Archive for the ‘forfeiture’ Category

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

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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.

Principles governing relief against for forfeiture

September 17, 2012

In Shiloh Spinners Ltd v Harding ([1973] AC 691, HL) S assigned part of their leasehold property to T. The assignment imposed positive obligations on T. There was a right of re-entry in the event of the non-performance of these obligations. T assigned to H who defaulted. S brought proceedings to recover possession. The House of Lords held that the right of re-entry was an equity and did not fail for want of registration under the Land Charges Act 1925.

One question was whether relief against forfeiture was available in principle. Lord Wilberforce referred to ‘the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result.’ (723)

Relief was possible, in principle, in this case:

‘The power of re-entry was inserted by way of reinforcement of the contractual obligation which it must have perceived might cease to be enforceable as such. Failures to observe the covenants having occurred, it would be right to consider whether the assignor should be allowed to exercise his legal rights if the essentials of the bargain could be secured and if it was fair and just to prevent him from doing so. It would be necessary …  to consider the conduct of the assignee, the nature and gravity of the breach and its relation to the value of the property which might be forfeited. Established and, in my opinion, sound principle requires that wilful breaches should not, or at least should only in exceptional cases, be relieved against, if only for the reason that the assignor should not be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations.’ (725)

As mentioned in this passage, one question was whether relief is available in cases of wilful breach. Lord Wilberforce indicates not. Lord Simon of Glaisdale thought that relief was always available in principle but that the fact that breach was wilful would be a factor to be considered when deciding on whether or not relief should be granted.

The House of Lords upheld the first instance decision not to grant relief in this case where the breach was clear, wilful and substantial.

Service of the writ, not its issue, amounts to re-entry

September 13, 2012

In Canas Property Co Ltd v K.L. Television Services Ltd ([1970] 2 Q.B. 433, CA (Eng)) T assigned a lease to M. When the assignee fell into arrears with the rent, the landlord issued forfeiture proceedings. M disappeared and the summons could not be served on him. The landlords then began proceedings in the High Court against the original tenant seeking the rent arrears both for the period before the issue of the earlier proceedings against the assignee and for the period after that. The original tenant argued that the issue of the earlier proceedings brought the lease to an end and that it had no liability to pay rent for the period after the date of issue. This failed. It was not enough to issue the proceedings; the lease only came to an end when they were served.

Lord Denning M.R. said:

‘My conclusion is that where a tenant has been guilty of a breach which has not been waived, then, in order to effect a forfeiture, the lessor must actually re-enter, or do what is equivalent to re-entry, namely, issue and serve a writ for possession on the lessee or assignee, as the case may be. If the lessee or assignee is a partnership (or joint tenants) service on one of them is enough for that purpose … The lease is determined as from the date on which the writ is served. The rent is payable up to the date of service. Mesne profits are payable after the date of service.’ (442)

Where the lessee cannot be found there may be no need to serve provided the election to bring the lease to an end is clear and unequivocal (441). Further:

‘If the lessee has left the premises and cannot be found, service can be effected by affixing a copy of the writ to some conspicuous part of the land.’ (441).

Unlawful sub-tenant not a trespasser while the head-lease subsists

September 11, 2012

In Zenuna Ltd v Jingdou Trading Co Ltd ([2001] 3 HKLRD 800, CFI) the tenant of a shop granted a sub-lease in breach of a covenant not to sub-let. The head landlord issued and served a writ to forfeit the lease on the grounds of this breach of covenant and failure to pay rent. The landlord sought, inter alia, payments from the sub-tenant on account of its use and occupation of the premises from the date of the sub-lease up to the service of the writ on the intermediate tenant. This aspect of the landlord’s claim failed (or at least it was arguable that it would fail since this was an application for summary judgment). Recorder Li SC said:

‘[E]ven an unlawful sub-tenant is not to be regarded as a trespasser; instead, the landlord’s remedy is to forfeit the lease, which forfeiture will be effective against both tenant and sub-tenant, entitling the landlord to mesne profits from the date of service of writ against the tenant and sub-tenant if possession is not given.’ [19]