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

CACV 83/2022
CACV 84/2022
(Heard Together)

[2023] HKCA 371

CACV 83/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 83 OF 2022

(ON APPEAL FROM HCA NO 1113 OF 2020)

__________________________________

__________________________________

AND

CACV 84/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 84 OF 2022

(ON APPEAL FROM HCA NO 1114 OF 2020)

__________________________________

__________________________________

(Heard Together)

___________________

J U D G M E N T

___________________

Hon Chu VP:

1.I agree with the judgment of Yuen JA.

Hon Yuen JA:

2.This is an appeal from a decision of DHCJ Le Pichon (“the judge”) given on 20 January 2022 (“the Decision”)[1] in which she dismissed the defendant’s appeal from an order of Master Rebecca Lee giving summary judgment to the plaintiff for arrears of rent and other charges payable under the tenancy agreements referred to below, as well as for damages for breach.

Background facts

3.1.The plaintiff was the landlord of Shop G1 and Shops G3 to G5 on the Ground Floor of China Building, a commercial building located in the Central District of Hong Kong Island. Unless otherwise indicated, both premises are referred to collectively as “the Premises”.

3.2.The defendant was the tenant of Shop G1 under a Tenancy Agreement (“G1 TA”) dated 22 August 2018, the term of the lease being 3 years from 16 June 2018 to 15 June 2021. Under Section III clause 1, the tenant was obliged to use these premises wholly and exclusively as a shop for the sale of watches under the “Swatch” trade name.

3.3.The defendant was also the tenant of Shops G3 to G5 under another Tenancy Agreement (“G3 - G5 TA”) dated 12 March 2019, the term of the lease being 3 years from 4 January 2019 to 3 January 2022. Under Section III clause 1, the tenant was obliged to use these premises wholly and exclusively as a shop for the sale of watches under the “Blancpain” trade name.

4.Although the parties to both tenancy agreements were the same and the Premises were in the same building, the provisions of the tenancy agreements were not entirely identical. In the G1 TA (the Swatch shop), there was a provision for turnover rent[2]. There was no provision for turnover rent in the G3 - G5 TA (the Blancpain shop).

5.However, both tenancy agreements contained the following term (“the abatement clause”)[3]:

“SECTION VII

ABATEMENT OF RENT

If the Premises[4] or any part thereof shall be rendered 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 moneys refused in whole or in part in consequence of any act or default of the Tenant [“the 1^st group”][5]

or if the Premises shall be condemned as a dangerous structure [“the 2^nd group”]

or a demolition order or closing order shall become operative in respect of the Premises [“the 3^rd group”]

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 that if the Premises shall remain unfit for use or inaccessible for 6 months

or that if the Landlord shall consider it uneconomical to repair rebuild or replace the Premises whether or not in the same form

or if any competent authority shall refuse permission for or otherwise prevent any rebuilding or replacement

either the Landlord or the Tenant may at any time after the said 6 months period

or within one month of the notification by the Landlord of its decision or such refusal or prevention as the case may be

give to the other of them notice in writing to determine this Agreement and the tenancy hereby created and thereupon the same and everything herein contained shall determine as from the date of the notice but without prejudice to any antecedent claims or causes of action which either party hereto may have against the other hereunder”. (Emphasis added).

Events giving rise to the proceedings

6.1.The judge summarized the events giving rise to the proceedings in §§8 - 14 of the Decision as follows:

“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, it was made known to the plaintiff by letter dated 2 April 2020 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 [§17] 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.”.

6.2.The reasons set out in §17 were, as submitted on behalf of the tenant,

“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’)”.

Legal proceedings

7.1.On 3 July 2020, the landlord issued a writ in HCA1113/2020 in respect of G-1 and in HCA1114/2020 in respect of G3 - G5. These were served on the tenant on 6 July 2020. On 23 July 2020, the Statement of Claim in both actions were filed.

7.2.As mentioned above, on 31 July 2020, on completion of the demolition works, the tenant returned the keys of the Premises to the landlord. What remained in the relief claimed in the actions were the landlord’s claims for arrears of rent, and other charges payable under the tenancy agreements, as well as damages for breach.

7.3.On 25 September 2020, the landlord filed applications for summary judgment in both actions.

7.4.On 23 June 2021, the master gave summary judgment in both actions for payment of arrears and damages to be assessed, and on 28 July 2021, she made orders regarding interest and costs.

7.5.The tenant’s appeals were heard by the judge on 4 January 2022.

Issues

8.The issues before the judge, as before this court, are whether the Extraordinary Circumstances

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

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

The judge’s Decision

9.In the Decision, the judge noted:

-  there was no evidence of any discussion between the parties which founded any “understanding or contemplation” when they entered into the agreements that the Premises would benefit from “significant numbers” of international and mainland (“non-local”) customers and that the rent was agreed and was only viable on that basis[6];

-  there was no evidence that the tenant’s business was divided into discrete sectors, one serving non-local customers and the other, local clientele, or that part of the Premises was used exclusively to cater to non-local customers[7];

-  there was no mandatory closure order in respect of the Premises (or the building) imposed by the Government[8];

-  the tenant was able and willing to carry on business after the outbreak of social unrest in June 2019 and the pandemic in early 2020, and evinced an intention to carry on business even in mid-May 2020, albeit at a reduced rent[9];

-  there was no evidence that the tenant was operating at a loss before it vacated the Premises[10];

-  the tenant was not invoking force majeure, but only “any other cause beyond the control of the Landlord” in the 1^st group in the abatement clause[11].

(A) The abatement clause argument

10.As for the judge’s reasons for rejecting the tenant’s arguments based on the abatement clause, I shall set them out following the order in which the relevant words or passages appear in the clause[12].

(1)  Regarding the expression “unfit for use or inaccessible”,

-  the judge considered the expression “inability to use” and “prevention of access” in Financial Conduct Authority v Arch Insurances (UK) Ltd and others[13]. In that case, the UK Supreme Court held that the requirement of “inability to use” is not satisfied by evidence of impairment or hindrance in use, but that a complete inability of use occurred if the policyholder in that case was unable to use the premises for a discrete part of its business activities, or if it was unable to use a discrete part of the premises for its business activities;

-  the judge noted however that there was no evidence that the tenant’s business was divided into discrete sectors, one serving non-local customers and the other, local clientele, or that part of the Premises was used exclusively to cater to non-local customers[14].

(2)  Regarding the expression “any other cause beyond the control of the Landlord”,

-  the judge considered the expression “any other cause beyond Seller’s reasonable control” in Tandrin Aviation Holdings Ltd v Aero Toy Store LLC[15]. In that case, Hamblen J (now Hamblen JSC) held[16] that it 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, and to construe the clause as if it were worded “any other cause beyond either party’s control” would give no meaning to the words “the seller” and would fundamentally change the meaning of the phrase[17];

-  the judge found that the landlord’s obligations under the Tenancy Agreements were just typical of agreements to let premises, and it was not a joint venture to carry on a specific business[18];

-  the judge held that the Extraordinary Circumstances were matters that were beyond the control of both parties[19], and consequently, the expression “any other cause beyond the control of the Landlord” was “not triggered”.

(3)  Regarding the words “nature and extent of the damage sustained” and the “determination ... by the landlord” of the extent of the abatement in rent in accordance therewith,

-  the judge held that where the damage alleged by the tenant is pure economic loss, it is not evident how determination of the extent thereof by the landlord can work in practice, as a landlord is not privy, and has no access, to financial information of the tenant’s business which is necessarily sensitive and confidential; the impossibility or difficulty of practical application of this part of the abatement clause is “a good indicator of the viability or otherwise” of the tenant’s construction[20];

-  the judge considered Bank of New York Mellon (International) Ltd v Cine-UK Ltd[21], where Master Dagnall, in construing a clause which stated “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”, held that “non-physical disadvantage to the Premises said to result in the Premises being ‘damaged’ is not the natural meaning of the words either on their own or in context ...”[22]; the judge held that the relevance of that case lay in whether the parties contemplated the abatement clause to cover pure economic loss[23];

-  the judge noted that “a common thread running through” the abatement clause is that “the triggering event is something that affects the premises themselves, impinging on their use and/or accessibility”. In contrast with the impossibility or difficulty of a landlord to determine the tenant’s pure economic loss, 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”[24].

(B)  The frustration argument

11.As for the tenant’s argument that due to the Extraordinary Circumstances, frustration of the leases had occurred by 18 June 2020[25] the date when the tenant ceased business at the Premises, as there was a “shared common (commercial) purpose between the parties that the Premises would be operated as luxury retail stores for watches”:

-  the judge had noted that there was no evidence of the alleged “understanding and contemplation” of the parties, and found that Swatch watches did not come within the description of “luxury” watches[26],

-  the judge held that, even assuming the “shared common purpose” above, there was nothing that prevented those business operations continuing beyond the above date; the tenant’s real complaint was of viability of operations, in other words, profitability of the business[27]; the obligations of landlord and tenant were not “radically different”[28];

-  the judge noted that there were no closure orders affecting the Premises, so customers were free to enter the Premises to shop for watches. This distinguished the case from UMNV 205 - 207 Newbury LLC v Caffe Nero Americas Inc.[29], a decision of the Massachusetts Supreme Court, where the court held that the purpose of the lease of the basement was for Caffe Nero to serve customers inside, a purpose which was frustrated when the Governor barred all restaurants from allowing on-premises consumption of food or beverages in March 2020.

12.For the reasons summarized above, the judge found the tenant’s arguments had no prospect of success, and summary judgment was appropriate. The tenant’s appeals were dismissed and directions were given regarding costs for summary assessment.

Appeal

13.On the appeals, the tenant’s case was as follows:

(A)  the abatement clause in the Tenancy Agreements was worded differently from standard abatement clauses, and could be triggered even without physical damage to the Premises, and even if the triggering events (the Extraordinary Circumstances) had a community-wide impact rather than specifically impacting only the Premises themselves[30];

(B)  further or alternatively, the Tenancy Agreements were frustrated at law by 18 June 2020.

Discussion

14.1.In the tenant’s skeleton submissions, it was first contended that the rents were at “exceptionally high levels” which were agreed by the parties “in the contemplation” that there would be “significant numbers” of non-local customers.

14.2.In the Decision, the judge had noted (and it was acknowledged by the tenant’s leading counsel) that there was no evidence of any discussion between the parties which founded the alleged “understanding or contemplation” [31].

14.3.In ground 1.3 of the Notice of Appeal, the tenant contends that “a common contemplation could triably exist without express discussion” (emphasis added).

15.1.It is not clear from the Decision whether this contention had been argued before the judge, but in any event, it should be rejected for the following reasons.

15.2.First, it is clear that the parties intended that all their respective rights and obligations would be set out in the Tenancy Agreements. The “Full Agreement” clause in each Tenancy Agreement provided the following[32]:

“This Agreement sets out the full agreement reached between the parties hereto and no other representations have been made or warranties given relating to this Agreement or the Building or the Premises and if any such representation or warranty had been given or implied the same is hereby waived”.

15.3.Further, the “common contemplation” would in effect amount to a warranty from the landlord that the Premises would, throughout the term, remain fit for the “purpose” of attracting “significant numbers” of non-local customers. However, the Tenancy Agreements contained a “No Warranty of User” clause which provided[33]:

“The landlord does not warrant that the Premises are fit for the purpose for which they are let or for any other purposes whatsoever used or intended to be used by the Tenant and shall not be responsible or liable to the Tenant for any damages or loss in respect thereof. The Landlord’s consent to the use of the Premises shall not in anyway be taken as a guarantee or warranty that the Premises are fit for such use ...”.

(A)  The abatement clause argument

16.1.Coming then to the abatement clause argument, the tenant argues that the clause in our case was worded differently from “standard” clauses.

16.2.That may or may not be the case, but the court’s task is to construe the actual clause before us in accordance with well-established principles of interpretation of contracts.

17.1.There is no dispute that the judge was correct in adopting the principles of interpretation of contracts articulated in the UKSC in Arnold v Britton[34].

17.2.The first factor emphasized by Lord Neuberger was the importance of the language of the provision to be construed. It was held that “the exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously gleaned from the language of the provision”[35].

17.3.As for the reliance sought to be placed on commercial common sense and surrounding circumstances, Lord Neuberger stated as the third factor that commercial common sense is not to be invoked retrospectively. He held that “commercial common sense is only 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”[36].

17.4.The contracts containing the abatement clauses here were made in June 2018 and January 2019[37], and there was no evidence that at that time, the parties (or reasonable people in their position) would or could have perceived that the Extraordinary Circumstances (or any of them) would occur.

18.With those principles of interpretation in mind, I turn to the language of the abatement clause, which should be construed as a whole, to see if it applies to the facts of our case. The court’s task is to see if the clause is engaged by the Extraordinary Circumstances as submitted by the tenant, not hypothetical situations.

19.1.In my judgment, it is clear from the language of the abatement clause that it refers to the Premises as a discrete physical space, and the common theme of the 3 groups of instances is their effect on the occupation of that space. Whether there would be abatement of the entirety or any proportion of the rent depends on the actual instance that has occurred affecting occupation. Physical damage or destruction is not a precondition to the engagement of the clause irrespective of the instance. Put another way, for the clause to be engaged, physical damage or destruction of the Premises is not mandatory as there may be different situations causing unfitness for use or inaccessibility, but the focal point is on the effect of the actual instance on occupation of “the Premises”.

19.2.So, for instance, if there was a typhoon which flooded the means of access to the Premises, although not physically damaging the Premises themselves, the rent would be abated until the Premises have been rendered accessible again. If, on the other hand, the typhoon only caused physical damage to a part of the Premises rendering only that part unfit for use, then the landlord would determine the nature and extent of the damage sustained, and abate a proportion of the rent until that part has been rendered fit for use again.

20.On appeal, the tenant has argued that the clause would be engaged even if the Extraordinary Circumstances had a community-wide impact rather than specifically impacting only the Premises themselves. I would reject this argument. Nothing in the abatement clause indicates an intention by both parties that the landlord would in effect be the tenant’s insurer for losses due to business interruption[38] not caused by any of the instances affecting occupation of the Premises as a discrete physical space.

21.1.Further, the tenant has argued that the abatement clause was engaged “since December 2019", apparently meaning continuing daily until the Premises were vacated on 31 July 2020. On that argument, the landlord would be obliged to abate the rent of the Premises, in the Central District of Hong Kong Island, even though social unrest occurred in say, the New Territories, many kilometers away, on days when customers could freely access the Premises where business operations were freely carried on. Nothing in the abatement clause indicates such an intention.

21.2.As for the pandemic and associated travel restrictions and public health measures, at no stage did those measures affect the occupation of the Premises physically or their use as retail space. Judgments construing specific cesser of rent clauses in overseas jurisdictions where the government had imposed restrictions on occupation or use of properties (eg as a cinema in Bank of NewYork Mellon) are not relevant to our case.

(B)  The frustration argument

22.The tenant argues that there was frustration of purpose. In the context of frustration of leases, the common commercial purpose of the contract can be inferred from the express terms of the lease which restrict the use of the demised premises to a particular purpose[39], and here the tenant argues that “the parties’ common purpose of operating luxury watch retail stores, in the contemplation that they would benefit from many overseas customers, was frustrated”[40] (emphasis added).

23.Insofar as the tenant is relying on a “common understanding or contemplation”, that has been discussed and rejected for the reasons set out earlier in this Judgment[41].

24.Further, the judge was entitled to dismiss the above “common purpose” on the indisputable facts. The judge noted in the Decision that Swatch watches would not come within the description of “high-end luxury” watches[42], and while Blancpain would come within that description, the lease for the Blancpain shop did not include a provision for turnover rent, so the number of customers, non-local or otherwise, in that shop did not benefit the landlord in any event.

25.It is obvious from the tenant’s argument that “luxury watch retail shops of this kind would only be viable if the Premises benefitted from a steady stream of [non-local] customers”[43] (emphasis added), that the tenant’s focus is on profitability. However, as in the Suez Canal cases[44] (which closure led to substantial increases in the time and cost for deliveries via the alternative Cape of Good Hope route), the House of Lords held that, without more, “it hardly needs reasserting that an increase in expenses is not a ground of frustration”.

26.The judge correctly held that there was no frustration of purpose as the landlord continued to let the Premises for the tenant’s occupation and the tenant continued to display and sell watches there. There was no fundamental change in the performance of the contract.

27.As for the cases referred to by the tenant, they are discussed below.

28.1.First, in the “coronation” case of Krell v Henry[45], the plaintiff had exhibited on his premises, on the third floor of a building in Pall Mall, an announcement to the effect that “windows to view the Royal coronation procession” were to be let. The defendant was induced by that announcement to take the rooms.

28.2.The court found that it was “not a demise of the rooms, or even an agreement to let and take the rooms. It is a licence to use rooms for a particular purpose and not other” (emphasis added) which was regarded by both parties as the foundation of the contract[46]. It was that purpose (the viewing of the coronation procession) which could no longer be achieved because of the postponement of the coronation. Passages in the judgment should be read in that context, and so read, do not apply to our case.

29.1.Then there are two Singapore cases. The important distinguishing feature between those cases and our case is that there were government mandated prohibitions in Singapore on non-essential services and entertainment venues, but none in Hong Kong affecting operations of the Premises as retail watch shops. First, in Dathena Science Pte Ltd v Justco (Singapore) Pte Ltd[47], the defendant rented buildings and provided workspaces therein to its customers. At the end of 2019, the plaintiff (a software developer) was interested in renting premises in one such building (OCBC).

29.2.It was of paramount importance to the plaintiff that the premises could meet its IT requirements and that it could physically move its servers into the premises before the start date of the lease. These requirements meant that certain works had to be done at the premises before the plaintiff moved in.

29.3.By an agreement called the “membership agreement” dated 16 January 2020, the plaintiff agreed to rent the premises from the defendant for 2 years commencing 1 May 2020. The plaintiff made various payments to the defendant, for (among other things) the required works.

29.4.However, before the plaintiff could move in, in early April 2020 the Singapore Government announced “circuit breaker measures” under which non-essential services were required to cease[48]. As a result, the defendant could not undertake the required works so as to make the premises ready for the plaintiff to move in.

29.5.On 29 May 2020, the plaintiff issued a notice of termination of the membership agreement on the basis that:

(a)  it had not been able to commence occupancy of the premises due to delays in the works at the premises;

(b)  the membership agreement has been frustrated.

29.6.The defendant then attempted to persuade the plaintiff to sign a new agreement for another one of its buildings (Bras Basah) to replace the membership agreement for the OCBC premises.

29.7.At trial, the plaintiff sought the return of the sums it had paid the defendant by relying on the Frustrated Contracts Act[49] to support its argument that the membership agreement for the OCBC premises had been frustrated by the “circuit-breaker measures”. The defendant denied that the membership agreement had been frustrated.

29.8.At §187, the judge found “looking at the facts”, that the contract had been frustrated. The judge found that the defendant’s own conduct in attempting to persuade the plaintiff to sign a new agreement for the Bras Basah premises indicated that it was aware that it could not perform its contractual obligations as previously agreed to in the membership agreement for the OCBC premises.

30.As this was a finding on facts based on the defendant’s conduct, it is not of much help to our case if at all. In any event, the facts were very different to our case in that the Singapore government’s “circuit-breaker measures” prohibited the performance of the works before moving in, which was “of paramount importance”[50].

31.1.The other Singapore cases referred to was Lachman’s Emporium Pte Ltd v Kang Tien Kuan (trading as Lookers Music Café, a sole proprietorship). The citation of the summary judgment decision in the High Court dated 26 January 2022 is [2022] SGHC 19 (“the SJ Decision”), and that of the leave to appeal judgment before the Appellate Division of the High Court dated 24 March 2022 is [2022] SGHC(A) 13 (“the Leave Judgment”).

31.2.The facts are set out in the SJ Decision. The plaintiff was the landlord of premises in Geylang, Singapore. The defendant tenant operated a music lounge there.

31.3.By a tenancy agreement dated 26 December 2019, the tenant rented the premises from the landlord for a period of 2 years from 1 January 2020 to 31 December 2021. The agreement required the tenant

“to use the demised premises as pub/bar/cabaret/nightclub/ discotheque/karaoke lounge only”.

31.4.The tenant failed to pay the rent for March 2020, and for the period from August 2020 to April 2021, at the end of which he terminated the agreement. The landlord then applied to the authorities for change of user.

32.The landlord applied for summary judgment against the tenant, who argued that the agreement was frustrated. The tenant’s evidence varied between alleging that the agreement had been frustrated by the Covid pandemic itself (which started in January 2020) and/or by the Covid regulations which came into force on 27 March 2020 under which the Government closed all public entertainment venues.

33.1.In the SJ Decision, the judge held (§11):

“a contract may also be frustrated when the effect of a supervening event thwarts the commonly held purposes by the parties when they entered into the contract. In the present case, the COVID-19 measures rendered the Premises no longer capable for its intended purpose, ie as a music lounge, contrary to what the tenancy agreement has provided for ... There is a triable issue as to whether using the Premises as a music lounge is a commonly held purpose shared by both parties. If so, the contractual obligations might have been rendered radically or fundamentally different from what was agreed upon in the contract and that performance of the contract is futile in light of the supervening event”. (Emphasis added).

33.2.At §13, the judge then said:

“In the present case, although the primary obligation to lease has not been rendered impossible by COVID-19 nor the COVID-19 measures, there is a bona fide defence of the frustration of the shared purpose of using the Premises for a music lounge. On the fact of the Tenancy Agreement, it may be said that there was a shared purpose of using the Premises to run a music lounge ... At the time of the contract, parties may not have contemplated that the Premises might be prevented by a tiny coronavirus from being used as a music lounge. The fact that the plaintiff had to write in to the URA subsequently in April 2021 to ask for a temporary permission to use the Premises as a restaurant reinforces my view that the plaintiff had similarly intended the Premises to be used as a music lounge. With the imposition of COVID-19 measures and the closure of night-time entertainment venues, it was obvious that this purpose cannot be achieved. It may however transpire that this purpose was not shared – or it might not; but for the purpose of this summary judgment application, I find that the defendant has raised a bona fide defence”. (Emphasis added).

33.3.The judge dismissed the landlord’s summary judgment application in its entirety.

34.1.The landlord applied for leave to appeal on the sole ground that it should have obtained summary judgment for the rent for the period 1 March 2020 to 26 March 2020 (“the reduced sum”), as the government’s measures only took effect from 27 March 2020.

34.2.The tenant argued that the frustration occurred from late January 2020, and not from the date the closure regulation came into force in March 2020. As mentioned above, his evidence before the judge had varied between alleging that the agreement had been frustrated by the Covid pandemic itself (which started in January 2020) and/or by the Covid regulations which came into force on 27 March 2020.

35.1.The Appellate Division noted that the landlord had not previously advanced an alternative case for summary judgment for only the reduced sum, and for that reason the judge could not be faulted for not distinguishing between the two postulated dates.

35.2.It noted at §11 that “a holistic reading of the SJ Decision indicates that the judge had identified the COVID-19 regulations as the frustrating event”.

35.3.It also noted a number of matters affecting the landlord’s new alternative application for the reduced sum which required further consideration, such as the tenancy deposit, the COVID-19 (Temporary Measures) Act 2020 which introduced temporary rental reliefs, and the relevance (or otherwise) of the Frustrated Contracts Act 1959.

35.4.For those reasons, the Appellate Division dismissed the landlord’s application for leave to appeal for summary judgment for the reduced sum.

36.Mr Bernard Man SC[51] for the tenant argued that the Lachman decisions fortified his argument that there was an arguable case of frustration of purpose. When the decisions are analysed as above, I do not consider that either the SJ Decision or the Leave Judgment is of much assistance to the tenant in our case. There was no examination of the issue whether the pandemic itself (without the closure order) would have been sufficient to cause the lease to be frustrated.

Order

37.1.For the reasons set out above, I would dismiss the appeals. The parties having agreed that costs would follow the event, the defendant should pay the plaintiff’s costs with certificate for two counsel.

37.2.As for the basis of costs, the master had awarded costs to the plaintiff on a solicitor and own client basis. The defendant’s challenge to this basis was withdrawn before the judge[52]. As this court was not addressed on the basis of costs, the parties are at liberty to file written submissions only on the basis of costs (maximum of 3 pages) within 7 days of the date of this Judgment.

Hon Chow JA:

38.I agree with the judgment of Yuen JA.

Mr Bernard Man SC and Mr Keith Chan, instructed by King & Wood Mallesons, for the defendant

Mr C Y Li SC and Mr Li Pak Hei, instructed by Woo Kwan Lee & Lo, for the plaintiff