LIU HONG KEUNG v. LIU CHING LEUNG

HCA 4173/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4173 OF 2002

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J U D G M E N T

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1.  This is a claim which stems from an expired tenancy of rural land in the New Territories.  The plaintiff being the statutory manager of the owner of the land claims that the defendant being the retiring tenant failed to comply with the tenancy agreement upon termination of it and restore the land to its original condition.  That is his primary contention.  He also claims that without his authority certain buildings and/or structures had been left straddling the boundary dividing the land from its neighbour.  The relief he seeks are damages and the removal of the offending structures.

2.  The land in question is Lot 407 DD 89 comprising 5,342 square metres of land in Sheung Shui Village.  It is owned along with other land in the village by Tai Wong Temple, which is a clan or ‘tong’, that is an unincorporated association of about 300 persons who share a common ancestor.  Pursuant to the New Territories Ordinance Cap. 97, its land is registered in the name of a manager appointed for the purpose.

3.  In a series of tenancy agreements dating from 1 July 1989 to 30 June 1999 the land in question was tenanted by the defendant.  The first of these was a document in Chinese.  There is a certified translation.  It was between the then statutory manager of the Temple called Liu Shau Hong and the defendant.  It was timed to run for 6 years, thus to expire on 30 June 1995.  The rent was fixed at $30,000 per annum for the first 3 years and thereafter at $40,000 per annum, payable yearly in advance.  The land was described as being “a piece of vacant agricultural land”.  It is more than likely however that cottages or huts variously made of metal plates and stone that are now on the land existed thereon before the tenancy and have been used or occupied since.  Nothing turns on the existence of these cottages or huts or their occupancy.

4.  The defendant was not restricted as to the use to which he could put the land provided that it was lawful.

5.  Surveyors were appointed to reproduce plans of the land for the purpose of this litigation and I now revert to these in an attempt to describe salient features of the land, and how it came to be altered and used.

6.  Lot 407 is irregular in shape but broadly speaking has the appearance of the cross section of an aeroplane’s wing, that is it is long and slim, running west to east, widest at a point about half way along.

7.  De facto access is by means of a road which runs through Lot 405, separately owned, which shares a boundary to the north.  Legal access is by means of what is designated on the survey plan as a track from a road running roughly parallel to and a bit to the south of the southern boundary.  This track comes to the land from the east, running adjacent with the southern boundary before entering the land about half way along.  From that point it serves to divide a portion of the land to the south from the balance.  That is on a different level and to this extent is notionally separated from the bulk of the land, which is to the north of the track.

8.  It is accepted by both sides that this legal access can be negotiated only by light vehicles.  Access by heavy duty trucks and particularly container trucks can only be managed by the road that comes through Lot 405.  But that perforce requires the consent of 405’s lawful occupier; there is no easement in place.

9.  The metal clad huts I have already referred to are situated at the far west of the land.  Those of stone are at the far east.  These are not separately designated areas, but for the purpose of defining them in this judgment I shall call them A and C respectively.  The majority of the land that separates these two enclaves I shall call B, and that part which is to the south of the access road, or track, D.

10.  The area B represents about half the land, that is about - acre.

11.  The defendant took a tenancy of the land for the purpose of using the area designated B as an open storage area, to which there is direct access for heavy vehicles via the road running through Lot 405.  To that end the defendant caused to have the area paved in concrete, with consent of the then statutory manager of the Temple.

12.  I come now to deal with the status of the defendant and his relationship with a company called Country City Property Limited.

13.  Country City is a company in which the defendant is a director and majority shareholder.  One Lam Cheuk Kee is General Manager of Country City and also a director.  Mr Lam is in charge of Country City’s day-to-day management.  Country City’s modus operandi is to take tenancies of tracts of land in the New Territories and then sub-tenant them for use as container parks or similar activity.  At all material times it has held the head tenancy of Lot 405, the lot immediately adjacent and to the north of Lot 407.

14.  Mr Lam was to say in evidence that the decision to take a tenancy of 407 was made to give Country City control over both adjoining lots.  But 407 was taken in the defendant’s name because the Temple’s then manager wanted to contract with the individual rather than the company he was and is a part owner of.

15.  Lot 407 and in particular that part designated B and 405 were sub-tenanted to a company called Ocean First (Hong Kong) Limited.  Ocean First then proceeded to run a container park over both parcels.

16.  The series of tenancies over Lot 407 ran uneventfully until a two-year term running from 1 July 1997 to 30 June 1999.  The plaintiff by now had taken over management of the Temple and was in charge of its affairs.  The defendant had by power of attorney delegated to Mr Lam full responsibility concerning the tenancy.  I should mention that although it is his case that he was standing in for Country City, no point is taken about his liability to perform as tenant under the tenancy.

17.  This as it turned out being the last of the tenancies between the parties it is pertinent to recite two clauses.  Clause 2K obliges the tenant:-

“To yield up the said premises at the expiration of the said term or its sooner determination in its original state and in good and substantial repair and condition together with any additional erections alterations or improvements which the Tenant may with the consent of the Landlord as aforesaid have made upon or in the said premises and which the Landlord wishes to retain without payment of such compensation for such additional erections alterations or improvements.”

And clause 8 reads :-

“The landlord hereby declares that the said premises are agricultural land.”

18.  The agreed rent was by now $480,000 per annum.

19.  As the time came to consider what was to happen past the expiry date, Mr Lam sought to negotiate a reduced rent, namely $280,000 per annum, on the basis that the economy was in a downturn.  The plaintiff refused to consider that but was willing to extend at the same rate.  There was no compromise.

20.  So it was that in December 1998 the plaintiff’s solicitors on instruction sent out a notice to quit.  There was no discussion, and thus no agreement, that the plaintiff would take back Lot 407 in its altered state, that is with the concreted area B.  That would have been a permissible option under Clause 2K.  But it was not pursued, by either party.

21.  In view of that, Mr Lam took steps to have the land restored to its original, pre-paved state. He engaged a contractor, called Kin Cheong Machinery and Engineering Company Limited, to undertake the work needed to restore the land to its original form.  Mr Kwan Ping Leung who runs Kin Cheong gave evidence to the effect that he had been asked to quote to Country City the cost of breaking up and removing from site the concrete and hardpack beneath it.  In the event his quote of $50,000 was accepted and the work was carried out, or purportedly so.  Kin Cheong by its own description recorded what had to be done:-

“to uplift concrete and mastic asphalt on the ground by mechanical excavator until solids exposed in order to restore to its original state as agricultural land; thence remove to adjoining sites managed by Country City.”

22.  What is in material dispute is as to whether the work was carried out to the effect that the land was restored in terms of Clause 2K to its original state.

23.  Mr Kwan, not surprisingly, said it had been.  Mr Lam said he inspected the land before paying the account and professed to be satisfied.  He backed this up with a photograph depicting most of the previously paved area designated B, albeit it was a distant shot.

24.  But evidence of the plaintiff, illustrated by photographs taken in August and September, 2 and 3 months later, was that the work was far from satisfactory.  The concrete had been broken up and much of it carted away.  But numerous large blocks of concrete and boulders and general unevenness shown in the photos indicated that the land was by no means restored to what it would have been prior to having been paved, back in 1989, and that was agricultural land. 

25.  And there was another unsatisfactory feature.  In the area I have designated C, it was established by survey that there were several structures built or placed straddling the boundary between 405 and 407, and thus were encroaching into Lot 407.  The principal offender was a structure used as a canteen, called for short Kong Lung, made out of converted containers.  Another was a series of structures from where the business of car repairs was carried out, called for short Choi Kee.

26.  The plaintiff sought to have these matters rectified.  No positive response emerged from the defendant or his representative Mr Lam.  The plaintiff engaged surveyors to draw plans and to inspect the land and report on the state of it.  Mr Stewart Wong, one of the surveyors, took the photographs I have referred to, some late in August; others in late September.  It was his account that the concrete and mastic asphalt had been dug up along with the hard core beneath but much of that remained as pieces scattered over the land.  In order to make good the restoration it would be necessary for this to be removed and be replaced by top soil to a significant depth, at a cost of about $1.8 million.

27.  He also confirmed that there was encroachment in the area designated C, in the main by Kong Lung and Choi Kee.

28.  It is pertinent to note at this point that many of the photographs, particularly those taken in September, graphically illustrate chunks of concrete, large rocks and stones which reveal the work undertaken by Mr Kwan was not properly carried out in terms of his quotation.  Amongst others I refer to photos 25 to 27, 35 to 39 and 42 in the bundle.

29.  In defence Mr Lam was to say that August that year was particularly wet; the defence produced records to show there was a rainfall of 773mm in the area for the month, of which 342mm fell in one day.  And September had heavy falls as well.  Mr Lam sought to explain that such rain was heavy enough to wash away some of the soil thus exposing larger stones and so on that had hitherto been covered, for which the defendant could not be held responsible.

30.  Mr Lam also gave evidence concerning the encroaching structures in area C.  He was aware of the encroaching.  He spoke to the sub-tenants who ran Kong Lung and Choi Kee, telling them of the prospective termination of the tenancy of 407.  They told him they would negotiate with the plaintiff a rental to cover those parts of their structures that were on 407.  Taking them at their word he took no further steps.

31.  In fact the plaintiff did state in evidence that he was approached by someone representing Kong Lung, and was asked to accept rent to represent their ongoing occupancy.  The plaintiff declined to take any money then or thereafter because the dispute with the defendant was unresolved.  There was no approach from anyone representing Choi Kee.

32.  It is pertinent to note from the photographs that 405 was continuing to be used as a container park, with containers stacked four or five high up to the boundary with 407.

33.  With the matter with the defendant not resolved, the plaintiff issued a writ in November 2002.  But at that time there was a further development.  The plaintiff had found another prospective tenant willing to take a tenancy of 407, another Liu, called Liu Tim Wan.

34.  Mr T W Liu also wanted to use the designated area B for parking and storage, and took a tenancy for 4 years with a right to repave the land.  He committed to a rent of $350,000 per annum.  But the parties recognised a risk that access through 405 might be withheld, and Mr T W Liu was given the right to terminate the tenancy on terms should that eventuate.  At his cost he levelled area B and paved it as to half with the balance in gravel.

35.  But then it was, about 4 months into the tenancy, that access was withheld.  Mr T W Liu was given leave to withdraw, with all the rent he had paid refunded.  However there was no refund of whatever he had expended to level, repave and gravel area B.

36.  The land remains in that condition to date.

37.  As for the encroachment in area C; Kong Lung remains on site and encroaching.  Choi Kee has pulled back and no longer does so.

38.  That is the history as it emerged in the evidence.  But of further moment was the plaintiff’s reaction to cross-examination by Mr Chain on the prospective use to which 407 could be put.  I quote from my notes:-

“Q.    Lot 405 has since 1999 been run as a container depot?

A.      Yes.

Q.      Realistically if 407 was returned to agricultural land it would be unthinkable for someone to use it to grow vegetables or fruit?

A.      Correct.

Q.      Realistically no one will farm 407?

A.      Correct.

Q.      It should be used for open storage – a container depot or similar?

A.      Yes.”

And so on.  This demonstrates what would seem to me a realistic view; that whatever the land was used for in the past its current use is limited to parking and storage; subject of course to access.

39.  If any further confirmation is needed it again came from the plaintiff, when he said that he would have preferred the defendant not to have attempted to restore the land to its original condition, but to have left it paved.

40.  And so to the issues.

41.  Did the defendant fulfil his contractual obligation to restore the land as required upon expiry of the tenancy?

42.  The short answer is ‘No’.

43.  I am singularly unimpressed with the state of area B following the efforts made by Mr Kwan’s company Kin Cheong to clear and restore the site.  Much was said in evidence and submissions about the prospective deterioration between the end of June, when the work was undertaken, and the end of September when Mr Wong took the more graphic of his photographs.  There were of course the heavy rains of August and September.  But the photos reveal a landscape scattered with huge rocks and concrete and huge amounts of spoil.  No amount of rain could have changed a properly cleared tract of land into that condition.

44.  Mr Lam may have been satisfied but he was not the owner.  The defendant did not restore the land in terms of his contractual obligation.

45.  On the other hand, I do take issue with Mr Wong’s estimate to make good of $1.8 million.  Relative to Mr Kwan’s charge that is an extraordinary sum.

46.  With regard to the encroaching buildings; Mr Lam conceded that there was encroachment and, to an extent, that remains.  He was under the impression that the sub-tenants would come to an arrangement with the plaintiff; indeed one of them did attempt that.  But representing a tenant about to retire and return vacant possession to the owner, his obligation lay to the owner and not to those whose structures were encroaching.  He took no such steps.  The defendant thus did not provide vacant possession to the extent of these encroachments.

47.  I come now to the remedies.

48.  Concerning first area B.  The plaintiff claims what it would notionally have cost to make good the sub-standard restoration of the land to its original unpaved condition; that is, the $1.8 odd million that Mr Wong quoted.  I say notional because in the meantime the plaintiff had authorised the repaving and gravelling undertaken in 2002 by his new tenant Mr T W Liu.  He bases this entitlement upon the premise that the defendant should have to meet the cost of reinstatement because he had failed to do so.

49.  Is that a justifiable entitlement?

50.  The answer lies in the authorities.  A case on point is Bryant – Macklin [2005] EWCA (Civil Division) 762.  The case concerned neighbours.  Livestock belonging to one trespassed into the property of the other damaging trees beyond repair.  The trial judge found herself facing the following conundrum:-:

“The real issue before me was whether I should award damages based on the diminution of the value of the claimants’ property, in this case £25,000 as assessed by the claimants’ own surveyor Mr Frank Jackson or the cost of restoration and replacement of damaged trees, the figures ranging from approximately £47,000, £193,000 to over £400,000 as estimated by Mr John Gilbert, tree surgeon.”

And she held:

“The claimants’ desire to reinstate the trees to the condition they were in before damage by trespass from the defendants’ straying livestock is understandable but sadly both impracticable and financially unrealistic.  There is no prospect of like for like replacement.”

51.  The appellate court allowed the appeal by the claimants, but did not disturb the judge’s analysis, which was that before awarding damages representing reinstatement, a court should consider whether it is fair, and does not amount to a sum out of proportion to the benefit thus conferred on the claimants.  In other words, the award must pass the test of reasonableness.

52.  Another case on point is C R Taylor Limited v Hepworths Limited [1977] WLR 659.  In that case a fire started by employees of the defendant destroyed a disused billiard hall on the plaintiff’s land, said to be “ripe for development”.  The plaintiff sued for the cost of reinstatement, about £28,000.

53.  The judge rejected the claim.  He found that the plaintiff was entitled to be placed in the same position as if there had been no fire; but the amount of damages had to be reasonable.  Given that the hall was no longer used, and given that the land was being held for redevelopment, it was not reasonable to reinstate.  He held that the plaintiff should be entitled to diminution of the market value of the land and that was £2,500.  (In fact there was no award under this head, in the end.  The judge found this figure should be offset by the saving in the cost of demolition which was estimated to be about £3,000).

54.  The same principles apply if the loss is occasioned by breach of contract rather than trespass.

55.  In Ruxley Electronics Ltd. v Forsyth [1996] 1AC 344, the dispute concerned a contract to build a swimming pool.  The diving area had to be 7’6” deep.  In fact it was built to be deep enough for safe diving, but was only 6’ deep.  In a claim for the balance due under the contract, the owner counterclaimed for the cost of reinstatement; that is, the amount required to put him in the position he would have been in if the contract had been performed.  There was no diminution in value of his property.  The judge at first instance awarded him but £2,500 being the loss of amenity.

56.  The Court of Appeal allowed his appeal, enhancing the award to one that amounted to the cost of reinstatement.  But the House of Lords restored the award that the court at first instance had awarded.  The headnote encapsulates the reasoning:-

“Held, allowing the appeal, that where the expenditure was out of all proportion to the benefit to be obtained the appropriate measure of damages was not the cost of reinstatement but the diminution in value of the work occasioned by the breach even if that would result in a nominal award; and that accordingly, since there was no dispute over the amount awarded by way of general damages, the judgment of the trial judge should be restored.”

57.  Lord Jauncey said at p. 357:-

“Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained.  If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate.  A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure.”

58.  On the matter of the compensation actually awarded, there being no diminution in the value of the owner’s property, Lord Mustill said at p. 361:

“As my Lords have shown, the test of reasonableness plays a central part in determining the basis of recovery, and will indeed be decisive in a case such as the present when the cost of reinstatement would be wholly disproportionate to the non-monetary loss suffered by the employer.  But it would be equally unreasonable to deny all recovery for such a loss.  The amount may be small, and since it cannot be quantified directly there may be room for difference of opinion about what it should be.  But in several fields the judges are well accustomed to putting figures to intangibles, and I see no reason why the imprecision of the exercise should be a barrier, if that is what fairness demands.

My Lords, once this is recognised the puzzling and paradoxical feature of this case, that it seems to involve a contest of absurdities, simply falls away.  There is no need to remedy the injustice of awarding too little, by unjustly awarding far too much.  The judgment of the trial judge acknowledges that the employer has suffered a true loss and expresses it in terms of money.  Since there is no longer any issue about the amount of the award, as distinct from the principle, I would simply restore his judgment by allowing the appeal.”

And going back to first principles, Lord Lloyd said at page 365:-

“Reasonableness

The starting point is Robinson v. Harman, 1 Exch. 850, where Parke B. said at p. 855:

“The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

This does not mean that in every case of breach of contract the plaintiff can obtain the monetary equivalent of specific performance.  It is first necessary to ascertain the loss the plaintiff has in fact suffered by reason of the breach.  If he has suffered no loss, as sometimes happens, he can recover no more than nominal damages.  For the object of damages is always to compensate the plaintiff not to punish the defendant.”

59.  Reverting now to this case and the plaintiff’s claim.  Is it in the circumstances of the case reasonable?

60.  I have already stated that Mr Wong’s estimate could only be regarded as excessive.  His calculations are based on the need not only to remove the detritus left by Mr Kwan but to excavate up to a metre thence to replace with “clean” soil.

61.  There is nothing to suggest this would be warranted, or fair.  But the argument on quantum is, as I find, academic.

62.  I think it is safe to make an assumption that the plaintiff has no intention of restoring Lot 407 to a condition whereon crops can be cultivated.  I say this for two reasons.  The first is that he has himself considered that it is no longer suitable to farm.  There can be no stronger evidence than a concession made by a litigant that is adverse to his interests.  The second is that he through the brief relationship enjoyed with Mr T W Liu allowed the land to be repaved and gravelled rendering it suitable for another purpose; namely, parking and storage; quite unsuitable for farming.  Thus if the plaintiff were to receive $1.8 million or a similar sum I feel confident that it would not be expended on the land, and would thus amount to inappropriate enrichment of the Temple’s coffers.

63.  Has there been a diminution of the value of the land?  There is no evidence to that effect, probably because there is none. 

64.  So what, if anything, should be recoverable by the plaintiff for the defendant’s failure to perform?

65.  It seems to me that under the head of what is reasonable should be an award that recognizes the loss of the plaintiff’s expectation that the defendant would perform, like a claim for the loss of an amenity awarded the owner of the pool in Ruxley.  It falls into compensation of a sort referred to by Lord Mustill in the passage I have quoted, and recognizes that any such loss is for the period from the date of the termination of the tenancy in 1999 to the date in 2002 when the plaintiff permitted further changes to the land.

66.  I think a fair figure is $75,000; I make such award under this head.

67.  I come now to the structures.  This is more straightforward.  It cannot be said, indeed it has not been pursued, that the plaintiff was denied use of the land because of the trespass.  Relative to the size of the land the encroachment was small and in an area not likely to have affected the use to which the land could be put.  It seems to me that the remedies lie in a requirement to remove that which remains encroaching, and that the plaintiff be paid mesne profits for the period of encroachment.

68.  No figures have been quoted.  Given the length of that time and the extent of encroachment, I believe a fair figure to be in the sum of $75,000.

69.  I order judgment in favour of the plaintiff in the sum of $150,000.  The defendant shall within 60 days cause the buildings which encroach to be removed; liberty to apply.

70.  Costs are nisi.  The plaintiff has judgment, but the defendant has succeeded to the extent that the award is for an amount significantly less than the claim.  I order in favour of the plaintiff to the extent of one third of his costs.