Posts Tagged ‘leases’

Relief from forfeiture will ordinarily only be granted once during a lease term

May 27, 2017

In Ramadour Industries Ltd v Bullen ([2017] HKEC 974, CA) L granted T a lease of a house on Lamma Island for a two year term. T fell into arrears with the rent but was granted relief from forfeiture. T quickly fell into arrears again and L brought new proceedings seeking possession. T sought relief from forfeiture a second time but this was refused.

The Court of Appeal (Yuen JA giving the court’s judgment) upheld this refusal. The court’s power to grant relief is now codified in section 21F of the High Court Ordinance. Section 21F(1A) provides that relief will only be granted to a tenant once during the term, ‘unless the Court is satisfied that there is good cause why this section should apply in favour of a lessee’.

The intention is clear: relief pursuant to section 21F will normally only be granted once to a tenant during a lease term. The onus is on the tenant trying to invoke section 21F for a second time during a term to show that there is good cause.

Michael Lower

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

Agreement determines whether landlords must give credit for security deposit when enforcing a judgment against tenant

February 3, 2017

In Power Plus Ltd v Fruit Design & Build Ltd ([2016] 5 HKLRD 707, LT) the tenant of a flat paid a security deposit of HK$150,000 at the commencement of the tenancy. The forfeiture clause provided that this would be forfeited to the landlord ‘as liquidated damages’ should the tenant be in breach of its obligations under the terms of the lease. The tenant fell into arrears with the rent and the landlord obtained judgment for the sum of HK$105,000. The question was whether the landlord could forfeit the deposit and, in addition, enforce the judgment.

The Lands Tribunal (Judge Wong King Wah) decided that whether this was possible or not depended on the terms of the lease. In this case, on a proper interpretation of the forfeiture clause, the landlord was not entitled to forfeiture and to enforce the judgment without giving credit for it ([15]). The parties’ intention was that the security deposit should be liquidated damages in respect of any claim that the landlord might have against the tenant in respect of the lease.

Michael Lower

Fixed term followed by periodic tenancy: a single term?

January 7, 2017

In Leeds City Council v Broadley ([2016] EWCA Civ 1212, CA (Eng)) a landlord granted a lease for an initial fixed term of six months  and thereafter continuing on a monthly basis until either party brought it to an end by one month’s notice to quit. For Council tax purposes, it made a difference whether the agreement gave rise to a single term or gave rise to two separate leases (a fixed term tenancy followed by a periodic tenancy).

The local authority argued that a single hybrid fixed / periodic tenancy was a legal impossibility since it would lack certainty of term.

This argument failed. Authorities going back to the seventeenth century showed that this kind of arrangement has long been regarded by the common law as a valid lease. The Law of Property Act 1925 (ss. 1(1) and 205(1)(xxvii)) took over the common law position (Lord Templeman in Prudential Assurance v London Residuary Body and Lord Neuberger in Mexfield Housing Co-operative v Berrisford).

According to their terms, these arrangements created a single tenancy and authority showed that this was to be regarded as a valid arrangement.

Michael Lower

Landlord’s repairing covenant: tenant must give the landlord notice of a defect in the property in the tenant’s possession

September 14, 2016

In Edwards v Kumarasamy ([2016] UKSC 40) the UK Supreme Court had to consider the landlord’s liability in respect of physical injury caused to his tenant. The lease was of the interior of a flat in a block of flats. The landlord (K) was himself a tenant of the flat and had the benefit of the right to use the entrance hall to the flats, the car park and the paved area between the front door and the car park. K sub-let the flat together with these ancillary rights to E. E injured himself when he tripped over an uneven paving stone in the paved area.

The primary question was whether the paved area was part of the exterior of the building of which the flat formed part. If it was, then K would be liable to T under the covenant imposed on landlords by section 11 of the Landlord and Tenant Act 1985. Lord Neuberger held that the paved area was not part of the exterior of the building. The natural meaning of the words of a statute should be applied unless they produced a nonsensical result or one which was inconsistent with the intention of the legislation. Here the natural meaning of the ‘exterior’ did not extend to the paved area ([17]).

That effectively meant that the case was decided in K’s favour. Lord Neuberger went on, however, to look at another, more general issue. He referred to the rule that, ‘a landlord is not liable under a covenant with his tenant to repair premises which are in the possession of the tenant and not of the landlord unless and until the landlord has notice of the repair’ ([30]). This is an implied term. It does not normally apply where the premises to be repaired are not in the tenant’s possession ([42]). If the landlord had been subject to a covenant to repair the paved area, did the tenant have to serve notice of disrepair on him before the landlord was under any liability to repair?

The distinguishing feature of this case was that the premises to be repaired were in the possession neither of the landlord nor the tenant but was property over which they both had a right of way. The premises were the paved area over which the landlord had been granted a right of way which he had effectively passed on to the tenant. The landlord had effectively disposed of his right to use the paved area to the tenant ([50]). Lord Neuberger held that the rule requiring the tenant to give notice of the disrepair applied to this case (49]).

Michael Lower

 

 

Does acceptance of rent waive a continuing breach of covenant?

January 13, 2016

In Kwok Hon Shing v Happy Team (China) Ltd ([2015] HKEC 2038, LT) L granted T a four year lease of a unit in an industrial building. There were sub-lettings of part for residential purposes in breach of a covenant not to use the property for residential purposes. These breaches continued even after L’s complaint letter of 12 November 2014. L began forfeiture proceedings in February 2015. The breaches of covenant continued at least until 14 February 2015 but the unlawful sub-tenancies were subsequently terminated. L continued to accept rent until April 2015.

The lease contained a clause to the effect that acceptance of rent would not constitute a waiver of any breach by T. This clause had no effect in this case (if it ever has any effect at all); it could not alter the legal implications of acceptance of rent with knowledge of the breach ([33] – [35]).

In the case of a continuing breach of the user covenant, acceptance of rent only waived the breach up to the date of acceptance of rent. Subsequent breaches were only waived to the extent that L knew at the date of acceptance of rent that they would continue ([42]). The application to forfeit the lease was an unequivocal election to determine the lease and acceptance of rent after that could not amount to a waiver ([47]). L had not waived the breach and was entitled to forfeit. The breaches had, however, been rectified and T was granted relief from forfeiture under section 58 of the Conveyancing and Property Ordinance.

Michael Lower

One tenant in common can bring possession proceedings

July 29, 2015

In Chan Po King v Yau Wai Yin ([2015] HKEC 1283, CA) two out of four tenants in common had granted a two year lease of land expiring on 31 December 2013.The tenant refused to leave when the term ended. One of the two tenants in common who had granted the lease brought proceedings to recover possession and seeking mesne profits in respect of the occupation after the end of the term. The tenant contended that both landlords had to be parties to the proceedings and that one tenant in common, acting alone, could not do so. This argument failed. The lease term had ended and the tenant had no further right to possession. There was no evidence to suggest that the other landlord was willing to allow the possession to continue. The applicant was entitled ‘in exercise of her right and interest to possession as a tenant-in-common’ to bring possession proceedings acting alone ([26] per Chu J-A).

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

Landlord’s repairing covenant: the scope of the rule in O’Brien v Robinson

February 24, 2015

Edwards v Kumarasamy ([2015] EWCA Civ 20, CA (Eng)) is a decision of the English Court of Appeal. Although the context is the English Landlord and Tenant Act 1985, it raises a general question as to when landlords must have notice of a defect before they can be in breach of their repairing covenant.

K granted a lease of a flat to E. K owned the flat but no other part of the building. K also had the benefit of certain easements over common parts including the entrance hall to the flats. E tripped over an uneven paving stone in a paved area just outside the entrance hall and injured his knee. He relied on the repairing covenant implied by section 11 of the Landlord and Tenant Act 1985. The Court of Appeal (Lewison LJ giving the main judgment) held that the paved area was part of the exterior of the building (and so within section 11) and that the easements granted to K gave him a sufficient interest for him to be liable for defects in the paved area under the terms of the covenant implied by section 11.

The question was whether K’s liability was conditional on E giving notice of the defect to K. Ordinarily, landlords are in breach of a repairing covenant as soon as a defect occurs and whether or not they have notice of it ([9]). The rule in O’Brien v Robinson, however, is an exception to this. In British Telecommunications plc v Sun Life Assurance Society plc ([1996] Ch 69), Nourse LJ explained the rule thus:

‘ … where a defect occurs in the demised premises themselves, a landlord is in breach of his obligation to keep them in repair only when he has information about the existence of the defect such as would put a reasonable landlord on inquiry as to whether  works of repair to it are needed and he has failed to carry out the necessary works with reasonable expedition thereafter.’

Here the implied repairing covenant imposed on K an obligation to keep the paved area in repair but the paved area did not form part of the demise. The crucial distinction for the rule in O’Brien v Robinson is whether the defect occurs in the demised premises. Since this defect was outside the demised premises, K was liable even though he had no notice of the defect.

Michael Lower

The covenant for quiet enjoyment where the landlord also exercises powers in the public interest

November 24, 2014

In Shebelle Enterprises Ltd v The Hampstead Garden Trust Ltd ([2013] EWHC 948) the Hampstead Garden Trust Ltd (‘the Trust’) exercised the rights and powers of management under a scheme of management under England’s Leasehold Reform Act 1967 (‘the Act’). Shebelle (‘S’) held a long lease of a house in the area covered by the scheme of management and the Trust was the landlord. The lease contained an express covenant for quiet enjoyment. F owned the freehold of the neighbouring house (enfranchised under the Act and subject to the scheme of management) which was higher up a hill than S’ property. Although F owned the freehold, the Trust was ‘for the purposes of the scheme to be treated as the landlord for the time being’.

F proposed to carry out extensive works at their property. The scheme of management required them to get the Trust’s consent to the work. F applied and S objected because of concerns about the the effect of the development on the movement of ground water. When the Trust indicated that it was minded to grant consent to the works, S sought a quia timet injunction on the grounds that this would amount to a breach of the covenant for quiet enjoyment. The Trust cross-applied for summary judgment on the grounds that S had no real prospect of success.

S relied on the proposition drawn from Sanderson v Berwick-Upon-Tweed that: ‘if a common landlord A demises land to B and also demises neighbouring land to C, A will be liable to B for breach of the covenant if it authorises C to act in a way which will interfere with B’s quiet enjoyment.’ ([27] in Shebelle per Henderson J.). Either the Trust was to be regarded as being akin to a landlord ([27]) or else the proposition should be understood in such a way as to rely on the Trust’s degree of control over F and not on privity of estate ([29]).

One element of the Trust’s defence was the argument that the covenant for quiet enjoyment could not be invoked so as ‘to interfere with (and/or subvert) the performance by the landlord, in its capacity as a “custodian of the public interest”, of a role under a statutory scheme under which the landlord owes a duty to act in the public interest.” ‘ ([31]). This argument succeeded and the Trust was granted summary judgment. It did not matter that at the time of the grant of the lease the landlord was a private body:

‘The freehold reversion to the Lease was always freely assignable, and the parties must be taken to have contemplated that it might at some date become vested in a body which had duties of a public nature to perform. If the proper performance of those public duties impinged on the normal use and enjoyment of the demised premises by the tenant, it must in my view have been envisaged that the tenant would to that extent be deprived of a remedy under the covenant.’ ([63]).

Michael Lower