Archive for the ‘Implied terms’ Category

Interpretation of the management charge provisions of a DMC

June 29, 2022

Sam Woo Marine Works Ltd v Po Hang Building (IO) ([2022] HKCA 733) concerned a dispute as to the interpretation of the management charge provisions of a Deed of Mutual Covenant (DMC).

There were three categories of owners in the building: (a) the ground floor owners); (b) the first-floor owners; and (c) the upper floor owners. Clause 3(f) of the DMC stipulated that the items in respect of which a management charge could be levied varied as between each category; the ground floor owners were not liable to contribute to expenses relating to the lift, for example.

Sam Woo owned a unit on the ground floor of the building. In the Court of Appeal, the incorporated owners accepted that there was implied into clause 3(f) a term that they would keep separate accounts for each category of owner ([29]).

The Court of Appeal decided, on its interpretation of the DMC, that any surplus collected from one category of owner could only be used to cover expenditure which that category of owner was responsible for under clause 3(f). So any surplus collected from ground floor owners could not be used to cover later expenditure relating to the lift. This was eventually accepted by the incorporated owners ([41]).

Sam Woo contended that there was a surplus standing to the account of the ground floor owners and that there was a further implied term that this would be used up before a further management charge would be demanded from them.

This contention was rejected both at first instance and in the Court of Appeal. At first instance, it was pointed out that this was an impractical suggestion; each category of owner would be responsible for some items in respect of which there would be a need to provide for contingencies. This made it unlikely that Sam Woo’s proposed term could be implied ([44] and [45]). Section 20(2) of the Building Management Ordinance requires the incorporated owners to establish a contingency fund.

Michael Lower


Covid restrictions, leases and failure of basis

October 31, 2021

London Trocadero (2015) LLP v Picturehouse Cinemas Ltd ([2021] EWHC 2591 (Ch)) concerned a claim that a tenant of premises let as a cinema was relieved from the obligation to pay rent in respect of periods when lockdown restrictions meant that the cinema had to be closed down.

The claim was based on an alleged implied term and on the argument that there was a failure of basis during the lockdown periods. The tenant did not argue that the lease was frustrated.


The lease in question specified that the property could only be used as a cinema. There was a keep open clause requiring the tenant to operate the cinema throughout the lease term. It also contained a clause to the effect that the landlord gave no warranty that the demised premises could lawfully be used as a cinema.

The implied term argument

The tenant argued that there was an implied term that the obligation to pay rent was suspended in respect of periods when it was illegal to use the premises as a cinema and / or the level of trade was below that anticipated by the parties when the lease was granted ([55]).

The judge (Robin Vos sitting as a Deputy Judge of the High Court) adopted Carr LJ’s summary of the law of implied terms in Yoo Design Services Limited v Iliv Realty Pte Limited ([2021] EWCA Civ 560 at [61]).

The suggested implied terms were not ‘so obvious that they go without saying’ nor ‘necessary to give the leases business efficacy’ ([67]). The implied terms would impose a commercial risk on the landlord and there was no reason for the court to intervene in this way ([72] and [75]).

The fact that the lease expressly provided there was no warranty that the premises could lawfully be used as a cinema cast further doubt on the argument for an implied term ([78]). Similarly, the clause for suspension of rent could have been made to apply to this situation but did not ([79]).

The second part of the suggested implied term was too uncertain ([80]).

The failure of basis argument

The following explanation of the elements of a failure of basis claim was explained:

‘a benefit has been conferred on the joint understanding that the recipient’s right to retain it is conditional. If the condition is not fulfilled, the recipient must return the benefit. The condition might take one of a variety of forms. For instance, it might consist in the recipient doing or giving something in return for the benefit … Alternatively, the condition might be the existence of a state of affairs, or the occurrence of an event, for which the recipient has undertaken no responsibility.’

(Goff and Jones, The Law of Unjust Enrichment, (9th ed) at [12-01])

Failure must be total (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Limited [1943] AC 32 at [77] per Lord Porter).

Where there is a subsisting contract, the claim must be consistent with the terms of the contract and must not interfere with the contractual allocation of risk between the parties (Dargamo Holdings Limited v Avonwick Holding Limited [2021] EWCA Civ 1149).

The failure of basis claim failed here because the use of the premises as a cinema was not fundamental to the basis of the lease. The clause providing that the landlord did not warrant that the premises could lawfully be used as a cinema was important in reaching this conclusion ([123]) as was the fact that the suspension of rent clause was not triggered by the lockdown restrictions ([130]). The failure of basis claim would be inconsistent with the terms of the lease ([132]).

Use as a cinema could be fundamental, it depends on the terms of the lease ([126]). The claim could not be defeated just by the argument that the tenant still had possession of the premises ([137]).

That said:

‘the default position is that, in the case of a lease, an inability to use premises for the intended purpose is unlikely to constitute a failure of basis as it may be relevant to the presumed allocation of risk between the parties. However, there can be no general rule. Each case will depend on its own facts.’ ([141]).

Since failure of basis has to be total, the claim could only succeed if the lease was severable. The argument could then be made that there was a total failure of basis in respect of those periods during which the premises could not be used as a cinema.

The lease could be severed in this way. The lease provided for an apportionment of rent for other purposes and this supported a similar severability for this purpose ([158]). If the failure of basis claim was available, the lease could be severed ([159]).

Michael Lower

There is an implied term that a sale of land is with vacant possession

March 30, 2016

In Wong Yuk Ying v Chan Pui Shan May ([2016] HKEC 537, CA) S1 agreed to sell a workshop to S2. S2 entered into a sub-sale agreement with P. The workshop was divided into three units and each unit was subject to a separate tenancy. Details of the tenancies were contained in the sale and purchase agreements (both the head contract and the sub-sale). Two of the tenancies would determine by effluxion of time by the time of the completion date, the third would not. The tenants of the units whose leases expired did not vacate the property at the end of the term and were still in possession at the completion date specified in the sale and purchase agreements. P argued that the failure to give vacant possession on completion amounted to a failure to give good title and sought a declaration that S2 was in breach of contract and the return of the deposit paid to S2.

S2 argued that there was no express or implied term to the effect that sale was with vacant possession. Yuen JA disagreed: there is an implied term that sale is with vacant possession in the absence of agreement to the contrary ([22.1]). The fact that the sale was subject to and with the benefit of the tenancies did not amount to an expression of a contrary intention given that the tenancies would have expired by the completion date. In the absence of a contrary intention, the seller bore the risk that the tenants would remain in possession at the end of their leases ([30]); P’s knowledge of the existence of the tenancies and that the tenants might not vacate did not mean that there was any such contrary intention.

Michael Lower

Contractual obligation to produce an architect’s certificate before completion: an implied term that it will be produced within a reasonable time before completion

February 24, 2016

In Guo Jianjun v Dragon Fame Investment Ltd ([2015] HKEC 1986, CA) S entered into an agreement to sell to P four office units (all on the same floor of the building). The agreement contemplated that there would be a re-partitioning of the office units owned by S. The units to be sold were the units as they would be after the re-partitioning. The contract contained a clause obliging S to obtain the certificate of an ‘Authorized Person’ to confirm the legality of the re-partitioning works. The agreement went on to provide that P would not raise any requisitions, queries or objections concerning the re-partitioning works. The re-partitioning works were carried out soon after the agreement was entered into. S produced an architect’s certificate of compliance. This satisfied S’s contractual obligations but it was produced at 6.07 pm on the completion date. It was common ground that the midnight rule applied. P argued that S was in breach of an implied obligation to produce the certificate at a reasonable time. It rescinded and sought the return of the deposit and damages. S argued that there was no implied term and that it was enough for it to have produced the certificate before midnight on the completion date.

The Court of Appeal (Lam V-P giving the judgment) looked at the English and Hong Kong authorities setting out the modern approach to contractual interpretation. This required the court to look at the rest of the contract and the whole of the relevant context / factual matrix. It also looked at what was said in Belize Telecom concerning the implication of terms (and linking this process to the broader process of contractual interpretation).

The obligation had to be construed in the context of the related clause which barred the raising of requisitions concerning the partitioning. It was also necessary to take account of the obvious commercial purpose served by the obligation: if S did not produce an adequate certificate there could be a doubt as to the legality of the works which could prevent P from giving good title on any future sale. Thus, there was to be implied a term ‘that the certificate would be a proper certificate prepared by an authorized person in good faith’ ([34]).

Given that the architect was commissioned by, and would report to, S P had to be given a reasonable time to assess whether or not the certificate satisfied the contractual obligation. They had to be given a reasonable time in which to do so. A term to this effect was to be implied ([41]).

What was a reasonable time? Had the implied obligation been observed in this case? The court referred to its earlier decision in Summit Link v Sunlink Group:

‘What should be considered as a reasonable time must be considered in the light of the prevailing circumstances, including the parties’ knowledge at the time if it can be proved and what the parties would each be reasonably contemplating at the time.’ (at 735 – 6 per Woo JA).

The court also referred to the headnote to the report of Kensland Realty Ltd v Whale View Investment Ltd ((2001) 4 HKCFAR 381):

‘The time which a vendor must allow, was the time reasonably required by the purchaser to perform its obligations, in relation to completion, in the ordinary course of business. This would include the purchaser’s dealing with bankers and solicitors.’

Lam V-P explained what this meant in the present case:

‘I am therefore of the view that the certificate should have been provided to the plaintiffs’ solicitors within a reasonable time before the end of the office hours [on the completion date]. The reasonable time should be long enough to afford the plaintiff’s solicitors a reasonable opportunity to conduct the checks which are reasonably necessary and to do so in the normal course of business. The time should not be so short that the solicitors would have to stretch all their available resources to the extreme so as to accomplish the tasks.’ ([46]).

Further, ‘one should proceed on the general assumption that purchasers will rely on mortgage financing in a conveyancing transaction’ ([50]).

Production of the certificate after the close of business on the date of completion did not satisfy the reasonable time requirement.

Michael Lower




Break clause: implied term that rent paid in advance in respect of a period after termination should be repaid?

January 6, 2016

In Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd ([2015] UKSC 72) BNP granted a lease to M & S. The lease contained a break clause. The lease required M & S to pay rent quarterly in advance. The break right could only be validly exercised if there were no rent arrears at the time when the lease would end assuming the valid exercise of the break right (the ‘break date’). M & S had also to make a further payment to BNP if it exercised the break right. M & S served a clause to trigger the break right, paid the quarterly rent due immediately before the break date and made the further required payment. It now sought to recover the proportion of the rent attributable to the period from the break date up to what would have been the next quarter date under the lease. It argued that a term requiring BNP to make such a repayment should be implied into the lease. The Supreme Court upheld the Court of Appeal’s decision that there was no such implied term.

Lord Neuberger gave the main judgment. The decisive factor was ‘the established legal background against which the Lease was entered into, and in particular the general attitude of the law to the apportionability of rent payable in advance.’ ([42]) Rent is not apportionable in time in common law ([43]). Section 2 of the Apportionment Act 1870 varied this with regard to rent payable in arrear but not rent payable in advance ([45]). Thus:

‘Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary.’ ([50])

There was a broader discussion of Lord Hoffmann’s statement in Belize Telecom that the process of implying terms into a contract was part of the general process of contractual interpretation. Lord Neuberger was critical of this view. He saw construction of the express terms of the contract as being logically prior to the question as to whether or not a term was to be implied ([28]) and as being ‘a rather different exercise’ ([29]). Lords Carnwath and Clarke, on the other hand, expressed support for Lord Hoffmann’s formulation. Lord Carnwath expressed the view that Lord Hoffmann’s formulation did not involve any watering down of the previous authorities to the effect that the implication of terms is based on necessity ([58] – [60]). Thus:

‘While I accept that more stringent rules apply to the process of implication, it can be a useful discipline to remind onseself that the object remains to discover what the parties have agreed or (in Lady Hale’s words) “must have intended” to agree. In that respect it remains, and must be justified as, a process internal to the relationship between the parties, rather than one imposed from outside by statute or the common law’. ([69])

Lord Clarke said:

‘like Lord Neuberger (at para 26) I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract in a broad sense.’ ([76]).

Michael Lower

Implied terms: the tension between the plain meaning of the words and an evident commercial purpose

August 26, 2015

In Aberdeen City Council v Stewart Milne Group ([2011] UKSC 56) the Council sold some development land to Stewart Milne Group Ltd (‘SMG’). The contract for the sale provided for a further payment (‘Profit Share’) to be paid to the Council in the event of (i) the service of a notice by SMG on the Council to trigger the obligation to pay; or (ii) a sale by SMG; or (iii) the grant of a lease by SMG. There was to be only one such payment and once it had been made there would be no further obligation to make any payment even if one of the relevant events occurred.

SMG sold the property to SMW, another company in the same group, at a price that the Council alleged was well below the open market value. SMG contended that this triggered the once and for all obligation to make a Profit Share payment. The Council refused to accept that this was the case. There was a tension between the wording of the contract and the alleged commercial purpose. The contract did not expressly rule out an intra-group transaction in its definition of event (ii) (a sale triggering the obligation to pay). On the other hand there was evidence from other provisions within the contract pointing to a contractual intention that the Profit Share would be calculated by reference to the property’s open market value.

The Supreme Court decided that there was a clear commercial intention that the Profit Share would be calculated by reference to the open market value.  They preferred to think of this in terms of an implied term rather than as a process of interpretation (though the result is the same whichever route is used ([33] Lord Clarke). A term was to be implied to the effect that where the sale was not at arm’s length, an open market valuation (rather than the actual price paid) would be used in the calculation of the Profit Share ([20] Lord Hope; [32] Lord Clarke).

Michael Lower

Seller entitled to rescind and recover deposit where deposit cheque is accidentally dishonoured and time is of the essence?

October 20, 2014

In Howarth Cheung Natalie Jane YS v Tsang Hong Kwang Ok ([2014] HKEC 1683, CA) S entered into a preliminary agreement for the sale of property to P. The agreement provided for P to pay a deposit of just under 5% of the purchase price. The cheque was not honoured as the bank thought that there was a discrepancy between the signature on the cheque and the specimen signature that they had. S accepted the repudiatory breach and P sought specific performance. S counter-claimed for payment of the deposit.

It was accepted by both parties that time for payment of the deposit is of the essence in Hong Kong even in the absence of an express stipulation to this effect. So the delay in paying the deposit was a repudiatory breach ([4.1] – [4.5] per Cheung JA). P argued, however, that the contract included an implied term to the effect that the stipulation as to time was suspended because the extraordinary event that had happened was beyond P’s control. This failed. The obligation was specified in clear terms ([5.9]); S should not be affected by disputes between P and her agent ([5.10]); the term was not needed to give business efficacy to the contract ([5.11]); nor was it capable of clear expression ([5.12]).

P argued that she should be granted equitable relief from termination of the agreement. This was rejected. First, the point had already been dealt with by the Privy Council in Union Eagle ([6.1]). The Australian courts took a different approach and granted equitable relief where the delay was occasioned by fraud, mistake, accident or surprise (and the High Court of Australia considered the ambit of these exceptions in Tanwar Enterprises Pty Ltd v Cauchi (2003) 201 ALR 359). Even if the Australian approach were followed, it would not allow for relief in the present case:

‘The parties themselves have stipulated the time for payment which is of the essence of the contract. The purchaser had chosen to pay by cheque which in law is in the nature of payment by cash. This by itself precludes any argument on suspension of this obligation. Further, the possibility of the bank not honouring the cheque is not beyond the reasonable contemplation of the parties as mishaps do happen. Hence payment of the deposit can be subject to an exculpatory provision which has not been sought for by the purchaser in the first place. As presently drafted, the payment term is not subject to the purchaser tendering another payment upon discovering that the cheque has not been made. In any event, HSBC is not a third party in the strict sense of the term but an agent of the purchaser. To decree relief will deprive the vendor of an essential right of the agreement. The whole circumstances just do not come within the ambit of the requirement for relief that, although the accident was not occasioned by the vendors who were innocent, it was sufficient of itself to render it unconscionable or inequitable for the vendors to insist upon its legal rights.’ ([6.20] per Cheung JA).

Finally, S could recover the unpaid deposit from P. Contractual damages aim to put S in the position that he would have been in had the contract been performed (and in that event the deposit would have been paid). Alternatively, the effect of the acceptance of a repudiatory breach is to discharge the parties from all executory obligations but does not affect rights and obligations that have already accrued (Damon Compania Naviera S.A. v. Hapag Lloyd International S.A. [1985] 1 WLR 435). This approach has been taken by the Hong Kong courts (for example, Sun Lee Kyoung Sil v Jia Weili [2010] 2 HKLRD 30).

Michael Lower



Implication of a term is an aspect of contractual interpretation

June 15, 2014

In A-G of Belize v Belize Telecom Ltd ([2009] UKPC 10, PC) the question was whether a term should be implied into the articles of association of a company (‘the company’) that had been formed to carry on the business of the Belize Telecommunications Authority. Belize Telecom (‘BT’) was the majority shareholder in the company. The company’s shares were divided into classes. BT, as holder of  C shares that exceeded 37.5% of the issued share capital, had the right (under the terms of the company’s articles) to appoint two of the members of the board of directors. When BT defaulted on loans made to it by the Government, it had to transfer a substantial number of shares to the Government. The result was that its C shares no longer amounted to 37.5% of the issued share capital.

The question was whether its appointees to the board remained members of the board. There was no express term dealing with this contingency. Was there an implied term to the effect that a director appointed by virtue of a specified shareholding should vacate his office if there is no longer any holder of such a shareholding.

Lord Hoffmann gave the only full judgment. He emphasised that the law on the implication of contract terms was an aspect of the general law concerning contractual interpretation:

‘It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.’ ([21])

The term contended for was implied, ‘to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles’ ([32]).

Michael Lower


Break clause: right to repayment of rent for period after the termination?

June 11, 2014

In Marks & Spencer plc v Bnp Paribas Securities Services Trust Company (Jersey) Ltd ([2014] EWCA Civ 603, CA (Eng)) a lease contained a break clause. If exercised, the lease would determine in between the quarter days on which rent payments were to be made. The tenants exercised the break clause. On the next quarter day, they paid a full quarter’s rent. After the lease had come to an end, the tenants argued that they were entitled to a repayment of that portion of the rent attributable to the period after the end of the lease.The lease provided that rent was payable ‘yearly and proportionately for any part of a year by equal quarterly payments in advance on the Quarter Days.’ At first instance, it was decided that a term should be implied requiring the landlord to repay the portion of the final rent payment attibutable to the period after the termination of the lease. The landlords successfully appealed against this.

Arden LJ gave the only full judgment. After the decision of the  Privy Council in A.G. of Belize v Belize Telecom Ltd , the approach to implied terms has become an aspect of the general principles of contractual interpretation:

‘The test in Belize requires the court to ask whether the agreement has the meaning that such a term would achieve, because, even though the parties did not expressly include that term in their agreement, that is what their agreement means.’ ([23]).

In the next paragraph:

‘the implication of terms by interpretation requires a high level of loyalty to the parties’ agreement, read against the admissible background. The party seeking to establish an implied term must therefore show not simply that the term could be a part of the agreement but that a term would be part of the agreement.’ ([24])

The starting point is that no term should be implied ([25]). It must be necessary to imply a term to achieve the parties’ express agreement (determined in the usual way) ([26]).

Here, the parties must have realised that this question would arise and could have dealt with it by express words ([35]). The state of the case law at the time of the lease (part of the admissible background) was such as to point to the conclusion that there was no right to recover the rental for the period after termination. This reinforces the need for express words ([39]) No term was to be implied ([43])

Michael Lower


Woops! The problem of the missing clause

January 29, 2013

In Sadd v Brown ([2012] UKUT 438 (LC)) the Upper Tribunal (Lands Chamber) had to deal with a dispute between the tenant of a flat held on a long lease and her landlord. The landlord covenanted to insure the building for its full reinstatement value. It sought to recover the cost of insuring the building. Unfortunately, there was no tenant’s covenant to reimburse a share of the premium.

The landlord sought to rely on a covenant to pay and indemnify the lessor against ‘all rates duties charges assessments impositions and outgoings whatsoever’. This was not adequate since this wording did not indicate an intention to repay an expense voluntarily incurred by the lessor ([18]). The landlord also relied on a number of other aspects of the service charge provisions in the lease but none of them amounted to an obligation to reimburse a share of the insurance premium (not even a covenant to contribute to the costs of estate management) ([16]).

Finally, there was no implied covenant. The lease was detailed and (on its face) a complete record of the terms that had been agreed ([20]). Business efficacy did not demand that a term to reimburse a share of the premium be implied. The mere fact that the landlord covenanted to insure was not a sufficient basis on which to imply the term. Nor was the fact that such a term would have been expected and was commonly encountered ([19] – [20]).

On the contrary:

‘To imply a term in the present case would be ‘to effectively draft a completely new paragraph in the Fifth Schedule to the Lease’ ([21].

The landlord could seek rectification or apply for the lease to be varied under Part IV of the Landlord and Tenant Act 1987 ([23]).