Case Summary 2: Interest clause in the event of default in payment of rent or other monies payable by the tenant can be enforceable (Luvpa Ltd v Honor City HK Pharmacy Ltd)
Case Name: Luvpa Ltd v Honor City HK Pharmacy Ltd [2021] 2 HKLRD 1326 (Lands Tribunal)
Subject: Modern approach to penalty clauses in tenancy agreement and enforceability of interest clause
Facts
The plaintiff (landlord) let four shops to the defendant (tenant).
The tenancy agreements expressly provided that in the event of default in payment of rent or other monies payable by the tenant, the tenant shall pay to the landlord daily interest on such sums outstanding at the monthly rate of 2.5% from the date on which the same shall be due for payment until the date of payment.
The tenant failed to pay rent and rates and government rent, the landlord applied for recovery of possession of the shops, and mesne profits till the date of delivery of vacant possession of the shops, costs and interest at 2.5% per month pursuant to the interest clause.
Issues
The main issue is whether the interest at 2.5% per month was payable by the tenant to the landlord.
Rulings and Discussion
Under the modern approach, it appeared that a clause in a tenancy agreement providing for the payment on breach of a sum of money that exceeded the amount that a court would award as compensation may not be regarded as penal if it could be justified commercially and if its predominant purpose was not to deter breach.
Whether the provisions were legitimate as commercially justified and whether or not they were exorbitant or unconscionable in amount or in their effect should depend on evidence as to the circumstances in which the contract was agreed and evidence as to standard market rates, the latter being the most important evidence.
This was not a case of a rate of interest that increased in the event of default. As the landlord’s claim was based on contractual entitlement, the landlord was entitled to that interest as of right.
The Court was satisfied that the 2.5% clause in the tenancy agreement was enforceable. The Plaintiff’s claim for interest against the defendant was allowed.
Takeaway
Under common law, a party who signed a written agreement knowing that it was intended to have legal effect would generally be treated as having read its terms and to be bound by them.
However, when the tenancy agreement contains a clause providing for the payment of interest, it would be prudent to seek legal advice as to whether such amount exceeds the amount that a court would award as compensation and whether it would be regarded as penal in the light of its commercial justifiability and its predominant purpose.