Posts Tagged ‘forfeiture’

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