Archive for the ‘Interpretation’ Category

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.

Construction of contract to assign a lease: was the right to terminate the agreement validly exercised?

February 20, 2013

Lancashire Insurance Co Ltd v MS Frontier Reinsurance Ltd ([2012] UKPC 42, PC) was an appeal to the Privy Council from the Court of Appeal of Bermuda.  LI had entered into a contract to assign a lease to MS. The agreement provided that LI would serve notice on MS that it was ready to move out. Completion was to take place within 15 working days after MS’s receipt of the notice. The agreement provided that either party could serve a notice to terminate the agreement if completion had not taken place by 31 December 2009. On 18 December 2009, LI served notice that it was ready to move out. This meant that completion would take place by 13 January 2010 at the latest. MS served notice to terminate the agreement on 13 January 2010.

On the face of it, MS was simply exercising the right to terminate conferred on it by the agreement. LI contended that there was an implied term to the effect that no notice to terminate could be served after midnight on 12 January. The Privy Council accepted LI’s contention that a term had to be implied that would reconcile the timing of the right to terminate with other aspects of the timetable for completion contained in the agreement. On the other hand, this did not lead to the implied term contended for by LI. The notice to terminate could be served at any time on 13 January.

There had been discussions between the parties concerning completion arrangements after LI had served notice of its readiness to move. These did not give rise to a waiver by MS of its right to terminate. Nothing in what MS said or did amounted to a clear and unequivocal communication to LI that it would not exercise its right to terminate.

Corridor: common part?

February 18, 2013

In Chow Sai Ping v Chan Yam King ([2013] HKEC 199, CA) P and D owned neighbouring flats. The flats both opened onto a small side corridor. The question was whether the corridor was a common part or was part of the area owned by P. The DMC identified the corridor as being a common area but it was shown as being part of the land included in the later assignment to P’s predecessor. The Court of Appeal had no difficulty in concluding that the DMC had priority over the later assignment. The corridor was a common part.

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]).

Implied terms as to termination of contractual licences

January 25, 2013

In Australia Blue Metal Ltd v Hughes ([1963] A.C. 74, PC) ABM granted H a licence to mine certain minerals on a specified portion of ABM’s land. There was no licence term nor any express provision as to how the licence could be brought to an end. ABM gave H notice requiring H to leave the land immediately.

The Privy Council held that this was not a licence coupled with an interest as Hughes had no right to extract any specified quantity of the minerals. This was either a case in which the licence could be terminated at any time on reasonable notice or it could be terminated with immediate effect but Hughes would then have a reasonable period of grace in which to leave. It was unnecessary to decide between these alternatives since either would lead to the same practical conclusion since Hughes had not been required to leave the land immediately and a reasonable period had since elapsed.

The Privy Council rejected the argument that the implied term was that ABM had to specify the notice period in the notice (and that this must be reasonable). There would need to be clear evidence to justify the implication of such a term.

On whether there was an implied term that notice should be reasonable, Lord Devlin said:

‘The question whether a requirement of reasonable notice is to be implied in a contract is to be answered in the light of the circumstances existing when the contract is made. The length of the notice, if any, is the time that is deemed to be reasonable in the light of the circumstances in which the notice is given.’ (p. 99)

On the construction of terms as to notice generally, he said:

‘An express provision about notice can be in any form which the parties care to adopt. If the term is that a contract is to terminate six months (or a reasonable time) after notice given, the notice need amount to no more than an election to terminate. It will automatically take effect after the expiry of six months (or of such period as the court subsequently determines to be reasonable). On the other hand, an express term can prescribe the form and content of any notice to be given and then a notice in the wrong form or with insufficient content will be bad. If the contract is, as here, entirely silent about notice and a term has to be implied, the nature and requirements of the term to be implied must be settled according to the ordinary rules governing the implication of a term. The question then will be whether the necessary implication extends beyond that of a simple notice to embrace a notice in a particular form or with a particular content.’ (pp. 100 – 101)

Deed of Mutual Covenant: approach to construction of charging clause

January 21, 2013

In Thorogood Estates Ltd v Robinson Heights (IO) ([2013] HKEC 55, CA) the Court of Appeal had to interpret the provisions of a Deed of Mutual Covenant allocating among the owners the liability to contribute to management expenses.

T owned the garage on the upper and lower ground floors of the development. The Incorporated Owners had carried out major works of repair and renovation works for the whole development. The question was whether all owners, including T, were liable to contribute in proportion to their shares in the development without any need to consider which parts of the development had benefited from the works. The Court of Appeal applied the well-known approach to contractual interpretation explained, for example, by Lord Hoffmann in Jumbo King.

The DMC divided the development into three (the Garage, the Tower and the Building). T argued that it was only liable to works relating to the Garage and the Building. The incorporated owners argued that T had to contribute to all works in proportion to the shares in the development that it owned.

One provision (D5) provided for the relevant budget to be split into two parts, one relating to the Garage and the other relating to Units (any flat, roof or car parking space in respect of which an exclusive right of occupation had been granted). Another provision (E2) provided that liability to pay was to be apportioned among the owners by reference to the number of shares they owned. The incorporated owners relied on this provision but failed in the Court of Appeal.

The Court of Appeal argued that an exclusive focus on E2 did not have sufficient regard to the terms of the DMC as a whole, the purpose which it sought to achieve and (in this light) to properly discern the parties’ objective intention as it would be understood in the light of the relevant background knowledge.

In terms of purpose, the purpose of the DMC was to provide for a due propertion of the management expenses to be borne by the owners ([10]). An exclusive focus on E2 would not give due weight to the split budget arrangement in D5. A reading of the rest of section D of the DMC made it clear that the reason for splitting the budget into two parts was to ensure that where expenditure was incurred solely for the benefit of a unit then the owner of that unit would bear that cost ([32]). D5 sought to create a significant division between expenditure for the benefit of the Garage and that incurred for the benefit of the Towers ([34] – [35]).

As part of the relevant background, the court took into account the fact that:

‘It is not uncommon for provisions to be made in a DMC to differentiate between the contribution to be made by owners to management expenses in respect of different types of common areas and facilities, to cater for different requirements for maintenance owing to the different usage of common areas and facilities and to achieve a degree of fairness among the owners.’ ([33])

Kwan JA concluded:

‘Thus, viewing the DMC as a whole, and the practical object which it was intended to achieve, in my judgment a reasonable person having all the background knowledge would have understood clauses D5(a) and (b) to provide for a mutually exclusive apportionment of the estimated Management Expenses. The practical effect of clauses D5(a), 5(b) and 6 is that flat Owners who do not benefit from the use and enjoyment of the Garage would not be required to contribute to the Management Expenses attributable solely to or solely for the benefit of the Garage including the Garage Common Areas, and the Garage Owner who does not benefit from the use and enjoyment of the flats in the Towers would not be required to contribute to the Management Expenses attributable solely to or solely for the benefit of the flats in the Towers including the Towers’ Common Areas and Facilities.’ ([38])

Conflict between plan ‘for identification only’ and other objective factors at the time of the transfer

January 7, 2013

Brown v Pretot ([2011] EWCA Civ 1421, CA (Eng)) arose out of a boundary dispute. The court had to interpret the transfer of a newly built house from the developer to Mr and Mrs Pretot. There was a conflict between the boundary as it was shown on the plan attached to the transfer, on the one hand, and the written description of the land transferred. This stated that the garage would be built within the land transferred (the garage that was built by the time of the transfer would be outside the land transferred if the plan were to take precedence). Further, there was a conflict between the plan and significant physical features that were present at the time of the transfer (the garage and the boundary fence). These physical features were better guides to the parties’ intention than the plan taken in isolation especially as it was said to be for the purposes of identification only.

Interpretation of a badly drafted clause

December 7, 2012

In Multi-Link Leisure Developments Ltd v North Lanarkshire Council ([2010] UKSC 47) a fifty year lease of a golf course included an option for the tenants to purchase the reversion. The valuation formula was in the following terms:

‘The option price, if the option to purchase is exercised subsequent to the first year of let, shall be equal to the full market value of the subjects hereby let as at the date of entry for the proposed purchase (as determined by the landlords) of agricultural land or open space suitable for development as a golf course but, for the avoidance of doubt, shall be not less than the sum of ONE HUNDRED AND THIRTY THOUSAND POUNDS (£130,000) STERLING. In determining the full market value (i) the landlords shall assume (a) that the subjects hereby let are in good and substantial order and repair and that all obligations of the landlords and the tenants under this lease have been complied with, and (b) that the subjects hereby let are ready for occupation, and (ii) the landlords shall disregard (a) any improvements carried out by the tenants during the period of this lease otherwise than in pursuance of an obligation [to] the landlords, and (b) any damage to or destruction of the subjects hereby let.’

The question was whether the valuation was to be of the land as ‘agricultural land or open space suitable for development as a golf course’ or was to be the open market value without any such restriction. It was very likely that it would be possible to get planning permission for housing development on the site so the question was whether the price to be paid should reflect this hope value. The problem arose from the poor drafting of the clause. The Supreme Court held unanimously that the valuer was to determine the open market value and should take the hope value into account.

The majority of the Supreme Court aligned itself with the reasoning of Lord Rodger. It was clear that something had gone wrong with the drafting ([27]). The starting point in the task of interpreting the clause was the assumptions and disregards at the end since these were clear ([28]). The valuer was valuing land that was in good repair and condition and ready for development as a golf course ([33]). There was, however, no direction to the valuer to disregard hope value ([34] and [36]).

Lord Hope reached the same conclusion but steered a different route through the clause (although he had no quibble with Lord Rodger’s approach ([18]). He provided general guidance as to the task of interpretation. The assumptions and disregards were incompatible with the earlier parts of the clause:

‘In this situation the solution must be found by recognising the poor quality of the drafting and trying to give a sensible meaning to the clause as a whole which takes account of the factual background known to the parties at the time when the lease was entered into.’ ([19])

It is legitimate to ask what the parties’ commercial purpose was but this must be discovered from an examination of the objective contextual background ([21]).

The local authority had a duty to get the full market price for the land; the option could have been exercised at any time during the lease term and much could happen during that time; the parties could have contemplated that planning permission for housing development might be granted; and disregarding hope value would give the tenants a windfall at the expense of the landlords ([22] – [23]). These features outweighed the argument in favour of a construction requiring hope value to be left out of account.

Covenant only to build domestic houses

November 29, 2012

Expressluck Development Ltd v Secretary for Justice ([2007] HKEC 1352, CFI) concerned land on which houses had been built. The Conditions of Exchange under which the land was held provided that “The lessee will not be allowed to erect any buildings on the lots except domestic houses.” From the 1940s onwards, the ground floors of the houses had been used for commercial purposes without the Government taking any formal action in respect of the breaches of covenant. Where, however, other major changes of use had been proposed, consent had been sought by the owners. Expressluck now intended to build a block of residential units but with the ground floor being used for commercial purposes. It did not want to apply for a variation or release of the covenant. Instead it sought, inter alia, declarations to the effect that the proposed development did not amount to a breach of covenant, that the covenant had been abandoned or waived (because of the long history of tolerating commercial use) or that the Government’s demand for rent based on commercial use of the ground floor of the development gave rise to an estoppel. Expressluck failed in all respects.

First, there was a breach. The covenant did not affect only the type of building that could be built but also its subsequent use. Second, although the Government may have waived breaches of the covenant, it had not waived the covenant itself:

’81. What I glean from the authorities is that waiver of a covenant cannot be lightly inferred. It can be, but only where acquiescence by the grantor is sufficiently clear and unambiguous that it would be inherently unfair for him to be permitted to go back on his word, either actually spoken or derived from his conduct.
82. Further, it is important to distinguish between waiver of a breach of a covenant and the covenant itself.
83. Acquiescence will not amount to a waiver of the covenant unless in the particular circumstances, there was a clear intention to do so for all time.’ (Deputy Judge Gill)

Finally, there was no estoppel the Commissioner for Rating and Valuation had issued the demand but this did not bind the relevant department of Government (the Director of Lands).

Construction of lease terms: wrong word used?

November 23, 2012

In Campbell v Daejan Properties Ltd ([2012] EWCA Civ 1503, CA (Eng)) a building was split into several units. C was the tenant of a maisonette on the upper (third and fourth) floors of the building. She originally held the property under the terms of a lease for 65 years granted in 1958. This required her to contribute 40% of the cost of repairing the roof and walls of ‘the premises’ (the maisonette rather than the entire building). Her property was covered by the original pitched roof of the building but there were three other flat roofs over extensions to the original building. C had contributed to the cost of repair work carried out in 1992 with her share of the cost having been calculated in accordance with the above arrangement.

In 1998, D granted a new lease of the premises to C for 164 years. This lease repeated the identical arrangement concerning C’s liability to contribute to the cost of repairs. Nevertheless, after repair works in 2005 / 6, D argued that a mistake had been made when the new lease was granted and that C should be liable to contribute 40% to the cost of repairing the roofs and walls of the whole building and not just the costs associated with repairing the roof and walls surrounding C’s maisonette. This was a claim based on an approach to the proper construction of the lease rather than on rectification.

D failed in the Court of Appeal; the lease meant what it said (or said what the parties must be taken to have intended). After a brief review of the authorities, Jackson L.J. said:

‘The two questions which I must address are: (i) whether it is clear that something has gone wrong with the language of clause 3 (iii); (ii) if so, whether it is clear that reasonable persons would have understood clause 3 (iii) to be referring to all of the roofs and all of the external walls of the house.’ )[47]).

It was not clear that something had gone wrong with the language.