HING WONG ENTERPRISES CO. LTD. v. THE DIRECTOR OF LANDS

1997, No.AL84

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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The issue

This application for judicial review concerns a plot of land in Kwai Chung. By a grant dated 19th January 1977 the Government entered upon a lease with the applicant for a term which was to expire on 27th June 1997. It was a term of the lease that the lot was not to be used for any purpose other than the tanning and dressing of leather. In 1987, the Hong Kong Government issued a pamphlet in which it explained the impact of pending legislation upon leases in the New Territories and also how it intended to deal with leases not extended by the proposed law beyond June 1997, including leases called "leases for special purposes" of which the applicant's lease was one. It explained the circumstances in which it intended to extend such leases.

The Government has, however, refused to extend the applicant's lease and it is that refusal which the applicant seeks now to quash. It is said that the announcement of 1987 gave to the applicant a reasonable or legitimate expectation that the lease would be renewed, and that the decision not to renew it is such as to call for this court's intervention in the exercise of its supervisory jurisdiction in the realm of judicial review.

The respondent asserts that the issue is not amenable to judicial review because the exercise of the relevant function does not fall within the public domain or, alternatively, that the decision of the respondent has not been shown to be either Wednesbury unreasonable, nor to have been based upon matters taken into account which were irrelevant, and it is further contended that such matters that were taken into account were clearly relevant.

The key documents

It seems common ground that before 1974, a number of tanneries operated in Sheung Shui, but that the operators surrendered land from which they then operated in return for grants of land by the Government. One such grant was made at Kwai Chung Lot 277 and Mr Yuen, a director of the applicant company, whose evidence is before me in the form of an affirmation, was a tenant in common with other operators of that land. He ran a factory there, and he says that he still does. It is said by him that the facilities were inadequate and in the result representations resulted in the grant of adjacent land, namely, Lot 327. Lot 327 is the land which is the subject of this application.

(1) The Lease

The lease is dated 19th January 1977. It is for a term of 99 years less three days from 1st July 1898.

The following terms in the Special Conditions appear to me to be the most relevant for the purposes of this case :

(i) Clause 4 precludes the grantee from assigning the lot.

(ii) Clause 6(a) is essential to this case and it reads :-

"6. (a) The lot shall not be used for any purposes other than for the purposes of tanning and dressing of leather. The grantee shall before carrying on the tanning and dressing of leather on the lot or any part thereof obtain a licence from the Director of Urban Services in accordance with the Offensive Trades (New Territories) Amendments Regulations and shall in all respects comply with any conditions (as the same may be varied or amended from time to time) imposed by the said Director upon the granting or renewing of such licence."

(iii) Clause 5 required the grantee to develop the lot by the erection of a building within two years of possession, and stipulated a minimum sum to be expend upon that development. There was however a limitation on the type of building to be erected and that limitation was found in Clause 7, the relevant parts of which read :-

"7. (a) No building or buildings shall be erected on the lot except a factory or factories ancillary offices and such quarters as may be required for watchmen or caretakers who, in the opinion of the Commissioner for Labour, are essential to the safety and security of the buildings. ...

(b) In addition to a factory or factories referred to in (a) hereof, a warehouse or warehouses may be erected on the lot but not in substitution thereof provided that such warehouse or warehouses erected or to be erected on the lot shall not be used for any purpose other than for the purpose in connection with the manufacturing processes carried out in the said factory or factories."

(2) The Policy Statement

I turn now to the policy statement, as it is called, which is the announcement included in the pamphlet issued by the Government in relation to extensions of leases, which is dated April 1987.

It stated, as was by then well known, that all New Territories leases were to expire on 27th June 1997. The New Territories Leases (Extension) Bill was automatically to extend leases in the New Territories from their existing expiry dates until 30th June 2047, but the new law was not to apply to certain categories of lease. One of these categories was constituted by leases for special purposes. Their nature is described in the pamphlet :

"10. Leases for special purposes are those granted, usually by private treaty, for specific purposes such as public utilities, subsidised schools, welfare facilities, recreational clubs, petrol filling stations, kerosene stores, piers, churches, civil servants co-operative and Government built housing schemes, special industries and airport support services and industries. There are 842 leases for special purposes in the New Territories. A full list of leases for special purposes is given in the appendix to this pamphlet."

Then there is a heading in the pamphlet "Policy on extension of leases for special purposes". The relevant part of the relevant paragraph reads as follows :

"13. Each lease granted for a special purpose will be examined before a decision is taken on extension. However, in general, leases for special purposes will be extended unless the land is required for a public purpose or is no longer being used for the purpose for which it was originally granted. Most extensions will be to 30 June 2047; some might be for a shorter period if the land is likely to be required for a public purpose before that date or is unlikely to be needed for its original purpose for the full period. ..."

Paragraph 14(b) makes express reference to leases for special industries and it provides as follows :

"14. The main categories of leases for special purposes and, subject to the general principles outlined in paragraph 13, the policies for dealing with each category are as follows :-

(a) ...

(b) Leases for Special Industries

Leases granted under the special industries policy (that is for industries unable to operate in ordinary multi-storey industrial buildings), including leases granted to The Hong Kong Industrial Estates Corporation, will normally be extended to 30 June 2047."

Then there is a paragraph entitled "Procedures for extension of leases for special purposes" and it begins thus :

"15. The extension of leases for special purposes will be dealt with as quickly as possible. However, it will take some years to examine the individual circumstances of all such leases. Once it has been decided that a lease for a special purpose should be extended, the appropriate lease documentation will be completed. The opportunity will be taken to include, where necessary, modern lease conditions. Thus, for example, a clause, now standard in new leases, providing for the surrender of the land should it no longer be needed for the purpose for which it was originally granted will be incorporated. ..."

The 1995 Decision

In or about 1981, a building was duly erected upon the site. The years that followed, and this seems clear from the evidence produced and I do not think disputed by either side for me, were peppered with allegations by the Government that the applicant was in breach of Clause 6 in that it was said that the premises were not being used for the purpose of tanning and dressing of leather, but were being used for the storage of goods, as well as with frequent requests by the applicant for a modification of the special conditions to permit user to general industrial and godown purposes and also to permit assignment. None such application came to successful fruition.

In March 1995, the Government informed the applicant by letter that it had decided not to renew the lease. It is an important letter, and this is what it says :

" The above lot is held by you under New Grant No.5418 dated 19.1.1997. You are probably aware that the lease term covering the lot will expire on 27.6.1997. The extension of this term through to 2047 is not provided for under the New Territories Leases (Extension) Ordinance 1988 because the above lease has been classified as a special purpose lease.

The possible extension of all special purpose leases are individually considered having regard to the circumstances of each cases with particular regard to whether the land is required at some future date for a public purpose, and whether the site is currently being used for the special purpose for which it was originally granted.

Recent site inspections by this office have revealed that the lot is being used for godown/storage purposes, in contravention of Special Condition No.6 (a) of the Conditions of Grant under which the above lot is held. Furthermore, my records indicate that for many years the lot has not been used for the purposes of 'tanning and dressing of leather', the original purposes for which the lot was granted.

In the circumstances, Government is unable to extend the lease term of the above lot. You are therefore required to deliver possession of the lot to Government upon expiry of the lease on 27.6.1997."

No order is sought in this application to quash the 1995 decision.

The 1997 Decision

Correspondence followed, to some of which it will be necessary to refer. Some of it was in 1995, and it was resumed in 1997. In April 1997, agents for the applicant wrote to the respondent, stating that machines had now been installed on site for the purpose of tanning leather and that a sewage treatment plant had been ordered, and the respondent was urged on the applicant's behalf to reconsider his decision not to renew the lease. He was also asked to reconsider their request to change the use from tannery to general industrial and godown use. Neither request met with success and by letter dated 13th June, the director replied saying that it had been decided that the lease would not be extended upon expiry on 27th June 1997.

It is this decision ( the 1997 decision ( communicated by the letter of 30th June 1997, which is the subject of this challenge. The applicant seeks an order of certiorari to remove and quash the decision, and an order of mandamus requiring the respondent to consider the renewal or extension of the term.

Behind that letter of 13th June 1997 was a meeting on 4th June 1997 at which the central decision was taken. The matters put to, and considered by, that meeting are summarised in an internal minute dated 4th June 1997. The contents of that minute are evidently central to this case, and read as follows :-

"1. KCTL 327 is held Hing Wong Enterprises Company Limited since 1977 by private treaty under a non-assignable Special Purpose Lease (SPL) with the user restricted to 'the tanning and dressing of leather' (S.C. 6a).

2. From the occupational history of the building on this lot, it is believed that the lot has never been used for leather tanning and dressing purposes. The lot was found to be used for the purpose of warehousing, which is in breach of the lease conditions. Lease enforcement action has been taken several times by DLO/KT on 12.6.89, 15.11.89 and 7.9.91. The grantee only purged the breaches temporarily and reinstated the illegal user shortly afterwards. There was never any sign that the grantee ever intended to carry out tanning operations on the lot.

3. The grantee, since 1983, submitted applications to widen the user restriction from tannery to general industrial/godown and remove the assignment clause. Site development was completed (O.P. issued) on 17.12.1981. The proposed modification was favorably considered by LAM in 1984 (Item 3 of 29.8.84) and 1989 (Item 3 of 4.1.89) as the proposal would achieve conformity with the statutory zoning of 'Industrial' and was desirable from the planning point of view. The applications were not pursued (LAM: Item matter arising of 17.5.89) in the light of the Director of Industry's opposition. He concluded that the grantee should surrender this lot if he could not use it for its intended purpose i.e. tanning and leather dressing industry.

4. In recognition of the above history and the on-going illegal godown/storage user, CES/EM advised Hing Wong Enterprises Co. Ltd. on 24.3.1995 that the SPL would not be renewed. The Government's position was re-affirmed in writing by GLA/EM on 1.9.95 and CES/EM on 18.3.97. Following the advice on the non-extension of lease, the site has been included into the land sales programme for 97/98 and is scheduled tentatively for disposal by way of tender in early 98.

5. Through Albert So Surveyors Ltd., the grantee on 11.3.97 and 9.4.97 requested Government to reconsider the case and extend the lease beyond 1997, as the lot is now restored to tanning and leather dressing industry. The surveyor's letter is attached at Appendix 1.

6. From the sequence of events, it would seem reasonable to draw the conclusion that the moving of a few batches of leather and items of machinery by Hing Wong Enterprises Co. Ltd. into the building is purely an attempt to secure a renewal. Should a lease extension be granted to the grantee for another 50 years after 27.6.97, recurrences of the breach of user clause are anticipated.

7. Furthermore, Hing Wong Enterprises Co. Ltd. are still requesting Government to reconsider their request to change the use of the subject lot from tannery to general industry/godown use. In this regard, there is no justification for Government to extend a special purpose lease of which the grantee is reluctant to use the lot for the purposes it was originally granted and has submitted application to modify the special user to general user. If the tannery is really declining as claimed by the grantee, it certainly does not justify the retention of the site.

8. The established Government policy applicable to the extension of SPL was promulgated in 1987 and set out in the booklet 'Extension of Leases in the New Territories' published in April 1987. The decision not to extend the SPL of KCTL 327 was in accordance with the above policy. In a similar case of Lot 473 in DD443 (the Gas Production Plant) at Yeung Uk Road, Tsuen Wan, LAM (Item 4 of 29.11.95) also refused to extend the SPL beyond 1997 because the site was no longer used for gas production. There are no grounds to justify a departure from policy in this case."

The argument

The respondent argues that the decision under challenge is not amenable to judicial review, for it is a private matter between the Government as landlord and the applicant as tenant. The applicant says that the real test is whether the function which it is sought to review is governmental in nature and whether it has a public flavour or element. I have taken the view that the point is not one which it is necessary for me to decide, for, in my judgment, the applicant so obviously falls short of establishing that the challenged decision, even if amenable to review, should for any of the grounds permissible in this realm succeed, that it suffices to dispose of the application for me to assume, without deciding, that the decision is one amenable to judicial review.

The matter was couched in the notice of motion on the footing that the public statement gave rise to a legitimate expectation of an extension of the lease, and further that the decision not to extend is, in any event, Wednesbury unreasonable on the basis, as I understand it, that what the applicant was doing self-evidently falls within the contemplation of Special Condition 6.

However, as the argument has been developed by Mr Tang S.C., on behalf of the applicant, he embraces the suggestion that the Director of Lands has failed to take into account a material relevant consideration, most particularly because it is the case, he says, that the premises have, since 1992 at least, been used for tannery related purposes, namely storage, airing and drying and that that constitutes a purpose for which the lease was granted. The Director of Lands has, he says, failed to take that on board, and had he properly appreciated that this is how the property was being used, and furthermore, that this fell within the umbrella envisaged by the special condition and the policy statement, his decision might well have been different; and, that being so, should now be set aside so that he might, upon a proper basis, reconsider the matter.

Legitimate expectation

Where it is sought to rely upon a representation as giving rise to an expectation on the part of the promisee, it must be a representation which is "clear, unambiguous and devoid of relevant qualification" : Hong Kong and China Gas Co. Ltd. v. Director of Lands [1997] 3 HKC 520. What is self-evident, it seems to me, is that there was in this particular policy statement no blanket undertaking. It was a statement of policy which was to be exercised only in general but subject to the circumstances of each case and that being so, the relevant question to ask is what is it that the promisee was entitled to expect, if anything. It cannot have been an expectation that an extension would be granted in all cases. So long as it could be shown that at a particular given date, the purpose of the grant was being met upon the land in respect of which the lease was granted, it could not have been a legitimate expectation that, willy-nilly, leases of this kind would be renewed regardless of the conduct of the grantee, regardless of the breaches and their nature, and in particular, that the lease would be renewed if only the original purpose was at a given time in progress, even in the face of cogent evidence that the applicant was not committed to continuing that special purpose. If there was an expectation, it could only be this : that the government would examine each case on its merits; that there would be many factors which in a particular case dictated whether the lease would or would not be renewed and that whilst generally it would be the case that if the land was not required for public purposes, and if the purpose of the grant was still under fulfilment, the lease would be renewed, nonetheless the Director of Lands would address the kind of matters which any landlord would address in deciding whether to allow a tenant who otherwise had an expectation of renewal to remain as tenant ( for example, questions as to the conduct of the tenant, past breaches, the likely future conduct of the tenant, the likely future use to which the premises would be put, the motive behind the request for a renewal, and whether recent remedial conduct was genuine, or whether on the other hand, it was a sham in order to obtain renewal.

Common sense dictates that it was addressing continuity of use, and did not embrace a tenancy in respect of which the tenant was, until shortly before the trigger date frequently in breach, nor someone who was not seriously using or intending to use the land for the designated purpose. That becomes the more evident when paragraph 13 of the policy statement is viewed in conjunction with paragraph 15. It was envisaged that the lease would fall to be considered from that time on, namely, from 1987, and well before the expiry date, and it is to be noted that significant breaches in this case on the part of the applicant took place after the date of the policy statement.

In other words, I do not think that this part of the policy statement is sufficiently clear in its ambit to give rise to the expectation to which the applicant wishes to draw this court. It is hedged about with too many implicit qualifications to do so.

But I add this : even that view is not necessary for my decision, for even assuming that the policy statement gives rise to an expectation that those who continue to use the allotted land for the purpose for which it was originally granted would be given extensions, then it is nonetheless not shown in this case that the Director of Lands has made a decision which is to be impugned.

The correspondence

A brief review of the history of this case at this point is appropriate. A building was in the event erected in 1981. It was already in 1982 that the applicant was seeking a modification of the special conditions to permit him to use these premises other than for their original purpose. Correspondence thereafter shows regular return to this theme, praying in aid the cheaper cost of running tannery businesses on the Mainland. Then in about 1985 and beyond, there were a number of occasions upon which the authorities noticed that the building was being used to store non-leather goods and enforcement action was threatened. None of the alleged breaches, either then or subsequently, was denied by the applicant.

Some of the relevant correspondence provides a flavour of the history of this matter. On 31st October 1989, the District Lands Officer wrote to the applicant and said this :

"... I am conscious of the fact that this lot was granted specifically for the purposes of tanning and dressing leather to enable you to relocate your tannery business following clearance in 1977 of your former tannery in Sheung Shui. However, it seems to be the case that you have never occupied the building for that purpose and indeed for several years allowed it to stand empty."

On 6th December 1989, the respondent wrote to the Secretary for Environment, Planning and Lands and in the course of that letter asserted in terms that the building was being used for storage purposes. On the last page of this letter, we see the following :-

"... As you may be aware even if we vacated all the goods that are stored in the building, it would be extremely difficult for us to resume tannery business there. ..."

And in January 1990, the Director of Buildings and Lands informed the applicant that the Government found no valid reason to accede to the request for a modification of the conditions of grant. "In arriving at this decision", the author of the letter says, :

"... I have had regard to the fact that this lot was granted to your company for the specific purpose of tanning and dressing leather upon clearance from Sheung Shui. I am also aware of the views of the Director of Industry who considers that the tanning industry in Hong Kong still has good prospects and can, therefore, ill afford to lose this lot to general industry usage."

And he concludes the letter by saying :

"I appreciate that this decision prevents you from achieving an alternative use which you consider more appropriate but I should emphasise that it does not prevent you from using the lot for the purpose for which it was granted."

That was in 1990. It is to be noted that the policy statement upon which the applicant so heavily relies was a statement issued almost three years prior to this correspondence with the applicant.

It is instructive to note what then transpired, not least since 1992; which was the year from which, according to Mr Tang, his clients have been conducting a proper tannery business or an allied business from these premises.

In March 1991, the applicant wrote to the District Lands Officer, talking about seeking a temporary waiver of the user clause; suggesting in that letter that they wish to operate a full scale tannery on the two lots; stating that the lot in question was being used as a reserved workshop and a storage area for the tannery and that about half of the floor areas were lying vacant. In May 1991, the District Lands Officer wrote again to the applicant, pointing out that it had been discovered that yet again the applicant was using the lot for an unauthorised use. That was not denied.

In October 1994, that is some two years after it is now said that the applicant was using the premises for the prescribed purposes, a letter was written on their behalf to the District Lands Officer in which it was said that if certain applications of theirs were refused, they would have no alternative but to move and transplant the tannery equipment from their factory at the adjacent lot to the subject lot, to fulfil the requirement under the conditions of grant.

In March 1995, a representation was made on behalf of the applicant by a firm of development consultants and surveyors, in the course of which it was said :

"Please be informed that the client to the captioned lot is commissioned to start refurbishment work to enable the existing factory building to be reverted to be used as tanning and dressing of leather, in addition to being used as storage area for the tannery business."

I pause to comment that there is no suggestion until this stage, nor indeed later in any of the correspondence, that the premises were being used for the airing and drying of leather.

In March 1995 came the decision of the Director of Lands not to extend the lease beyond June 1997. And in April of the same year, the same development consultants wrote to the Chief Estate Surveyor, stating that it was the intention of the owners to renovate the existing building on the captioned lot to enable it to be used more efficiently for tanning and dressing of leather.

And nothing, so far as the correspondence is concerned, was then heard on behalf of the applicant until March 1997 when surveyors writing on behalf of the applicant to the Chief Estates Surveyor requesting a review of the 1995 decision, represented that the site was being used as a reserved workshop and storage area for the tannery. They further went on to say that in view of letters in March and September 1995 :

"... our clients have ceased using the above property for godown/storage purposes and the breach of Lease Conditions has been rectified. ... They have ... moved part of the present tannery operation in the adjacent lot ... and re-established the tannery on the above lot."

Furthermore,

"... that a number of tannery machines are now being installed on the site"

and that the site was "now" being used "for tannery purposes". In the circumstances, they made a request for a re-grant of the above lot. All this in the light of the suggestion that the respondent in this case has made a fundamental error in concluding that the premises were not being used for the purposes for which they were leased to the applicants.

In April 1997 the same surveyor wrote to the Director of Lands, stating that :

"The owners of the above lot, ... were granted the lot ... for the purpose of tanning and dressing of leather. ... Because of the declining tannery trade and escalating operating costs in Hong Kong, the above building could not be put into full use and could only be used as a reserved workshop and storage area for tannery ...".

They then pointed out or suggested that the owner of the lot :

"... have purged all the breaches and restored the site to its legal use, i.e. tanning of leather. They have already installed several tannery machines on site and also ordered the sewage treatment plant suitable for tannery operation".

If that representation is true, it follows that it was only in the Spring of 1997 that the applicant was moving machinery in order to establish a tannery operation in the premises. It is not unimportant to note that in the same letter the surveyors renewed the request for a change of use "... from tannery, which is a declining and polluting industry, ... to general industrial/godown use which still has some demand here."

Finally, on 23rd May 1997, the same surveyors wrote, stating that the operation of the tannery had started about a week ago and that : "The site is now fully put into its legal tannery use and there is no breach of Lease Conditions."

It is against the background of that history and that correspondence, particularly in 1997, that the decision of 4th June, which is now sought to be impugned by the Director of Lands, was made.

What the correspondence shows

There was, until very recently, no suggestion that the use to which the applicant was putting the place complied with the purpose for which the lot was leased to them; no suggestion that the airing and drying of leather was sufficient to meet the requirement; and, in particular, no suggestion that for at least six or seven years, the place was used for drying and airing of leather, and no suggestion that in so using it, Special Condition 6(a) was being fulfilled. It seems to me self-evident that the applicant accepted that the land was not so used. Allegations of breaches in 1995 were not accompanied by any suggestion that apart from breaches and storage, the building was otherwise being used to fulfil the condition and no suggestion that the use to which it was put was sufficient to comply with the condition in Clause 6(a) of the lease and to fulfil the policy espoused by the Government as evident from its policy statement in April 1997. The applicant was after all the best person to know whether what was going on constituted the valid purpose or not ( whether it constituted tanning or not. They were the tanners. Beyond that, if it was thought that they were fulfilling the conditions of Clause 6(a), what then were they doing in 1997 by importing machinery and flourishing before the Director of Lands this importation of machinery to the building as well as the laying of sewage works, if it was not to persuade the Government that here, at long last, was a serious attempt to fulfil the key condition of the agreement? All parties were self-evidently treating Clause 6(a) as requiring an actual tanning process and not a process with goods that had already been tanned. It is now said that the Director has failed to take into account relevant matter. But it was never a suggestion made, and the applicant has failed to persuade me that it was a matter which fell for serious consideration.

The width of condition 6(a)

But beyond that, I am satisfied that Clause 6(a) does not embrace ancillary and post tanning activities. There is no qualification to section 6(a) such as that which we see in the Special Conditions to the lease which is the subject of the judgment in Hong Kong and China Gas Company Limited v. The Director of Lands, where the special condition read as follows :-

"The lot shall be used for the production and storage of gas and for commercial purposes specifically associated with selling gas and providing gas services only."

Clause 6(a), in conjunction with paragraph 13 of the policy statement, envisaged in my judgment that the policy of the Government would be engaged in favour of renewal if the premises were being used for the purpose of tanning and dressing, and not for the purpose of handling or dealing with the goods already tanned and dressed. Even if the contention of fact holds good, namely, that the premises are in fact being used for airing and drying, then it is the fact that the premises are being used for the airing and drying of goods already tanned. That is self-evident from paragraph 17 of the affirmation of Mr Yuen where he says :-

"Since 1991 up to the end of 1996, the lot had been used for the airing and drying or the storage of tanned leather ..." (emphasis added)

It is the process of tanning, in my judgment, that is the essence of Clause 6(a) and it has not been shown that the airing and drying of leather already tanned falls within the contemplation of Clause 6(a) and it follows, in my judgment, it has not been shown that the Director of Lands misinterpreted Clause 6(a), nor has it been shown that he failed to take into account relevant matters or has misapplied paragraph 13 of the policy statement, and it has certainly not been shown that his decision was irrational. It should also be noted that the decision was based not solely upon the question of non-use for the actual tanning process; it was based also on past breaches in relation to storage and the use of premises as a godown, and furthermore, based on the clear reluctance ( a reluctance continuing in 1997 ( to carry on business as a tannery as was evident as late as the request in 1997 to change use. These are all proper matters for the Director of Lands to have taken into account, and I shall not interfere with his decision.

Conclusion

Accordingly this application is dismissed. The costs of this application will be to the respondent.