Posts Tagged ‘construction’

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

March 20, 2017

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


Interpretation of service charge clauses

July 22, 2015

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

April 1, 2015

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

‘Hong Kong style’ completion and sub-sales

October 27, 2014

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

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


The limited role of admissible background in the case of registered documents

February 10, 2014

In Cherry Tree Investments Ltd v Landmain Limited ([2012] EWCA Civ 736, CA (Eng)) C had granted a charge of property to D pursuant to the terms of a facility agreement. The facility agreement extended the statutory power of sale in section 101(3) of the Law of Property Act 1925 by providing that the power of sale could be exercised at any time after the execution of the charge. This extension of the statutory power of sale did not appear in the charge. The charge was registered at the Land Registry but the facility agreement was not registered. D sold the property to L in exercise of the power of sale. It could only do so if the statutory power of sale had been extended as set out in the facility agreement. No claim was made for rectification of the charge. The primary question was whether the power of sale implied into the charge could be ‘interpreted’ in such a way as to include the extension found in the facility agreement. The English Court of Appeal decided (Arden LJ dissenting) that the charge could not be so interpreted.

Lewison LJ thought that he was bound to hold that the facility letter was admissible evidence for the purposes of interpreting the charge. But it was still necessary to consider the effect of this: what use could be made of the facility letter ([104] and [128])? The fact that the charge was a document that would be registered at the Land Registry was highly significant. The factual background carries a different weight in such cases than it would in other sorts of contract:

‘The reasonable reader’s background knowledge would, of course, include the knowledge that the charge would be registered in a publicly accessible register upon which third parties might be expected to rely. In other words a publicly registered document is addressed to anyone who wishes to inspect it. His knowledge would include the knowledge that in so far as documents or copy documents were retained by the registrar they were to be taken as containing all material terms, and that a person inspecting the register could not call for originals. The reasonable reader would also understand that the parties had a choice about what they put into the public domain and what they kept private. He would conclude that matters which the parties chose to keep private should not influence the parts of the bargain that they chose to make public.’ ([130])

A little later, Lewison LJ observed:

‘Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short at saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include.’ ([132]).

The charge could not be interpreted in such a way as to confer the more expansive power of sale contained in the facility agreement.

Longmore LJ agreed with the conclusion and reasoning of Lewison LJ ([150]).

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