Archive for the ‘forfeiture’ Category

Relief from forfeiture will ordinarily only be granted once during a lease term

May 27, 2017

In Ramadour Industries Ltd v Bullen ([2017] HKEC 974, CA) L granted T a lease of a house on Lamma Island for a two year term. T fell into arrears with the rent but was granted relief from forfeiture. T quickly fell into arrears again and L brought new proceedings seeking possession. T sought relief from forfeiture a second time but this was refused.

The Court of Appeal (Yuen JA giving the court’s judgment) upheld this refusal. The court’s power to grant relief is now codified in section 21F of the High Court Ordinance. Section 21F(1A) provides that relief will only be granted to a tenant once during the term, ‘unless the Court is satisfied that there is good cause why this section should apply in favour of a lessee’.

The intention is clear: relief pursuant to section 21F will normally only be granted once to a tenant during a lease term. The onus is on the tenant trying to invoke section 21F for a second time during a term to show that there is good cause.

Michael Lower

Agreement determines whether landlords must give credit for security deposit when enforcing a judgment against tenant

February 3, 2017

In Power Plus Ltd v Fruit Design & Build Ltd ([2016] 5 HKLRD 707, LT) the tenant of a flat paid a security deposit of HK$150,000 at the commencement of the tenancy. The forfeiture clause provided that this would be forfeited to the landlord ‘as liquidated damages’ should the tenant be in breach of its obligations under the terms of the lease. The tenant fell into arrears with the rent and the landlord obtained judgment for the sum of HK$105,000. The question was whether the landlord could forfeit the deposit and, in addition, enforce the judgment.

The Lands Tribunal (Judge Wong King Wah) decided that whether this was possible or not depended on the terms of the lease. In this case, on a proper interpretation of the forfeiture clause, the landlord was not entitled to forfeiture and to enforce the judgment without giving credit for it ([15]). The parties’ intention was that the security deposit should be liquidated damages in respect of any claim that the landlord might have against the tenant in respect of the lease.

Michael Lower

Penalty or pre-estimate of loss: an inadequate dichotomy.

January 20, 2016

In Cavendish Square Holding BV  v Talal El Makdessi and Parking Eye Limited v Beavis ([2015] UKSC 67]) the UK Supreme Court addressed fundamental issues concerning the law of penalties in two cases. One concerned provisions in a very substantial share sale; these provided for the sellers first to lose their entitlement to very substantial installments of the sale price and, second, to transfer their remaining shares to the buyers at a reduced price which left goodwill out of account. These provisions would take effect if the sellers defaulted by soliciting customers for a competing business or working for a competitor. The sellers defaulted and these provisions were invoked by the buyers. The sellers contended that these provisions were penalties and unenforceable. The other concerned a provision whereby motorists agreed that they would pay GBP 85 if they overstayed a two hour free parking limit. A motorist overstayed (by 56 minutes) and Parking Eye Limited (which operated the car park on behalf of its owner) demanded the GBP 85. The motorist contended that it was a penalty. The Supreme Court was unanimously of the view that none of the provisions just outlined amounted to a penalty.

Penalties are clauses that operate in the event of a breach of a primary obligation by a contracting party. They may provide for the payment of money, the transfer of property or the loss of the right to receive money (such as purchase price installments) from the other contracting party. Where any such provision: (a) serves a legitimate commercial interest; and (b) is not  unconscionable or extravagant then it is enforceable. Otherwise, it is a penalty and unenforceable. The idea that the sum payable or forfeited must always be a genuine pre-estimate of loss occasioned by individual breaches of contract is too narrow an approach to the question as to whether or not there is a penalty. One has to look more broadly at whether the provision in question protects some legitimate interest or purpose of the innocent party.

The common law concerning penalties and the equitable jurisdiction to grant relief from forfeiture have common origins and serve similar purposes. They are, nonetheless, distinct from each other and might each be applicable in a particular case. Thus, the court might determine that a particular provision is not a penalty and then go on to consider whether it should grant relief. There is a ‘safe haven’ for the forfeiture of deposits that are restricted to the amount that is customary in a given jurisdiction. If a provision is a penalty, it is completely unenforceable, the courts cannot allow the provision to be partially enforced.

In Cavendish Square, a large proportion of the very substantial purchase price was attributable to goodwill. The clauses restricting the sellers from soliciting clients or engaging in a competing business were designed to protect the goodwill. This was the legitimate commercial purpose of the provisions. Where the sellers broke these clauses, it was not extravagant or unconscionable for them to lose the right to receive payments of the purchase price that were intended to reflect the ongoing value of this goodwill. On balance, the Supreme Court was of the view that the sellers’ obligation to transfer their remaining shares in the company to the sellers at a reduced price could be justified on the same grounds.

As for the car parking case, the legitimate interest was to secure an adequate turnover of traffic on a car park that served a shopping outlet and to prevent the availability of free parking from being abused by people who were not shoppers at the retail outlet. The provision for overstaying also funded the operating costs of the car park and made the offer of free parking possible. The amount of the charge for overstaying was in line with industry guidelines for car park operators and was clearly publicised so that motorists would be aware of it before they entered the car park.

Michael Lower

 

Does acceptance of rent waive a continuing breach of covenant?

January 13, 2016

In Kwok Hon Shing v Happy Team (China) Ltd ([2015] HKEC 2038, LT) L granted T a four year lease of a unit in an industrial building. There were sub-lettings of part for residential purposes in breach of a covenant not to use the property for residential purposes. These breaches continued even after L’s complaint letter of 12 November 2014. L began forfeiture proceedings in February 2015. The breaches of covenant continued at least until 14 February 2015 but the unlawful sub-tenancies were subsequently terminated. L continued to accept rent until April 2015.

The lease contained a clause to the effect that acceptance of rent would not constitute a waiver of any breach by T. This clause had no effect in this case (if it ever has any effect at all); it could not alter the legal implications of acceptance of rent with knowledge of the breach ([33] – [35]).

In the case of a continuing breach of the user covenant, acceptance of rent only waived the breach up to the date of acceptance of rent. Subsequent breaches were only waived to the extent that L knew at the date of acceptance of rent that they would continue ([42]). The application to forfeit the lease was an unequivocal election to determine the lease and acceptance of rent after that could not amount to a waiver ([47]). L had not waived the breach and was entitled to forfeit. The breaches had, however, been rectified and T was granted relief from forfeiture under section 58 of the Conveyancing and Property Ordinance.

Michael Lower

Interpretation of clause modifying duty to respond to requisitions concerning unauthorised structures

August 20, 2013

In Channel Green Ltd v Huge Grand Ltd ([2013] HKEC 1124, CFI) CG had entered into a contract to buy property from HG. It had paid a 15% deposit. The contract contained a clause to the effect that the property was sold on an ‘as is’ basis. The clause provided that CG could neither raise requisitions concerning unauthorised additions, alterations or illegal structures nor refuse to complete or delay completion on account of any such matters. There were several unauthorised structures at the property. CG raised requisitions concerning these structures and refused to complete. HG elected to terminate the contract and forfeit the deposit as a result.

The question was whether, as a matter of contractual interpretation, the relevant clause meant that CG had no right to raise requisitions nor to refuse to complete on account of the unauthorised structures. The Court of First Instance decided that this was the case ([91] – [98] per Recorder Coleman SC).

The court noted that although the content of pre-contractual negotiations is irrelevant to the process of interpretation, statements of fact made in the course of negotiations are good evidence as to the context or factual matrix and so  are relevant to the construction of the contract ([23]). Thus, the fact that HG had informed CG of the existence of a number of the unauthorised structures before contracts had been exchanged was relevant to the construction of the clause.

The court also considered whether the 15% deposit was a true deposit or whether it could potentially be a penalty and decided that it was a true deposit. While the amount exceeded the conventional 10%, this was justifiable in the context of a lengthy period between contract and completion ([109]).

Michael Lower

Deposit or penalty? The court can order repayment of a penalty that has already been paid.

June 26, 2013

Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd ([1993] AC 573, PC) was an appeal to the Privy Council from the Court of Appeal of Jamaica. A purchaser had paid a 25% deposit and this had been forfeited by the vendor when the purchaser failed to complete on time (time being of the essence for completion). The purchaser successfully sought relief from forfeiture of the deposit.

Lord Browne-Wilkinson explained that in general a provision that a party in default is to pay or forfeit a sum of money is an unlawful penalty unless the sum in question can be shown to be a genuine pre-estimate of damages. There is an exception to this general rule in the case of deposits; these can be forfeited even where they bear no relation to the anticipated loss of the innocent party (p. 578).

For a sum to be treated as a deposit it must be a sum that can reasonably be described as a deposit. Since it is difficult to say what sum would be a reasonable deposit, the approach is to accept (without searching for any further explanation) that it is long established custom and usage in the United Kingdom and Jamaica to accept a 10% deposit as being reasonable in those jurisdictions. It is for a seller wishing to rely on any larger sum to show what special circumstances would justify the larger deposit (p. 580). A reference to market practice at the time of the contract does not amount to such a justification (pp. 579 – 580).

Here the vendor had not been able to show why a larger (25%) deposit was justified. As a result, the entire sum (not merely the excess over 10%) was treated as a penalty. The court had jurisdiction to order the vendor to repay the entire sum less the amount of any damage actually suffered by the vendor as a result of the purchaser’s breach (p. 582).

Michael Lower

Provision for forfeiture for non-payment of rent is a usual covenant in Hong Kong

May 30, 2013

In Sun Hing Company v Brilliant Investment Co Ltd ([1966] HKLR 310, FC) L and T entered into a provisional agreement for lease but no formal agreement was entered into (though the ‘provisional’ agreement envisaged that this would happen). The provisional agreement did not contain a forfeiture clause and T fell into arrears with the rent. The question was whether the provisional agreement (enforceable by virtue of Walsh v Lonsdale) included a forfeiture provision as a ‘usual’ covenant. It was held that a forfeiture clause for non-payment of rent is a usual covenant and was enforceable under the rule in Walsh v Lonsdale.

Stamp Duty had not been paid on the provisional agreement. The court had a duty to take notice of that fact and no order would be made until the landlord’s solicitors had undertaken to submit the agreement to the Inland Revenue and to pay the stamp duty.

Michael Lower

Break clause and forfeiture

October 24, 2012

In Far East Consortium v Full Wealthy International Ltd ([2006] HKEC 968, CA) T occupied property under a three year lease that gave the landlord the right to break the lease on six months’ prior written notice. The landlord served notice pursuant to this break clause. After service, but before the notice period had elapsed, the landlord served forfeiture proceedings on T. The court refused to deal with the matter under order 14. It was at least arguable that the service of the forfeiture proceedings prevented the landlord from relying on the break clause even though the notice to quit had been served before the forfeiture proceedings.

Relief from forfeiture available for finance lease of equipment and effect of sale pursuant to court order

September 19, 2012

In On Demand Information plc v Michael Gerson (Finance) plc ([2002] UKHL 13) M and O entered into four finance leases of video and editing equipment. The leases were for ‘primary’ periods of two years and would then continue for an indefinite secondary period. In effect, O was to pay for the equipment (through the rentals) during the primary period and the rentals for the secondary period were nominal. During the secondary period the lessee could sell the equipment at the best price available with the lessor’s consent and keep 95% of the proceeds of sale (as an ‘abatement of rentals’). 

The leases stipulated that the appointment of a receiver of the lessee would be a repudiatory breach. The lessee went into administrative receivership when the primary period of two of the leases had ended and was about to end in the case of a third lease. There were three months left of the final lease and it was only in respect of this lease that there was an outstanding primary period rental still to be paid. The lessor sought to rely on the breach to bring the leases to an end. The lessee argued that it was entitled to relief from forfeiture.

The lessor consented to a sale of the property under RSC Ord. 29 r. 4. This was without prejudice to the parties’ rights and was intended to allow the best value to be obtained for the property.

At first, the lessors had argued that relief had always been unavailable in this case since the leases were purely contractual. This had failed in the Court of Appeal; relief was available. The rights were not purely contractual and the conditions in which the court should consider relief were met ([28] and [29] of the House of Lords report). This aspect was not part of the appeal to the House of Lords.

The question was whether the sale had the effect of making relief impossible. The first instance judge and the Court of Appeal thought so. The House of Lords held that the sale pursuant to a court order which was expressly without prejudice to the parties’ rights did not take away the right to relief but shifted the parties’ rights from the property to the proceeds of sale.

Waiver of breach and resolving ambiguity in a lease by looking at the counterpart

September 18, 2012

In Matthews v Smallwood ([1910] 1 Ch. 777) a tenant granted a sub-lease in breach of a covenant against sub-letting. There was an ambiguity in the proviso for re-entry in the lease in that it allowed for re-entry in the event of a breach of  ‘the covenant’ therein contained. Was the right of re-entry only available for the breach of a single covenant in the lease and, if so, which one? This ambiguity, having arisen, could legitimately be resolved by looking at the counterpart which allowed for re-entry in the case of a breach of any of the ‘covenants’ contained in the lease.

There was also the question of whether there had been a waiver of the breach. There had not:

‘Waiver of a right of re-entry can only occur where the lessor with knowledge of the facts upon which his right to re-enter arises does some unequivocal act recognizing the continued existence of the lease.’ (786, per Parker J.)

The court refused to grant relief to the sub-lessee since it had been careless in failing to check on the terms of the head-lease concerning sub-letting.