26 November 2020
In the related appeals of New Castle Investments Ltd v. Foo Wai Lok and Others  HKCA 931 and  HKCA 755, the Court of Appeal addresses the construction of a clause found in a tenancy agreement, the subject of which is a property consisting of three Houses on Shouson Hill Road (reportedly owned and previously resided in by Li Ka-shing), at a monthly rental of HK$2 million.
Upon the tenant’s default of its rental payment, the landlord obtained default judgment against the tenant (and the personal guarantors under the tenancy agreement). In seeking to set aside the default judgment, it was contended in essence that the rental deposit paid in the sum of HK$8.5 million (“Deposit”) should have been automatically applied to reduce the outstanding rent. It thus follows, so the argument goes, that there had been no extant liability when default judgment was entered.
The key issue surrounds the proper construction of a clause in the tenancy agreement which provides, inter alia, that “the amount of the Deposit paid to the Landlord by the Tenant shall be deemed to have been reduced by the amount of Rent or other charges in arrears or the loss or damage suffered by the Landlord” (“Subject Clause”).
At first instance, it was held that the Subject Clause essentially gave rise to an automatic “set-off” or extinguishment of the tenant’s liability to pay rent or other charges. Thus, a good defence was shown by the tenant and the personal guarantors in seeking to set aside the default judgment.
In  HKCA 755 (which concerns an application to set aside the default judgment), the Court of Appeal (consisting of Lam VP and Barma JA) departed from the approach at first instance. In particular, in applying established principles on construction, it was held that the deeming effect of the Subject Clause was only for the limited purpose of enabling the landlord to make a demand for topping up under that clause and the reduction of the amount of Deposit repayable back to the tenant. It therefore did not give rise to any automatic “set-off” or extinguishment of the tenant’s liability.
This analysis takes into account the true purpose of the Deposit, which was paid to the landlord prior to the commencement of the tenancy for the purpose of securing the due observance and performance by the tenant of its obligations throughout the duration of the same. Thus, so far as the Deposit is concerned, it was the landlord’s money in the legal as well as beneficial sense.
In  HKCA 931 (which concerns the bankruptcy petitions presented against the personal guarantors on the basis of the default judgment), there was no challenge against the above construction before the Court of Appeal (now consisting of Lam VP, Barma and Au JJA). Instead, it was contended on behalf of the personal guarantors that a term should be implied in all tenancy agreements, to the effect that upon the election by a landlord to terminate a tenancy, the landlord must immediately apply the deposit towards the reduction of arrears of rent so that a clean break would be achieved.
In rejecting the argument, it was held that there was no proper basis for implying such a term. In particular, having regard to the true nature of the Deposit and the proper construction of the Subject Clause, there was no basis for implying a term that the landlord must give immediate credit to the tenant for an amount equivalent to the deposit when it commenced proceedings for termination of the lease and recovery of possession.
Tommy Cheung acted for the personal guarantors in  HKCA 931.