Ipsofactoj.com: International Cases  Part 4 Case 14 [DCHK]
DISTRICT COURT, HKSAR
Typhoon 8 Research Ltd
- vs -
H.H. JUDGE ANDREW CHEUNG
5 SEPTEMBER 2001
Judge Andrew Cheung
In this action, the Plaintiff sues the Defendants for the return of a rental deposit of $366,000 it has paid under a Tenancy Agreement dated 11 November 1999.
The 1st Defendant is a limited company incorporated in the Cayman Islands and is registered in Hong Kong as a foreign company and listed in the Hong Kong Stock Exchange. The 2nd Defendant is a limited company incorporated in Hong Kong. It belongs to the Seapower group of companies of which the 1st Defendant is the "ultimate holding company". Through various holding companies within the group, the group owns various floors of premises in a commercial building known Silver Fortune Plaza, No. 1 Wellington Street, Central, Hong Kong. Under this arrangement, the 2nd Defendant is the registered owner of the 21st floor of Silver Fortune Plaza.
By a Tenancy Agreement dated 11 November 1999, the 2nd Defendant agreed to let the 21st floor with the exception of the machine room on that floor to the Plaintiff for a term of two years commencing on 6th October 1999 and expiring on 5th October 2001 at a rent of $61,000 per calendar month. A deposit equivalent to six months' rentals in the sum of $366,000 was paid by the Plaintiff to the 2nd Defendant pursuant to the Tenancy Agreement.
Prior to the entering of the Tenancy Agreement, by a Mortgage dated 18th November 1998, the 2nd Defendant had together with other associated property holding companies in the group as co-mortgagors, with the 1st Defendant as borrower, mortgaged, inter alia, the 21st floor to Wing Hang Bank Limited. Amongst other things, the Mortgage prohibited the mortgagors from entering into a tenancy agreement in relation to the mortgaged premises "except with the Lender's prior written consent" (clause 8.01). Further, the Mortgage provided that if an event of default should have occurred the bank could "enter into and upon and take possession of the Property" and "to receive the rents and profits thereof" (clause 6.01(i)).
As admitted by the Defendants, the prior written consent of the bank was not obtained before the Tenancy Agreement was signed. Further according to the evidence, the 1st Defendant defaulted in making payment of the mortgage instalments as from October 2000. The bank therefore sued the borrower and mortgagors in High Court Miscellaneous Proceedings No.182 of 2001 for repayment of the loan and vacant possession of the mortgaged premises including the 21st floor.
By a letter dated 12th January 2001, the bank's solicitors wrote to the Plaintiff informing the Plaintiff that proceedings had been commenced against the owner of the 21st floor for the recovery of vacant possession of the premises. The letter noted that the bank had not given any consent to any letting of the property. The solicitors asked the Plaintiff to supply them with a copy of the Tenancy Agreement so that their client might consider the position of the Plaintiff in the matter. The Plaintiff duly sent a copy of the Tenancy Agreement to the bank's solicitors. By a letter dated 1st February 2001, the bank's solicitors wrote back to the Plaintiff, reiterating that their client had never given any consent to the creation of the tenancy. The letter went on to say that the bank had the power under the Mortgage to enter into and take possession of the premises and receive the rents and profits thereof in the event of an event of default happening, an event of default had happened, and therefore the bank by the letter exercised its right and power to enter into possession of the premises. The letter then directed the Plaintiff to pay all future rent to the bank instead of the 2nd Defendant. The letter also emphasised that the bank's demand for rent was made solely pursuant to and in exercise of its power under the Mortgage but not otherwise, and the bank should not be liable for the refund of any rental deposit paid under the Tenancy Agreement to the 2nd Defendant.
This however prompted the Plaintiff to believe that the Tenancy Agreement was at an end and therefore the deposit had become refundable by the Defendants. Thus by a letter also dated 1st February 2001 written by the Plaintiff to the 1st Defendant, the Plaintiff requested for the refund of the deposit. There was further correspondence between the Plaintiff and the bank's solicitors in which the Plaintiff sought and the solicitors gave clarification regarding the true basis of the bank's entering into possession of the premises and demanding rent from the Plaintiff. In their letters written to the Plaintiff, the solicitors tried to explain that the continued enjoyment and occupation of the premises by the Plaintiff would not be objected to by the bank for so long as the Plaintiff continued to pay rent to the bank as demanded. But the Plaintiff, despite the solicitors' repeated explanations of the bank's position, continued to maintain that the bank had not recognised the tenancy of the Plaintiff, and as a matter of law the tenancy had come to an end by the bank's taking possession of the premises. On that basis, the Plaintiff refused to pay rent to the bank. This the Plaintiff did despite a letter dated 26 February 2001 written by the 2nd Defendant to the Plaintiff confirming that the bank had taken possession of the property and could receive the rents and profits thereof, and requesting the Plaintiff to pay rent in respect of the property to the bank with effect from 1st February 2001.
Despite repeated explanations and demands for payment of rent, the Plaintiff refused to pay the rent for February or March. As a result, by a letter dated 16th March 2001, the bank's solicitors wrote to the Plaintiff to forfeit the tenancy. The correspondence between the parties continued. The solicitors still wrote to the Plaintiff trying to persuade the Plaintiff that their analysis of the situation was the correct one and the Plaintiff should vacate the premises as its tenancy had been forfeited as aforesaid. Again all these were to no avail.
Two actions were then commenced. One was the present action commenced by the Plaintiff against the Defendants on 21st March 2001 claiming for the return of the deposit. The other was High Court Miscellaneous Proceedings No.2477 of 2001 commenced by the bank against the Plaintiff for vacant possession of the premises, arrears of rent for February and March up to 16th March 2001 and mesne profits thereafter.
It is clear from the correspondence and evidence that vacant possession of a major part of the premises was delivered back to the bank by the end of March, leaving a room still being occupied by the Plaintiff. Eventually the Plaintiff reached agreement with the bank and agreed to vacate the remaining room on 12th June 2001. The compromise reached between the Plaintiff and the bank was embodied in a Consent Order dated 20th June 2001 made by Master Kwan. Pursuant to the compromise, the Plaintiff agreed to vacate the remaining room on 12th June 2001 and pay a sum of $33,582.80 to the bank in settlement of the bank's claim, which apparently the Plaintiff did.
In this action, the Plaintiff claims for the return of the deposit. At one stage, there was a claim of misrepresentation against the Defendants, but that has since been dropped. The Plaintiff says that the 1st Defendant is liable to repay it the deposit although it did not sign the Tenancy Agreement because there was a collateral agreement reached between the 1st Defendant and the Plaintiff whereby the 1st Defendant agreed to repay the deposit to the Plaintiff upon the expiration or sooner determination of the Tenancy Agreement. Alternatively, the Plaintiff argues that the 2nd Defendant merely acted as the agent of the 1st Defendant in the registration of the ownership of the 21st floor, the mortgage of the property to the bank and the letting of the property to the Plaintiff.
During the course of trial, I pointed out to the parties that issues might also arise as to whether the deposit was refundable under clause 9.03 of the Tenancy Agreement, whether the deposit-forfeiture provisions in clause 8.01 of the Tenancy Agreement were penal in nature, whether the court has jurisdiction to grant relief against forfeiture of the deposit (equivalent to 6 months' rentals) and whether such jurisdiction, if any, should be exercised in this case. Although these issues were not raised specifically or in so many words in the pleadings, the parties agreed that they fairly arose out of the facts and materials placed by the parties before the court and that they should therefore be dealt with by the court if necessary.
The Defendants counterclaim against the Plaintiff for arrears of rent from 6 February 2001 to 16th March 2001, damages for the Plaintiff's premature termination of the Tenancy Agreement, for the Plaintiff's wrongful occupation of the premises after 16th March 2001, and for the loss and damage arising out of the Plaintiff's refusal to allow the Defendants access to the machine room located on the 21st floor for the purpose of removing the telephone system installed there by the 1st Defendant to the Seapower group's new office premises in Kwai Chung, and outstanding electricity charges.
TENANCY BY ESTOPPEL
In order to determine whether the Plaintiff is right in saying that the tenancy came to an end on 1st February 2001 when the bank through its solicitors entered into possession of the premises and demanded payment of rent from the Plaintiff, and thus the deposit became refundable to the Plaintiff by the Defendants, it is necessary to examine the law relating to a tenancy created by a mortgagor without the consent of the mortgagee and that relating to a mortgagee's taking possession of the mortgaged premises, particularly in the context of there being an unauthorised tenancy in existence in respect of the premises.
The law may be summarized thus. A landowner may of course grant any lease of his premises as he pleases, subject to any restrictions as to leasing that may be contained in the government lease and (in the case of a multi-storeyed building) the deed of mutual covenant. But once he has mortgaged his property to a mortgagee, his ability to grant a lease changes. Having parted with his legal right to possession by legal charge, in the absence of authorisation by law or express consent by the mortgagee, the mortgagor may only grant a lease which is binding on himself and his tenant based upon the principle of estoppel. Beyond that, the mortgagor may do nothing in terms of leasing the mortgaged premises. Of course, this has nothing to do with any lease granted before the creation of the mortgage. Further, if a post-mortgage lease is granted pursuant to an express or statutory authorisation, it will be binding not only on the mortgagor and the tenant but the mortgagee as well. So in other words, a tenancy created before the mortgage or one created by the mortgagor after the mortgage under an express or statutory power is binding on the mortgagee. In particular, if the mortgage prohibits the creation of a tenancy without the mortgagee's prior consent and such consent has been obtained, the tenancy created pursuant to the consent is binding on the mortgagee.
On the other hand, where after the mortgage a tenancy is created without statutory or express power, or more particularly where the mortgagee's prior consent (if required) has not been obtained, the tenancy is good by estoppel as between the mortgagor and tenant, but is void as between the mortgagee and the tenant. This is because, as explained above, the mortgagor has by the mortgage conveyed away the title to possession. The lease, though not binding on the mortgagee, will continue as between the mortgagor and the tenant until the mortgagee interferes: See for instance the local case of The Banque de L'indo Chine v Mitchell (1928) 23 HKLR 44. Mere inaction on the part of the mortgagee after learning of the existence of the tenancy is insufficient to terminate the tenancy. Nor is mere inaction with knowledge of the tenancy on the part of the mortgagee sufficient, for that matter, to constitute any acceptance of the tenant by the mortgagee: Parker v Braithwaite  2 All ER 837. Whilst the tenancy remains undisturbed, the parties to the transaction by are estopped from denying that they stand in the relationship of landlord and tenant. That will remain the position unless and until the tenant is disturbed by being evicted by someone with a title superior to that of his landlord (usually described as being evicted by title paramount) or its equivalent in which case he can dispute the landlord's title.
Instances of "the equivalent of eviction by title paramount" are where the tenant is forced to acknowledge the title of a third party and attorn to him or where the tenant contests the title of his landlord on being given an indemnity by a third party: Hill & Redman's Law of Landlord and Tenant Vol.1 paras.A & A citing as authority, among others, the English Court of Appeal case of Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries Ltd  QB 580, where Lord Denning MR explained the position thus:
If a landlord lets a tenant into possession under a lease, then, so long as the tenant remains in possession undisturbed by any adverse claim - then the tenant cannot dispute the landlord's title. Suppose the tenant (not having been disturbed) goes out of possession and the landlord sues the tenant on the covenant for rent or for breach of covenant to repair or to yield up in repair. The tenant cannot say to the landlord: 'You are not the true owner of the property.' Likewise, if the landlord, on the tenant's holding over, sues him for possession or for use and occupation or mesne profits, the tenant cannot defend himself by saying: 'The property does not belong to you, but to another.' But if the tenant is disturbed by being evicted by title paramount or the equivalent of it, then he can dispute the landlord's title. Suppose the tenant is actually turned out by the third person -- or if the tenant, without going out, acknowledges the title of the third person by attorning to him -- or the tenant contests the landlord's claim on an indemnity from the third person - or there is anything else done which is equivalent to an eviction by title paramount - then the tenant is no longer estopped from denying the landlord's title (see Wilson v Anderton per Littlewood J). The tenant, being thus disturbed in his possession, can say to the landlord: 'You were not truly the owner at the time when you demanded and received the rent from me. I am liable to pay mesne profits to this other man. So you must repay me the rent which I overpaid you. Nor am I liable to you on the covenants during the time you were not the owner' (see Newsome v Graham; Mountney v Collier; Waston v Lane). The tenant can also claim damages for the eviction if there is, as here, an express covenant for quiet enjoyment covering interruption by title paramount.
Short of eviction by title paramount, or its equivalent, however, the tenant is estopped from denying the title of the landlord. It is no good his saying: 'The property does not belong to you but to a third person' unless that third person actually comes forward and successfully makes an adverse claim, by process in the courts or by the tenant's attornment; or acknowledgment of it as by the tenant defending on an indemnity. If the third person, for some reason or other, makes no adverse claim or is debarred from making it, the tenant remains estopped from denying the landlord's title. This is manifestly correct: for, without an adverse claim, it would mean that the tenant would be enabled to keep the property without paying any rent to anybody or performing any covenants. That cannot be right. That was the reasoning adopted by the Court of Queen's Bench in Biddle v Bond, a case of a bailor and bailee, but the court treated it as the same as landlord and tenant.
As pointed out by Hill & Redmond at para.A, it is not wholly clear what precisely is equivalent to eviction by title paramount such as to enable the tenant to deny the title of the landlord who has granted him a lease. The list of instances of such equivalent to eviction by title paramount given by Lord Denning in the passage quoted above was obviously not intended to be exhaustive. For the purpose of the present case, the question is whether the action by a mortgagee of taking possession of the mortgaged premises and demanding payment of rent by the tenant amounts to an equivalent to eviction by title paramount. Mr. Wong, counsel for the Defendants, argued "no" because if the tenant agrees to pay rent to the mortgagee his quiet possession of the premises will not be disturbed, and therefore there is no eviction or an equivalent to eviction.
In my judgment, this gives too narrow a meaning to an equivalent to eviction by title paramount. From the instances of such equivalent referred to above, it is quite clear that a tenancy by estoppel is fatally disturbed when the relationship of landlord and tenant is fundamentally disturbed. From the angle of a landlord, the receipt of rent is a if not the most important instance of his status as the landlord, and once the mortgagee asserts his right to receive the rent against both the mortgagor and tenant, it fatally disturbs the landlord and tenant relationship and thus the tenancy by estoppel. From the angle of the tenant, payment of rent is his most important obligation under the tenancy. He recognises the title of his landlord by making payment of rent to him. Once he is forced to recognize someone else as having the right to receive payment of rent from him, he is in fact being forced to acknowledge that someone else as having a better title than his landlord to the reversion and receipt of rent. That strikes at the very foundation of the relationship of landlord and tenant. So in my judgment, when a mortgagee takes possession and demands payment of rent by the tenant, this amounts to an equivalent to eviction by title paramount by the mortgagee, the tenancy by estoppel is fatally disturbed and the tenant is free to challenge and deny his landlord's title. In other words, the tenancy by estoppel is destroyed.
This analysis of mine is supported by an old English Court of Appeal case of Corbett v Plowden (1884) 25 Ch 678. In that case, the mortgagees went into possession and demanded payment of rent from the tenant under an unauthorised lease for 21 years. After putting the mortgagees to proof of their title to receive rent, the tenant eventually paid rent to the mortgagees as demanded. The tenant then gave notice to terminate the lease by the end of the year arguing that he was occupying the premises (after the mortgagees' intervention) pursuant to a new tenancy from year to year under the mortgagees although the rental amount was the same as before. The mortgagees (together with the mortgagor) refused to accept the termination arguing that the tenant was still staying in the premises under the lease created by the mortgagor with the tenant. The Court of Appeal held against the mortgagees:
But the paramount right of the mortgagees being asserted, the tenant had availed himself of the right which in that case the law gives him to consider himself as holding no longer from the mortgagor, but as a tenant from year to year of the mortgagees, and he has taken the necessary steps to determine the tenancy. It is therefore too late for the mortgagees to adopt the agreement between the mortgagor and the tenant and bring an action to enforce it against the tenant. The only question is, whether the tenancy was well determined by Mr. Plowden [the tenant], and that depends upon well understood principles of law. If a mortgagor left in possession grants a lease without the concurrence of the mortgagees .... the lessee has a precarious title, inasmuch as, although the lease is good as between himself and the mortgagor who granted it, the paramount title of the mortgagees may be asserted against both of them. The question is, whether in this case it was asserted. It was argued for the [mortgagees] that, from the correspondence, it was to be inferred that the mortgagees did not intervene by their paramount title, but claimed the rent due to the mortgagor on the footing of leaving the mortgagor's possession undisturbed, under an arrangement as between him and themselves. In the first place, I cannot draw that inference from the letter of the 25th of March, 1881 .... [I]t is well settled law that when a mortgagee intervenes by virtue of his paramount title, and claims rent, which he has a right to do without setting up any lease whatever, the rent if paid will be the previously existing rent, under a new tenancy from year to year under the mortgagees... It is plain that they insisted on their paramount title, and the effect of the payment to them under those circumstances is, according to all the authorities, to create the relation of tenancy from year to year on his part towards them. This tenancy he took the proper steps to determine, and it had actually been determined before this suit was instituted.
(per Earl of Selborne LC at pp.681-683)
The only other point in this case is this, that what was done on behalf of the mortgagees was not asserting their title, but asserting the title of the Plaintiff, Cobbett [the mortgagor], under the agreement, and asking that the rent should be paid to them as his agent, and on his behalf. That is inconsistent with the letters. If we look to the letters written before the rent was paid there is an assertion by the mortgagees that they have entered into possession, and have a right to the rent, and inquiries made by Mr. Plowden are; are you really the mortgagee? .... After that how can they assert that when they did what they did in this case they were not asserting their own independent title, but were merely asking for payment of the rent under and according to the agreement entered into by Mr. Corbett.
(per Cotton LJ at pp.683-684)
That turns upon this further question, whether the mortgagees by their notice of the 25th of March, and by the correspondence, asserted their independent superior title as mortgagees, or whether they claimed to receive the rent as agent of the mortgagor. To my mind the correspondence plainly shews that they asserted their superior title, and did not claim as agent of the mortgagor.
(per Fry LJ at p.684)
I note that in Corbett v Plowden, the tenant upon the demand of the mortgagees paid rent to the mortgagees. In my judgment, this is irrelevant to the question of whether the mortgagees there had asserted their paramount title against the mortgagor and tenant, thereby fatally disturbing the tenancy by estoppel. This is particularly clear from the above passages extracted from the judgments of Cotton and Fry LJJ respectively which both focused on what the mortgagees wrote to the tenant and not what the tenant did in response (i.e. payment of rent). What is important is the assertion of a title paramount by the mortgagee, but not what the tenant does or does not do upon such an assertion of superior title. The only significance of the payment of rent in Corbett v Plowden was that by the payment and receipt of rent (as such) the mortgagee and the tenant entered into a new tenancy relationship, i.e. a tenancy from year to year.
See also generally Cousins, The Law of Mortgages (1989 ed.) 333 et. seq., Halsbury's Laws of England (4th ed. reissue) Vol.32 paras.494 to 502. See also another old Hong Kong case Hui Sai Hoi v Chan Lai Wan (1932-1933) 26 HKLR 31, 33, and the more recent unreported decision of the Court of Appeal in Yeung Lam Wilson v Lam Po Chong Priscilla CACV268/1999 (14/1/2000) (which, however, unlike the present case, was concerned with the position of a tenant who was being evicted by the mortgagee).
MORTGAGEE GOING INTO POSSESSION
But Corbett v Plowden gives rise to two further questions in the context of this case.
First, can the mortgagee, upon going into possession and demanding payment of rent from the tenant, simply confirm, adopt or ratify the unauthorised tenancy, thereby leaving the tenancy between the mortgagor and the tenant intact (and indeed legitimising the previously unauthorised tenancy)?
Second, can the mortgagee not simply accept payment of rent from the tenant as a receiving agent of the mortgagor in which case the tenancy by estoppel between the mortgagor and the tenant will remain in place?
These can only be answered by examining the law relating to a mortgagee going into possession and what he can or cannot do in those circumstances. In my judgment, this is just looking at the same matter already analysed above from a different angle, or put differently, they are simply the two sides of the same coin.
It may be gathered from the cases and authorities referred to above the following general principles. When a mortgagee goes into possession, he is entitled to take the rents and profits by virtue of his legal (or equitable) ownership conferred on him by the mortgage. So if he finds a tenant in occupation whose tenancy is binding on him, he will be entitled to receive the rent from the tenant in his own right, and not as an agent of the mortgagor. In this context, taking possession does not mean taking physical or vacant possession. Taking possession by the mortgagee simply refers to his asserting his paramount title against both the mortgagor and tenant by demanding for the payment of rent to him instead of the mortgagor in his own right as the mortgagee (and not as a receiving agent of the rent of the mortgagor). See Halsbury's, supra, paras.611 to 615.
But if he finds a tenant in occupation whose tenancy is unauthorized and is thus not binding on him, he faces a choice. Either he may choose to evict the tenant as a trespasser, or he may try to enter into a direct and new tenancy relationship with the tenant. But in either case, he may direct the tenant to stop paying rent to the mortgagor but pay over the same to him instead. In the former case, as explained by Cousins (at p.212) and Halsbury's (at para.620), the demand for "rent" should actually be regarded as a demand for payment of mesne profits for the tenant's wrongful occupation of the premises after the mortgagee's intervention, thereby bringing to an end the tenancy by estoppel between the mortgagor and the tenant. In the latter case, the demand for rent is regarded as an offer by the mortgagee to enter into a direct tenancy relationship with the tenant. If the tenant accepts the offer and pays rent, there will be a new tenancy created directly between the two the terms of which will have to be gathered from the evidence and may not necessarily be the same as the one previously between the mortgagor and the tenant. See Corbett v Plowden, supra; Towerson v Jackson  2 QB 484.
But can there be a third possibility, i.e. that upon entering into possession and discovering the existence of the unauthorized tenancy, the mortgagee simply "confirms", "adopts" or "ratifies" the tenancy between the mortgagor and tenant thereby preserving intact the same, with the exception that the rent will henceforth be payable by the tenant to the mortgagee? Such a possibility is attractive and seems, at least at first glance, to be unobjectionable. After all, the law is full of examples of ratification of unauthorized transactions, doctrines of relation back, feeding of title or estoppel and the like. And the above extract from the judgment of Earl of Selborne LC in Corbett v Plowden would seem to suggest that at least before the mortgagee effectively intervened in the tenancy by estoppel, he could adopt the tenancy. But the true answer, in my judgment and according to authorities, is "no", and this has been succinctly explained by Cross J (as he then was) in Stroud Building Society v Delamont  1 WLR 431, 434 thus:
when a mortgagor has granted a tenancy which is not binding on the mortgagee the latter can, instead of treating the tenant as a trespasser, consent to treating him as his own tenant or he may act in such a way as precludes him from saying that he has not consented to take him as a tenant. Such an acceptance by the mortgagee of the mortgagor's tenant, whether express or implied, or operating by way of estoppel, must, I think, amount to a creation of a new tenancy between the parties. The tenancy between the mortgagor and the tenant is not one which is merely voidable by the mortgagee if he chooses not to accept it, but which he can confirm by waiving his right to avoid it. It is a nullity as against the mortgagee and so, if the mortgagee is to lose his right to treat the mortgagor's tenant as a trespasser, it must be because the tenant has become the mortgagee's tenant under a new tenancy. The law on the subject is, I think, correctly stated in Smith's Leading Cases (13th Edn.), p.575, in the notes to the case of Moss v Gallimore.
I respectfully agree with this analysis, subject to one qualification which I shall shortly mention. Once it is accepted that a tenancy created after the mortgage without express or statutory power is void as between the mortgagee and the tenant, and not merely voidable, the conclusion reached by Cross J in the passage quoted above must logically and inevitably follow. So a proper analogy here is not with the ratification of an unauthorised transaction by an agent. Rather a more appropriate analogy is with a transaction that is ultra virus the object clause of a company, which cannot be ratified even by a general meeting of the company, as it is in truth a nullity. Likewise as such a tenancy is a nullity vis-à-vis the mortgagee, not even the mortgagee may give it any breath of life.
This being the case, the conclusion must be that in the case of an unauthorised lease, once the mortgagee takes possession and directs the tenant to pay to himself instead of the mortgagor the rent, the original lease between the mortgagor and the tenant must come to an end. Whether the tenant and the mortgagee will thereafter enter into a new tenancy or whether the tenant will remain a trespasser is a matter in the hands of the mortgagee and the tenant (whose consent to the creation of a new tenancy is required). The mortgagor has no say or choice in the matter.
My only qualification is this. It seems to me possible that a mortgagee who has discovered an unauthorised tenancy may receive the rent without destroying the tenancy by doing it (i.e. receiving the rent) as a receiving agent of the mortgagor. This was in fact the argument of the unsuccessful mortgagees in Corbett v Plowden who failed on the facts in that case. But as a matter of principle, just as a mortgagor may at any time as landlord direct his tenant to pay the rent to someone else as the mortgagor's receiving agent, the mortgagor may (upon the request of the mortgagee) require and direct the tenant to pay the rent to the mortgagee as the mortgagor's receiving agent. But this can only be done if the facts support such a finding and if the mortgagee has not by any action destroyed the unauthorised tenancy. And as mentioned above, a mortgagee's taking of possession and demanding payment of rent to himself in his own right as the mortgagee will destroy the unauthorised tenancy. So there is a fine line to be drawn between demanding for the payment of rent as the receiving agent of the mortgagor and upon his direction, and demanding for the payment of rent as a consequence of taking possession of the mortgaged premises in one's own right as the mortgagee.
Refund of deposit
Where do all these leave us? In my judgment, the Tenancy Agreement between the Plaintiff and the 2nd Defendant was clearly an unauthorised one. It was good as between them for so long as the bank did not interfere. Although the bank may have learned of its existence by October 2000, on the evidence, the bank had done nothing prior to 1st February 2001 to recognise the Plaintiff as a tenant of the premises. And as I said, by their solicitors' letter dated 1st February 2001, the bank expressly and specifically entered into possession of the premises and demanded for payment of rent pursuant to the Mortgage. This being the case, in my judgment, on 1st February 2001 when the bank entered into possession and demanded rent from the Plaintiff pursuant to its power under the Mortgage, it asserted its title paramount against the Plaintiff and the 2nd Defendant. It interfered, and interfered effectively, in the tenancy relationship between the Plaintiff and the 2nd Defendant. The result was that it destroyed and brought to an end the tenancy relationship between the Plaintiff and the 2nd Defendant.
In my judgment, by expressing its willingness to allow the Plaintiff to remain in occupation of the premises provided that rent was paid to the bank, the bank was in fact and in law making an offer to the Plaintiff to enter into a new tenancy relationship directly with the bank. But it takes two to tango. No new tenancy between the Plaintiff and the bank could be entered into without the Plaintiff's consent. And in my judgment, it is plain from the correspondence that the Plaintiff never consented to accepting the bank as its new landlord or paying rent to the bank. This being the case, as from 1st February 2001, the Plaintiff became in wrongful occupation of the premises and a trespasser liable to be evicted by the bank. It follows that the bank was right to commence proceedings against the Plaintiff for recovery of possession of the premises. But as a matter of legal analysis, the bank was wrong to sue the Plaintiff for "rent" for the period between 1st February and 16 March 2001, or for that matter, to write on 16 March 2001 to "forfeit" the Plaintiff's tenancy under the Tenancy Agreement.
But all these, happening as they did after 1st February 2001, are irrelevant to the position of the 2nd Defendant. So far as the 2nd Defendant is concerned, the tenancy relationship it once had with the Plaintiff came to an end on 1st February 2001. What happened subsequently between the Plaintiff and the bank did not concern the 2nd Defendant. It must therefore follow that upon the termination of the Tenancy Agreement on 1st February 2001 as analysed above, through no fault on the part of the Plaintiff, the deposit paid under the Tenancy Agreement must have become refundable to the Plaintiff.
As I said, the possibility of the Tenancy Agreement remaining intact upon the bank's taking possession of the premises and demanding rent from the Plaintiff simply did not exist as a matter of law. The Tenancy Agreement was void, and not merely voidable, as between the Plaintiff and the bank, and it was beyond the power of the bank to keep it alive on the one hand, and take possession of the premises and demand rent on the other.
Nor is it possible, in the face of the correspondence and evidence, to construe the action taken by the bank as anything less than the bank's entering into possession of the premises, and demanding rent in its own right as the mortgagee and asserting its title paramount against the Plaintiff and the 2nd Defendant as such. In other words, in demanding rent the bank cannot be said to have been doing so as agent of the 2nd Defendant. Plainly the bank did so as mortgagee in its own right. As mentioned above, the bank sued the 2nd Defendant in a mortgagee action for vacant possession of the mortgaged premises by writ on 10th January 2001. In their letter dated 1st February 2001, the bank's solicitors specifically wrote as follows:
Our client hereby exercises its power to enter into possession of the Property. Accordingly, as from the date hereof all rent shall be paid by you to our client instead of [the 2nd Defendant] .... We emphasize that our client's demand for rent is made solely pursuant to and in exercise of its power aforesaid under the Mortgage and not otherwise.
In their subsequent letter dated 16th February 2001, the solicitors further wrote as follows:
As our client has entered into possession of the Property by requiring you to pay rent, our client as the Mortgagee in possession is entitled to receive payment of rent from you.
Even the 2nd Defendant realised and accepted that the bank had taken possession of the premises, for on 26 February 2001 it wrote to the Plaintiff thus:
We confirm that Wing Hang Bank Ltd, the Mortgagee, may take possession of the Property by receiving rent and profits thereof. We hereby request that you pay rent in respect of the Property to Wing Hang Bank Ltd .... with effect from 1st February 2001.
That the bank has exercised the right to enter into possession of the premises is plain from the above extracts. But equally plain from the correspondence is that at the time the bank's solicitors did not realise the legal consequences of the bank's action was that the tenancy between the Plaintiff and the 2nd Defendant was thereby destroyed. This is clearly evident from what they wrote on 1st March 2001:
Our client is only exercising its rights as the mortgagee to enter into possession of the Property by demanding payment of rent. Our client has not taken any steps up to the date hereof to terminate the tenancy.
In their letter dated 7th March 2001, the solicitors further expanded on this notion of theirs:
By demanding you to pay to our client the rent payable by you under the tenancy, our client has entered into possession of the property subject to the tenancy and the legal consequences arising therefrom.
So following this logic, the bank's solicitors wrote on 16 March 2001 to forfeit the Plaintiff's tenancy created under the Tenancy Agreement between the Plaintiff and the 2nd Defendant.
In my judgment, it is plain from the correspondence as well as the writ issued by the bank against the 2nd Defendant for vacant possession of the premises that the bank had entered into possession of the premises by demanding rent from the Plaintiff in its own right as the mortgagee, and not as the receiving agent of the rent of the mortgagor. Having done so, neither the bank nor the 2nd Defendant, regardless of their subjective understanding of the position or the legal consequences of the action taken by the bank, could alter the legal consequences or outcome. So although it is equally plain from the letters written by the bank's solicitors that they intended to allow the Plaintiff to remain in occupation of the premises and did not intend to evict the Plaintiff unless the Plaintiff refused to pay rent to the bank as demanded, and that at all material times they believed that the tenancy of the Plaintiff created under the Tenancy Agreement between the Plaintiff and the 2nd Defendant was still in existence, that is neither here nor there. The subjective intention or belief of the bank, or for that matter, its solicitors, could not affect the true legal analysis of the consequences flowing from the bank's going into possession of the premises and demanding rent. What counts is the action, not the subjective belief or understanding.
In conclusion, in my judgment, the Plaintiff is right in claiming for the return of the deposit paid under the Tenancy Agreement. The Tenancy Agreement came to an end on 1st February 2001 through no fault of the Plaintiff. The deposit should be refunded by the 2nd Defendant to the Plaintiff.
Given my conclusion, it is unnecessary for me to deal with the other issues raised and argued at trial as outlined above in relation to the Plaintiff's claim for the return of the deposit.
The Defendants' counterclaim for arrears of rent and damages for the Plaintiff's alleged premature termination of the Tenancy Agreement must fail. As for the counterclaim for damages in relation to the Plaintiff's continued occupation of the premises after 1st February 2001 (i.e. after the termination of the tenancy by estoppel upon the mortgagee's taking possession of the premises as aforesaid), in my judgment, after the bank took possession of the premises on 1st February 2001, the matter was no longer in the hands of the 2nd Defendant. In other words, it was the bank which, having the right to possession, could sue to evict the Plaintiff and claim mesne profits relating to the Plaintiff's continued occupation of the premises after 1st February 2001. And as mentioned before, the bank did sue the Plaintiff for its occupation of the premises in a High Court action that was subsequently compromised. In my judgment, the 2nd Defendant cannot counterclaim against the Plaintiff for the occupation of the premises after 1st February 2001 in those circumstances.
Mr. Wong, counsel for the Defendants, complained that the bank only obtained a mere sum of $33,582.80 from the Plaintiff by way of compromise, which was far less than what the Plaintiff ought to pay for its continued occupation of the premises (or a part thereof) after 1st February 2001 until 12th June 2001, bearing in mind that the monthly rental was $61,000. This affected the position of the 2nd Defendant vis-à-vis the bank because only a small sum of $33,582.80 was in those circumstances credited by the bank as partial repayment of the outstanding loan due and owing to the bank. The Plaintiff should at least be responsible for the shortfall in rent or mesne profits to the 2nd Defendant. In my judgment, any such complaint, if justified, should be directed to the bank which had the title to sue the Plaintiff for its continued occupation of the premises and which had in its on right chosen to settle with the Plaintiff in the manner and amount described above. The 2nd Defendant cannot now turn to the Plaintiff for its alleged loss, or the shortfall, in mesne profits.
I would simply note here that a mortgagee who goes into possession of the mortgaged premises burdens himself with the liability of a mortgagee in possession, and generally speaking he is bound to account to the mortgagor, not only for the rents and profits which he actually receives, but also for the rents and profits which, but for his wilful default or neglect, he might have received: Halsbury's, supra, para.628. But this would be a matter between the 2nd Defendant and the bank, with which I am not concerned in this action. I make no comment regarding whether the 2nd Defendant's complaint or grievance is justified or on the adequacy of the settlement sum in the proceedings between the bank and the Plaintiff.
Further, the counterclaim for outstanding electricity charges in the sum of $8,612.02 must also fail as the sum claimed is fully set-off and extinguished by the overpayment of rentals for four days in the month of February 2001 by the Plaintiff (i.e. 2nd to 5th February 2001).
As for the counterclaim for damages for loss and damage arising out of the failure of the 1st Defendant to gain access to the machine room in late March to remove the telephone system installed there to the Seapower group of companies' new office, Mr. Wong for the Defendants clarified in his final submission that this is a counterclaim made by the 1st Defendant, not the 2nd Defendant, against the Plaintiff. The immediate difficulty facing such a claim is that (subject to the Plaintiff's argument to be dealt with below that in fact the 2nd Defendant entered into the Tenancy Agreement as agent for the 1st Defendant) the 1st Defendant had no contractual relationship with the Plaintiff whatsoever and cannot maintain a claim in contract against the Plaintiff for denying the 1st Defendant access to the machine room.
A further difficulty on the path of the 1st Defendant is that after 1st February 2001, the 2nd Defendant no longer had possession of the 21st floor, and neither the 1st Defendant nor the 2nd Defendant had any right to demand the Plaintiff to give the 1st Defendant access through the formerly leased premises to the machine room. Although the bank consented to the 1st Defendant's going through the formerly leased premises to gain access to the machine room, this would not give the 1st Defendant a right by itself to sue the Plaintiff for the resulting loss by reason of the Plaintiff's refusal to allow the 1st Defendant in. Any complaint in this regard would have to be made by the bank which had the right to possession of the entire 21st floor premises (including the machine room), but understandably the bank had no incentive to do so and did not make any such complaint in its action against the Plaintiff.
In final submission, Mr. Wong re-formulated his client's claim by placing reliance on a cause of action based on tort, namely, interference with the 1st Defendant's economic interest by unlawful means on the part of the Plaintiff. Such a cause of action was never pleaded, but the Plaintiff did not object to its being relied on. In my judgment, the claim as re-formulated must fail as there is simply no evidence to support any finding that there was any "deliberate" interference with the 1st Defendant's interest by unlawful means or an "intention to injure" as a contributing cause of the 1st Defendant's alleged loss, which is crucial for maintaining such a cause of action: Clerk & Lindsell on Torts (18th ed.) para.24-88.
In fact, it is clear from the Plaintiff's letter dated 26th March 2001 to the solicitors acting for the bank and the bank's solicitors' letter dated 26th April 2001 written to the Plaintiff that the bank had before 30th March 2001, the deadline imposed by the Defendants for gaining access to the machine room, recovered vacant possession of various parts of the 21st floor which were sufficient for the 1st Defendant to gain access to the machine room. Moreover, judging from the correspondence, and in particular the Plaintiff's letter of 26th March 2001, the Plaintiff's handwritten reply written on a letter written by the Defendants' solicitors to the Plaintiff dated 28th March 2001 and a further letter written by the Plaintiff to the Defendant's solicitors dated 29 March 2001, it is plain that the Plaintiff did not deliberately interfere with the 1st Defendant's access to the machine room or intend to injure or harm the economic interest of the 1st Defendant. The Plaintiff was simply saying that it had vacated those parts of the premises which the 1st Defendant required to go through in order to gain access to the machine room and the 1st Defendant should arrange with the bank to go through those parts of the premises in question for gaining access to the machine room.
Finally, the 1st Defendant simply failed to prove the amount of loss claimed which it quantified at $75,278, being the alleged difference between the cost of buying a new telephone set and the removal cost of the old telephone set from the machine room to the new office, less the second-hand value of the old telephone system which it eventually removed from the machine room. Amongst other things, the 1st Defendant failed to prove the necessity of buying a new telephone set instead of a second-hand one (if available), or what discount should be made to its claim to reflect the fact that the 1st Defendant had purchased a new set of telephone system the price of which was used to calculate the damages claimed. No evidence was led to prove how old was the old telephone set and how advanced was the new set as compared with the old one.
Therefore in my judgment, for all these reasons, this part of the counterclaim also fails.
THE POSITION OF THE 1ST DEFENDANT
It is not in dispute that the 1st Defendant is the ultimate holding company in the Seapower group of companies, and the 2nd Defendant is just a company in the group holding the 21st floor property. But a property holding company is still a company in its own right, a separate legal entity in the eyes of law. It is no less a separate legal entity because it holds a single property and does no other business. It is no less a separate legal entity because it is but one company in a group comprising many.
It is also common ground that the Tenancy Agreement in question was negotiated by the senior staff of the group in the direct employ of the 1st Defendant, and not by any director or staff in the direct employ of the 2nd Defendant. Further during negotiations, the question of the provision of a guarantee by the 1st Defendant for the return of the deposit upon the expiration or earlier termination of the Tenancy Agreement was discussed. The reason was that the Plaintiff only knew the 1st Defendant, a listed company, but not the 2nd Defendant. The Plaintiff was told by a Mr. Boris Lam, chief financial officer of the 1st Defendant in charge of negotiating the Tenancy Agreement with the Plaintiff, that no such guarantee was necessary because the deposit was a "real liability" of the 1st Defendant's. The Plaintiff took this to mean that the 1st Defendant was agreeing to guarantee the refund of the deposit to the Plaintiff, for otherwise the deposit could not be a "real liability" of the 1st Defendant's, it not being a party to the Tenancy Agreement. But it is clear that the Tenancy Agreement, prepared by lawyers, made no mention of this whatsoever. Nor was there any written guarantee or document signed by the 1st Defendant in favour of the Plaintiff to that effect. I also note that what Mr. Boris Lam said, which is not in dispute, was said in the presence of the Defendant's lawyer attending the meeting who apparently did not understand Mr. Lam as having given a promise on behalf of the 1st Defendant to be responsible for the refund of the deposit. As I said, nothing in writing to that effect was prepared or signed.
In my judgment, what Mr. Lam said was too uncertain to constitute any binding promise on the part of the 1st Defendant to be responsible for the refund of the deposit to the Plaintiff. A "real liability" of the 1st Defendant is capable of meaning more than one thing. One possible interpretation is that Mr. Lam was simply referring to the fact that in the normal course of events the 1st Defendant as a listed company and the ultimate holding company of the 2nd Defendant would not allow, for good commercial reason, the 2nd Defendant to be in default in repaying the deposit to its tenant, and in that sense the liability of the 2nd Defendant's was that of the 1st Defendant's. Another possible interpretation is that Mr. Lam's reference to the 1st Defendant was simply a reference to the 1st Defendant as agent for the 2nd Defendant, just like all other references to the 1st Defendant during the negotiations which resulted in the signing of the Tenancy Agreement between the Plaintiff and the 2nd, not the 1st, Defendant. In any event, whilst the matter must be determined objectively, I find the expression relied on to be too uncertain as capable of constituting a promise on the part of the 1st Defendant.
Moreover, in my judgment whatever was promised by Mr. Lam orally was, like the discussions and the negotiations about the Tenancy Agreement, not legally binding until a formal document prepared by lawyers was signed. As I said, the Defendants were advised by lawyers who prepared the draft Tenancy Agreement for the parties' discussion and who eventually prepared the formal Tenancy Agreement for the parties' execution which they did. In my judgment, the intention of the parties must have been that no legal relationship would be created unless and until a formal document was signed. This applied not only to the Tenancy Agreement but to any alleged collateral agreement or guarantee. I find it most unlikely that a listed company like the 1st Defendant would have intended to make such a collateral agreement or give such a guarantee in such an informal manner, whilst the Tenancy Agreement was to be formally prepared by lawyers for the parties' execution.
The subsequent conduct of the 1st Defendant in handling all tenancy matters arising out of the Tenancy Agreement including the payment of deposit and rent does not, in my view, alter the position. In my judgment, the 1st Defendant simply acted as the agent of the 2nd Defendant in handling all tenancy matters. This is nothing surprising or strange in the commercial world, particularly in a group company situation.
I also reject the Plaintiff's alternative argument that the 2nd Defendant purchased the premises, mortgaged the premises, and let out the premises to the Plaintiff, all as agent for and on behalf of the 1st Defendant. As I said, though they are within the same group, the 1st and 2nd Defendants are separate legal entities. And not only that, but in my judgment, when the 2nd Defendant transacts, it transacts as a principal, not as an agent of the 1st Defendant. I can find nothing in the evidence to contradict this. This is how the commercial world works, and I see nothing wrong with it, nor do I see any need for the court to interfere by the imposition of an agency relationship when circumstances do not justify and when none was, on the evidence, intended. Likewise the circumstances under which the courts would be prepared to pierce the corporate veil or equate a company with an individual or another legal entity are reasonably well defined, and none existed in the present case.
But this is not the end of the matter. The Plaintiff argued that if the 1st Defendant was acting as an agent of the 2nd Defendant only, and only received the deposit and rental payments as agent for the 2nd Defendant (although all receipts were issued in the name of the 1st Defendant), since the tenancy created as a result was merely a tenancy by estoppel which was subsequently destroyed by the mortgagee's intervention and thus a nullity as analysed above, the deposit was paid under a mistake or as a result of the Defendants' wrongdoing (in failing to obtain the prior written consent of the mortgagee before entering into the Tenancy Agreement), and therefore the deposit was recoverable from the 1st Defendant who had received it as agent. The Plaintiff relied on, amongst others, the following passage from Halsbury's Laws of England (4th ed.) para. 174 which says:
If, however, a third party pays money to an agent under a mistake of fact, or in consequence of some wrongful act, the agent is personally liable to repay it, unless, before the claim for repayment was made upon him, he has paid it to the principal or done something equivalent to payment to his principal, or where the principal is a foreign sovereign immune from suit. Where, however, the agent has been a party to the wrongful act, or has acted as a principal in the transaction, in consequence of which the money has been paid to him, he is not discharged from his liability to make repayment by any payment over to his principal.
Further, on the facts, it was accepted by Mr. Wong and is in fact clear from the evidence that the deposit money is still with the 1st Defendant, as the 2nd Defendant does not have a bank account. As made clear in Halsbury's, ibid., at footnote no. 5, the mere crediting of the principal with the amount without there being any change of circumstances rendering it inequitable for the agent to refund the money is not sufficient. Therefore although the deposit has been credited to the 2nd Defendant in its books, as no money actually changed hands, the deposit is still, so it was pressed before me, repayable by the 1st Defendant.
Mr. Wong, counsel for the Defendants, objected to this argument on the ground that it was never pleaded and in fact went contrary to what had been pleaded by the Plaintiff against the 1st Defendant, i.e. that the 2nd Defendant was the agent of the 1st Defendant. Of course this was only one of the two alternative pleas relied on by the Plaintiff against the 1st Defendant, the other being a plea of collateral contract which could stand together with an argument based on the 1st Defendant's being an agent of the 2nd Defendant. But Mr. Wong must be right in saying that as a matter of fact the argument based on the 1st Defendant's receipt of the deposit as an agent of the 2nd Defendant has never been pleaded. This argument was only raised for the first time during final submission.
In my judgment, all the relevant facts and evidence are before the court, and the matter is basically a question of law. Even at this late stage, it is open to the court to grant the Plaintiff leave to amend its statement of claim to incorporate such an alternative plea against the 1st Defendant. In his written reply on this point, Mr. Wong was unable to point out any real prejudice to the 1st Defendant if leave was granted by the court to allow the Plaintiff to argue this point by making the necessary amendment to the pleading. I see no real prejudice to the 1st Defendant if I allow this point to be run. All relevant evidence is before the court, and it really is a question of law which the court has to decide according to the evidence. This is just a technical objection, and I consider the adjudication of the real issues between the parties according to the evidence placed before the court a much more relevant and important consideration than a technical objection based on pleading. Mr. Wong had a full opportunity to address this argument, which he did by means of a very detailed written reply on this point. So in the exercise of my discretion, I allow this argument to be run, and give leave to be Plaintiff to effect the necessary amendment to its statement of claim.
In this regard, I also reject Mr. Wong's argument that this argument cannot be run because it is inconsistent with the pre-existing pleaded case of the 2nd Defendant being an agent of the 1st Defendant. In litigations, parties are generally permitted to run alternative and mutually inconsistent cases provided that the facts relied on to support each alternative case are clearly pleaded in the pleadings. No election need be made until judgment. In the present case, clearly the Plaintiff has not made any binding election in relation to its alternative cases against the 1st Defendant.
Turning to the substantive merits of the Plaintiff's argument based on agency, for my part, I would prefer the more detailed formulation of the relevant principles by the learned editors of Bowstead & Reynolds on Agency (16th ed.) para.9-095 which is as follows:
Except as provided in this Article, an agent is not personally liable to repay money received by him for the use of his principal.
Where money is paid to an agent for the use of his principal, and the circumstances are such that the person paying the money is entitled to recover it back, the agent is personally liable to repay the money in the following cases:
Where the money is obtained by duress or by means of any fraud or wrongful act to which the agent is party or privy.
Where the money is paid under a mistake of fact, or under duress, or in consequence of some fraud or wrongful act, or generally under circumstances in which any immediate right of recovery arises, and repayment is demanded of the agent, or notice is given to him of the intention of the payer to demand repayment, before he has in good faith paid the money over to, or otherwise dealt to his detriment with, the principal in the belief that the payment was a good and valid payment.
I reject any argument on the part of the Plaintiff based on any alleged wrongful act on the part of the 1st or 2nd Defendant. In particular, I note that the Plaintiff had specifically abandoned before trial its claim based on misrepresentation against the Defendants. I do not accept that for the present purpose the failure of the 1st or 2nd Defendant to obtain the prior written consent of the bank to the creation of the Tenancy Agreement was in itself a wrongful act on the part of the 1st or 2nd Defendant. What was required in the present context to constitute a wrongful act would be something similar to duress or fraud. So Rule (2)(b) above is irrelevant in the present case.
As for Rule (2)(c), the mistake relied on by the Plaintiff may be formulated as a mistake that the landlord had obtained whatever prior consent it had to obtain in order to be able to enter into the Tenancy Agreement. But as pointed out in Bowstead para.9-100, the formulation of Rule (2)(c) applies to all cases "where the very fact of payment creates an immediate liability to repay." However,
[w]here the liability to repay arises subsequently, however, e.g. because of breach of contract, it seems that the more general rule (Rule (1)) applies and the agent is not liable even though he still has the money.
In the present case, the Tenancy Agreement created a tenancy by estoppel which was good between the Plaintiff and the 2nd Defendant so long as the mortgagee did not intervene. The liability to repay the deposit only arose subsequently when the mortgagee intervened. The very fact of payment of the deposit upon the signing of the Tenancy Agreement did not there and then as a matter of law create an immediate liability to repay. So in my judgment, although the deposit may still be regarded as being in the hands of the 1st Defendant, the 1st Defendant is not liable to repay the money to the Plaintiff who can only look to the 2nd Defendant for repayment of the deposit. In other words, I reject the Plaintiff's argument based on the duty of an agent to repay money received for the use of his principal in appropriate cases under the law of restitution and agency.
Finally, I should also mention that in its final submission, the Plaintiff also relied on a resulting trust in support of its claim for the return of the deposit, arguing (if I understand the argument correctly) that the 1st Defendant held the deposit on a resulting trust for the Plaintiff, the purpose for the payment of the deposit having failed as a result of the intervention by the bank. I reject this argument, not so much because it was never pleaded, but rather because when the Plaintiff as tenant paid over the deposit pursuant to a tenancy, the landlord or its receiving agent did not receive the deposit as trust money under any trust, so when the tenancy came to an end due to the intervention of the bank and the deposit thus became repayable, it was not repayable because of any trust or resulting trust. No trust was intended, no trust was created, and no resulting trust arose when the bank intervened. A deposit was only payable and paid over by a tenant to a landlord pursuant to a contract of tenancy, not any trust. Its payment did not create any trust. Nor did the subsequent failure of the tenancy give rise to any resulting trust.
In my judgment, the Plaintiff's claim for the refund of the deposit against the 1st Defendant fails.
I give judgment to the Plaintiff against the 2nd Defendant for the sum of $366,000.
As for interest, the Plaintiff argued that since the Tenancy Agreement was a nullity and therefore the deposit ought never to have been paid in the first place, interest should run from the date of payment of the deposit. As I understand it, this was a sort of total failure of consideration argument, as the deposit paid served, so it was sought to be argued, no useful purpose in the light of what subsequently happened. The Plaintiff further supported this argument by relying on the above extract from the judgment of Lord Denning in Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries Ltd that in fact the Plaintiff was at risk of making payment of rent to the bank for its entire period of occupation right from the very beginning once the bank intervened and destroyed the tenancy by estoppel, even though it had paid the rent before the bank's intervention to the Defendant. I do not agree with this proposition. What Lord Denning said must be read subject to the well established principle of law that a mortgagee going into possession may recover from the tenant rent which has accrued but not yet been paid, but not rent already paid to the mortgagor before his going into possession: Halsbury's, Vol.32, paras.620 and 621. In any event, I find it wholly unjust to award interest from the date of payment of the deposit when the Plaintiff had enjoyed the use and occupation of the premises undisturbed from the commencement of the Tenancy Agreement up to 1st February 2001. Certainly as a matter of fact and to its credit, the bank never sought to demand payment of rent in relation to any period prior to 1st February 2001 from the Plaintiff. So in the exercise of my discretion, I would only award interest at the rate of 10 percent per annum from 1st February 2001(when the tenancy by estoppel was destroyed and the Plaintiff first wrote to the Defendants demanding repayment of the deposit) to the date of judgment and thereafter at the judgment rate until full payment.
I dismiss the Plaintiff's claim against the 1st Defendant.
I dismiss the counterclaim.
I make an order nisi that the 2nd Defendant pay the Plaintiff the costs of its claim against the 2nd Defendant in this action, that the Plaintiff pay the 1st Defendant its costs of defending this action, and that the 1st and 2nd Defendants pay the Plaintiff the costs of the counterclaim, all to be taxed if not agreed. My order nisi as to costs will become absolute unless any party applies within 14 days from the date hereof to vary the same.
The Banque de L'indo Chine v Mitchell (1928) 23 HKLR 44
Parker v Braithwaite  2 All ER 837
Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries Ltd  QB 580
Corbett v Plowden (1884) 25 Ch 678
Hui Sai Hoi v Chan Lai Wan (1932-1933) 26 HKLR 31
Yeung Lam Wilson v Lam Po Chong Priscilla CACV268/1999 (14/1/2000)
Towerson v Jackson  2 QB 484
Stroud Building Society v Delamont  1 WLR 431
Authors and other references
Hill & Redman's Law of Landlord and Tenant Vol.1
Cousins, The Law of Mortgages (1989 ed.)
Halsbury's Laws of England (4th ed. reissue) Vol.32
Clerk & Lindsell on Torts (18th ed.)
Bowstead & Reynolds on Agency (16th ed.)
The Plaintiff, acting in person, represented by its director Mr. Lachlan James Christie.
Mr. William Wong for the 1st and 2nd Defendants (instructed by M/s. Tang, Tso & Lau)
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