Case Summary 1: There can be no legally binding contract in the absence of the essential terms of a tenancy agreement (World Food Fair Ltd v Hong Kong Island Development Ltd)

Case Summary 1: There can be no legally binding contract in the absence of the essential terms of a tenancy agreement (World Food Fair Ltd v Hong Kong Island Development Ltd)

World Food Fair Ltd v Hong Kong Island Development Ltd
Case No.: FACV 6/2006
Date of Judgment: 8th December 2006
https://www.hklii.hk/en/cases/hkcfa/2007/89?hl=FACV%206%2F2006

Facts

In 1996, the plaintiff started negotiations with the defendant landlord to lease shop spaces at an underground shopping mall in Tsim Sha Tsui close to completion of construction for running a restaurant and food court.  The parties orally reached agreement on certain aspects of the proposed tenancy, such as the monthly rent, management fees and air-conditioning charges.

On 27th January 1997, the plaintiff issued to the landlord a cheque of HK$200,000, describing it as an “initial deposit”.  The plaintiff’s case was that all material terms of the tenancy had been agreed and an oral contract intended to be immediately binding came into existence no later than the date when the deposit was paid.  The landlord contended that important tenancy terms remained to be negotiated as at that date.

By that time, no design work had been done and the parties had yet to begin discussing the extent of the landlord’s provision of the kitchen facilities.  The plaintiff had not yet started advertising for sub-tenants or licensees for the food court nor brought in investors as partners in the venture.  There had been no steps taken for hiring staff or provisioning the restaurant.

On 1st February 1997, the landlord sent to the plaintiff a draft letter of intent, stating that the tenancy would commence on 8th March 1997 tentatively, subject to the issuance of the occupation permit, with a prior 7-days’ written notice to be served for the actual date of commencement.  On 4th July 1997, a draft tenancy agreement passed between the parties, which provided that the tenancy would commence on 1st August 1997.  Neither the draft letter of intent nor the draft tenancy agreement was executed.

In early July 1997, the landlord gave the plaintiff access to the shop spaces for its contractors to commence fitting-out works.  The parties also agreed on the kitchen facilities to be provided at the landlord’s cost, but no tenancy agreement was signed.  But in late July 1997, the landlord informed the plaintiff that it was now against having a food court in the mall.  By then, the plaintiff had already incurred substantial expenses on the design and preliminary works for the intended restaurant and food court.

There had been attempts to negotiate a fresh agreement for the plaintiff to take the tenancy to operate the proposed restaurant but in vain.  Eventually the landlord purported to forfeit the “initial deposit”.  The plaintiff brought action against the landlord for breach of agreement.  The subject matter of the plaintiff’s claim was expenses incurred in anticipation of the commencement of operations of the food court, later quantified by the Court of Appeal in the sum of HK$3.1 million, and the return of the deposit.

The trial Judge dismissed the plaintiff’s action on the basis that the parties had not proceeded beyond the stage of negotiation so there was no concluded contract.

The Court of Appeal overturned the decision and found that a contract for the tenancy was concluded orally, and that the absence of formality was met by part performance.

The landlord appealed to the Court of Final Appeal.

Issue

The only issue to be decided by the Court of Final Appeal was whether the Court of Appeal was correct to conclude that there was a binding contract between the parties.

Ruling and Reasons for Judgment

The essential terms which must be agreed by the parties for there to be a concluded agreement for any lease were:- (1) the identity of the parties; (2) the premises; (3) the commencement and duration of the term; and (4) the rent or other consideration to be paid.  Additionally, for there to be a concluded contract for the grant of a lease, the parties must have reached unconditional agreement on all the terms they intended to have in the lease.

Whether the parties intended to enter into a concluded contract was to be assessed objectively.  The Court of Final Appeal held that there was no concluded contract in the present case because final agreement had not been reached on the commencement date of the tenancy, the rent-free period and the option to renew, all of which were matters the parties plainly intended to be addressed in their tenancy agreement.

The tentative start date of 8th March was not a binding commencement date and was soon overtaken by events.  The evidence showed it was inherently unlikely that the parties would have felt ready at the end of January to go firm on the March start date.  In fact, it was not until 4th July that a firm date could be proposed as the intended commencement date of the tenancy.

The payment of a deposit and the giving of access for fitting out works were generally equivocal acts.  These acts were consistent with:- (1) the existence of a concluded agreement; and (2) could equally be acts done in anticipation of a legally binding agreement which never materialised.  The Court observed that it was not uncommon for parties in the course of negotiations which were still incomplete or subject to contract to pay deposits or to allow contractors access to the premises.  The “initial deposit” and the giving of access for fitting out works did not prove the existence of any concluded contract.  Indeed the request for an “initial deposit” rather than the execution of a tenancy agreement might suggest that the parties had not yet reached final agreement.

The Court of Final Appeal allowed the landlord’s appeal.  The landlord had to return the deposit as there was no concluded agreement, but was held not liable for the plaintiff’s claim for recovery of expenses.

Takeaway

The Court of Final Appeal has authoritatively set out the essential terms of a tenancy agreement, namely:- (1) the identity of the parties; (2) the premises; (3) the commencement and duration of the term; and (4) the rent or other consideration to be paid.  There can be no legally binding contract in the absence of any of these terms.

This case also serves as an illustration of the potential risks involved when the parties are only relying upon oral agreement.  Whilst, generally speaking, oral agreement can be legally binding, trouble may arise not only as to the terms contained in the agreement, but also, more fundamentally, whether the parties have actually come to a concluded agreement.  Performance by the parties (e.g. given access to the premises for fitting out works to be done) in and of itself does not prove the existence of an agreement if in fact the landlord and the tenant have not come to any conclusive agreement.

Where the parties are ready to commit, they advised to sign a tenancy agreement in writing before expending money and resources in contemplation of the start of the tenancy.