Archive for the ‘relief from 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

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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

Post-acquisition constructive trust: evidential burden where there is reliance on an express statement. Detriment: where the plaintiff’s benefit outweigh any detriment

June 10, 2015

In Kwan So Ling v Woo Kee Yiu Harry ([2015] HKEC 694, CFI) the plaintiff (a widow) claimed that her parents-in-law had promised to give her and her husband two flats that they owned in Hong Kong. The plaintiff followed her husband to Hong Kong from the mainland. The parents-in-law transferred the title to one of the flats to the plaintiff and her husband. The plaintiff and her husband were allowed to make full use of the other flat (‘the second flat’) for several decades. Sometimes they lived in the second flat and sometimes they rented it out. The plaintiff’s husband and father-in-law died. The mother-in-law, shortly before her own death, transferred the title to the second flat to one of the plaintiff’s nephews. The nephew claimed that the plaintiff was a mere licensee of the second flat and he revoked this licence. The plaintiff claimed that she was the sole beneficial owner of the flat under the terms of a common intention constructive trust. Alternatively, she sought relief on the basis of proprietary estoppel.

The plaintiff’s claims failed for the simple reason that Godfrey Lam J found that there was no common intention / assurance. Nevertheless, he commented on the assertion that a more compelling standard of proof was needed since this would be a post-acquisition constructive trust. He suggested that this idea had no application where the trust was based on an express promise ([24]).

Godfrey Lam J also considered whether there was detriment. The plaintiff and her husband spent several hundred dollars to create internal partitions within the second flat in the 1970s. While this could potentially be detriment, it was not in this case since the income and other benefits that the plaintiff and her husband derived from the second flat far outweighed the expenditure ([53]). The same consideration was also relevant at the level of calculating any relief (53)).

The fact that the plaintiff made significant changes to her life by moving to Hong Kong was potential detriment. There was no causal linkage between this and any possible assurance by the parents-in-law. She moved to Hong Kong because of her love for her husband (54)).

Michael Lower

Deposits, liquidated damages and penalties

October 12, 2012

In Polyset Ltd v Panhandat Ltd [2002] 3 HKLRD 319, CFA) S agreed in May 1997 to sell property to P for HK$115 million. Completion was due to take place nine months after the date of the contract. P paid a deposit of HK$40.25 million (35%  of the purchase price). The contract expressly justified the larger than usual deposit on the basis of the longer than usual period between contract and completion. P later alleged a breach of contract and refused to complete. The Court of Final Appeal agreed with the Court of Appeal that S was not in breach of contract. The question was whether S could keep the deposit which exceeded S’s actual loss (HK$ 33million) by just over HK$ 7 milion. It held (Litton NPJ dissenting) that the deposit in this case was excessive and so the seller was not entitled to forfeit it.

The Court of Final Appeal distinguished between a liquidated damages clause and a deposit. A liquidated damages clause is intended to replace a claim for breach of contract. If it represents a genuine attempt to quantify the damages that might be payable in the event of breach then effect will be given to it. It then prevents any claim to the effect that the amount is too large or too small. If the liquidated damages payable are excessive so that they cannot be said to be a pre-estimate of the damages payable but are, instead, an attempt to terrorise the other party into performance then the liquidated damages clause is a penalty and the court will strike down the liquidated damages clause.

A deposit is quite different from a liquidated damages clause. A payment in advance is properly classified as a deposit if  it is intended both as part payment of the purchase price and as a proof that the buyer is serious about the transaction. It is not intended to substitute for a claim for breach of contract; in principle, a seller can keep the deposit and bring an action for breach (giving credit for the deposit if the claim is successful). If the deposit is not excessive then effect will be given to the contractual intention in its regard (usually that the seller can keep the deposit if the purchaser fails, without legal justification, to complete).

Where, however, the deposit is excessive the seller will not be allowed to keep it. When deciding whether or not a deposit is excessive, it is not appropriate to ask whether or not it represents a genuine pre-estimate of loss. That question is relevant to the evaluation of a liquidated damages clause but not to the contractual provisions concerning a deposit.  A deposit that is in line with usual practice (10% of the purchase price in Hong Kong) is not excessive. A deposit that is larger than the customary deposit is excessive unless there were special circumstances to justify it.

Ribeiro PJ summarised the position thus:

‘In the light of the foregoing authorities, the proper approach to unusually large deposits may be stated as follows.

(a) Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach.
(b) Where the deposit exceeds the conventional amount, that is, 10% in Hong Kong, forfeiture is only permitted if the party seeking to forfeit can show that exceptional circumstances justify the higher amount.
(c) Such exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.
(d) If such justification is not forthcoming, the courts will not recognize the amount as a true deposit but will treat it as an advance payment towards what was payable under the contract and recoverable as such, subject to the innocent party’s entitlement to deduct damages for any actual loss suffered as a result of the other party’s breach.’ (para. 90)

A 35% deposit was excessive.  The lengthy gap between contract and completion might justify a larger than usual deposit but not a deposit as large as that paid in the present case.  Hence, P could not be allowed to forfeit the deposit but was only entitled to its actual loss. The safest course for a seller is to accept the customary deposit and to have a clause that allows him to re-sell and to claim the loss on sale and the costs of sale as liquidated damages. A seller should accept that a deposit that is several times larger than the customary deposit is likely to be impermissible (para. 108).

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.

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.

Right to apply for relief after forfeiture by peaceable re-entry

January 24, 2012

A tenant’s right to apply for relief from forfeiture begins when the landlord serves notice (under CPO, s58, LPA 1925, s.146(1)) and ends once the landlord has taken possession pursuant to a judgment ordering that he be given possession. A tenant has a right to apply for relief even after a peaceable re-entry.

In Billson v Residential Apartments Ltd ([1992] 1 AC 494, HL) T, in breach of covenant, carried out alteration works at the property. L served a notice under section 146 of the Law of Property Act 1925 (equivalent to section 58 of the Conveyancing and Property Ordinance). T showed no sign of complying and L then effected a peaceable re-entry. T sought relief pursuant to section 146(2) (in the same terms as section 58(2) of the Conveyancing and Property Ordinance). This allows T to seek relief , ‘Where a lessor is proceeding, by action or otherwise, to enforce such a right of re-entry or forfeiture’. L argued that it was no longer proceeding to enforce the right; it had enforced it through its peaceable re-entry. The argument failed. Tenants have a right to apply for relief in these circumstances. A tenant’s right to apply for relief from forfeiture begins when the landlord serves notice (under CPO, s58, LPA 1925, s.146(1)) and ends once the landlord has taken possession pursuant to a judgment ordering that he be given possession. A tenant has a right to apply for relief even after a peaceable re-entry.

Questions of statutory interpretation aside, the House of Lords clearly wanted to promote ‘the civilised method’ and discourage ‘a dubious and dangerous method of determining the lease’ (per Lord Templeman at 536).

Relief against forfeiture on a second occasion where late payment was inadvertent

October 7, 2011

In Far East Land Holdings Ltd v Empire Asian Ltd ([2011] 4 HKLRD 472) the landlord had obtained an order for possession on the basis of the tenant’s failure to pay the rent. The tenant successfully applied for relief against forfeiture. By mistake, it was a few days late with a subsequent payment. This payment was, however, accepted by the landlord. The landlord, nevertheless, sought possession. The tenant was granted relief a second time on the basis that the delay was a slip on its part and the court has both statutory and an inherent equitable discretion to grant relief a second time. In any event, the landlord had waived the breach by accepting the late rent payment.

The court can grant relief from forfeiture after peaceable re-entry

January 6, 2011

The court can grant relief from forfeiture whether the landlord has recovered possession as a result of court proceedings or by peaceable re-entry. The right to apply for relief is a chose in action that can be assigned.

In Howard v Fanshawe ([1895] 2 Ch 581) a tenant had fallen into arrears with the rent. The landlord re-entered peaceably (easily done since the tenant hadn’t finished building houses on the properties and they had no back door). It was held that the court could grant relief even though there had been no court proceedings. This right is a chose in action that the tenant’s trustee in bankruptcy could transfer to a purchaser.