Goldon Investment Ltd v. Nph International Holdings Ltd

HCA005457A/1999

HCA 5457/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5457 OF 1999

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Coram: Hon Reyes J in Court

Dates of Hearing: 4-6, 9-10 August 2004

Date of Judgment: 10 August 2004

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J U D G M E N T

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I. Introduction

1.The Plaintiff landlord ("Goldon") sues the Defendant tenant ("International") for arrears of rent and service charges due under a lease ("the Lease") dated 14 September 1998 of the whole of the 28th floor, CITIC Tower, No. 1 Tim Mei Avenue, Hong Kong ("the Premises"). The Lease provided for a term of 2 years and 3 months from 1 September 1998 to 30 November 2000 at a monthly rent of $1,002,687.50 (exclusive of service charges and government rates), although with September, October and November 1998, March 1999 and June 2000 as rent-free months. Under the Lease, monthly rent and service charges were due in advance on the first day of each month.

2.Goldon also claims fees due under a licence agreement ("the Licence") dated 14 September 1999 allowing International to use 4 car park spaces at the CITIC Tower during the term of the Lease at $16,000 per month. No particular spaces were designated at the car park, but instead 4 private cars (bearing registration nos. GZ 7050, GT 8167, GS 6619 and FA 6613) were authorised to park under the Licence. The Licence provided for its termination upon cessation of the Lease.

3.Finally, Goldon seeks mesne profits and damages in respect of the premature termination of the Lease and Licence on 30 March 1999.

4.International accepts that it failed to pay monthly rent due on 1 January and 1 February 1999. It further accepts that it failed to pay service charges and the car park licence fees due on 1 February and 1 March 1999. But International alleges that Goldon repudiated the Lease by the issue of a Writ on 31 March 1999, claiming arrears of rent and other charges and repossession of the Premises from International. International contends that the Writ was premature because Goldon had agreed at a meeting on 3 March 1999 to extend the time for payment of all overdue amounts to the close of business on 31 March 1999. Goldon acknowledges that the parties met on 3 March 1999. But Goldon says that it was only agreed then that International was to have until 30 March 1999 to pay all outstanding sums. Whatever the position as to what was said on 3 March 1999, International argues that non-payment of rent and other charges over 2 months could not have entitled Goldon to claim repossession of the Premises, so that the Writ in claiming repossession was still repudiatory.

5.International says that it accepted Goldon's repudiation on 7 or (alternatively) 14 April 1999 and thus terminated the Lease and Licence. International was consequently entitled (it says) to leave the Premises before the expiry of the term stipulated in the Lease. International counterclaims for the return of its deposit of $3,566,358.91 after deducting unpaid rent, service charges, licence fees and interest covering the period up to 7 April 1999.

II. Findings of fact

6.Goldon owns the CITIC Tower, including the Premises. It is part of the CITIC Group.

7.International is a listed company. Its main business is the manufacture and sale of Chinese medicine products. International as the holding company of the NPH Group ("the NPH Group") has many subsidiaries. Nam Pei Hong Management Limited ("Management") is a wholly-owned subsidiary of International. Another NPH Group company is Nam Pei Hong Sum Yung Drugs Co. Ltd. ("Drugs").

8.By a tenancy agreement ("the 1st Lease") dated 19 January 1998 Management agreed to rent the Premises from Goldon at a monthly rent of $1,002,687.50 (exclusive of service charges and government rates) for a term of 3 years (with an option to renew for a further 2 years) commencing from 1 December 1997. Management paid a deposit of $3,566,358.91 pursuant to the 1st Lease. By a licence agreement (the 1st Licence") dated 9 February 1998 Management was allowed to use 4 car park spaces at CITIC Tower for a monthly fee of $16,000. Thereafter, with the advent of the Asian financial crisis in 1998, Management experienced cashflow difficulties and failed to pay 2 months' rent, Goldon issued a writ on 24 July 1998 claiming unpaid rent and licence fees and forfeiture.

9.Following negotiations between Goldon and Management, it was agreed in September 1998 that Goldon would accept an early surrender of the 1st Lease and an early termination of the 1st Licence by Management and International would enter into the Lease and Licence with Goldon. Management's deposit would be treated as International's deposit under the Lease. The settlement agreement was carried out, Goldon and Management entering into an Agreement for Surrender dated 14 September 1998. The rent-free months mentioned above were not stated in the Lease, but were instead stipulated in a side letter dated 14 September 1998 signed by Mr Patrick Chung Wai Sum ("Mr Chung") and Mr Raymond Yim Chun Leung ("Mr Yim"). At the time, Mr Chung was a director of Goldon and Mr Yim a director (and the only employee) of International.

10.International experienced cashflow difficulties in the difficult financial environment of 1998 and 1999. International consequently explored ways to lessen its commitments under the Lease and Licence. Under the Lease International was entitled to sub-let 30% of the Premises. In a bid to reduce its financial exposure, between December 1998 and January 1999 International negotiated with Ms Cindy Kwan Kit Ying ("Ms Kwan") (then Leasing Manager of CITIC Pacific Property Agents Limited ("CPPA") (Goldon's agent)) for the surrender of the Premises of up to 60% of the Premises to a replacement tenant. The proposed replacement tenant was Ascend Communications (HK) Ltd. ("Ascend"). However, although agreements were drafted, nothing came of the discussions.

11.Goldon was only prepared to accept a replacement tenant on the commercial footing that Goldon would be no worse financially than if International continued with the Lease and paid its commitments promptly. Ascend was only prepared to pay $28.50 per sq. ft. Goldon further required that the replacement lease with Ascend be expressed to be for a rent at $40 per sq. ft. This meant that International would have to compensate Ascend by some $11.5 (that is, $40 - $28.50) per sq. ft. of the sub-tenancy area. International would also have to pay Goldon about $22.50 (that is, $62.50 - $40) per sq. ft., $62.50 per sq. ft. being the approximate unit rate under the Lease. Although Goldon was prepared for International to be responsible for the balance of the rental due on the sub-tenancy area without the provision of a guarantee, Ascend insisted on a bank guarantee from International for about $4 million to cover the whole of the compensation payable to Ascend over the sub-tenancy period. The provision of the bank guarantee was a sticking point in International's negotiations with Ascend. The proposed deal among Goldon, International and Ascend fell through in or about late January or early February 1999.

12.As already mentioned, International failed to pay certain amounts in January and February 1999.

13.At the time Goldon's procedure for dealing with delinquent tenants was to send a reminder where rental payments or other charges were outstanding for 7 days. If monies remained unpaid for 7 days after the reminder, Goldon's Accounting department would instruct solicitors to send a letter before action. If that letter remained unheeded, a writ would automatically follow within another 7 days. Pursuant to standard procedure, Messrs Willie Chang & Co. ("WCC") sent letters before action on Goldon's behalf on 25 January and 24 February 1999 for International's January and February 1999 arrears of payment respectively.

14.On 3 March 1999 a short meeting took place in CPPA's office. It was attended by Mr Chung and Ms Kwan for Goldon and Mr Yim and Mr Daniel Lo Chun Kit ("Mr Lo") on behalf of International. The meeting was conducted in Cantonese. Mr Yim started by saying that, despite cashflow problems, International was anticipating receipt of a payment from the Mainland which would enable it to meet its commitment to Goldon. Mr Yim asked Goldon to defer legal proceedings and to give International more time to pay.

15.Mr Chung was disposed to assist International. He therefore said that Goldon was prepared to give International a grace period. Mr Chung told International that it would have until 30 March 1999 to pay. But Mr Chung stressed that International had to pay by 30 March 1999 and in any event before 31 March 1999. Mr Chung concluded by saying that from then on International should be a good tenant and pay its rent punctually. The meeting then ended.

16.It is International's case that at the meeting of 3 March 1999 Mr Chung had given International until 31 March 1999. But I accept Mr Chung's evidence on this question. Mr Chung and Ms Kwan explained in Court that a writ had already been drafted in accordance with Goldon's normal procedure and it was Goldon's intention that, if International failed to pay its arrears, the writ should issue on 31 March 1999. On 1 April 1999 a further payment of rent would fall due and Goldon wished for the writ to be issued before that happened. Goldon did not want any outstanding rent payment to exceed 2 months before legal action was taken. On 1 April 1999 3 months rent would be outstanding and (if that amount was not paid) it would mean that the deposit securing International's tenancy would not be enough to cover the debt owed. Ms Kwan mentioned that 2 to 6 April 1999 coincided with Easter and Ching Ming and Goldon wanted to issue a writ before the long holiday. However, this did not seem to be as significant a factor as the imminence of 1 April, in Goldon's insistence on payment by 30 March 1999 at the latest.

17.A statement from Mr Lo (who is abroad and can no longer be traced) was adduced by way of hearsay notice. The statement alleges that a 31 March 1999 deadline was agreed. In Court Mr Yim confirmed Mr Lo's version of events. I am unable to attach any weight to Mr Lo's evidence on this point since that has not been tested in cross-examination. As far as Mr Yim is concerned, he said that Mr Chung had given until "the end of March" for International to pay and he (Mr Yim) personally understood that to mean 31 March 1999. In my judgment, Mr Yim has misremembered events. I do not accept his evidence on this matter.

18.On 23 March 1999 pursuant to Goldon's procedure WCC wrote a letter before action to International in relation to unpaid service charges and licence car park fees for March 1999.

19.Tenants at the CITIC Tower must normally inform the building management of any movements of heavy goods from leased offices. This is done for security reasons and in order that lorries for the relevant goods can be allowed into the building car park. On 28 March 1999 Drugs informed the management of CITIC Tower that it was arranging for Drugs' lorry (vehicle registration no. FT 1006) to remove 26 boxes of goods (including about 3 cartons containing copies of International's Annual Returns) and 1 computer from the Premises.

20.International made no payment on 30 March 1999. In fact as at the end of March 1999 the receivable from the Mainland had not materialised in International's hands. Nor was any payment of outstanding rent, service charges and licence fees tendered on 31 March 1999.

21.On 30 March 1999 at 4.30 pm International informed the management of CITIC Tower that is was moving out 2 sets of computers from the Premises by a Mercedes Benz with registration no. GZ 7050 (in Management's name).

22.On 31 March 1999 Drugs informed the management of CITIC Tower that it was removing company documents and other material by vehicles with registration nos. FT 1006, GT 5490 and HN 6390. The last 2 were street lorries hired by Drugs because its company lorry was insufficient to move out its goods. Even then Drugs had to obtain a second exit permit on 31 March 1999 because one trip was not enough for the carriage of its materials.

23.At some time before 10.35 am on 31 March 1999 the management of CITIC Tower received the following letter ("the Management Letter") under Management letterhead's:-

"Dear Sir,

Re: Return parking tickets

Due to the removal of our office from Citic Tower on 31 March 1999, we shall return the tickets for car number# FA 6613, GZ 7050, GK 4104 and GS 6619 for your kind attention.

We thank you in advance for your assistance.

For & On Behalf OF
Nam Pei Hong Management Ltd.

(signed)

Bonnie Yau

Deputy Manager of
Human Resource & Administration Dept."

Car FA 6613 was a Mercedes Benz registered to Foster (Group) Limited ("Foster")¹ with an address at the Premises. Car GK 4104 was an Opel registered to Sinogrowth Investment Limited ("Sinogrowth")² with an address at 1902 Harbour Centre, 25 Harbour Road, Wan Chai. Car GS 6619 was a BMW registered to HHK Finance Limited ("HHK")³ with an address at 3001 Shun Tak Centre, West Tower, 168-200 Connaught Road Central.

24.Ms Kwan was told of the Management Letter. She in turn told Mr Chung. Mr Chung then telephoned WCC and instructed them to issue the Writ.

25.At about noon on 31 March 1999 WCC wrote to International as follows:-

"You have failed to pay the arrears of rent demanded by us in our said letter dated 24th February 1999. Your continued failure amounts to repudiation of the Lease in respect of the above premises dated 14th September 1998 and made between our client as the Landlord and you as the Tenant. Further your failure to pay rent for the month of January 1999, coupled with your failure to pay rent due for February 1999, also constitutes repudiation.

We write to inform you that your repudiation of the said Lease is hereby accepted by our client and that the said Lease and the tenancy thereby created are hereby terminated."

The Writ was issued in the afternoon of 31 March 1999. The Writ as originally drafted claimed a repudiatory breach arising from the failure to pay rent, service charges and licence fees and sought repossession of the Premises.

26.On 7 April 1999 International attempted to return the keys to the Premises to the management of CITIC Tower. Not having received any instructions from Goldon on the matter, the CITIC Tower management refused to accept the keys. On 12 April 1999 International again attempted to return the keys, this time by simply dropping them in an envelope at the offices of the management of CITIC Tower.

27.On 14 April 1999 International's solicitors then Messrs Siao, Wen & Leung ("SWL") wrote to WCC as follows:-

"Our client denies that it was in wrongful repudiation of the lease dated 14th September, 1998 (the 'Lease'). During a meeting held at your client's office on or about 3rd March, 1999 between Mr daniel Lo and Mr Raymond Yim of our client, and Mr Patrick Chung and Ms Cindy Kwan representing your client, Mr Patrick Chung agreed that our client can pay the rental arrears on 31st March, 1999.

Your letter dated 31st March, 1999 and your client's issuing the aforesaid proceedings claiming, inter alia, possession against our client, whether individually or cumulatively, in turn amount to a wrongful repudiation of the Lease on the part of your client, and our client was entitled to, and did accept your client's wrongful repudiation by vacating the Premises on 7th April, 1999, thereafter despite our client's repeated attempts, the key to the Premises were only received by your client's management office on 12th April, 1999.

SWL then claimed the return of the rental deposit after taking into account all unpaid arrears up to 7 April 1999⁴.

28.Despite the statement in SWL's letter that International had vacated the Premises, in fact substantial property belonging to International remained on the Premises. Such property was not completely removed from the Premises until 29 April 1999.

29.There is an issue between Goldon and International as to whether International had decided to vacate the Premises prematurely some time before the sending of WCC's 31 March 1999 letter and the issue of the Writ. Goldon says that the exit permits issued to Drugs on 28 and 31 March 1999 coupled with the Management Letter evidenced an intention on International's part not to be bound by the term of the Lease and Licence, but instead to leave the Premises early.

30.International contends that, since Drugs' management needlessly occupied about one third of the Premises, Drugs decided to moved out its belongings and cartons (largely comprising a new Chinese medicine product which Drugs was promoting) on 28 and 31 March 1999 in order to free up space in the Premises. Drugs maintained a warehouse in Shatin and it was thought more convenient to have its management office in the same location as the warehouse. The exit permits issued to Drugs could not therefore prove (International submits) an intention on the part of the NPH Group as a whole to leave the Premises. As for the Management Letter, that merely concerned a decision by Management to give up use of car park spaces and again demonstrated no intention on International's part to vacate the Premises early. Alternatively, the Management Letter (International submits) ought to have been sent under Drugs letterhead.

31.As a matter of fact, International having learned at about noon on 31 March 1999 that Goldon was treating the Lease as forfeited and seeking repossession, Mr Sun, Mr Yim, Mr Lo and Mr Xu Zhouxing (an assistant manager of a subsidiary of International) had visited a vacant unit of 1,811 sq. ft. on 18th floor, Harbour Centre, 25 Harbour Road, Wanchai ("the HC Premises") at between 2.00 and 3.00 pm on the same day. The group liked what it saw and on the spot agreed to lease the HC Premises for a term of 2 years at a monthly rent of $47,086. A Provisional Agreement ("the Provisional Agreement") was signed between Canny Management Ltd. ("Canny") (a company with the NPH Group) and Xipho Development Co. Ltd. (the landlord of the HC Premises) acting through Sun Hung Kau Real Estate Agency Ltd. on 31 March 1999. A formal lease for the HC Premises was executed by Canny on 8 May 1999.

32.International says that it had to lease the HC Premises at a moment's notice as a result of Goldon's repudiatory breach in seeking repossession. But for Goldon's conduct, International claims that it would have remained on the Premises and had no intention of abandoning the same.

33.In my view, the NPH Group (including International) must have decided to vacate the Premises at some time before the sending of WCC's letter on 31 March 1999 and the issue of the Writ. This is plain from the Management Letter. That explicitly states, "Due to the removal of our office from Citic Tower on 31 March 1999". Much play was made of the fact that the Letter was written on Management letterhead and signed on behalf of Management. But I do not see that the letter was confined to Management.

34.International only had one employee. Of necessity it shared office staff and equipment with Management and other companies within the NPH Group. Ms Bonnie Yau who signed the Management Letter was effectively in charge of personnel and administration for International, Management and most members of the NPH Group, with the only one significant exception being Drugs. In reality, Management could not have been surrendering the tickets for car par spaces earmarked for International's use under the Licence without International's authority. That Management letterhead was used seems to me to have been merely fortuitous. When one couples the Management Letter with the near simultaneous departure of Drugs from the Premises, I am left in little doubt that the NPH Group as a whole had decided to not to pay any further rent (nothing was tendered on 31 March or 1 April 1999) but to quit the Premises instead for cheaper offices as soon as possible.

35.I do not accept that the Management Letter should have been sent under Drugs letterhead.

36.International would have the Court believe that the renting of the HC Premises was decided in a matter of hours in the afternoon of 31 March 1999. I think that this stretches credulity and it seems to me inherently more probable that at least for a few days before 31 March 1999, International had already been looking for office space to occupy. A pointer to this is the unexplained fact that the Provisional Agreement is addressed to Canny "c/o Treasure Land (HK Commercial Leasing) Property Consultants Ltd. [,] 24/F Henley Building [,] No.5 Queen's Road Central" ("Treasure Land"). When and how did Treasure Land come on the scene? It is hard to believe that Canny quickly engaged it in the afternoon of 31 March 1999 after viewing the Property. No explanation of Treasure Land's involvement was proffered at trial by any of International's witnesses.

37.After International had completely left the Premises, Goldon attempted to re-let the same in mitigation of its loss. On 23 August 1999 Goldon entered into a Licence ("the Sony Licence"), a Lease ("the Sony Lease") and a 3 car park space Licence Agreement ("the Sony with Sony Music (Asia) Inc. ("the Sony Car Park Licence"). The Sony Licence and Lease covered 12,448 sq. ft. of the Premises.

38.By the Sony Licence a rent-free licence of 6 months from 23 August 1999 was granted to Sony for the purpose of carrying out decoration and fitting works. The Sony Lease provided for a term of 6 years from 23 February 2000 to 22 February 2006 at a monthly rent of $323,648 and a service charge of $82,156.80, with a rent review for the period from 23 February 2003 and subject to a break clause after 42 months. It was also agreed that there would be a rent-free period from 1 February to 31 July 2001 and from 1 February to 31 May 2002. In the event Sony did not exercise the break clause. The Sony Car Park Licence allowed Sony the use of 3 car park spaces at the CITIC Tower for $12,000 per month.

III. Discussion

A. Repudiatory breach

39.By 31 March 1999 rent due for January 1999 from International was 88 days in arrears. Rent due for February 1999 was 57 days in arrears. Service charges and fees due for March 1999 was 30 days in arrears. By failing to pay rent, service charges and licence fees on or before the expiry of Mr Chung's grace period on 30 March 1999, International was plainly in breach of the Lease and Licence. Nonetheless, Ms Myint (for International) submits that non-payment of the rent due on January and February 1999 cannot be a breach which goes to the root of the Lease. Ms Myint relies on Hop Woo Cheung Enterprises Ltd. v. Intergroup Industries Ltd. [1982] HKC 436, where Barnes J explicitly said that without more "the failure to pay punctually ... two instalments of rent did not amount to repudiation".

40.But Hop Woo is distinguishable from the circumstances here. At the 3 March 1999 meeting Mr Chung made it clear that Goldon expected International to be punctual in the payment of its obligations under the Lease and Licence and, in particular, that outstanding arrears had to be paid by 30 March 1999 at the absolute latest. International accepted that deadline. As a result Goldon made the time for payment of the outstanding rent, service charges and licence fees of the essence. International's failure to pay on 30 March 1999 thus constituted a breach of condition which entitled Goldon to treat the Lease and Licence as repudiated. By the WCC's 31 March 1999 letter to International and the issue of the Writ Goldon accepted International's repudiation.

41.Ms Myint accepts that as a matter of legal principle the time of payment of rent can be made of the essence. But she argues that could not have happened in the specific circumstances of this case. This is because (Ms Myint submits) by clause 5(2) of the Lease interest was chargeable on overdue rent payments. Ms Myint also relies on clause 5(6) in the following terms:-

"No condoning excusing or overlooking by the Landlord of any default breach or non-observance or non-performance by the Tenant at any time or times of any of the Tenant's obligations herein contained whether the rent the further or additional rent or the Service Charge or other charges payable hereunder or any part thereof have been accepted or not shall operate as a waiver of the Landlord's rights hereunder in respect of any continuing or subsequent default breach or non-observance or non-performance or so as to defeat or affect in any way the rights and remedies of the Landlord hereunder in respect of any such continuing or subsequent default or breach and no waiver by the Landlord shall be inferred from or implied by anything done or omitted by the Landlord unless expressed in writing and signed by the Landlord. Any consent given by the Landlord shall operate as a consent only for the particular mater to which it relates and in no way shall be considered as a waiver or release of any of the provisions hereof nor shall it be construed as dispensing with the necessity of obtaining the specific written consent of the Landlord in the future unless expressly so provided."

Ms Myint says that the latter provision prevents Goldon from making time of payment of the rent of the essence unless notice is given in writing. Finally, Ms Myint says that what Mr Chung had said in the 3 March 1999 meeting was insufficient to make time of payment of rent of the essence because Mr Chung did not specifically mention that a failure to pay rent would cause Goldon to regard the Lease as repudiated.

42.There is no substance to Ms Myint's objections. That interest is chargeable on overdue rent does not logically prevent a party from making time of payment of the rent of the essence by giving reasonable notice to such effect. There is nothing in clause 5(6) (which appears to have been inserted in the Lease for Goldon's protection as landlord) requiring a written notice of any intention on Goldon's part to make time of payment of the essence. Finally, International must clearly have understood at the 3 March 1999 meeting that, if rents were not paid by the expiry of the grace period, Goldon would proceed with legal action. Letters before action had been despatched by WCC to Goldon and International's purpose of the 3 March 1999 meeting was to persuade Goldon to hold back legal proceedings. In those circumstances, it is hard to see how International could not have understood that the failure to pay punctually by the deadline would have serious consequences.

43.Even if I am wrong in holding that Goldon had made time of the essence, non-payment of outstanding amounts on 30 March 1997 coupled with the despatch of the Management Letter (wherein International acting (as I have held) through Management manifested its intention no longer to be bound by the Lease), constituted a repudiatory breach in any event. Goldon was entitled to treat such conduct by International as putting an end to the Lease.

44.Neither WCC's letter of 31 March 1999 nor the original Writ refer to International's premature departure from the Premises as a basis for terminating the Lease and Licence. This does not seem to me to be material. Chitty on Contracts (29th ed.), vol.I, §24-014 states:-

"The general rule is well established that, if a party refuses to perform a contract, giving therefore a wrong or inadequate reason or no reason at all, he may yet justify his refusal if there were at the time facts in existence which would have provided a good reason, even if he did not know of them at the time of his refusal.... The general rule is the subject of a number of exceptions. First, a party cannot rely on a ground which he did not specify at the time of his refusal to perform 'if the point which was not taken could have been put right.' Secondly, a party may be precluded by the operation of the doctrines of waiver or estoppel from relying on a ground which he did not specify at the time of his refusal to perform. Thirdly, a party may be held to have accepted the goods so that he is no longer able to justify his refusal to perform. However, there does not appear to be any separate principle which would preclude a party from setting up a different ground simply because ti would be unfair or unjust to allow him to do so."

Given that the exceptions identified by Chitty are not applicable here, the fact that Goldon did not initially rely on International's decision to abandon the Premises in support of Goldon's case on repudiatory breach, does not preclude Goldon from later doing so.

45.There is a further point. Even on the assumption that time had not been made of the essence and that the evidence is insufficient to establish an intention on International's part to vacate the Premises prematurely, one must look at all relevant circumstances in deciding whether the failure to pay rent constitutes a repudiatory breach. See Super Century Investments Limited v. Advance Limited and Mao Kong Mei Lan, Julia HCA No.73 of 2002, 24 June 2002 (Deputy High Court Judge Lam), §27.

46.Mr Lo's witness statement (admitted under hearsay notice) states (at §3):-

"The Defendant [International] first took up a lease of 28th Floor of Citic Tower, No.1 Tim Mei Avenue, Hong Kong (hereinafter called 'the Premises') in 1998 for a term of 3 years commencing on 1st December 1997, at the monthly rent of HK$1,002,687.50, under a lease dated 19th January 1998 (hereinafter called 'the Previous Lease') entered into by the Plaintiff (as the landlord) and Nam Pei Hong Management Limited (hereinafter called 'the Subsidiary'), a wholly-owned subsidiary of the Defendant, (as the tenant). At the same time, the Defendant also took up a licence of four (4) car parking spaces on Carpark Levels 1 to 9 of Citic Tower (hereinafter called 'Parking Area') for a term of two years and eleven months commencing on 1st february 1998, at the monthly licence fee of HK$16,000.00, under a licence dated 9th february 1998 (hereinafter called 'the Previous Licence') entered into by the Plaintiff (as the licensor) and the Subsidiary (as the licencee). Since the Defendant moved into the Premises in about February 1998, the Premises became the headquarters of the Defendant."

Mr Yim confirmed Mr Lo's §3 (among others) in evidence before the Court.

47.Taken at face value, Mr Lo's and Mr Yim's evidence suggests that International was the real tenant all along, including under the 1st Lease. The 1st Lease thus appears to have been simply taken out in the name of Management acting for and on behalf of International. It follows that the failure to pay rent under the 1st Lease can be attributed to International as Management's principal. Goldon would be entitled to have regard to the history of arrears in respect of the 1st Lease in determining whether to treat International's failure to pay rent in January and February 1999 under the Lease as repudiatory. In particular, Goldon would be entitled to regard International as having a history of persistent default due to financial difficulty. The non-payment in January and February 1999 are not then events in isolation but part of a continuing series of defaults capable of amounting (when seen as a whole) to repudiation.

48.Accordingly, I conclude that International repudiated the Lease and Licence and Goldon was entitled to seek repossession by the issue of the Writ. It follows that International's claim that Goldon repudiated the Lease fails.

B. The measure of damages

49.The normal measure of damages in cases such as this would be the difference between the total amount which Goldon would have received had the Lease and Licence been duly performed less the actual amount which Goldon received from International. Account must also be taken of Goldon's duty to mitigate its loss.

50.Goldon claims compensation as follows:-

(1) Between 1 January 1999 and 30 November 2000 had the Lease been fully performed, Goldon would have received $21,056,437.50 ("Sum 1") in rent. Further, between 1 February 1999 and 30 November 2000 Goldon would have received $2,329,443.60 ("Sum 2") in service charges and $352,000 ("Sum 3") in car park licence fees. The total of Sums 1, 2 and 3 is $23,737,881.10 ("Sum A").

(2) Goldon spent $825,539 to reinstate the Premises for Sony's occupation. Goldon seeks reimbursement of this amount ("Sum B").

(3) Goldon is prepared to give credit for the deposit of $3,614,358.91 and for the following amounts received from Sony:-

(a) Net effective rent received from 23 February to 30 November 2000: $2,376,651.70 ("Sum 4").

(b) Service charges received from 23 August 1999 to 30 November 2000: $1,256,203.97 ("Sum 5")

(c) Car park licence fees from 15 October 1999 to 30 November 2000: $162,580.60 ("Sum 6").

The total of Sums 4, 5 and 6 is $3,795,436.27 ("Sum C").

(4) Goldon's claim is therefore for (Sum A + Sum B) - (Deposit + Sum C) or $17,153,624.92 ("Sum X").

51.Ms Myint submits that Goldon failed to mitigate its loss properly in that it failed to obtain the "best rent" for the Premises after International vacated the same. She relies on expert valuation evidence from Mr Andy Chan ("Mr Chan") of DTZ Debenham Tie Leung Limited. Mr Chan suggests that the Premises were let to Sony at too low a rent. He values the Premises at $425,000 on 1 April 1999, $419,000 on 23 August 1999, $403,000 on 31 January 2000 and $481,000 on 30 November 2000.

52.It was never suggested to any of Goldon's witnesses that the letting to Sony was otherwise than the result of arm's length negotiations. Indeed, the evidence is that the Sony Lease was the outcome of hard bargaining with Sony acting by an estate agent, Messrs Cushman & Wakefield.

53.The duty to mitigate merely requires a plaintiff to take reasonable steps to reduce (or avoid increasing) his loss. Given the arm's length negotiations with Sony, I cannot see how Goldon can be said to have acted otherwise than reasonably. In my view, the agreement reached with Sony was indicative of market rental at the time.

54.Ms Myint criticises Goldon for failing to rent the remainder of the Premises by 1 October 1999. She bases this on Mr Chan's view that in the market prevailing in mid-1999 the whole of the Premises could have been re-let by then. However, it was never put to any of Goldon's witnesses that as a matter of fact they failed to use reasonable endeavours to let the remainder of the Premises. In the circumstances, I do not think that it is open to International to suggest that the balance of the Premises ought to have been let by 1 October 1999 on the basis of a subjective remark by Mr Chan unsupported by any particular data in his expert report. In any event, the evidence is that Goldon actively marketed office spaces at CITIC Tower, including the 28th floor, through regular advertising. Despite such effort, no prospective tenant was prepared to take up the remainder of the Premises.

55.Mr Myint further criticises Goldon for failing to let the fourth car park space by 1 May 1999. This again is based on what amounts to little more than a speculative remark by Mr Chan in the course of examination by Ms Myint, unsupported by any empirical discussion in Mr Chan's expert reports. Moreover, the fourth car park space was tied to the rental of the balance of the Premises. I do not think it was unreasonable for Goldon to retain such space while looking for a tenant for the balance of the Premises.

56.It follows from the foregoing that I do not regard Mr Chan's valuation evidence as helpful or relevant. Nonetheless, I shall make a few observations for the sake of completeness on the competing valuations presented by the parties.

57.I have serious doubts over the empirical rigour of Mr Chan's methodology. Although he started with a consideration of some 12 comparables, following adjustments, he rejected most as being either too high or too low and inconsistent with the "market tone" which he discerned. Inexplicably, the Sony lease was rejected as "too low" by Mr Chan even though it was for a substantial part of the actual Premises which Mr Chan was valuing and therefore required only a minimum of adjustment. In the end Mr Chan was left with 2 comparables as "indicative" of market tone and an additional 2 comparables which appeared to be within the tone set by the 2 indicative comparables chosen. But on what basis, apart from subjective feel, did Mr Chan arrive at 2 "indicative" comparables from the 12 with which he started out? To reject comparables as "too high" or "too low" in order to arrive at the "best market rent" seems to be circular reasoning. Such exercise of elimination assumes that one already has an idea of the "market tone" even before one has come to a conclusion as to an appropriate market valuation.

58.Mr Chan used the Rating and Valuation Department Index ("RDI") for office properties in Central and Sheung Wan. Mr Ng Sai Hee ("Mr Ng"), Goldon's expert, relied on the Jones La Salle Index ("JLI") for core Central properties. Ultimately, it is a matter of judgment which index a valuer chooses. I merely point out that (as Mr Ng observed in examination) use of the RDI in Mr Ng's valuation calculations would in some cases have resulted in much lower rental values for the Premises than even those which Mr Ng was putting forward on Goldon's behalf.

59.I am not persuaded by Mr Chan's adjustment of 1% per floor in adjusting valuations for offices in CITIC Tower. I prefer Mr Ng's more modest figure of 0.33% per floor. I do not think that reference to the floor differentials at Chinachem Golden Plaza ("CGP") in Tsim Sha Tsui East assists Mr Chan's case one way or another. The CGP is a different type of building in a wholly different business environment.

60.I am not persuaded by Mr Chan's adjustment of 10% for orientation. That seems far too broadbrush and fails to take account of the 3 different basic views (harbour, Central, Wanchai) at the CITIC Tower.

61.On the whole I prefer Mr Ng's valuation. He arrived at $18.15 per sq. ft. for the Premises as at 23 August 1999, the date of the Sony Lease. This compares well with the net effective rent of $20.29 per sq. ft. (ignoring the break clause and having regard to the full 6 year term) or $19.90 (taking account of the break clause) achieved by the Sony Lease.

62.Finally, I note that Mr Merry (appearing for Goldon) calculated the monthly effective rent received from Sony by taking account of all monies received and to be received from Sony as rent during the 6 years of the Sony Lease and dividing that amount by 72 months. Paradoxically, if Goldon calculated the actual amount received from Sony for the period between 23 August 1999 and 30 November 2000, the amount would be $2,990,953.90. That is some $600,000+ over the amount of $2,376,651 (based on Sony's effective rent) for which Mr Merry is prepared to give credit to International. I drew this to Ms Myint's attention in closing submission. However, she believed that the correct basis for calculating that part of Sony's rent for which International should receive credit was effective rent.

IV. Conclusion

63.There will be judgment for Goldon in the amount of Sum X⁵. In light of the evidence from Mr Chung that the interest rate of 1.5% per month stipulated in clause 5(2) of the Lease was not reflective of any genuine attempt to pre-estimate damages, I do not think that I can award the stipulated interest rate on Sum X or any part thereof. Accordingly, interest is to run on $2,249,142.60 (that is, that part of Sum X which represents arrears of rent, service charges and licence fees claimed under the Writ) at an annual rate of 1% over Hong Kong prime from date of Writ until date of judgment. Interest is to run on the damages and mesne profits part of Sum X (that is, $14,904,482.32) from 1 December 2000 to date of judgment at an annual rate of 1% over Hong Kong prime. Thereafter, interest is to run on the entire judgment debt at the judgment rate until payment.

64.The Counterclaim is dismissed.

65.I will now hear the parties on costs and any other consequential orders.

Representation:

Mr Malcolm Merry, instructed by Messrs Willie Chang & Co, for the Plaintiff

Ms Sue Myint, instructed by Messrs Tanner De Witt, for the Defendants

1 Foster changed its name on 11 August 2000 to Nam Pei Hong (Holdings) Limited.

2 Sinogrowth is a private investment company. One of its directors, Mr Sun Hiu Lu ("Mr Sun"), was and remains a director of International.

3 HHK was controlled at the time by Heilongjiang Economic Development Corporation. One of its directors, Ms. Huang Shuyun, was also a director of International.

4 International claims that the abortive return of the keys on 7 April 1999 or (alternatively) SWL's letter of 14 April 1999 constituted unambiguous acceptance of Goldon's repudiation.

5 $17,153,624.92.