Case Summary: Distinguishing between rental deposit forfeiture and outstanding rent payment in tenancy agreements (Leung Wai Ling Isewesg v Success Base Engineering Ltd)

Case Summary: Distinguishing between rental deposit forfeiture and outstanding rent payment in tenancy agreements (Leung Wai Ling Isewesg v Success Base Engineering Ltd)

Leung Wai Ling Isewesg v Success Base Engineering Ltd
Case No.: CACV 58/2020
Date of Judgment: 15 March 2021
Citation: [2021] HKCA 310, [2021] 4 HKC 80
https://www.hklii.hk/en/cases/hkca/2021/310?hl=CACV%2058%2F2020

Facts

The plaintiff (Landlady) leased a property in an industrial building to the defendant (Tenant). Their written tenancy agreement stated that, like the clauses in an ordinary and common tenancy agreement:

1. the tenancy was for 3 years (firstly a fixed-term of two years and a flexible term of one year) with a monthly rent payable,
2. if Tenant could not complete the period of tenancy, Landlady would forfeit the rental deposit of 3-months’ rent,
3. if Tenant did not pay rent, Tenant would be treated as in breach of contract and having automatically surrendered the lease, and Landlady would terminate the contract,
4. the property was for ‘general industrial use’,
5. Landlady had the right of access to the property and repair the main structural parts including sewages and pipes.

About 5 months after the tenancy had commenced, Tenant complained about water seepage and structural deterioration in the property, and Landlady agreed to make good the defects but had not done so. Later, Tenant did not pay rent for 3 months, saying that Landlady repudiated the tenancy agreement because she delayed in making good of the defects. On the other hand, Landlady asked Tenant to pay rent. On the facts, Tenant gave the keys back to Landlady, but Landlady refused to accept them.

Landlady sued Tenant in the Court of First Instance for the outstanding 3-months’ rent and for forfeiting the rental deposit (amounting to 3 months’ rent). Landlady succeeded in obtaining judgment against Tenant in the Court of First Instance. Tenant appealed to the Court of Appeal.

Tenant argued that Landlady had the duty to repair, but she breached the duty and repudiated the tenancy agreement, and therefore, Tenant had a defence in not paying rent. Further, Tenant argued that the Landlady could not have both the rental deposit and the payment of the outstanding rent. (N.B. This is a common stance of some tenants in Hong Kong, i.e. because the landlord/landlady was ‘wrong’ or had failed to do something for the tenant, the tenant could not properly use/enjoy the property, so the tenant needed not pay rent, the rental deposit could cover the rent, and the tenant could win the case.)

Issues

Because Landlady had the right of access to the property to repair, did she also have the duty to repair? If Landlady did not do the repair, did Tenant have a defence in not paying rent?

Could the rental deposit ‘off-set’ against the outstanding rent?

Ruling and Reasons for Judgment

Answers: No. Landlady is entitled to win the case.

The clause of the tenancy agreement only provided Landlady a right of access to repair the main structural parts of the property. The clause did not necessarily/impliedly impose on Landlady a duty to repair. The landlord’s duty to make such repairs depends on whether it was necessary at the time the rental agreement was made. In this case, the landlord did not owe the tenant an implied duty of repair because there was no factual basis to support the argument that it was a necessary term, i.e. a necessary term is a term without which the tenancy would lack commercial or practical coherence at the date when the contract was made.

Even if Landlady had the duty to repair and breached her duty, Tenant unilaterally decided to surrender the property and ended the tenancy. Tenant used and could still use the property for industrial use, and Tenant could not withhold payment of rent.

The forfeiture of rental deposit and the payment of outstanding rent served different purposes. The rental deposit was to cover the loss due to the premature termination of the tenancy, and it was a pre-estimate of such loss. There was no duplication. (i.e. Arrears of rent represented the loss of rent in the past, while forfeiture of rental deposit represented the loss of rent in the future because the tenancy agreement ended prematurely.)

Takeaway

Whether a tenancy agreement contains an implied duty of repair depends on whether it is a necessary term at the date when the contract was made. In court litigation, the party alleging an implied duty of repair will need to plead and adduce evidence to show that without the implied duty of repair, the tenancy agreement would lack commercial or practical coherence.

Even if a clause in a tenancy agreement says that the landlord has the right to access the property to do repairs, it is not saying that the landlord has the duty do the repairs for the tenant. The duty to repair, normally, cannot be implied into the tenancy agreement. To avoid dispute, parties should expressly identify the party who has the obligation to repair in the tenancy agreement, and the consequence of such party’s failure to fulfill the obligation.

Although this case happened in a property in an industrial building, it is also applicable to domestic premises. It is an example of applying the general principles that: (1) even if the landlord/landlady fails to do what he/she had ‘promised’ to do (for example, to do repairs), the tenant needs to pay rent anyway; (2) rental deposit cannot simply be deducted as outstanding rent, and the rental deposit will normally be ‘forfeited’ because the fixed-term tenancy was terminated prematurely and it will be used to cover the loss in rental income suffered by the landlord/landlady.