Meaning of covenant to reinstate to ‘bare shell’ condition

AFH Hong Kong Stores Ltd v Fulton Corporation Ltd ([2022] HKCA 1243) concerned the interpretation of a tenant’s covenant to reinstate the demised premises to a ‘bare shell’ state on the determination of the lease.

The premises were retail premises over five floors of a building in the Central district of Hong Kong. When it took possession, the tenant removed the entire floor slab of one of the floors and part of the floor slab of three others. It installed lifts and staircases.

The lease required the tenant to yield up the premises to the landlord at the end of the lease, ‘in a “bare shell” good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord’ (emphasis added).

The landlord contended that this wording required the tenant to reinstate the floor slabs it had removed while the tenant argued that it was under no such obligation.

There was, perhaps surprisingly if reinstatement had been intended, no express covenant to reinstate the removed floor slabs in the lease nor, so far as can be seen in the judgment, in any license to carry out the alterations.

There was, by contrast, a clause that gave the landlords the option to require the tenant to remove fixtures that the tenant added to the demised premises.

The Court of Appeal referred to the principles of contractual interpretation in the Court of Final Appeal in Eminent Investments (Asia Pacific) Ltd v DIO Corp ([2020] HKCFA 38).

It decided that the reference to ‘on each floor’ supported the landlord’s contention that the tenant had to reinstate the floor slabs that had been removed ([26.1] and [43]).

Michael Lower

Tags: contractual interpretation, leases, Michael Lower, reinstatement