Archive for the ‘contract’ Category

Removing internal staircase: infringement of right of way: encumbrance?

June 17, 2013

In Ho Ching Group Ltd v Tsang Pui Lin ([2013] HKEC 780, CFI) S agreed to sell the property (a ground floor shop) to P. There had been an internal staircase leading from the shop to the cockloft above (in separate ownership) and the owner of the cockloft had a right of way to use the staircase to get to the cockloft. The staircase had been removed and S acknowledged that this amounted to an infringement of the easement. The internal staircase had been replaced by an external staircase before S bought the property in 1998 and there had been no complaint by the owner of the cockloft. On the other hand, when approached by P, the owner of the cockloft refused to renounce its right to use the internal staircase. The question was whether the infringement of the easement amounted to an encumbrance on title.

The court held that it was not an encumbrance. J Poon J. stated the test thus:

‘In considering if a risk of litigation may constitute an encumbrance, the court will ask : are the facts and circumstances of the case so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the encumbrance.’ ([12]).

Here, there had been no complaint by the owner of the cockloft. There had been no threat of action concerning the removal of the staircase by other owners in the building or the Government. It seemed clear that the owner of the cockloft had abandoned the right of way. The risk of litigation was fanciful ([13]).

The sale and purchase agreement contained a clause requiring P to accept the situation as regards the staircase but the presence of this clause was not a factor in the judgment.

Michael Lower

Periodic tenancy: effect of exercise of landlord’s right to increase the rent

June 7, 2013

In West Coast International (Parking) Ltd v Secretary for Justice ([2001] HKEC 442, CA) L granted T a lease for a two year fixed term. At the end of the two years, the agreement provided for the tenancy to continue from quarter to quarter until terminated by either party as provided for in the agreement. The lease gave the landlord the right to revise the rent at the end of the third year of the agreement. The landlord exercised this right. The tenant completed a reply slip indicating its willingness to pay the increased rent and to pay an additional deposit (the agreement provided for an increase in the rent but not in the amount of the deposit). Not long after, the landlord served a notice to quit. The question was whether the agreement as to the revised rent and increased deposit simply amounted to a variation of the terms of an ongoing periodic tenancy or amounted to the surrender of the lease and the grant of a new two year term that would later become a periodic tenancy.

As a matter of construction of the correspondence concerning the increase (in the context of the relevant terms of the tenancy) the Court of Appeal held that this was a variation of the terms of the existing periodic tenancy. Hence L was entitled to serve notice to quit.

Michael Lower

Provision for forfeiture for non-payment of rent is a usual covenant in Hong Kong

May 30, 2013

In Sun Hing Company v Brilliant Investment Co Ltd ([1966] HKLR 310, FC) L and T entered into a provisional agreement for lease but no formal agreement was entered into (though the ‘provisional’ agreement envisaged that this would happen). The provisional agreement did not contain a forfeiture clause and T fell into arrears with the rent. The question was whether the provisional agreement (enforceable by virtue of Walsh v Lonsdale) included a forfeiture provision as a ‘usual’ covenant. It was held that a forfeiture clause for non-payment of rent is a usual covenant and was enforceable under the rule in Walsh v Lonsdale.

Stamp Duty had not been paid on the provisional agreement. The court had a duty to take notice of that fact and no order would be made until the landlord’s solicitors had undertaken to submit the agreement to the Inland Revenue and to pay the stamp duty.

Michael Lower

Fully Profit (Asia) Ltd v Secretary for Justice (Court of Final Appeal)

May 21, 2013

In Fully Profit (Asia) Ltd v Secretary for Justice ([2013] HKEC 717, CFA) F owned several neighbouring plots of land. Each lot was the subject of a Government lease containing a restriction against building more than one house on the land. The question was whether building a single 26-storey residential building straddling the lots would be a breach of the covenant not to build more than one house on the land.

The plots had been carved out of a larger lot the subject of Conditions of Exchange which provided that if more than one ‘building’ were erected on the land then there would be a separate lease for each building (special condition 6). They also required the construction of ‘one or more good and permanent buildings’ on the land. There was a prohibition on industrial use and a restriction on building more than twenty houses. The lot covered by the Conditions of Exchange had twenty houses on it, each being the subject of a separate Government lease containing the restriction on building more than one house. There was nothing to indicate that the leases were intended to introduce any additional restrictions beyond those contained in the Conditions of Exchange.

The Court of Final Appeal (reversing the decision of the Court of Appeal) held that the proposed development would amount to a breach of the covenant.

Ma CJ emphasised the key role that context has to play in the process of contractual interpretation ([15]).

Applying that principle to this case, he continued:

‘In context, it is clear that the meaning of the word “house” under the Government Leases must have reference to those characteristics of the houses which were actually standing at the time the Government Leases were entered into … [H]ouses were actually standing on each of the individual, sub-divided Lots at the time the Government Leases were created. In the context of those Leases, the meaning of the word “house” should be taken to mean the type of house existing on the individual lots. ([17])

Michael Lower

Part performance: contract unregistered and in breach of New Grant

May 6, 2013

In Silver Hope Ltd v Chan Kwai Wah Alice ([2013] 1 HKLRD 823, CFI) W had entered into a contract to purchase the property in 1996. The contract amounted to a breach of the New Grant covenants concerning the property. W paid the entire purchase price and entered into possession. The contract was stamped but not registered. In 2012, P obtained a charging order in respect of the property and later an order for sale. W now sought to be joined as a defendant to the proceedings and to stay the execution of the order. To succeed, W needed to show that there was an arguable case that he had an equitable interest in the property. W was met by two arguments. First, that the contract was unlawful and so void (because it was formed in breach of covenant). Second, that the charging order (which had been duly registered) had priority over the unregistered contract.

W succeeded in being joined as a party. He was not relying on the contract but on the equity that arouse out of his having paid the entire purchase price and gone into possession (presumably this is on the basis of the doctrine of part performance). Hence, it could be argued that W would not need to plead the unlawful contract (see Tinsley v Milligan).

As for registration, after Financial and Investment Services for Asia Ltd v Baik Wha International Trading Co Ltd, it is clear that the court can look at the substance of the competing interests (and then consider the impact of registration or a failure to register). This could be seen as a contest between two equitable interests (Hong Kong Civil Procedure 2012 50/9A/17). Thus, it is arguable that W’s equitable interest has priority over the charging order notwithstanding the failure to register it.

Landlord’s failure to give vacant possession: tenant’s duty to mitigate and the calculation of damages

April 12, 2013

In Mega Yield International Holdings Ltd v Fonfair Co Ltd ([2013] HKEC 313, CFI) D entered into an option to grant a lease to P. The option was exercised but D was unable to give vacant possession of the site. Negotiations then began concerning a new lease between the same parties. These foundered because of an inability to obtain express agreement on whether the grant of a new lease would be without prejudice to  P’s claim against D in respect of D’s failure to give vacant possession pursuant to the original agreement. D then granted a new lease to a third party.

D argued that P had failed to mitigate its loss by accepting a new lease promptly. This failed. On the facts of the case, P’s actions had been those of an ordinary and prudent businessman ([46]).

As far as the calculation of damages was concerned, D argued that it was for P to show that it would have been able to recoup its loss or expenditure had the initial lease been performed. This failed: in a loss of bargain case the burden of proof is on D (the contract-breaker) to show that the loss or expenditure could not have been recouped even had the contract been performed ([71]).

The fact that some of the expenditure had been incurred by other companies on P’s behalf (other companies in the same group where the facts were such that a loss to one company would be equally felt by the other) was no bar to their recovery from D ([101]).

P could not recover the difference between the rental it would have paid and the rental payable under the lease of another site that it eventually entered into because the latter was not truly a substitute for the former. The same applied to expenditure on abortive attempts to acquire a lease of another site which would have been complementary to, not a replacement for, the site owned by D.

Faulty sub-DMC: rectification

April 10, 2013

In Re Lee Mei Yan Kris ([2013] HKEC 382, CFI) a flat was owned by three people as tenants in common in equal shares. The flat was partitioned in 1980.  A sub-DMC was entered into but this failed to express the parties’ common intention that each was to have a one-third share of the shares attached to the flat. The assignment to one of the owners made a mistake and purported to attach 11/20 of the shares attached to the flat to the part assigned. A later purchaser sought rectification of the 1980 assignment to reflect the common intention of the tenants in common that each was to own one-third of the shares attached to the flat. This relief was granted.

Deputy Judge Marlene Ng identified the applicable principles thus:

‘a party seeking rectification for a common mistake should show that (a) the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified, (b) there was an outward expression of accord, (c) the intention continued at the time of the execution of  the instrument sought to be rectified, and (d) by mistake the instrument did not reflect that common intention.’ ([19])

These conditions were satisfied here. The relief was granted ex parte since the relevant tenant in common could not be found.

Construction of ‘curtilage’ covenant in Government lease

April 9, 2013

In New Mercury Holdings Corp v Secretary for Justice ([2013] HKEC 435, CFI) P wanted to re-develop the residential properties on sites it owned. It sought a declaration that the government should permit these developments. There were two applications. One concerned the redevelopment of property on two neighbouring lots. The other concerned the redevelopment of a ‘stand-alone’ lot. The relevant leases contained the following covenant:

“[The plaintiff] … shall at all times during the term hereby created maintain and preserve in respect of and exclusively for the purposes of the residential premises now erected or being upon the demised premises a curtilage or compound of an area (including the area covered by buildings) of not less than Eight thousand square feet; AND shall at all such times provide maintain and preserve in respect of and exclusively for the purposes of any other residential premises which may at any time be erected upon the demised premises in each case a curtilage or compound as aforesaid of like minimum area”

Essentially, the question was whether, as the government contended, the purpose and effect of the covenant was to control the density of permissible development: did the clause require each house to have its own ‘curtilage or compound’ of eight thousand square feet? The developer contended that this was not the correct interpretation and that houses could share their curtilage with each other (so that two semi-detached houses could share some of the eight thousand feet with each other).

The government succeeded.

The court reminded itself of the relevant legal principles:

‘7. These are not in dispute: (a) when construing the terms of a land grant, the court can take into account the matrix of fact (that is, the objective surrounding circumstances known (or reasonably known) to both parties) at the time of the grant: see, for example, Gold Shine Investment v Secretary for Justice [2010] 1 HKC 212 , 218; Investors Compensation Scheme Ltd v West Bromwich [1998] 1 WLR 896 , 912; Jumbo King Ltd v Faithful Properties [1999] 4 HKC 707 , 726;

(b) the court shall have regard to the object and purpose of the term, which can be informed by the genesis, the background and the context: River Trade Terminal Co Ltd v Secretary for Justice (2005) 8 HKCFAR 95 , 107 (para 34 to 36);

(c) the above are applicable to the construction of a lease: Woodfall’s Law of Landlord and Tenant (2012) Vol 1, para 11.007 and 11.008).’  (Andrew Chung J.)

The factual matrix and the relevant term construed in the context of the rest of the document all supported the government’s contention.

Death does not bring an end to obligation to repay loan; deliberate concealment can prevent time running for limitation purposes

March 7, 2013

In Lam Ching Sheung v P.R. of the Estate of Tam Shui ([2013] HKEC 294, CFI) L made a loan to TS and her husband (D2). This was not repaid and an oral agreement was entered into in 1999. L agreed to forebear from bringing legal proceedings in return for TS and D2’s agreement to pay interest to a third party and, in due course, to repay the principal. TS died in 2000. In 2001, D2 assured L that the interest payments to the third party were being made. L only discovered that this was not the case in November 2005. It was held that time did not start to run until November 2005 (rather than 1999) because of D2’s deliberate concealment of the true position (see section 26(1) of the Limitation Ordinance) ([56]).

The court also held that TS’s death did not end her liability under the oral agreement and that the claim could be brought against her estate (see Law Amendment and Reform (Consolidation) Ordinance, s.20) ([62]).

Section 2 Law of Property (Miscellaneous Provisions) Act 1989: oral supplemental term

February 28, 2013

In Keay v Morris Homes (West Midlands) Ltd ([2012] EWCA Civ 900, CA (Eng)) K entered into an agreement for the sale of land and the leaseback of part. MHL was to carry out building works on the part leased back. The agreement was later varied when a price reduction was agreed. The original agreement complied with section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 and the supplemental agreement seemed also to do so. K alleged that a further term had been orally agreed at the time of the variation. The alleged term required MHL to proceed promptly with the building works. K was seeking damages for breach of this term.

This appeal concerned a preliminary point as to whether this term needed to be incorporated in the supplemental agreement (whether it needed to be part of an agreement that complied with section 2(1)). Rimer L.J. said that this was a question of fact. The question was whether the alleged term was part of the varied agreement for the sale and leaseback or whether it was a truly separate contract ([32]). This would need to be decided at trial. If it was part of the variation then the variation (and this term) were void for want of compliance with section 2(1).

In fact, the sale and leaseback were completed. K argued that once all the land elements of the sale and leaseback were complete any outstanding terms were valid contractual obligations even if the agreement had been void for failure to comply with section 2. This was rejected. If the alleged term was part of the supplemental agreement then the agreement was void and the fact that some terms of the void agreement had in fact been performed did not mean that any outstanding terms became valid ([47]).