business, albeit at a reduced rent of 50%[29].

82.“Commercially or fundamentally different” was not a legal test laid down in Tsakiroglou but a finding of fact by the appeal board[30] in arbitration proceedings before the matter was litigated in court. It cannot advance the defendant’s case.

83.In those circumstances, it is inconceivable that the defendant has any prospect of satisfying the ‘radically different’ test.

84.I now turn to consider the Caffe Nero case which the defendant considered to be an a fortiori case. That case concerned a 15-year lease of a walk down basement of the building ‘solely’ for the operation of a Caffe Nero themed cafe commencing June 2017. The relevant facts may be summarised as follows:

(1)  In March 2020, the Governor barred Massachusetts restaurants from allowing on-premises consumption of food or beverages indoors or outside from 24 March to 22 June, 2020. As a result, Caffe Nero temporarily closed its cafe and reopened it on 8 June but until 22 June only offered outside table service and take out.

(2)  When Caffe Nero failed to pay rent for April 2020, UMNV terminated the lease by notice served on 19 May 2020 and brought proceedings to recover, inter alia, unpaid rent for the months that Caffe Nero continued to occupy the premises and liquidated damages for the remainder of the lease.

(3)  Caffe Nero continued to pay no rent even though it occupied the premises and had reopened its business on 22 June.

(4)  When UMNV moved for partial summary judgment as to liability for breach of contract through 29 October 2020, the day that Caffe Nero left the premises[31], the court held that UMNV’s motion was without merit and instead granted partial summary judgment in Caffe Nero’s favour on the basis that the entire purpose of the lease (which was for Cafe Nero to use the premises to serve customers inside the premises) had been destroyed or frustrated.

(5)  Upon reopening on 22 June, Caffe Nero tried to renegotiate the rent payable but UMNV rejected that offer.

(6)  At some point Caffe Nero concluded that UMNV was unwilling to negotiate and made plans to vacate the premises, returning the keys on 29 October 2020.

85.It is apparent from the order made that its scope was limited in that the court took the view that UMNV’s claim for holdover rent for the period from 22 June to 29 October 2020 could not be resolved on summary judgment. The partial summary judgment in Caffe Nero’s favour was limited to its obligation to pay rent from 24 March to 22 June, 2020.

86.The Caffe Nero case is of no assistance to the defendant: it is distinguishable because in the present case there were no closure orders affecting the premises. In any event, as stated in Treitel, Frustration and Force Majeure (3^rd edition), §5 – 008:

“... in English law, under which, in cases of partial impossibility, the contract is either frustrated or remains in force. There is no such concept as partial or temporary frustration on account of partial or temporary impossibility.”

Conclusion

87.For the reasons stated above, neither of the defences advanced by the defendant has any prospect of success. Summary judgment is appropriate. It follows that the defendant’s appeals must fail.

88.Accordingly, in both HCA 1113 and HCA 1114, the defendant’s summonses appealing the Master’s orders are dismissed with costs nisi to the plaintiff with certificate for 2 counsel, such costs to be summarily assessed and payable forthwith.

89.It is directed that the plaintiff serves its statements of costs within 14 days hereof, the defendant lodges its objections (if any) within 14 days thereafter and the plaintiff lodges its reply (if any) within 7 days thereafter.

The costs order made by the Master

90.The Master ordered that costs be awarded to the plaintiff on a solicitor and own client basis. At the outset of the hearing, the defendant abandoned its challenge in view of the authorities[32] cited by the plaintiff of express contractual terms to that effect being upheld.

Mr Li Chau Yuen SC leading Mr. Li Pak Hei, instructed by Woo Kwan Lee & Lo, for the Plaintiff

Mr Bernard Man SC leading Mr Keith Chan, instructed by King & Wood Mallesons, for the Defendant