IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO. 448 OF 2004
||GOOD PROCESS LIMITED
||GRAND CHEST LIMITED
||MR LEUNG CHI HUNG
Coram : H H Judge H C Wong in Court
Dates of Hearing : 29 and 30 August 2005
Date of Delivery of Judgment : 31 August 2005
J U D G M E N T
1. In this action, the plaintiff is the registered owner of a property known as Shops 50-54, Ground Floor, Glorious Garden, 54 Lung Mun Road, Tuen Mun, New Territories (hereinafter referred to as “the suit property”).
2. On 24 May 2000, the plaintiff entered into a tenancy agreement with the 1st defendant for a six-year lease of shops 50-53 on the ground floor of Glorious Garden commencing from 26 August 2000 to 25 August 2006 at a monthly rental of $155,000 between 26 August 2000 and 25 August 2003, and $186,000 rent per month between 26 August 2003 and 25 August 2006, not inclusive of rates, government rent and management fee, the monthly rental to be payable on the 26th day of each month (hereinafter referred to as “the first lease agreement”).
3. On 3 July 2000, the parties entered into a second tenancy agreement for Shop 54 of the suit property for an identical lease period of six years at a monthly rental of $18,300 between 6 August 2000 and 25 August 2003, and $22,000 monthly rental between 26 August 2003 and 25 August 2006 (hereinafter referred to as “the second lease agreement”).
4. The parties agreed in or about July 2001 that rental payments shall be adjusted and become payable on the 1st day of each month commencing from 1 August 2001.
5. Under two letters of guarantee dated 25 April 2000 and 3 July 2000, the terms and conditions of which are identical, the 2nd defendant undertook and guaranteed the due payment by the 1st defendant to the plaintiff, the rental and the due performance and observance by the 1st defendant of all the terms, conditions and covenants in the two lease agreements.
6. The 1st defendant surrendered the suit premises on 13 December 2002 upon service of a notice of termination on the plaintiff on 29 October 2002. But upon surrender of the suit property to the plaintiff, the 1st defendant failed to pay outstanding rental, rates and government rent and management fees from June to December 2002 totalling $1,331,846. After deducting the rental deposit and public meters deposit, the outstanding balance comes to $669,277, with interests.
The Issues In Dispute:
Set off and Estoppel
7. The 2nd defendant disagreed that he is liable to the plaintiff. It is the 2nd defendant’s pleaded case that he had a discussion with the plaintiff’s senior property officer, Mr Ng Hui-lam (PW1), regarding the outstanding rental in June 2002. Mr Ng suggested to the 2nd defendant that if the 1st defendant surrendered the suit property together with the furniture, fixtures, fittings, decoration and the restaurant and liquor licences, the arrears of rental could be set off.
8. This suggestion was repeated, according to the 2nd defendant, Mr Leung, in December 2002 when the 2nd defendant made enquiry with Mr Ng concerning the status of the outstanding rental. The 2nd defendant claimed Mr Ng had suggested to him that he should persuade the 1st defendant to deliver up vacant possession of the suit property but leaving behind all furniture, fixtures, fittings, decorations, and transfer the restaurant and liquor licences held by the 1st defendant’s shareholder, Mr Chow Sau-kuen, to a potential new tenant of the plaintiff. It is the 2nd defendant’s pleaded case that it was on this basis that the 1st defendant’s shareholder, Mr Ng Kwong-yuen, acceded to the suggestion and requested Mr Chow to transfer the liquor and restaurant licences to a new tenant of the plaintiff at the suit property. Consequently, the 2nd defendant claimed the arrears of rental, rates, government rent and management fees between June 2002 and December 2002 were fully set off.
9. The 2nd defendant in his evidence in court and witness statement, supported the pleaded defence case. In her final submission, Miss Lin, counsel for the 2nd defendant, however, made her submission on two further issues: first, the revocation of the guarantees by the 2nd defendant; second, the demand of the guarantor under the guarantee was made after the reasonable period following notice of termination had expired.
Revocation of Guarantee
10. Miss Lin submitted that the two guarantees had been unilaterally revoked by a letter dated 3 October 2002 from the 2nd defendant to the plaintiff’s Mr Ng. The letter purportedly notified the plaintiff that he had left the 1st defendant in August 2001 and that in September 2002 the 1st defendant had admitted a new shareholder and operated under a new restaurant name.
11. At the same time, the 2nd defendant had transferred his shareholdings in the 1st defendant to another shareholder and he had resigned from the 1st defendant’s board of directors in September 2002. He further requested the plaintiff’s Mr Ng to negotiate with the new board of directors for a replacement guarantor to the lease and that he would no longer accept the validity of the letters of guarantee, he ended the letter by requesting Mr Ng to give him a reply.
12. At this juncture, for the sake of record, I will read this particular letter of the 2nd defendant to Mr Ng dated 3 October 2002. This is in Chinese and reads as follows:
Demand on Guarantee
13. The other issue raised in the submission of Miss Lin is on the basis that the said two guarantees are guarantees on demand, that the liability of the guarantor to pay is contingent upon demand and that the creditor has no cause of action until such time the demand is made. Miss Lin submitted that the notice of termination of guarantee expired within 15 days, the period of the landlord’s right to re-enter the premises upon default of payment of rental. Alternatively, the period of two months, referring to clause 6 of the tenancy agreement at page 47 of the documents bundle that the lease is terminable by the giving of written notice from either party to the lease.
14. Clause 6 of the lease on page 47 of the bundle is as follows:
||Notwithstanding anything herein contained, the tenant may terminate this agreement by giving two months’ prior notice in writing to the landlord or paying two months’ rent in lieu of notice. The tenant shall not withdraw the said notice once given. Upon expiration of the said notice, this agreement shall be terminated but such termination shall not affect nor prejudice the tenant’s liability for breaches, if any, of the terms and conditions of this agreement committed prior to such termination.”
15. On the two letter issues raised by Miss Lin, the plaintiff’s counsel, Mr Gidwani, submitted that the 2nd defendant had failed to plead the guarantee had terminated or that the demand was served after the notice of termination of guarantee had expired in any of the 2nd defendant’s pleadings. The 2nd defendant had also failed in his evidence to give evidence on these matters or that he had revoked the two letters of guarantee or that the notice of termination had expired by the time the plaintiff served a demand on the guarantee on the 2nd defendant.
16. Mr Gidwani submitted that when the 2nd defendant signed the two letters of guarantee, they were witnessed by the 2nd defendant’s solicitors. He alleged the letters of guarantee were drafted by the defendant’s solicitor while the 2nd defendant’s counsel, Miss Lin, denied that it was drafted by the defendant’s solicitor. There was no evidence adduced on this point as to who drafted the letters of guarantee. On the face of the two documents, they were identical letters of guarantee from the 2nd defendant to the plaintiff witnessed by his then solicitor.
17. It is apparent that the 1st defendant had been in arrears of payment of rental since 2001. The evidence revealed that the plaintiff had taken out proceedings against the 1st and 2nd defendants for payment of rental outstanding in July 2001 for the payment of rental from 1 May 2001 to 31 July 2001. This High Court action was settled on 4 October 2001 and the plaintiff’s then legal representatives filed a...