Wing Siu Co Ltd v. Goldquest International Ltd

HCA4145/2001
& hca3183/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 4145 AND 3183 OF 2001

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BETWEEN

(Consolidated pursuant to the Order of Master M. Yuen dated 26^th April 2002)

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Coram: Before Master de Souza in Court

Dates of Hearing: 23 November 2005, 25 & 26 May 2006 and 5 June 2006

Date of Handing Down Judgment: 18 August 2006

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ASSESSMENT OF DAMAGES

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Introduction

1.This is an assessment of damages pursuant to the order of Mr. Justice Ma (as he then was) on 11 November 2002.  The salient uncontroversial facts giving rise to these proceedings are briefly these.

2.Under a lease dated 11 October 1999, the Plaintiff leased Grade A office premises at Suites 2101-210A Dah Sing Financial Centre, Wanchai (the premises) to the Defendant for a 3-year term from 11 October 1999 to 10 October 2002.  The Plaintiff is the owner of the premises.  The lease contained the usual obligations on the part of the tenant for timely payment of rental and other outgoings.  As happened, the Defendant committed defaults in the payment of rent and other related charges resulting in the Plaintiff instituting proceedings in the District Court in January 2001 under DCCJ 1297/2001.  Those proceedings were transferred on 4 September 2001 to the High Court, becoming HCA 4145/2001 (the first action).

3.Some three days after the District Court action was launched, on 22 January 2001 the Defendant purported to terminate the letting by returning to the key of the premises to the Plaintiff.  The Plaintiff treated the conduct as tantamounting to a repudiation.  By letter from its solicitors dated 6 February 2001 to the Defendant, the Plaintiff accepted the repudiation of the lease.

4.In May 2001, summary judgment was entered for the Plaintiff in the first action in the sum of $354,252 with interest and costs on an indemnity basis against the Defendant with execution stayed pending final determination of the Defendant's counterclaim for return of the rental deposit.  Subsequently, the Plaintiff having been refused leave to amend the claim in the first action to plead wrongful repudiation brought a second action on 16 July 2001 under HCA 3183 of 2001 for damages for breach of the lease, interest and indemnity costs.  By order dated 26 April 2002, both actions became consolidated.

5.On 11 November 2002, on the Plaintiff's O.14 summons, Ma J, gave interlocutory judgment on liability to the Plaintiff with damages to be assessed subject to partial judgment in the sum of $476,581.50 to the Plaintiff with the balance of any damages to be assessed by a Master.  At the same time, he also lifted the stay of execution in the first action.

The Plaintiff's Claim

6.In broad terms, the Plaintiff seeks, inter alia, damages for repudiatory breach of the lease and the cost of reinstatement of the premises together with interest in this suit and indemnity costs in respect of both actions.  Much was made of the Plaintiff's alleged failure to reasonably and properly market and re-let the premises to mitigate its loss.  There is no dispute that the premises were only taken up by a new tenant some 31 months later.  In those circumstances, it is necessary to revisit basic principles.

Damages and Mitigation

7.An aggrieved landlord's entitlement to damages for wrongful repudiation of a tenancy agreement following general contractual principles is well established in cases such as Hop Woo Cheung Enterprises Ltd v Intergroup Industries Ltd [1982] HKC 436 and Sano Screen Mfrs v J & R Bossini [2000] 3 HKC 216.  He can legitimately anticipate in the measure of damages to be awarded, such damages as reflecting the rental, service charges, rates and reinstatement cost stipulated in the tenancy and therefore payable were the agreement to be permitted to run its full course, subject always to a duty to minimize his loss: Chitty on Contracts, 29^th ed. Vol. 1, at 26-094.  He is, accordingly, expected to act reasonably and to take such steps as are necessary to re-let the vacant premises at a market rent: Merry “The Hong Kong Tenancy Law”, 4^th ed. at page 167-168.  However, it falls upon the errant party to establish that mitigation has not taken place: Chan Annie v Lau Wai Kwong [1984] 1 HKC 231, 235G-H; Lai Hon Ming v Fong Wai Ching HCPI 994/2001, 21 Oct 2002, unreported.

8.The duty to mitigate is not onerous as the landlord is not required to do anything other than in the ordinary course of business: Chitty at 26-095; MacGregor on Damages 16^th ed. paras. 322-323.

9.With these principles in mind, I turn then to evaluate and assess the Plaintiff's claims and the arguments advanced for and against them on the evidence adduced.

Damages for loss of rental following repudiation

10.Mitigation or rather the lack or adequacy thereof loomed large in the Defendant's contention.  It is said that the Plaintiff's marketing strategy of pursuing a high headline rent in a falling market was totally inappropriate and unrealistic and had the effect of discouraging potential tenants.  Mr. Memfus Wong, the defence expert (Mr. Wong) would have approached the problem differently.  His evidence suggested that it would have been more productive, and therefore more reasonable, to have lowered the asking price to or at below the prevailing market rent if the Plaintiff was genuine in wanting to move the premises. To further compound matters, no attempt had been made to reinstate the empty unit to make the unit more attractive.  Had these steps been taken in a timely manner, no or considerably less damages would have been incurred by the Defendant's abandonment of the premises.  This supposed laissez-faire attitude resulted in the unit lying empty for some 31 months, long after the lease would have expired.

11.There was a wealth of evidence from both sides and extensive cross-examination of the witnesses, particularly the experts, Mr. Wong and Mr. Dwyer for the Plaintiff.  It is patent that Mr. Wong would have advised a different marketing approach to the premises.  It is important not to lose sight of the fact that his expertise lies essentially in residential and new developments and not in Grade A office properties.  This is a material consideration when coming to determine the reliability or weakness of his evidence.  This did not, however, prevent him from offering his professional view on what the Plaintiff ought to have done.

12.The Plaintiff's other crucial witness was Mr. Philip Kwan (Mr. Kwan).  As the Assistant Business Manager of the Plaintiff, he was responsible for all letting in the Plaintiff's building.  Following the Defendant's repudiation, in about February 2001, he contacted a number of estate agents, namely Jones Lane Lasalle, FPD Savills, CB Richard Ellis, Queen's and Chesterton Petty by phone instructing them to let the premises.  Midland Realty, Treasure Land, Cosmo and Sallman came on board from about October 2001.  They were given a headline rent.  Mr. Kwan accepted that a higher asking rent was sought in line with the usual practice in the industry to offer a higher rate in contemplation of a significant reduction after negotiation with the prospective tenants.

13.Mr. Kwan said he maintained regular contact with the agents to review progress on a weekly basis.  The asking unit rate was also reviewed every 2 months as such rate had dropped by approximately HK$2.00 every 2 to 3 months since February 2001.  He provided a schedule of the estate agents and prospective tenants who have inspected the premises since 6 February 2002 and copies of correspondence passing between the Plaintiff and the agencies since June 2001.  The schedule was exhibited as KKT-8 to his 4^th affirmation.  There was no lack of interest in the premises, but it remained empty despite all reasonable endeavours to re-let as described by Mr. Kwan.  Maximum market exposure of the premises to all prospective tenants was targeted and in fact achieved.  I have no hesitation in holding that the Plaintiff has made genuine and reasonable effort to market the premises.

14.The much-criticized practice of seeking a higher headline rent was, as Miss Ismail submitted in reference to Mr. Dwyer's testimony, neither unreasonable nor counter-productive.  The bottom line is that landlords and potential tenants both strive to achieve an effective rent that would be consistent with the market price obtainable at any given time.  That the objective is to achieve a market effective rent is common ground between the experts.  It is the method adopted that was different.  Mr. Wong's approach would have the Plaintiff lower the asking rent to or below market rent.  There was no evidence that such a move in a falling market would have had the stimulating effect envisaged.  Further, as Mr. Dwyer explained in evidence, agents handling Grade A office properties concentrated on the achievable effective rent and not the asking headline rent as this was clearly information of greater significance to the market.  He also opined that some landlords quoted no asking rent at all or if they did, failed to regularly adjust such rents.  In his view, the practice of stating an asking headline rent was irrelevant and could have no impact on the achievable effective rent at which premises would ultimately be let.  With that I agree.

15.Mr. Wong also failed to appreciate the potential deleterious effect of lowering rental on a single unit to below market rent on the Plaintiff's portfolio of properties within the building.  As a whole-building landlord, such an approach would impact on rent reviews, renewals and new lettings of other premises.  The Plaintiff was duty bound to do no more than was reasonably necessary to market the premises.  Taking any steps that may have an adverse consequence on the rental tone of the building is not to be expected of the Plaintiff in my considered view.

16.The evidence disclosed that some 15 units in the building were let from March 2001 to November 2002 at levels broadly in line with market rates.  This speaks of an effective and reasonable marketing policy at a time of considerable difficulty.  These other premises were able to achieve competitive rates, a fact with which Mr. Wong agreed.  On the evidence, it has not been established that the Plaintiff's approach to letting was unreasonable, erroneous or inconsistent with what the market could have sustained.

17.The suit premises remained empty for as long as it did through no fault of the Plaintiff.  It had attracted a degree of interest from time to time, but for various reasons given by Mr. Kwan was not taken up.  The commercial reality is that some units move quickly and others take longer to re-let despite all reasonable effort.  Some properties just ‘stick' according to Mr. Dwyer.  He gave as an example an Exchange Square unit that had lain empty for some 2 years.

18.On the issue of reinstatement, it is submitted that the Plaintiff should have undertaken it soon after the Defendant left the premises to enhance its attractiveness to potential tenants.  In failing to do so, the Plaintiff is said to have failed to take all reasonable steps to minimize its loss.  This contention can be shortly addressed.

19.There is consensus between the experts that it is unexceptional for whole-block landlords to have empty and fitted premises on their portfolios.  This offers a choice to tenants some of whom may wish to move in quickly with the minimum of attention and cost.  It makes for good economic sense.  Mr. Wong opined that if the caged vault and the configuration of the reception area of the premises rendered the unit less attractive, they ought to have been removed.  Partial reinstatement is uncommon and as Miss Ismail submits, costly if undertaken properly.  The actual reinstatement for the replacement tenant took only 20 days.  If the fittings represented a genuine impediment, reinstatement could have been done quickly if keen interest in letting was expressed.  On Mr. Kwan's evidence, the premises remained empty for a variety of reasons relating to location, non-lift facing, layout, decoration, etc, none of which related to price.  Mr. Kwan also testified that he was advised by a number of agents to keep the premises as was.  There is nothing on the evidence to demonstrate that the Plaintiff's decision not to reinstate contributed to the unit not being taken up sooner had a potential tenant come along.  If the fittings were deemed undesirable, they could have been removed fairly promptly.

20.Returning to Mr. Wong's evidence, I hold that he has failed to demonstrate that the Plaintiff's approach to marketing was intrinsically flawed or in any way contributed to the sluggish movement of the premises.  His was but one approach and he had to admit that there was no industry standard for leasing.  He advised that it was crucial to attain maximum exposure by taking on a pool of agents.  Mr. Kwan did precisely that and followed the advice offered.  His advocated lowering of asking rent to generate interest has been adequately addressed and refuted.  He also agreed that there were significant differences between residential and office lettings and between letting new buildings and existing building with vacant units.  Coupled with his declared lack of experience in Grade A office marketing, I have little difficulty in preferring Mr. Dwyer's evidence to his.

21.I hold that the Plaintiff has taken all reasonable steps in the circumstances to minimise loss consequent upon the wrongful repudiation of the Defendant.

22.The Plaintiff is accordingly, by way of damages, entitled to the loss of rental for the remainder of the term.  The claim for rental income loss as pleaded and substantiated on the evidence comes to HK$2,500,652.90.  This is calculated at the monthly rate of HK$123,048.00 from 1 February 2001 to 10 October 2002 when the lease would have expired.  I award this sum to the Plaintiff.    

23.Under the lease the Defendant was responsible for service charges and rates.  They amount to HK$625,163.22 (1/2/2001 to 10/10/2002) and HK$92,379.35 (1/4/2001 to 10/10/2002) respectively.  These amounts are wholly supported on the evidence and are recoverable in full.

24.Also recoverable in full are the costs of reinstatement pursuant to Clause 3(8) of the lease.  It remained the Defendant's contractual duty to reinstate which it wholly failed to do.  They are itemized and properly receipted in the sum of HK$244,005.  There is no moment in the contention that such task should have been undertaken at any time other than when it was.

25.The Plaintiff is therefore entitled to recover further damages in the sum of HK$2,985,618.97.  This sum represents the aggregate of the lost rental, management fees and rates allowed above less the amount of partial judgment in the sum of HK$476,581.50.

26.The Plaintiff additionally claimed interest pursuant to s.48 of the High Court Ordinance.  Under clause 3(3)(a) of the lease, the prescribed rate is 3% over prime.  This is the rate sought.  Whilst it remains within the discretion of the court to determine what rate of interest should be given, if any, no cogent or compelling reasons have been advanced why the bargain between the parties should be departed from in this case.

27.Accordingly, I award interest on the judgment sum at 3% above prime to the date of judgment and thereafter at judgment rate until payment.

28.The Plaintiff shall also have its costs of both actions, taxed if not agreed with certificate for counsel for the assessment.  The scale of costs shall be indemnity basis as urged by Miss Ismail upon the basis of the contractual entitlement to such costs pursuant to clause 3(29) of the lease.  I perceive no valid reason in the exercise of my discretion not to accede to the Plaintiff's request: Chekiang First Bank v Fong Siu Kin [1997] 2 HKC 302.

Ms Roxanne Ismail instructed by Herbert Smith, for the Plaintiff

Mr Andrew YS Mak instructed by Chan, Wong & Lam, for the Defendant