FAIRFAX LTD. v. ATTORNEY GENERAL

IN THE COURT OF APPEAL

1995, No.114
(Civil)

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J U D G M E N T

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Godfrey, J.A.:

1. This is an appeal by Fairfax Limited ("the tenant") from the dismissal by Mayo J., on 28 March 1995, of the tenant's action against the Attorney General, representing the Crown ("the landlord").

2. Two issues divide the parties; and these may be shortly stated.

3. The first issue is whether, on its true construction, a covenant contained in the lease under which the tenant claims is apt to preclude the tenant from erecting, on that part of the demised premises of which it is the tenant, a multi-storey residential development. If this issue has to be decided against the tenant, the second issue arises, whether the only legitimate inference, from the facts of the case, is that the landlord must be taken as having abandoned its right to insist on compliance by the tenant with the covenant.

4. The facts of the case are as follows.

5. By a lease dated 16 June 1862, the Crown demised to the lessee therein named the land therein described as Inland Lot 757. This can be sufficiently identified for present purposes as land lying between Bonham Road and Hing Hon Road, Hong Kong. The tenant is the owner of the leasehold interest in that part of the land now known as 9 and 10 Hing Hon Road, registered at the Land Registry as Sections H and I of Inland Lot No.757. (Inland Lot No.757 has, over the years, been much divided and sub-divided.)

6. The term created by the lease is a term of 999 years commencing from 7 January 1862.

7. The lease contained a covenant on the part of the lessee thereunder in the following terms:

"that [the lessee] shall and will, before the expiration of the first year of the term hereby granted, at his and their own proper costs and charges, in a good, substantial and workmanlike manner erect, build and completely finish fit for use, one or more good, substantial and safe brick or stone messuage or tenement, messuages or tenements, upon some part of the ground hereby demised, with proper fences, walls, sewers, drains and all other usual or necessary appurtenances, and shall and will lay out and expend thereon the Sum of Three thousand two hundred and thirty Dollars, and upwards in the erection of one or more villa residences only, in accordance with the terms of sale which said messuage or tenement, messuages or tenements, shall be of the same rate of building, elevation, character and description, and shall front and range in an uniform manner with the messuages or tenements in the same street and the whole to be done to the satisfaction of the surveyor of Her Majesty, her heirs, successors or assigns."

8. The lease also contained a lessee's covenant to repair and keep in repair "the said messuage or tenement" etc.; a lessee's covenant to deliver up "the said messuage or tenement" etc. at the end of the term with a right for the lessor to enter on the demised premises "and into any messuages or tenements, which may at any time be built thereon" to inspect the same; and a lessee's covenant not to carry on any noisy, noisome or offensive trade or business (including a number of specified trades or businesses) without previous licence.

9. It does not appear from the evidence whether there was ever erected, within the first year of the term or at all, any "villa" residence whether in accordance with the provisions in that behalf contained in the lease or not. It does, however, appear from the evidence that there has, over the course of the years, been erected on the premises demised by the lease a whole host of multi-storey residential buildings, ranging from three storeys to twenty-six storeys in height. It further appears from the evidence that no modification of the lease has ever been sought or granted, and no premium has ever been paid, for permitting the erection of any of these buildings.

10. So far as 9 and 10 Hing Hon Road are concerned, it appears from the evidence that, sometime before 1939 at the latest, a number of terraced houses had been built on this site. However, these terraced houses were demolished in or about 1957 and a 6-storey building was erected on the site. This consisted of a total of 12 units of residential accommodation with multiple ownership.

11. Between November 1992 and April 1993, the tenant gradually acquired all the units in this building, spending almost HK$60 million in the process. The tenant intended to redevelop the site and erect a much larger multi-storey building on the site. It obtained all the permissions it needed under the Buildings Ordinance, Cap.123 to demolish the old building and erect the new one.

12. By a letter dated 10 September 1993, from the District Lands Office, Hong Kong West, to the tenant's architect, the tenant was informed that its plans were in breach of lease conditions. The letter stated as follows :

" The Crown Lease governing the above property restricts development to 'the erection of one or more villa residences only'. It is my view that 'villa' means 'exclusively a self-contained house of individual and separate character standing within its own grounds'. As a result, the proposed high rise apartment building shown on your submitted plans is in breach of the lease conditions. You are therefore advised to re-design the development scheme and have the proposals re-submitted to government for consideration in due course. Alternatively your client may wish to apply for a modification of the lease. Such a modification if granted would be at a premium."

13. Although the Building Authority, constituted under the Buildings Ordinance, Cap.123, has granted approvals for the demolition of the old building and the erection of the new building, it is common ground that these approvals do not act as a waiver of any term in the lease.

14. I turn to the first issue. Is the covenant in question apt to preclude the tenant from erecting on its site the multi-storey building which it wishes to erect?

15. In my judgment, it is. In form, the covenant is a positive covenant; to build, within the first year of the term and subject to the provisions as to expenditure, rate and range, etc. "one or more villa residences only" on Inland Lot 757. But although such a covenant is positive in form, it must, in my judgment, be construed as including a negative covenant not to build any buildings other than "one or more villa residences only" on Inland Lot No.757; (support for this construction may be derived from the treatment of this sort of covenant by the courts summarized in Preston and Newsom, Restrictive Covenants, 8th Edition, 1991, at pp.121, 122). The point requires no further elaboration. I would hold that the terms of the covenant in question are indeed apt to preclude the erection of multi-storey buildings on the demised premises.

16. The second issue is more difficult. As I have said, a host of multi-storey residential buildings have been erected on various parts of Inland Lot 757 over the course of the years. Land in the immediate neighbourhood of Inland Lot No.757 has similarly been so redeveloped. The covenant, no doubt originally taken in 1862 for the purpose of controlling the nature of the development of Inland Lot 757, has long since failed to confer any practical benefit on the landlord. The landlord has not the least desire to confine future development of Inland Lot 757 to "one or more villa residences only". Its desire to rely on the covenant in the present case is actuated exclusively by a desire to extract from the tenant a premium for the grant of modification of the terms of the lease; and this is a desire which the landlord has at no time previously exhibited. Of course, a Hong Kong landlord (whoever he may be) is perfectly entitled to demand a premium for the grant of his licence or consent to the tenant to permit the tenant to do something otherwise prohibited by the terms of his lease : see, for example, Hang Wah Chong Investment Co. Ltd. v. Attorney General [1981] HKLR 336 (in which case, as here, the landlord demanding the premium was the Crown). We are not concerned with the legitimacy of the demand for the premium. We are concerned with the question whether, in order lawfully to erect its new multi-storey building, the tenant needs a modification of the lease at all. Since, as I hold, the covenant does, on its true construction, operate to preclude the tenant from erecting a multi-storey building on its site, the tenant can succeed on this issue only by proving that the landlord must on the facts of the case to be taken as having abandoned the right it would otherwise have to insist on the tenant's compliance with the covenant.

17. It is, in my judgment, important to appreciate that we are not here concerned with the court's grant or refusal, on equitable grounds, of an injunction to restrain the tenant at the suit of the landlord from erecting a multi-storey building on its site. We are concerned only to determine the rights of the parties at law; the question is whether, on the facts of the case, an abandonment by the landlord of its rights to insist on the tenant's compliance with the covenant is to be presumed. The landlord does not contend (and in the face of the authorities upon the point it could not contend) that such an abandonment can never be presumed; rather, it contends that, on the facts of this case, an abandonment should not be presumed. It says, rightly, that mere passive acquiescence in one breach or even many breaches of covenant is not necessarily a waiver for all time of the right to complain of any other breach or prospective breach of covenant. And it is true that the proper inference to draw, on the facts of a particular case, may be that, far from intending to abandon altogether its right to insist upon performance of the covenant in question, the landlord has merely chosen deliberately to sanction (whether or not in consideration of a premium) specific and limited acts which, but for the licence, would have constituted a breach of covenant. How then, in any given case, should the court approach the question : What is the inference properly to be drawn from the facts?

18. Sir John Swaine Q.C., for the tenant, cited to us "the trilogy of cases" (as he described them) commonly relied on in this connection. They are Gibson v. Doeg (1857)2 H & N 615; In re Summerson [1900]1 Ch.112; and Hepworth v. Pickles [1900]1 Ch.108. These cases establish that, in the words of Pollock C.B., in the first case, "notorious and avowed acquiescence" in a breach of covenant is sufficient evidence from which it may be presumed that the otherwise unlawful act has grown into a right, so that an abandonment of the covenant is to be presumed; thus, if you find a long course of usage which is wholly inconsistent with the continuance of the covenant relied upon, the court infers some legal proceeding which has put an end to that covenant, in order to show that the usage has been and is now lawful, and not wrongful.

19. To "the trilogy of cases" may be added Gibbon v. Payne (1907) 23 TLR 250. In this case, by a lease in 1866, the lessee of a plot of land covenanted with the lessor to complete a coach-house and stable upon the land within six months to the satisfaction of the lessor, and to keep in repair the demised buildings. The lease contained a proviso for re-entry on breach of covenant. The plot was one of a number of building plots subject to a building scheme. The scheme was subsequently modified, and no coach-house or stable was ever built. In an action by the assignee of the lessor to recover possession for breach of the covenant to repair the coach-house and stable, it was held that the true inference was that the parties intended to release the covenant to repair as regards the coach-house and stable. The Court of Appeal affirmed the decision of the judge, who had inferred from the facts that the landlord must have intended to release the tenant from the burden of repairing the stable and coach-house.

20. I would draw a similar inference from the facts in this case. For myself, I find a clearer case of "notorious and avowed acquiescence" on the part of a landlord difficult to imagine. It may be open to question whether the terraced houses erected before 1939 on Inland Lot 757 satisfied the description of "villa residences" contained in the covenant. If they did not, then, on the landlord's own case, there have been open and notorious breaches of the covenant, in so far as it affects the site with which we are concerned, for well over 50 years; but even if it is assumed that the terraced houses did satisfy the provisions of the building covenant, the 6-storey building erected on the site in 1958 manifestly did not, so that the period of "notorious and avowed acquiescence" still falls not far short of 40 years. In these circumstances, I have no doubt the proper conclusion is that the landlord has long since abandoned any legitimate interest in the enforcement of this covenant. "If you find a long course of user, such as in the present case for twenty-four years, which is wholly inconsistent with the continuance of the covenant relied upon, the court infers some legal proceeding which has put an end to that covenant, in order to show that the usage has been and is now lawful and not wrongful." : see Hepworth v. Pickles, Supra, per Farwell J. at p.110. It would be strange, as Pollock C.B. pointed out in Gibson v. Doeg, supra, if "unlawful" breaches of covenant over this length of time, in the circumstances of this case, did not have that result, when, in accordance with the policy of the law, a period of 20 years and upward is sufficient to establish other rights by limitation, or prescription, and is often sufficient (as it is) to prove abandonment of a legal easement.

21. That really concludes the matter; but I should mention briefly two further authorities cited to us which might be said to militate against the conclusion to which I have come. The first case is In Re a Compensation Board [1971] HKLR 338. The second case is T.S. Cheng & Sons Ltd. v. Attorney General, MP 1595 of 1986 (unreported).

22. In the first case, the Acting Chief Justice refused to assess compensation sought by an owner of agricultural land which was being compulsorily resumed on the basis that the applicant should be allowed the value of unauthorised erections which had been on the land for a considerable period of time. The Acting Chief Justice appears to have considered that "the trilogy of cases" depended on the circumstances and conditions prevailing in England and Wales at the date of their decision, and should not be treated as offering guidance in the circumstances and conditions prevailing in Hong Kong in 1971. Given that we are concerned with what inference ought to be drawn from the facts of any particular case, I would be prepared to assent to this. However, I do base the opinion which I have formed as to the proper inference to be drawn from the facts of this case on the circumstances and conditions prevailing in Hong Kong; and I find that the proper inference to be drawn from the facts of this case is that the landlord long ago abandoned its right to insist on compliance with this covenant in relation to any part of Inland Lot No.757.

23. In the second case, the judge (Macdougall J.) said that "the mere fact that the Crown may have permitted other lessees or their successors in title, either with or without the payment of a premium, to depart from strict observance of the terms of the building covenants relating to other sites, does not affect the right of the Crown to insist on compliance with the restrictive covenant on the present site or to demand the payment of a premium in return for its relaxation." I am prepared to assent to this, too, as a general statement of principle. But, in the present case, we are concerned with the terms of a covenant relating to Inland Lot 757 and we do not have to consider the position of lessees under leases of other land. Furthermore, it is accepted, in our case, that what the landlord has permitted here it has consistently permitted without "the payment of a premium", conduct consistent, as it seems to me, only with an abandonment of its right to rely on the terms of the covenant against the owner of any interest in any part of Inland Lot No.757. The facts here are much stronger than "the mere fact" mentioned by Macdougall J. in the passage of his judgment which I have quoted.

24. I would, accordingly, allow this appeal. I would make a declaration in favour of the tenant, in the following terms :

"On the true construction of the lease and in the events which have happened, the plaintiff as tenant is entitled without the consent of the defendant as landlord to erect a multi-storey residential building on the site of 9 and 10 Hing Hon Road notwithstanding the covenants in the said lease relating to the erection on the land demised by the said lease of one or more villa residences only and the repair and delivery up of the same."

25. If this court does make a declaration in these terms, the tenant will have succeeded in obtaining the relief it sought in the action (although its prayer for relief was somewhat differently framed) and, on the principle that costs should follow the event, I would award the tenant all its costs here and below, although it has not succeeded on the first issue as to the true construction of the covenant.

Leonard, J.:

26. I too would allow this appeal, for the reasons given by Godfrey J.A., who has set out the facts in his judgment.

27. The judge below had no difficulty in finding, as he was entitled to on the undisputed evidence, that the Crown as landlord had knowledge of the development which had taken place on the Lot. He took note of the decisions in Hepworth v. Pickles (1900) 1 Ch 108; in Re Summerson (1900) 1 Ch 112 and Gibson v. Doeg 2 H&N 615, 157 ER 53 (Nov. 24, 1857). In the latter case, Pollock CB said:

"We are of opinion that where a breach of covenant has continued for upwards of twenty years, and, with full knowledge of it, rent has been from time to time received, that fact may be left to the jury to say whether they will not presume a licence. It would be strange if a jury might presume a grant from upwards of twenty years' user, and yet not be at liberty to presume a licence. It is a maxim of the law of England to give effect to everything which appears to have been established for a considerable course of time, and to presume that what has been done was done of right, and not in wrong. That, practically, has caused a series of trespasses to constitute a right, so that it might be said a right has grown out of proceedings which are wrongful. But, in truth, it is nothing more than giving effect to notorious and avowed acquiescence. No person would have permitted a covenant to be broken for more than twenty years, unless he was aware that it was broken as a matter of right. It is not necessary, in point of form, to send the case to a jury to find the facts which the Judge may tell them they ought to presume."

28. In Re a Compensation Board Ex parte Attorney General (1971) 1 HKLR 338, Blair Kerr, Ag. C.J., said in reference to the three cases cited above:

"This Court is not bound by decisions of the English Court of Appeal or by decisions of any English court inferior to the Court of Appeal. Furthermore, it has frequently been said in this Court that when a case decided in some other part of the world is cited, a Hong Kong Court should carefully consider the circumstances and conditions prevailing in that other jurisdiction at the time when the case was decided and should compare those with the circumstances and conditions prevailing in Hong Kong today.

This applies with particular force to the proceeding now before us. We have had cited to us old English cases decided under circumstances very different from those prevailing in Hong Kong during the last 20 years or so; and in my view this Court should scrutinise those decisions with the greatest care."

29. The Acting Chief Justice did not say that the law was otherwise than as stated in those English cases. He appears to have intended to say no more than that in applying the law to the facts the court must take into account all relevant circumstances. Approaching the matter in that way and making particular reference to the special circumstances existing in Hong Kong in 1949 and for some years thereafter, he found that there was no evidence to support an inference of the grant of a licence to build especially having regard to the fact that the Crown had continued to accept a nominal rent only appropriate to agricultural land after buildings had been erected upon it. The circumstances were that during the relevant period a great influx of people from Mainland China had occurred and those people had to find shelter. The inaction of the Crown had to be looked at against that background. It was a compensation case and the facts bore no resemblance to those presently under consideration.

30. With regard to the reference by Blair Kerr, Ag. C.J. to the citation of old cases, I note that, in the year following the report of his judgment, the report was published of the House of Lords case of Banning v. Wright (1972) 1 WLR 972 at p. 989 where Lord Morris cited with approval Hepworth v. Pickles and Gibson v. Doeg. He said:

"If a lessor is aware of a continuing breach and acquiesces in it for a long period the court may presume either that he has released the covenant or that he has granted a licence for some particular user."

31. Lord Morris did not say that the court must so presume. Clearly, each case must be decided upon its own facts.

32. The judge below considered that the approach of Blair Kerr Ag. C.J. was a sensible one and I respectfully agree. The question is, however, whether applying the law to the facts of the present case, including the circumstances prevailing in Hong Kong during the relevant period any reasonable inference can be drawn other than that there was a release of the covenant in question. The judge declined to make the declaration sought, but he did not say why. He did not point to any particular fact or any circumstances in Hong Kong which might justify a refusal to draw what must otherwise be a plain and obvious inference from the facts. There are no such circumstances. The evidence is overwhelmingly in favour of the presumption of a release. For many years past, the Crown has been aware of some 18 developments between 1957 and 1992 in clear contravention of the covenant in question upon the land the subject of the lease. It has done absolutely nothing to prevent it : nor has it sought to profit from the development by charging a premium. It was charging premia for developments on other land and there is no evidence to suggest that it could not have exacted a premium had it chosen so to do when the various buildings were built in breach of covenant upon the land the subject of the lease with which this court is concerned.

33. By contrast, in the case of TS Cheng & Sons Ltd. v. Attorney General MP 1595 of 1986 (unreported), a partial modification on payment of premium had been agreed for the subject site, with two other sites also subject to agreed modifications, one on payment of a premium, the other in compromise of an action on the express condition that the Crown was not waiving any term in the Crown lease for the parent lot. It is not surprising that Macdougall J. felt unable to conclude that the covenant in that case had been released. The case may be distinguished on its facts from the present one where the Crown as landlord has been consistent in ignoring all breaches of the covenant over a period of at the very least 35 years.

34. There is evidence that a search of the files of the Crown as landlord for any application for permission to build drew a blank, but on the question of knowledge that evidence is neutral. The suggestion that the Crown as landlord did not know of the developments is unrealistic.

35. I am not unmindful of the fact that in the Buildings Ordinance since 1955 it has been provided that the consent of the Building Authority for building works shall not be deemed to act as a waiver of any term in the lease. See e.g. section 14(2) of the Buildings Ordinance, which was brought to the attention of the appellant when approval was granted on 3rd June 1993 for the erection of a 28-storey building on sections H and I of the Lot. The appellant does not rely on the building consent. The question is whether by 1993 the covenant had already gone.

36. It is also the case, as has been pointed out by Mr Andrews for the respondent, that in Hepworth v. Pickles (supra) emphasis was placed upon the acceptance of rent with full knowledge of a breach of covenant whereas acceptance by the Crown of rent in Hong Kong would not operate as a waiver of a breach of covenant.

37. This, however, is not a case where the Crown is taking action in an attempt to forfeit and re-enter for breach of covenant or where it is seeking to enforce the covenant. It has no wish to do so.

38. Mr Andrews submits quite correctly that waiver of a breach does not necessarily constitute release of the covenant. He contrasts the period of the Crown's inaction with the 999 year term of the lease and submits that it is open to the Crown to ignore all breaches for many years and then, when it chooses, to look for a premium for a proposed future breach. Whilst conceding that the court must look at all relevant circumstances, he suggested that what happened on other plots has limited value. But all the plots upon which the 18 developments took place were governed by the very same covenant in the very same lease and the evidence of consistent inaction in relation to those developments is highly relevant.

39. This is not a case where there is a discretion to be exercised. Either the covenant has been released or it has not. If it has been released, the financial consequences are not a matter to be taken into account by this court. The test is an objective one : see Central Estates (Belgravia) Ltd. v. Woolgar (No. 2) (1972) 1 WLR 1048 at p. 1054-1055. I find that the evidence permits only one conclusion - that the covenant has been released. The plaintiff has discharged its burden and is entitled to the declaration set out in the judgment of Godfrey J.A.

40. I too would award to the plaintiff all its costs here and below.

Mortimer, J.A.:

41. I agree and would allow this appeal but would also add a few remarks of my own as we are differing from the judge.

42. On the first issue, for the reasons given by Godfrey JA, I also would hold that the covenant although in positive terms is apt to preclude the tenant from erecting the multi-storey building he proposes.

43. The second issue I find more difficult. Before this Court there is no dispute about the applicable law. Mayo J. below founded himself upon the approach of the Court in Re a Compensation Board Ex parte Attorney General [1971]1 HKLR 338 and concluded:

"I consider this to be a sensible approach as to whether there has been waiver of the restrictive covenant. The fact that the Crown has not seen fit to enforce this covenant against other owners of the Lot is insufficient reason to hold that there has been a waiver of the covenant and that it is unenforceable."

With respect, if the judge thought that the above case lays down any principle which leads to any different or particular "approach" in the instant case he misled himself. In Re a Compensation Board turned upon the then unusual but relevant facts and circumstances prevailing in Hong Kong. Here also the case turns upon its particular but unremarkable facts. Neither party has suggested otherwise. These facts are not in dispute - including the judge's finding that " ... the Crown must have been fully aware of the development which had taken place on the Lot". By "the Lot" he meant the land the subject of the lease.

44. On this issue the question for this Court is whether the judge's decision is shown to be wrong on the undisputed facts. Or put another way whether in all the circumstances the tenant is able to show that the only proper inference is that the landlord has abandoned altogether its rights under the covenant in this 999 year lease as opposed to having acquiesced only in a particular breach.

45. For my part, I would not be prepared to hold that the terrace houses built on 9 and 10 Hing Hon Road long ago which were demolished in 1957 were erected in breach of the "villa only" covenant. The 6-storey building, however, was undoubtedly built in breach of the covenant in 1957. The landlord took no action on that breach. Now the offending 6-storey building has been demolished and the site is empty. By its letter of 10th September 1993 the landlord seeks to enforce the covenant.

46. Mr Andrews, for the Attorney General, contends that even if the landlord has acquiesced in the tenant's breach since 1957 and that, therefore, for many years the landlord has been unable to seek any remedy, it is not to be presumed from these facts that the landlord has abandoned altogether its rights under the covenant. In particular, he says that as the 6-storey building has been demolished and the site is empty, now is the appropriate and only time since 1957 when the landlord can enforce the covenant.

47. Further, he submits that the landlord's failure to take any action in respect of the many buildings erected in breach of the covenant on other parts of the land the subject of the original lease indicates only that the landlord has acquiesced in respect of those other breaches even though the buildings were erected without modification of the covenant, licence, permission or premium.

48. Had the original lease concerned 9 and 10 Hing Hon Road only, I would have found the landlord's argument persuasive. It is relevant that this is a 999 year lease and failure to enforce the covenant in 1957 would not, without more, justify the conclusion that the landlord has abandoned its rights altogether. Such would be consistent only with acquiescence in the erection of the 6-storey building - now demolished.

49. But 9 and 10 Hing Hon Road does not stand alone. Both parties agree that the landlord's approach to breaches on other parts of the original lease is relevant. Obviously, the circumstances must be examined with care. Acquiescence in one breach in respect of one building in one place does not necessarily indicate that the landlord has abandoned its rights in another place. But the landlord's case was not that it had acquiesced in respect of some breaches only. Its case was that it was unaware of the breaches - an impossible contention on the facts and rejected by the judge.

50. Given the landlord's failure to take any action in respect of the multiple breaches which have taken place over the years on the land the subject of the original lease, including 9 and 10 Hing Hon Road, I am satisfied that it is not possible to reach any conclusion other than that long ago the landlord abandoned its rights under this covenant altogether. In finding otherwise on these facts the judge fell into error and allowed himself to be misled by the Compensation Board case.

51. I would allow the appeal and make a declaration in favour of the tenant in the terms proposed by Godfrey J.A. together with an order nisi that the tenant should have its costs here and below.