Hultucktong Enterprises Ltd v. Chau Wai Yee

HCA005532/1981

The exercise of an option to grant a further term of 2 years to commence from the expiration of a previous fixed term of 3 years created a new tenancy of post-war business premises not exempted from Part V of the Landlord & Tenant (Consolidation) Ordinance - the phrase "further term" considered - service of a six months' notice required - an extension or enlargement of an original term distinguished.

BETWEEN

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Coram: Hon. Liu, J. in Chambers

Date: 17 April 1982

Appeal from Master's decision

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JUDGMENT

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1. This is an appeal against the decision of the learned Master given on the 11th January, 1982 granting leave to sign final judgment against the defendant for possession, mesne profits and costs as claimed.

2. The suit premises form part of a post-war building. By a Tenancy Agreement in writing dated the 23rd July, 1976, the plaintiff's predecessors-in-title granted to the defendant, without payment of any premium, a fixed term of three years commencing from the 1st August, 1976. In paragraph 2 of the amended Statement of Claim, the said Tenancy Agreement was alleged to have granted "an option exercisable by the defendant to extend the term for another two years", but Clause 5 of the said Tenancy Agreement did not seem to have so provided. No enlargement or extension of the original term was envisaged. The original term was to expire and be followed by "a further term". "Extension" could perhaps be better understood in terms of only the tenant's extended right to occupation.

3. The relevant part of Clause 5 read as follows:

"If the Tenant shall be desirous of continuing the tenancy hereby granted for a further term of two(2) years at the expiration of the term hereby granted .... then the Landlord shall let the said premises to the Tenant for the further term of two years from the date of expiration of the said term hereby granted at such rent as the parties hereto shall agree upon PROVIDED that in any event the rent for renewed period shall not exceed 120% of the rent hereby granted."

Whilst the preamble of Clause 5 spoke of the tenant's desire to continue with the tenancy, the option granted by its operative part seemed to be one of a new tenancy for a further term of two years to commence from the expiration of the existing term - a "renewed" "further term of 2 years".

4. In December, 1977, the suit premises were assigned to the plaintiff presumably with notice to the defendant. There was no issue taken on the validity of the said option, which would not appear to be enforceable as a mere agreement to agree without any predetermined or ascertainable new rental. However, in June 1979, on the defendant's due exercise of her option, by a further Tenancy Agreement in writing dated the 21st June, 1979 and purportedly entered into as an agreement supplemental to the said 1976 Tenancy Agreement, the plaintiff granted to the defendant a further term of two years from the expiration of the original three years' term at an increased monthly rental of $4,320.

5. On these facts, it was averred in paragraph 4 of the amended Statement of Claim that the tenancy was "extended" for a further term of two years, but it would seem that the said 1979 further Tenancy Agreement in effect created a new term of two years to run from the expiration of the former tenancy. An extension and a further term as a matter of plain terminology, do seem to be mutually exclusive; the former would prolong the subsistence of an original term and the latter would spring into operation only after the cessation of it, particularly when it is stipulated, as in this case, to be "renewed".

6. By an undated letter allegedly posted on the 5th January, 1981, the plaintiff reminded the defendant of the coming expiration of her then tenancy on the 31st July, 1981 and requested her to quit and deliver up vacant possession of the suit premises thereat. It was denied in the Defence inter alia that this letter was effectively served on the defendant. As a matter of fact, the defendant claimed on affirmation that she never received any such notice. Counsel for the plaintiff readily conceded, in such a denial, a prima facie triable issue, but counsel hastended to remind me that the central point was whether the suit premises were exempted from Part V of the Landlord and Tenant (Consolidation) Ordinance, in another words, whether the defendant was protected by Part V and entitled to the service of a six-months' notice.

7. Whilst much play was made of an alleged "option to extend", it must not be overlooked that the original tenancy had come to an end. It was not contended that the term thereby created was not for a fixed term of 3 years, but we are quite unconcerned with the position as at the expiration of that old term. The crux of the matter seems to be whether the original fixed term for two years.

8. It has been held that "an option ..... cannot, until exercised, be in any event said, ........ to create a term of years at all". See Weg Motors Ltd. v. Hales,⁽¹⁾ where an option of taking "a further lease" exercisable before the expiration of the original lease to commence from the date of the exercise of the option was construed together with its "essential phrase" viz., "taking a further lease" as a convenant to renew a lease, per Lord Evershed, M.R. and Harman L.J., and it was observed by Donovan L.J. that the option agreement enabled the tenants "to call for a new lease".

9. I received further assistance from counsel, particularly on a point debated in the Exchequer Division in Hand v. Hall,⁽²⁾ where a 12 months' tenancy agreement with the benefit of an option "to remain on for three years and a half more" was held by the English Court of Appeal to be a term of less than three years thus falling outside the provisions of the Statute of Frauds. The principle that an option would not have the effect of creating any term before its exercise was adumbrated, and the 12 moths' tenancy agreement and the 3½ years' option were separately dealt with by Lord Cairns, C. At page 357, the learned judge treated the 12 months' tenancy agreement and the 3½ years' option independently as follows :

"Whereas there is not anything to be done by the tenant in the first part of the agreement to create a demise, in the second part something has to be done by him before that part takes effect, and until that is done it is impossible to tell whether a tenancy shall come into force or not. I think, therefore, that it is absolutely necessary to divide the contract into two parts. I think the agreement is an actual demise, with a stipulation superadded, that if at his option the tenant gives the landlord a notice of his intention to remain, he shall have a renewal of his tenancy for three years and a half."

10. In this case, the 3 years' tenancy under the former 1976 Tenancy Agreement had expired. The further 2 years' term granted under the 1979 further Tenancy Agreement to commence from its expiration was at least arguable to have been created as a new term. The tenancy which stemmed from the exercise of the option here could not be said to be an extension or enlargement of a term which had ceased to exist. There was no pretence of an extension. There was nothing left to be enlarged. It was expressly stipulated that "the further term" was to be for "a renewed period" after the old term. As has been constantly referred to in paragraph 1-2060 at page 931 and paragraph 1-2078 at page 940 Vol. 1 Woodfall on Landlord and Tenant 28th ed., a tenant is entitled to a new lease upon the exercise of an option to renew. The option granted to the defendant in this case was one for a renewed further term (and not one for an extension to the original term) of 2 years from the expiration of the previous term. For our purposes, I can draw no distinction between an option to renew and the option under consideration.

11. In Baker v. Merckel,⁽³⁾ an authority so heavily relied upon by the plaintiff, the original term was to be varied from 7 years to 11 years upon the exercise of an option, and the original lease was stipulated to be thereupon "read, construed and take effect as though the term" granted by the original lease "was for a period of eleven years". It was held that at the time of the granting of the option some 2 years later, the option agreement "varied the original lease and resulted in a notional surrender of the lease and re-grant of a new lease by operation of law, so that the lease then become one for a maximum of eleven years if the option were duly exercised". It was an enlargement or true extension of the original term ab initio from the exercise of the option. In effect, it was a variation of the duration of an existing lease. Such was not or, at least, would appear not to be the case here.

12. In addition, counsel for the plaintiff sought to take refuge in a passage in the judgment in Shek Kau v. Poon Kam Cheung,⁽⁴⁾ where Judge Cons, as he then was, equated a short lease reserving to the tenant a right to extend with a long lease. In Shek Kau⁽⁴⁾ case, the effect of the tenant's option for an earlier termination on the duration of the leased term for the purposes of two new Ordinances was examined. These Ordinances were the then Tenancy (Notice of Termination) Ordinance, 1962 and Rent Increases (Domestic Premises) Control Ordinance, 1963. The change of language was evident in a section in these newly introduced legislation, which exempted from their application "a tenancy for a fixed term of three years or more (without any) provision for earlier determination". S.121 in Part V of the Landlord and Tenant (Consolidation) Ordinance retains the same provision exempting this category of a long lease of post-war business premises. It was held in Shek Kau⁽⁴⁾ that the tenant's option to sooner terminate would diminish a term qualifying for such exempting. In the learned judge's analytic approach, only the tenant's right to extend as opposed to his right to a further lease was under consideration. Moreover, the tenant's right to extend was merely examined in one of its concepts. The said 1979 further Tenancy Agreement was, at least arguably, not one for an "extension". Furthermore, the decision in Shek Kau⁽⁴⁾ case rested on the premise that the tenant's option or right was to be wholly ignored. Turning to another concept, it is noteworthy that by ignoring the tenant's option for earlier determination in a long lease, the long lease would not be pruned down and its exemption lifted, but by wholly disregarding the tenant's right to extend in a short lease, the short lease cannot be elevated by an ignored provision and must necessarily remain unextended thus unqualified for statutory exemption. The plaintiff took great pains in seeking to incorporate the tenant's option as part of the initial grant; the option was not sought to be ignored. Therefore, it would seem that the judicial analysis underlining the decision of Shek Kau⁽⁴⁾ cannot be, in my view, of any comfort to the plaintiff.

13. In conclusion, it would seem to be arguable whether the renewed further term created by the said 1979 further Tenancy Agreement was exempted from Part V of the Landlord and Tenant (Consolidation) Ordinance, and consequently whether the defendant was entitled to a 6 months' notice thereby prescribed. The defendant has categorically denied receipt of the letter set out in amended Statement of Claim, which was said to serve as a valid statutory notice. Triable issues have been raised. For all these reasons, the appeal must be allowed and the defendant be let in to unconditionally defend this action. I order that the order of the learned Master be set aside. In view of the nature of the defendant's allegations and the various points of law canvassed, a fair order to be made is, I think, costs before the learned Master and in this appeal be costs in the cause.

(1) [1961] 3 A.E.R. 181 at pp. 184C/D, 186E/F, 190G & 192H.

(2) [1877] Ex. D.355

(3)   [1960] 1 A.E.R. 668

(4)   [1970] D.C.L.R. 79 of p.82

(4)   [1970] D.C.L.R. 79 of p.82

Representation:

Mr. Wesley Wong instructed by Messrs. W.K. Lore & Co. for the Plaintiff.

Mr. Van Burren instructed by Messrs. Chan & Lo for the Defendant/Appellant.

Action No. : High Court Action No. 5532 of 1981

Date of Hearing/Trial: 29th March, 1982.

Date When Judgment Was Delivered: 17th April, 1982.

Case Cited by Counsel for the Plaintiff but not mentioned in the Judgment:

1. Hill and Redman on Landlord & Tenant, 6th Ed., p.404.

Cases Cited by Counsel for the Defendant/Appellant but not mentioned in the Judgment:

1. Re Hopkins's Lease [1972] 1 All E.R. p. 248

2. Chitty on Contracts 24th Ed. para. 751

3. Cap. 7 Section 121 Landlord & Tenant

4. Ng Cheong Tong Ltd. v. Shaw Theatres Hong Kong Ltd. [1975] H.K.L.R. p. 524

5. Cheshire: Modern Law of Real Rroperty 10th Ed. p. 416

6. Lemon v. Lardeur [1946] 2 ALL E.R. p. 329

Actual Cases Cited in the Judgment:

1. Weg Motors Ltd. v. Hales [1961] 3 All E.R. 181 at pp.184C/D, 186E/F, 190G & 192H

2. Hand v. Hall [1877] Ex. D. 355

3. Baker v. Merckel [1960] 1 ALL E.R. 668

4. Shek Kau v. Poon Kam Cheung [1970] D.C.L.R. 79 of p. 82