Pacific Realty Ltd v. Lam Sau Mui

LDMP000020/1983

Property law - landlord and tenant - appeal against Certificate of Increase of Rent - effect of exercise of right of renewal early during the original term - whether due exercise of right of renewal conditional upon payment of new rent - whether period of renewal within the tenancy's fixed term and therefore excluded from statutory machinery for increase in rent - Sections 59, 60 and 74A(a) Landlord and Tenant (Consolidation) Ordinance, Cap. 7.

IN THE LANDS TRIBUNAL 0F HONG KONG

(Appellate Jurisdiction)

Landlord and Tenant Appeal No. 20 of 1983

TRIBUNAL: His Honour Judge Cruden, Presiding Officer.

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JUDGMENT

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1. This is an appeal pursuant to Section 60 of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7, against the decision of review by the Commissioner of Rating and Valuation of a Certificate of Increase of Rent in respect of Flat A, Block 26, 22nd Floor, Baguio Villas, 555 Victoria Road. The subject premises were let under a tenancy agreement dated the 20th day of March 1979 by the respondent to the appellant for a period 3 years from the 10th day of April 1979 at a rent of $4,450 per calendar month including a right of renewal.

2. It was common ground between the parties that the premises were subject to Part II of the Landlord and Tenant (Consolidation) Ordinance and that the appellant has remained in possession of the premises continuously since the 10th day of April 1979 and is still in possession.

3. On the 19th day of April 1983 the respondent applied to the Commissioner of Rating and Valuation, pursuant to Section 58, for a Certificate of Increase in Rent. On the 27th day of June 1983 the Commissioner issued a Certificate which allowed an increase of $1,274 per calendar month which was equivalent to the maximum statutory limit of 30% of the current rent.

4. The appellant on the 28th day of June 1983, pursuant to Section 59, applied for a review by the Commissioner of the Certificate. On the 28th day of September 1983 the Commissioner issued a Notice of Decision confirming the the Certificate and further certifying that the increase was to take effect on the 10th day of August 1983.

5. From that Notice of Decision the appellant now appeals to this Tribunal advancing the same grounds in support of its appeal as it placed before the Commissioner on review. These grounds are first that the appellant has duly exercised a right of renewal under the tenancy agreement for a further period of 3 years commencing on the 10th day of April 1982. Secondly, that Section 74A(a) prohibits any increase of rent, pursuant to the provisions of Part II, during the period of the tenancy agreement including the period of renewal.

6. The appeal proceeded on the basis of the facts set out in the affidavit sworn by Mr. P.K. Yuen together with the exhibits thereto and filed on behalf of the Commissioner. Clause 4(i) of the tenancy agreement created an option to renew in these terms:

"The tenant shall have the option to renew the agreement for a further 3 years upon expiry at a increase in rental of 15%. "

7. On the 20th day of November 1979, which was very early on during the original term of 3 years, the appellant purported to exercise the right of renewal by letter to the respondent which included the following sentence:-

"We hereby exercise our option to renew our tenancy of the abovementioned premises as provided in our lease agreement clause 4(i). "

8. The appellant submitted that the letter, which it was undisputed was received by the respondent, constituted the due exercise by the appellant of the option. According to the appellant the option was exercisable solely by it as tenant and required no acquiescence on the part of the respondent as landlord. On this point I was referred to the recent obiter observations of Barker J.A. in the judgment of the Court of Appeal in Thomas Young v. Chan Pak Wai Civil Appeal No. 100/1983 on appeal from another Presiding Officer:

"I pause there to say although that was not a point which was argued before us, the Presiding Judge's" sic "conclusion that the option had not been validly exercised by the Appellant was clearly wrong. It was not an option which required the assent of the landlord. It was a term of the agreement that the tenant could exercise the option and he clearly did. However, that, as I have said, is a matter which was not argued before us. "

The appellant then submitted that by virtue of Section 74A(a) the premises were not liable to any increase of rent under the statutory provisions of Part II. Within Part II, Section 74A(a) provides:

9. The only increase which the appellant would recognise was the increase of 15% contractually due in terms of the renewed lease. The appellant disputed the statutory increase of 30%.

10. Counsel for the respondent made a threefold submission. First, that Clause 4(i) required the option to be exercised on the expiry of the original 3 year term. It was submitted that the appellant by purporting to exercise the option only 6 months after the original 3 year term had commenced failed to exercise the option in terms. Secondly, that it was implied in the option that in addition to notice of exercise, the tenant would also pay the 15% increased rent during the renewal period. It was common ground that the increased rent had not been paid.

11. Accordingly, it was submitted, the purported exercise of the option was incomplete. Non-payment of the increase nullified any effect the letter of the 20th day of November 1979 might otherwise have had. Thirdly, it was submitted that as the option had not been duly exercised the appellant had merely remained in possession after the 9th day of April 1982 by virtue of the statutory continuance of the original 3 year term under Part II and not by virtue of any exercise of a right of renewal. In those circumstances, it was submitted, Section 74A(a) had no application and the 30% increase certified was lawfully payable.

12. Counsel for the respondent was unable to cite any authority in support of the submission that the exercise of the right of renewal was impliedly conditional on payment of the increased rent payable thereunder. However, I was referred to the general statement of principle in 'Hill & Redman's Law of Landlord and Tenant' (17th Edn.) 164:-

"A lessee desirous of exercising an option to renew must conform with the conditions in the lease as to its exercise. "

I was also referred to the footnoted judgment of Mauray v. Durley Chine (Investments) Ltd (1953) 2 Q.B. 433 as authority for the proposition that an option to take a lease at a specified rent is not duly exercised by a notice demanding a lease at a lower rent. By analogy it was submitted that an option that required to be exercised on the given date of expiry, was not exercised by being given many months earlier.

13. I was finally referred to Biondi v. Kirklington & Piccadily Estates Ltd (1947) 2 All E.R. 59 as authority supporting the proposition that a purported exercise of an option so early in the original term was, by itself, ineffective. In that case the lease was for 35 years from the 1st day of March 1911. There was a right of renewal subject to a "written request of the lessees made 6 calendar months before the expiration of the term "originally granted provided there were "not at the time of such request any existing breach or non-observance" of any of the lessees covenants. On the 10th day of March 1911 the lessees served notice that they elected to exercise the option of renewal. By July 1945 when an assignee of the original lessee, initially unaware of the earlier exercise of the option in 1911, wished to exercise the option to renew, she believed she was precluded from doing so at that stage, because of her non-observance of other covenants of the lease. Subsequently becoming aware of her predecessor's exercise of the option in 1911, she attempted to avail herself of that earlier act.

14. The Court clearly considered that, on the facts, her claim was without merit. In the event the claim was defeated by the interpretation the Court was prepared to give to the covenant creating the right of renewal. In effect the Court held that, in view of the considerable length of the lease, the parties could not have contemplated an early exercise of the right. The Court rejected the view that the option could be exercised at any time before the 8th day of August 1945 and preferred any of the other alternative constructions although it recognised that each of these created difficulties. The alternatives were that the right had to be exercised on the 8th day of August 1945 or on or within a reasonable time before that date or given to take effect on the 8th day of August 1945. The Court, perhaps surprisingly, did not declare a preference for any of these alternatives but was content to conclude that any were preferable to the only interpretation that would assist the lessee. In the special factual circumstances of that case the Court was prepared to held that the notice by the lessee in 1911 exercising the right of renewal did not in 1945 entitle the defaulting assignee of the lessee to a renewal.

15. After considering the parties helpful submissions I have arrived at these conclusions. First, the issue whether the option could be exercised, as to time, only on the expiry of the tenancy agreement, gives rise to a question of construction. In my view the plain meaning of Clause 4(i) is clear and no ambiguity exists. Clause 4(i) is a simple unequivocal clause which states that the tenant shall have an option to renew the tenancy for a further three years. The clause then goes on to declare that the 3 year period under the option shall commence on the expiry of the original 3 year term. I am well satisfied that the Clause neither expressly or by implication requires the option to be exercised on the date of expiry of the original term.

16. Secondly, I have to consider whether the exercise of the option during the first 6 months of the original 3 year term and not towards its end, offended the terms in which the option was granted. In this particular option there was no express date on which, or period within which, the option had to be exercised. I do not find Biondi v. Kirlington & Piccadilly Estates (supra) of direct assistance on this issue because of the unusual facts on which that case was decided. In that case there was a long 35 year lease during the last year of which a defaulting assignee of the original lessee attempted to take advantage of a purported exercise of a right of renewal 34 year earlier. The terms of that particular option, unlike the present option, imposed a stipulation as to time, namely that the option had to be exercised 6 months before expiration. Here the original lessee is still in possession; that lessee is not in default; the option contains no express stipulation as to time; the tenancy is for the relatively short period of 3 years; the right of renewal is not even subject to the tenant at the date of exercise not being in default under the other terms of the tenancy agreement.

17. Where there is a stipulation as to time it is usually inserted for the benefit of the landlord so that he is not taken by surprise but has sufficient notice of a tenant's intention to avoid loss, by arranging a new letting on expiral, if the option is not exercised. I appreciate, however, that if there is such a time stipulation either party may take from it such benefit as may arise in their favour. But in the present case there is no stipulation as to time. However, the early exercise of the option in the case of such a relatively short tenancy would normally be of benefit and convenience to the landlord. Certainly in this case it was not claimed or suggested that the exercise was so early in time that the landlord had forgotten or overlooked that the option had been exercised.

18. This is a case where both the duration of the period of renewal and the precise rent to be paid during that period are fully and clearly set out in the renewal clause. Where such a clause may not be so complete, the judgment of Megarry J. in Brown v. Gould (1972) Ch 53 shows how far Courts are prepared to go to uphold the efficacy of a renewal clause where, for example, the machinery to decide the now rent is not fully provided. The parties in this case do not require the Court's assistance to enable the renewal clause to be implemented.

19. Thirdly, was the exercise of the option subject to the implied condition that payment of the increased rent had also to be performed? Clause 4(i) imposes no such express term as a condition of exercise of the option. The power to exercise that option is unilaterally and unconditionally vested in the tenant. The provisions of Clause 4(i) are very similar to the provisions of the Clause 4(i) option considered by the Court of Appeal in Thomas Young v. Chan Pak Wai (supra). I am satisfied that the right of renewal contained in Clause 4(i) was unconditional. Payment of the increased rent was not a condition to its exercise.

20. Payment of the new rent, however, remains very important even though it is not relevant to the exercise of the option. But payment of the new rent only becomes relevant once the option is exercised. Once the option is exercised the relationship of the parties as landlord and tenant during the period of renewal is just as much subject to the covenants of the original tenancy agreement as the tenancy was during the original 3 years. If the new rent is not paid, the tenant would be in default under Clause 2(a) and the contractual remedies on default under Clause 4(a) would arise. The landlord would be entitled to sue for recovery of rent and could exercise, subject to law, his re-entry, forfeiture and other powers on default. All those powers and remedies, however, can only arise after the right of renewal has been duly exercised. Payment of the new rent is not a condition to the exercise of that right of renewal. The obligation to pay the new rent can only arise after that right of renewal has been exercised. Payment of the new rent is a separate and subsequent matter for which a landlord has separate and subsequent remedies.

21. Nor does the cited extract from Hill & Redman or Mauray v. Durley Chine (Investments) Ltd., strengthen the respondent's case. The reference in that textbook to "conform with the conditions in a lease" relates only to the conditions in the covenant for renewal. In some cases that covenant may additionally require that the other conditions of the lease be complied with which makes such compliance a condition precedent to the exercise of the option to renew. There is no such requirement here. Even if there were, that would not have assisted the respondent. For there is no suggestion that either at the date when the option was exercised or at any other time during the original 3 year, term the tenant was in default. All that is alleged is that after the expiration of the original 3 year term there was default.

22. Finally, the provisions of Section 74A must be considered. That Section is widely drafted and excludes all the Part II statutory machinery for increase in rents, from applying to any tenancy, during the unexpired portion of a fixed term. The original term of 3 years under the tenancy agreement was clearly a "fixed term". Is the 3 year period of renewal equally a "fixed term" within the meaning of the Section?

23. A renewal of a lease simpliciter means the renewal of a lease on the same terms as the original lease. So where the original duration was for a fixed term, so too will the duration of the renewal as a general rule be for a fixed term. In Rothwell v. Wakeling (1974) 29 P. & C.R. 234, Megarry J. after referring to his own earlier judgment in Brown v. Gould (supra) which helpfully collects many of the leading judgments on renewal, points out that the more words "with the option to renewal" suffice for a Court to order a decree of specific performance of a new lease on all the terms of the old save the provision for renewal. The judgment refers to the application by Bruce J. in Lewis v. Stephenson (1898) L.J.Q.B. 296 of Price v. Assheton (1834) 1 Y. & C. Ex. 82 where Lord Abinger said it was:

"... only to give to language its natural meaning to hold that a renewal of a lease means the renewing of the old lease for the same period and on the same terms. Unless such a meaning is given to the word "renewal" the words in the present agreement are deprived of all meaning. "

24. In the present case the renewal of the original fixed term of 3 years does not have to rely solely on these common law principles. For Clause 4(i) itself expressly provides that the duration of the period of renewal shall also be for 3 years and not for any indeterminate period. Until the option in that clause is duly exercised, the original fixed term of 3 years, it is true, is only potentially liable to an extension. However, upon the due exercise of the option, the original fixed term of 3 years is extended by a further fixed term of 3 years. I, therefore, hold that the further period of 3 years under the renewal is also a "fixed term" for the purposes of Section 74A(a).

25. Having found that the option in Clause 4(i) has been duly exercised, it follows that the statutory power authorising increases in rent to premises subject to Part II is excluded, in the case of this particular tenancy, by Section 74A(a). This conclusion accords with Kung Chun v. Ngai Ching-yung (1978) H.K.L.R.44.

26. The appeal must therefore be upheld. The Commissioner's Certificate of Increase of Rent is consequently a nullity and no increased rent is payable thereunder. The current rent is governed by the provisions in Clause 4(i) under which the rent is only increased by 15%. There will be no order as to costs.

DATED this 31st January 1984.

Representation:

Mr. Thomas Young, by leave, for the appellant.

Miss Alice Chung instructed by Chan & Lo for the respondent.