Sale of land as ‘agricultural land’ in the New Territories

In Splendid Resources Inc v Secretary for Justice ([2017] HKEC 504) the plaintiffs had constructed columbaria on land owned by them. The Government contended that this was a breach of the terms of the Government lease.

The lease did not contain an express covenant not to use the land for any purposes other than as agricultural land. It had, however, been sold as ‘agricultural land’.  The question was whether this was purely descriptive of the use at the time of sale or implied a covenant only to use the land for this purpose.

Deputy Judge Le Pichon pointed to various features of the New Grant that could only be explained on the basis that the words imposed a restriction on the use to which the property could be put. These included a provision requiring the land to be cultivated.

The judge referred (at [35]) to a statement in Halsbury’s Laws of Hong Kong that ‘[w]ithout special permission from the Government, all Government leases granted in the New Territories are for agricultural purpose and can not be used for other profitable purposes.’

Further, ‘where an interpretative ambiguity arises in the context of a Government lease, a presumption in favour of the Government applies’ (at [36]).

The landowner’s argument that the covenant was purely personal to the original lessee was also rejected.

Finally, Deputy Judge Le Pichon held that the columbarium was a structure; it was a breach of the covenant not to build any structure on the land.

Michael Lower

Making time of the essence for completion

In Many Gain Investment Ltd v Chan Fai Ho ([[2015] HKEC 1553, CFI) P, a property developer agreed to buy a property from D. P raised a requisition about D’s title and there was a dispute as to whether or not it had been properly answered. This dispute continued up to the contractual completion date of 31^st May 2011. The parties agreed to extend the completion date to 14^th June 2011. The next day, 15^th June, D’s solicitors wrote to P’s solicitors requiring completion by 20^th June. Despite this, on 16^th June, D entered into an agreement to sell the property to another buyer. P now withdrew the requisition and sought specific performance. The question was whether P’s delay in completing amounted to a repudiatory breach entitling D to rescind.

Time was not expressly of the essence for completion and Anthony To J found that time was not impliedly of the essence in this case ([23]). The question then was whether the letter of 15^th June made time of the essence (see United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904). As a matter of construction it did not. Anthony To J preferred P’s interpretation which was that the letter was no more than a demand that P should withdraw the requisition within 5 days ([24] – [27]).

For the sake of completeness, Anthony To J considered whether, if the letter were to be construed as a notice making time of the essence, the 5 day period it specified constituted reasonable notice. He held that it could have amounted to reasonable notice had D taken the necessary steps to make completion possible (including notifying P of the amounts of the split cheques that would be required on completion). The only other step to be taken within that time was that P had to decide whether or not it would insist on the requisition. As D had not taken the steps to make completion possible within 5 days, the 5 day period would not amount to reasonable notice ([33]).

P was granted the order of specific performance that it sought.

Michael Lower

Where there are two arguable interpretations of a contractual provision it is reasonable to have regard to the commercial consequences of the rival approaches

Rainy Sky SA v Kookmin Bank ([2011] UKSC 50) arose out of contracts for the building and sale of ships. The purchasers were to pay the purchase price in five installments and the contract provided that the installments would be refunded to the purchasers on the happening of any of certain events specified in the contract. The contracts required the shipbuilder to procure refund guarantees to protect the buyers against the possibility that the shipbuilder might fail to refund advance payments when required to do so under the terms of the contract. Kookmin Bank provided the refund guarantees. After the purchasers had paid the first installments due under their respective contracts, an event occurred entitling the purchasers to call for a refund of the installments. The purchasers invoked this clause but the shipbuilder refused to repay the money. The purchasers then sought payment from the Bank under the terms of the guarantee. The Bank refused to pay arguing that the guarantee did not cover the event that had occurred.

Lord Clarke (with whom the other members of the Supreme Court agreed) considered the rival constructions argued for by the parties and concluded that each interpretation was arguable. In such a case, the court could legitimately have regard to the commercial consequences of the rival interpretations. The interpretation that was most in line with the parties’ reasonable interpretations could be preferred:

‘If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.’ ([21])

Where, however, the language was unambiguous then the court must apply it ([23]). At first instance an experienced judge of the Commercial Court expressed the view that the Bank’s construction ‘defies commercial common sense’. The purchasers’ construction was, therefore, to be preferred ([45]).

Michael Lower

Interpretation of service charge clauses

Arnold v Britton ([2015] UKSC 36) concerned the construction of the service charge clauses in a number of long leases of chalets in a caravan park. The clauses in question required the lessees to pay, as a proportionate part of the landlord’s costs in providing the relevant services, GBP 90 plus VAT in the first year. This sum was to increase by 10% per annum. The startling result was that the GBP 90 had become GBP 3,366 by 2012 and would rise to GBP 1,025,004 by 2072 (the final year of the leases). It was possible that the sum payable by even one tenant occupying on these terms would exceed the actual cost of the provision of services for the whole estate. The leases of most of the chalets on the estate had been granted earlier than the disputed leases. These earlier leases provided for the initial GBP 90 to rise by 10% every three years (or by roughly 3% per annum). These earlier leases were referred to as the ‘triennial leases’. The clause in the triennial leases gave rise to very much more modest liabilities; even by 2072, the service charge would only have risen to GBP 1,900. These figures are taken from the table in Lord Carnwath’s dissenting judgment (see below).

The first question was whether the landlord’s interpretation of the service charge clause (in line with the above description) was correct so that there would be an automatic increase at 10% per annum. The tenants contended for an alternative construction. They pointed to the fact that the obligation was to pay a proportionate part of the landlord’s cost in providing the services and argued that the compounded GBP 90 merely provided a cap on the amount that was to be paid. The majority of the Supreme Court agreed with Lord Neuberger and rejected this interpretation. The wording of the provision was clear and the fact that it had disastrous consequences for the tenants did not entitle the court to rewrite the clause.

The second question was whether, as the tenants contended, an implied term should be read into the service charge clause. The leases contained a recital to the effect that they were intended to be ‘upon terms similar in all respects to the present demise’. The leases contained a covenant (in clause 4(8)) by the landlord  that the leases of the other chalets ‘shall contain covenants on the part of the lessees thereof to observe the like obligations as are contained herein or obligations as similar thereto as the circumstances permit.’ The questions were whether this created a building scheme or letting scheme and, if so, whether this gave rise to an implied term that would affect the interpretation of the service charge clause. The tenants argued that there was an implied term in the disputed leases to the effect that they were on the same terms as the triennial leases and that this prevented the landlords from increasing the service charge in the disputed leases at a rate that exceeded the rate of increase in the triennial leases.

First, Lord Neuberger was prepared to accept that the relevant terms did indeed create some kind of building or letting scheme and that it was ‘envisaged that there would be a degree of reciprocity and mutual enforceability between the lessees of chalets when it came to the covenants they entered into.’ ([49]). Building schemes can only cover restrictive covenants in the case of freehold land. Lord Neuberger thought it might be possible that they would extend to positive covenants in the case of letting schemes. Even if this were possible, however, it was questionable whether a covenant to pay a service charge or any other sum of money could be within the ambit of a scheme ([51]). In any event, there were other obstacles that, in Lord Neuberger’s view, prevented the tenant’s argument from succeeding: the relevant lease terms appeared to relate to future lettings (not past lettings like the triennial leases); even if there were an implied term as contended for it could not override the obligations that the tenants had expressly assumed; and clause 4(8) referred to ‘like’ or ‘similar’ terms and so envisaged the possibility of some degree of variation. More fundamentally, the implied term that was the best fit with the relevant provisions was to the effect that the triennial leases contained the same service charge provisions as the disputed leases (and not vice versa). While there was a good argument in favour of such an implied term, this did not help the tenants under the disputed leases; they suffered no damage as a result of a failure to impose the same term in other leases.

Lord Neuberger’s judgment contains a section ([14] – [23]) reviewing the major authorities on contractual interpretation. Amongst the points made in this section is that he is ‘unconvinced by the notion that service charge clauses are subject to any special rule of interpretation.’ ([23])

On the major question, the view of the majority is summed up thus:

‘In my judgment, there is no principle of interpretation which entitles a court to re-write a contractual provision simply because the factor which the parties catered for does not seem to be developing as the parties may well have expected.’ ([41] per Lord Neuberger).

Lord Carnwath gave a dissenting judgment. He inclined to the view that service charge clauses did merit special treatment to ensure that they give effect to their intended purpose and to guard against ‘unfair and unintended burdens being placed on the lessees.’ ([123]) Service charge clauses in many residential leases are subject to controls imposed by legislative scheme. There was no obvious policy reason to explain the fact that the disputed leases did not fall within the ambit of this legislation ([90] – [92]).

Lord Carnwath identified the following features of the factual matrix: the huge service charge liabilities that the tenants holding under the disputed leases would face in the later years of the terms and the gross disparity between these sums and those payable under the triennial leases ([104]); the service charge uplift was intended to respond to the very high inflation of the 1970s but the disputed leases were mainly granted between 1977 and 1991 at which time it was possible to anticipate lower rates of inflation ([106]); the lessees were taking the leases as a long term investment and so it is likely that they would have made enquiries of existing lessees (holding under the triennial leases) about their experiences and the costs associated with living on the estate  ([107]).

Something clearly had gone wrong in the drafting of the clause given the disconnection between the idea of contributing a proportionate part of the cost of providing the services and the obligation to pay a fixed sum each year ([125]). It was inconceivable that the lessees under the disputed leases would gamble on inflation being close to or exceeding 10% per annum for over 90 years ([139]). They would have known of the change from the triennial formula to the annual formula in their own leases and the likelihood is that they would have understood it as amounting to a cap or upper limit on their service charge liability ([142]). If questioned by the officious bystander they would have articulated this understanding ([143]).

Michael Lower

Interpretation of a letter modifying conditions of sale

In United Bright Limited v Secretary for Justice ([2015] HKEC 438, CA) the Court of Appeal (Lam V-P delivering the judgment of the Court) had to deal with a dispute concerning the construction of a letter modifying restrictions contained in the Conditions of Sale. The Conditions of Sale (entered into in 1939) allowed only ‘European type houses’ to be built and contained a ‘DDH’ clause:

‘The design of the exterior elevations and the disposition and height of any building to be erected on the lot shall be subject to the special approval of the Director of Public Works and in no case may any building to be erected on the lot exceed 2 storeys.’

In 1957 the Government issued a Letter of Modification that allowed flats to be built instead of houses. This modification was said to be subject to conditions:

‘(a) Payment of an additional premium amounting to $33,550.00 for each Section within 14 days on demand.

(b) Buildings to comply with the following coverage limitations:

3 storeys over car port – 55% of lot area

4 ” ” ” ” – 45% ” ” ”

5 ” ” ” ” – 40% ” ” ”

(c) Car parking to be at the rate of not less than 1 car per flat.

(d) Buildings to be in accordance with the provisions of the Buildings Ordinance and plans to be submitted to the Building Authority for approval in the usual way.’

United Bright wanted to build a 37 storey block of flats with car parking beneath and associated facilities. It contended that the Letter of Modification permitted this development. The Government contended that the Letter of Modification only permitted a 5 storey development and that the DDH clause remained in full operation. Thus, the question concerned the proper construction of the Letter of Modification.

The Government succeeded:

1. Defining the relevant ‘context’ against which the relevant terms should be considered is central to contractual interpretation (Fully Profit (Asia) Limited v Secretary for Justice) ([8]). The relevant context included the Conditions of Sale that were modified ([9] – [12]). In terms of the letter itself, it was to be noted that it did not expressly release the lessee from the need to obtain approval under the DDH clause ([14]).

2. In Ying Ho Co Ltd v Secretary for Justice, the Court of Final Appeal had decided that the DDH clause in that case was an independent restriction from other more detailed restrictions in the Conditions of Sale. There was no reason to take a different view of the status of the DDH clause in the present case ([15] – [19]).

3. The fact that the Building Ordinance had been amended in 1955 (shortly before the Letter of Modification) allowing buildings of more than 5 storeys to be built and conferring powers to disapprove plans) was not part of the relevant context. The Government’s powers under the Building Ordinance and under the Conditions of Sale were separate from each other and had different objects even if administered by the same Department (Hang Wah Chong Investment Ltd v AG) ([20] – [24]).

The Court of Appeal reached its decision (in favour of the Government) based on the above considerations([27]).

The court went on, however, to look at the admissibility of correspondence around the time of the application.The lessee applied for the modification in 1956. There was, however, earlier correspondence between the lessee’s solicitors and the Government  referring to an earlier (1955) application for permission to build ‘not more than four flats on each of the six sites.’ The 1956 application was a renewal of the 1955 application. Should the correspondence be taken into account when interpreting the letter? The developer objected that the correspondence was a subjective statement of intent or merely reflected the state of the negotiations at a given moment in time ([31]). This objection failed. It was legitimate to look at the correspondence in order to clarify the subject matter of the application ([33]). The letter of modification referred to the application and so invited a reading together of the two documents. The correspondence cast light on what had been applied for (permission to erect flats and not houses) ([33] – [34]).

Evidence of the Government’s internal calculations of the premium was also admissible since the basis of the calculation was common knowledge among the relevant professional community at the time. The fact that the specific calculations were not shown to the lessee did not, therefore, mean that the calculation was inadmissible ([35] – [40]).

Finally, the correspondence was admissible even though it was being used to interpret a document registered at the Land Registry. The letter of modification regulated the rights and duties as between lessor and lessee and was not of its nature a public document ([41]). The English Court of Appeal has recently said that ‘context’ is of limited relevance when interpreting publicly registered documents (Cherry Tree Investments Ltd v Landmain Limited) but that was said in the context of a registration system with a state guarantee of title and Hong Kong’s system is materially different ([41(d)]). It is reasonable to expect Hong Kong purchasers to make enquiries of the Lands Department if they are in any doubt as to the effect of a letter of modification ([41(e)]).

Michael Lower

Deposit: where sums are described as a deposit but the ‘escape’ clauses in the provisional agreement have been deleted

In Best Linkage Ltd v Marbella Garden Ltd ([2015] HKEC 167, CFI) the parties had entered into a provisional agreement for the sale and purchase of the plaintiff’s property. The agreement required the defendant to pay $200,000 as an initial deposit and then provided for a further deposit (to take the total of the deposits to 10% of the purchase price) on the signing of the formal agreement. Two clauses had been deleted from the standard form of provisional agreement signed by the parties. One was the clause entitling the seller to forfeit the deposit (and still pursue its other remedies) in the event of the buyer’s default. The other was the ‘escape’ clause entitling the seller to terminate the contract by refunding the initial deposit and making a further payment to the buyer of an equivalent amount. The buyer later wrongfully refused to proceed with the purchase. The seller later sold to another party at a very much higher price. The seller sought, and was granted, declarations that the buyer had wrongfully repudiated the agreement and that the seller was entitled to forfeit the initial deposit.

Although the clause expressly entitling the seller to forfeit the deposit had been deleted, the parties still intended the payment to be a deposit and the nature of a deposit is now well settled (see Polyset Ltd v Panhandat Ltd) ([66]). Where there was an ambiguity, deletions have a limited role to play in interpreting a contract but there was no ambiguity here. Even if there were an ambiguity, it is not legitimate to infer from a deletion (of the clause entitling the seller to forfeit the deposit) that the parties intended the reverse proposition to govern their agreement (that the deposit could not be forfeited (see The Golden Leader)).

Michael Lower

Construction of DMC: were parking spaces common parts?

In Tai Fat Development (Holding) Co Ltd v Gold King Industrial Building (IO) ([2014] HKEC 2130, CA) the question was whether 13 car parking spaces in a building in multiple ownership were common areas or whether they had been retained by the first owner of the entire building. Barma JA referred to the principles of contractual interpretation in Jumbo King ([15]). Commercial common sense can be an aid to construction where the words used are capable of differing, but equally plausible, meanings ([16]). Here the relevant documents were the first assignment of a unit in the building, the DMC, the Special Conditions of Grant and the Approved Building Plans ([17]). The wording of the first assignment gave primacy to the DMC  when it came to defining the common areas. The DMC identified the car parking spaces in question as common areas ([23]). A number of other factors supported this conclusion. First, the DMC did not attach ownership shares to the spaces in question ([25]). Second, the DMC referred to ‘Parking Spaces’ (which were not common areas) as being spaces to be allocated to individual buyers; that these spaces had never been assigned was telling ([26]). If the spaces were in private ownership there would be no loading or unloading areas available to non-owners and the accessway would have to be used for this purpose ([27]).

Michael Lower

‘Hong Kong style’ completion and sub-sales

In Wellfit Investments Ltd v Commence Ltd ([1997] HKLRD 857, PC) the Privy Council had to consider the impact of an agreement to effect a Hong Kong style completion and the fact that both parties were aware that the transaction was a sub-sale on the construction of the provisions as to completion in the sub-sale agreement.

The agreement was for the sub-sale of an apartment. Time was of the essence in the agreement. The funds from completion of the sub-sale were to be used to finance completion of the head contract. The sub-sale was to be completed by 3pm on the stipulated date and the deadline for completion under the head contract was two and a half hours later. The sub-contract was ‘subject to and with the benefit of’ the head contract. The sub-contract provided that on completion, the seller would execute a ‘proper assurance’ and give vacant possession. The parties agreed to a ‘Hong Kong style’ completion (on completion, the seller gave an undertaking to forward the executed assignment within 17 days of completion). The sub-purchaser had not provided the completion monies by 3pm and the sub-seller rescinded 24 minutes later. The sub-purchaser sought specific performance.

The buyer’s argument that the deadline had been waived or varied  by virtue of a telephone conversation between the solicitors acting for the parties failed. The words used did not amount to a clear representation that the sub-seller would not insist on its contractual rights.

The buyer argued that the seller was in breach since on completion it would not be in a position to execute a proper assurance or give vacant possession (it could only do this when the head contract was completed). This failed since these obligations were to be interpreted in the light of the agreement to complete by undertakings and because both parties were aware of the sub-sale context and had factored this into their contract.

The sub-purchaser sought relief in equity. This judgment was handed down a few months before Union Eagle. The Privy Council expressed no view as to whether such jurisdiction existed. We had to wait for Union Eagle to learn the answer to this. The Privy Council held that it would not grant such relief even if it had the power to do so. Given the linkage between the sub-contract and the head contract, there was nothing unconscionable in the sub-seller’s insistence on its strict contractual rights.

Michael Lower

Using extrinsic evidence where the property description is unclear

In Superene Ltd v Metro Fair Ltd ([2014] HKEC 99, CA) the Court of Appeal had to consider whether an assignment had included the whole of a column next to the front entrance of the property that had been assigned or only part of it. The assignment described the property by reference to a plan. Although the plan was rough and ready, the Court of Appeal felt that it was sufficiently clear to allow a conclusion to be reached without any need to refer to extrinsic evidence. It decided that only half the column had been included in the assignment. 

The judgment of Barma JA notes the argument of counsel for the defendant ([12]) that extrinsic evidence (here a description of the property in a tender document) is admissible either (i) as part of the factual matrix according to the established principles of contractual interpretation or (ii) where the instrument in question does not clearly define the land transferred (Scarfe v Adams [1981] 1 All ER 843 at 851, CA (Eng) per Griffiths LJ).

Michael Lower

Interpretation of user clause: was there a positive obligation to use the property for the specified use

Youseffi v Musselwhite ([2014] EWCA Civ 885, CA (Eng)) is an English Court of Appeal case arising out of a lease renewal application under Part II of the Landlord and Tenant Act 1954. It does, however, raise a general issue about the construction of user clauses.

The clause in question read:

‘at all times during the said term to use the Premises for the purposes of any retail trade within Classes A1 and A3 of the Town & Country Planning (Use Classes) Order 1987 and not to use the Premises or any part thereof for any other purpose without the written consent of the Landlord (such consent not to be unreasonably withheld)…’

There was no keep-open clause.

The tenant had not used the demised premises for the permitted use and the question was whether this covenant positively required the property to be put to the permitted use or whether it was only negative, restraining other uses of the property.

The Court of Appeal, Gloster LJ giving the only full judgment, noted that the clause began with a positive obligation and that, therefore, it did impose a positive obligation to put the property to the permitted use.

Michael Lower