Bloomark Investment Ltd and Another v. Yu Yim Keung and Another

DCCJ 5779/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5779 OF 2002

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BETWEEN

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Coram : Deputy Judge Lam in Court

Dates of Hearing: 10^th and 11^th August 2005

Date of Handing Down Judgment : 17^th August 2005

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JUDGMENT

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Background

1.This is a claim by joint landlords (“Ps”) for unpaid rent and fees, called “interim payment”, in respect of a shop in Shatin Plaza.  Defendants (“Ds”) commenced tenancy on 1st February 2001 although the tenancy agreement was dated May 2001 due to processing time taken by Henderson which was Ps’ land agent.  The shop was used as a “foot therapy” clinic, and D1 appeared to be the more active tenant.  The initial period of tenancy was for 12 months with an option for Ds to renew.  About 6 months since tenancy commenced, on 26th July 2001 Ds by letter jointly exercised their option to extend the tenancy for a year (Bundle B/047).  By the tenancy agreement in its First Schedule Pt.11 paragraph 2 (Bundle B/027-028) the landlords’ offer was a unilateral offer for tenants to extend, so that once a tenant has exercised this option the landlord had no right to refuse (more on the law below).  The only uncertainty in this case was whether the rent would remain at the same level as, or higher than, the existing level, depending on negotiations or an independent valuer’s determination: Bundle B/036-037.  Before rent is determined for the renewed period, a tenant was liable for “interim payment”: B/037 at paragraphs 5 to 6.  Ds had paid rent for the first 12 months, but had not paid any rent or fee for the renewed term despite their exercise of option to renew.  The within Writ was issued on 4th September 2002, the shop continuing to trade until 15th October 2002 when Ds surrendered same.

2.The claim is for the period from 1st February 2002 to 31st August 2002 at $ 30,000 per month together with rates and other fees, including fees (but not rent) for the month of September 2002.  The total claim is for $292,742.80.  D1 not having entered a Defence, default judgment was entered against him on 9th December 2002.  Accordingly this trial is only over D2’s liability.

3.D2 disputes liability basically on the following grounds: (1) D2 says she had resigned from partnership from D1 since 26th July 2001 hence not liable for D1’s offer to extend the lease, (2) Because a Mr POON who was the proposed substitute tenant for the renewed period, and both Ds, had all signed a transfer of tenancy (Bundle B/077-078), D2 says this had released her from liability for further rent, (3) D2 says Ps are estopped via the conduct of their agent Mr LEE (PW2), because PW2 had informed her that upon all parties signing the transfer of tenancy, she would be released, and (4) Ps forfeiture of the deposit would release her from liability.

The evidence

4.PW1 was Ms YIP, Assistant Leasing Officer of Henderson Property Agency acting for the Ps.  She adopted her witness statement in the Court Bundle.  She said that once a tenant exercised his option to renew, her company had no right to refuse.  This case was an option to continue tenancy before the existing tenancy had expired (which she referred to as “續生約”).  The only negotiable item regarding an extended tenancy was the level of rent, but all parties had known from the original tenancy agreement that the rent in the renewed period could not be less than the existing level, only that if parties could not agree on a higher level then an independent valuer would need to be engaged to give a determination.  I note that in this action Ps are only claiming at the previous level of rent, which was the minimum level for the renewed period pursuant to the tenancy agreement.  PW1 said, and this is not in dispute, that the shop was trading right up to the time of surrender, i.e. 15th October 2002.

5.PW2 was Mr LEE, a Leasing Clerk of Henderson Property Agency   His testimony was consistent with PW1.  He had dealt with both Ds, although mainly with D1.  In January 2002 when the original tenancy was about to expire, because of the exercise of option to extend, he had prepared a “tenancy extension confirmation” for Ds to sign, which D1 took away saying he would ask D2 to sign, but had never returned the document. In late March or early April 2002 (about 2 months after the original tenancy had expired), D1 suddenly took along a Mr POON who said he was willing to take over the tenancy, as a result of which D1, POON, and about 2 days later D2, all signed a transfer (Bundle B/077-078).  However as PW2 had no power to effect the transfer himself, such power vesting only with Management, PW2 only told the parties that the transfer was subject to Management endorsement.  In any case POON’s two cheques had not yet been presented, not to mention honoured.  As matters turned out, about 2 days later D1 and POON returned, POON saying to PW2 that his own business had collapsed and hence he could not take over the tenancy.  PW2 informed Management who said it had not yet processed the transfer, and so the transfer was cancelled (as we can see at Bundle B/077).  As to D2 having dissolved partnership with D1, PW2 said this was not his concern because he regarded D1 and D2 “as one”.  PW2 said that if D2 wanted to terminate her own tenancy, a new agreement must be signed by all parties in substitution, but this had never been done, and so D2 remained liable, which we know is correct in Law.  The defence put to PW2 that he had told D2 her tenancy was terminated upon parties signing the transfer to POON, but this PW2 disagreed because firstly he, as a clerk and not Management, had no power to say, and secondly the transfer had not yet gone through.  I find PW2’s testimony logical and convincing, and I accept it to represent the truth. 

6.D2 testified.  In essence she said since dissolution of partnership from D1 she had nothing more to do with the shop, the exercise of option at Bundle B/047 she had signed only to enable D1 to negotiate with the landlord, that it was not a binding contract, that after 31st January 2002 she was no longer a tenant, and that when she signed the transfer of tenancy (Bundle B/077-078) she had thought it was a finalised document because PW2 had said to her “There will be a new tenant, this will have nothing further to do with you”.  She says that for the above reasons she should not be liable to pay the claim. 

Findings

Validity of exercise of option to extend tenancy

7.There is no dispute regarding the validity of the original tenancy agreement, or the terms therein.  The notice to extend is evident at Bundle page B/047 (I will refer to it as “the Notice”).  D2 does not dispute she had signed the Notice, but she asserts she had signed the Notice without knowing its nature because D1 had misled her into signing (more below).  I do not accept this thesis.  The document is in Chinese, and she admits she could read Chinese.  Furthermore there was D2’s identity card number adjacent to her signature.  When D2 signed the Notice she could not have regarded it as “just a casual support for D1 to see if he could negotiate an extension for himself only”.  The subject matter of the Notice was perfectly clear: see the heading being “Notice to extend lease”, and the first paragraph which clearly refers to extension of lease of the subject shop premises.  And the tenants’ intention was perfectly clear: see the first sentence after the introductory paragraph, which says “Following consideration, this Centre has decided to extend tenancy from 2002 (本中心經研究決定2002年續約)”. 

8.Once Ds exercised the option, they became tenants in equity, and the extension was valid and enforceable: see Hill & Redman’s Law of Landlord and Tenant Issue 49, March 2005 at paragraphs 7685 to 7701. 

9.D2 says, however, that the Notice was not a valid exercise of option because it was ambiguous in that it contained uncertain terms, such as the request for a favour not to increase the rent, and its clarification (Bundle B/048) mentioned an extension period longer than 12 months.  D2 relies on the case of Bess Fashion Management Co Ltd & Anor  v  Star Play Development Ltd & Anor [2002] 1 HKC 708.  However the Notice in our case today is quite the opposite of the Bess Fashion situation: see at judgment paragraph 26(3) where the Court said “(The tenant was) effectively saying that it was awaiting to hear from the landlord as to suitable terms for the renewal of the tenancy… the tenant was willing to renew but only on reasonable terms… the tenant was saying that it wished to negotiate afresh all terms of the tenancy and was awaiting the landlord’s proposals in this regard”.  In our case today I can find no ambiguity regarding intention to exercise the option to extend.  Furthermore, the Notice has passed all the tests under paragraph 22 in the judgment of Bess Fashion.  I can find nothing which points to the Notice not being valid.

10.In our case today the only thing regarding extension of lease was the undetermined level of future rent, but this had nothing to do with whether the Notice was valid or not.  The level of rent would as a matter of certainty be settled because of the provisions stated in the Third Schedule of the tenancy agreement, where even if the parties could not agree, the matter would be settled via the engagement of a surveyor whose decision would be final (Bundle B/036).  There was nothing in either the First or the Third Schedule to say that if rent in the extended period was not agreed upon, the exercise of option would become null and void.  This is also PW1’s testimony which I accept to represent the true situation.  Furthermore, while Ds had asked for a favour not to increase the present level of rent, there was nothing in the Notice like a demand for a lower rent such as referred to in Mauray  v  Durley Chine (Investments) Ltd [1953] 2 QB 433. 

11.D2 also suggested a hint of D1 having deceived her into signing the Notice.  For reasons already stated above, I do not accept her testimony about the lack of understanding or her misunderstanding of the contents of the Notice at Bundle B/047 (or of the Transfer at Bundle B/077-078).  But even if D1 had deceived her into signing the Notice, which I do not accept to have taken place, this did not affect her obligation vis-à-vis the landlord. 

12.For the above reasons I find that the Notice was a valid exercise of the option and this bound both Ds.  Further, the Notice gave life to the tenants’ obligation to make “interim payment”: see the Third Schedule to the tenancy agreement at Bundle B/036 to 037, especially at paragraphs 5 and 6. 

D2’s resignation from partnership with D1

13.D2 was party to the extension of lease as an individual, albeit as a joint applicant with D1.  Liability for rent and fees was joint and several: not only is this the common law position, but the tenancy agreement in Clause 9(b) at Bundle B/025 has made this clear.  What has happened between D2 and D1 is external to the Ps.  No transfer from D1 and D2 as joint tenants over to D1 as sole tenant had ever been submitted, not to mention subsequently agreed to by Management, to free D2 from the then existing tenancy or from the extended tenancy.  I do not see how D2 can escape liability by the dissolution of partnership.  The situation was not that an incorporated company had been the tenant and D2 had resigned from directorship.  I do not find D2’s dissolution of partnership to be of any relevance in the present action.

The proposed substitute tenant and the issue of equitable estoppel

14.For obvious reasons if the lease had validly been transferred from Ds to Mr POON, Ds would have been released.  However Mr POON had not taken up the lease, and the lease was cancelled before it had been processed by Henderson.  The “transfer document” (Bundle B/077-078) had in any event only been signed by one side, i.e. the tenants’ side.  I am unable to see how a non-completed, and subsequently cancelled, instrument could enable D2 to say she can now rely on it at law. 

15.In the alternative, D2 relies on equity to come to her aid.  D2 says PW2 (Mr LEE) as agent for the Ps has estopped Ps from enforcing the extension of lease.  PW2’s testimony is that he had said to both Ds and Mr POON that the transfer was “subject to approval” by Management, and “subject to Mr POON taking up the lease”.  The transfer, in the last paragraph on the second page under “戊”, clearly shows that there were conditions precedent, but none of these conditions precedent had eventuated.  D2, however, said that PW2 had told her that by signing the transfer she would be out of the picture.  As the transfer had only been signed by the tenants and not yet by PW2’s principals, D2’s assertion about PW2 is illogical, especially when PW2 was in the daily business of dealing with the preparation of commercial leases.  Furthermore, PW2 had no authority to endorse the transfer, nor did he have any motive to mislead D2, because he was merely Henderson’s clerk, and further, it did not matter to him or to Henderson as long as somebody was paying the rent, and therefore there was no reason why PW2 would have any urge to lure D2 into signing the transfer.  It may be that D2 had misunderstood PW2, because it is possible that PW2 might have said “Once Mr POON’s cheques are cleared, and Management has endorsed this transfer, you will no longer have anything to do with the tenancy”, but I make no finding in this regard.  On the evidence before me, I do not accept D2’s allegations about PW2 reassuring her that once she had signed, even before the transfer had been endorsed, she would ipso facto be released. 

16.For the above reasons I find, as a matter of fact, that PW2 had not said the words to D2 as D2 alleges he  has said.  I can find nothing to support the argument of an equitable estoppel.

17.For the sake of completeness under this topic, I should mention that I note the date on which the transfer was signed may be important, but unfortuately we have no documentary evidence to show the same.  PW2 said the transfer was signed in late March or early April 2002, while D2 said it was in January 2002.  I do not accept D2 had signed the transfer in January because, on her own version, she would only have had several days left before she would be out of the tenancy altogether, so that she could not have had any need to transfer the lease on the eve of its expiry, especially when her tenancy would more than likely have expired by the time the transfer was processed:  the original tenancy agreement had taken Henderson 3 months to process, and D2 knew this fact and testified to the same in court.  On the other hand, if the transfer was signed in March-April as PW2 said, D2 could not have held the belief that she had already been out of the tenancy by 31st January 2002, because if that had been the case D2 would have no reason to sign the transfer 2 months later, because by then (in D2’s mind) there would have been nothing to transfer away.  Either way, I do not find D2’s allegation against PW2 to be true.

The deposit

18.Ps have not asked this Court to make any order regarding the deposit.  This is only a question which D2 has raised as a shield.  Reference to a deposit is found in the tenancy agreement at Clause 6.1.  I need make no finding in this issue because it is not the subject of any claim.  If D2 has raised it as a shield I cannot see any provision which says that forfeiture of deposit would release a tenant from liability to pay rent.  Furthermore, as tenancy had terminated, the deposit cannot normally be applied to offset the rent: Orient Bright International Ltd  v  Hiang Kie Hong Kong Ltd CACV 220/2004, and WONG Kam-kong  v  Intercontinent Mercantile Co [1968] HKLR 331.

Summary

19.For the abovestated reasons I find D2 liable (jointly with D1) to the Plaintiffs’ claim.  There will be judgment in favour of the Plaintiff for $ 292,742.80 with interest at 2% p.a. from the date of the Writ.  

20.Costs to the Plaintiffs nisi to be taxed if not agreed.

Miss Pauline Leung instructed by Messrs. Chow, Griffiths & Chan for the 1^st & 2^nd Plaintiff.

Mr. C.Y. Tsang of Messrs. Y.T. Chan & Co. for the 2^nd Defendant.