TOP TALENT DEVELOPMENT LTD v. TOP SYSTEM INVESTMENTS LTD

HCA 3120/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3120 OF 2003

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REASONS FOR DECISION

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Background

1. By a Summons dated 11 November 2003 the Plaintiff ("Talent") applied for Orders that the Defendant ("System"):-

(1)	"be restrained until the conclusion of the trial of this action or further order, whether through its officers, servants, agents or otherwise howsoever, from using the Premises (as defined in the Re-Amended Statement of Claim) or any part thereof as a hotel or guesthouse";
(2)	"be restrained until the conclusion of the trial of this action or further order, whether through its officers, servants, agents or otherwise howsoever, from erecting or installing any signs or signboards which suggest that the Premises or any part thereof is being used or is going to be used as a hotel or guesthouse inside or outside the Building (as defined in the Re-Amended Statement of Claim)"; and,
(3)	"do within 7 days dismantle or remove any signs or signboards which suggests that the Premises or any part thereof is being used or is going to be used as a hotel or a guesthouse, whether the said signs or signboards are inside or outside the Building".

2. The Re-Amended Statement of Claim ("RAMSOC") defines "the Building" as "Lucky Centre situated at Nos. 165-171 Wan Chai Road, Hong Kong". RAMSOC defines "the Premises" as "the whole of First Floor to the Fourth Floor including the Ground Floor Entrance, the whole Basement including Ground Floor Entrance of the Building". I adopt those definitions in this Decision.

3. Talent is the owner of the Building (including the Premises). System has let the Premises from Talent for an initial period of 4 years commencing on 1 February 2003 with an option to renew for 2 further periods of 3 years each.

4. Clause 2 of the Tenancy Agreement dated 30 January 2003 between Talent and System provides as follows:-

"The Tenant to the intent that the obligations hereunder shall continue throughout the said term of tenancy hereby agrees with the Landlord as follows:-

....

(m)

Subject to Clause 11 herein, not to affix or display or permit or suffer to be affixed or displayed within or outside the said premises any signboard, sign decoration or other device whether illuminated or not which may be visible from outside the said premises without the written consent of the Landlord first had and obtained.

....

(p)

To obey and comply with and perform all the covenants terms and provisions in the Deed of Mutual Covenant ['the DMC'] and Management Agreement (if any) relating to the said building so far as they relate to the said premises and to indemnify the landlord against the breach non-observance or non-performance thereof.

...."

5. Clause 11 of the Tenancy Agreement provides:-

"	(a)	The Landlord shall allow the Tenant to install (at the Tenant's own costs) shop front signage at the Ground Floor lift entrance, the Basement entrance and also a signage board outside the wall facing Wanchai Road between 1st Floor Level and 4th Floor Level without charge (details and design are subject to further confirmation by Landlord and Tenant).
	(b)	All design of the signage and images and the content of the material shall be subject to the approval of the Landlord and at the costs of the Tenant.
	(c)	The Tenant shall be fully responsible for all costs and expenses in relation to the erection, installation and usage and maintenance of the said signage.
	...."

6. Clause 20 of the DMC dated 15 January 1985 for the Building provides as follows:-

"The owner or owners for the time being of any undivided share or shares and part or Floor in the said Premises and the said Building shall at all times during the subsistence of this Deed be bound by and observe and perform the covenants and conditions hereinafter contained, namely:-

....

(e)	Not under any circumstances to use or permit or suffer any part or floor or other area wherever situated to be used for the purposes of a boarding house, apartments, ... or for any obnoxious purpose.

.... "

The words "the said Premises" in the DMC refer to the ground (registered in the Land Office as Subsections 1, 2, 3 and 4 of Section A of Inland Lot No.438) on which the Building is situated.

7. On 1 November 2003 System started to run a hotel, known as "Earl's Hotel," in the Premises. System also erected signs on the external walls of the Building with the name "Earl's Hotel" in English and Chinese.

8. RAMSOC seeks a final injunction to prevent System from using the Premises as a hotel in breach (Talent says) of Tenancy Agreement cl. 2(p) and DMC cl. 20(e). RAMSOC also seeks an Order that System remove any signs from the Building's exterior suggesting that a hotel business is being run from the Premises.

9. At the end of the hearing before me, I granted the interim relief sought by Talent. I briefly set out below my reasons for doing so.

Discussion

10. Mr Liu (appearing for Talent) drew my attention to the following passage in Hong Kong Civil Procedure 2002 Note 29/1/32 (p. 483):-

"Express negative covenants. The balance of convenience test is not applied in the case of applications to restrain breach of express negative covenants. The defendant's promise is upheld irrespective of the balance of convenience, although the grant of an interlocutory injunction remains, of course, a matter for discretion. Once the plaintiff establishes a serious question to be tried, the balance of convenience test becomes inappropriate, and the court has little option but to grant an injunction to restrain the breach of a negative covenant ....."

11. The passage is supported by Incorporated Owners of South Seas Centre, Mody Road v. Great Treasure Development Ltd [1994] 1 HKC 197 (CA). There the plaintiff incorporated owners sought an interlocutory injunction to prevent the defendant (who had exclusive use of the 1st Floor of the relevant building) from erecting signs on the external wall of that building. The plaintiffs alleged that the defendant would be acting in breach of the DMC if it put up such signs. The defendant accepted that there was a serious question to be tried.

12. The Court (Nazareth, Mortimer and Godfrey JJA) formed a provisional conclusion that the maintenance of the defendant's signs outside of the owners' building without consent would be a breach of negative stipulations in the DMC. Citing Lord Cairns LC in Doherty v. Allman (1878) 3 App Cas 709 (at 720)¹ and Megarry J in Hampstead & Suburban Properties Ltd v. Diomedus [1969] 1 Ch 248 (at 259)², Godfrey JA then said:-

"The dictum of Lord Cairns in Doherty v. Allman has frequently been quoted and cited with approval. But never, so far as we are aware, so as to exclude altogether the general discretionary considerations which always fall to be considered when the question for the court to decide is whether or not to grant an interlocutory injunction in the circumstances of the particular case. We would reformulate the principle thus: where a defendant is proposing to act in breach of an express negative stipulation binding upon him, he will normally be enjoined from doing so, and, save in exceptional cases, damages will not be regarded as an adequate remedy. However, the defendant may, nonetheless, be able to establish special circumstances of such a nature that the hardship that the making of the order would cause him would so far outweigh the inconvenience to the plaintiff through denying the plaintiff specific relief that the court considers that its intervention would be unjust. In addition, general discretionary considerations, such as unfairness, acquiescence or delay, may make the grant of an interlocutory injunction inappropriate...."

I shall apply the principles formulated by Godfrey JA to the facts of the present case.

13. Talent's claim is plainly a serious one. On the face of matters, by running a hotel in the Premises System is acting in breach of Tenancy Agreement cl. 2(p), incorporating the negative covenant in DMC cl. 20(e) not to suffer any part of the Premises to be used as a "boarding house" or "apartment".

14. System argues that a "hotel" is not the same thing as a "boarding house" or "apartment". Mr Lam (appearing for System) suggests that "boarding house" implies provision of food and lodging, while "apartment" connotes long-term (as opposed to short-term) accommodation. Here (Mr Lam says) System is only providing short-term hotel rooms without restaurant services.

15. I do not have to come to any settled view on the proper construction of the prohibition in DMC cl. 20(e). Suffice it to say that I have doubts about the validity of Mr Lam's argument. I think that the operation of a hotel falls squarely within the spirit and letter of the forbidden uses in DMC cl. 20(e).

16. Mr Lam argued that, in any event, the negative covenant in DMC cl. 20(e) can be ignored because the DMC had become null, void and of no effect. He said that, just as a restrictive covenant is extinguished when the ownership of a servient tenement which is subject to the covenant merges with the ownership of a dominant tenement which derives benefit from the covenant, so the covenants in the DMC were extinguished for all purposes (including that of binding System) when Talent became the sole owner of the Building.

17. This argument lacks substance. Regardless of whether the DMC is binding on any other person (and I should not be taken to be accepting Mr Lam's submission that the covenants in the DMC have been extinguished), System expressly agreed by cl. 2(p) of the Tenancy Agreement to be bound by the terms of the DMC, including cl. 20(e).

18. Mr Lam says that System should be allowed to operate a hotel because the Plaintiff itself intended to run such a business in the Premises. Talent denies that it ever had such intention as Mr Lam alleges. I have doubts whether the evidence supports Mr Lam's case. But assume that he is right that at some stage Talent harboured an intention to run a hotel out of the Premises. I do not see how, by itself, such an intention would absolve System from complying with its express obligations under the Tenancy Agreement.

19. Mr Lam applied to refer the Court to without prejudice correspondence between Talent and System which (Mr Lam said) showed that in reality Talent was amenable to System running a hotel in the Premises. I refused to look at such correspondence. I did not see how it could be material or helpful. Talent was entitled to explore on a without prejudice basis whether the parties could compromise on whether and (if so) to what extent and for what extra consideration (if any) System could operate a hotel out of the Premises despite the terms of the Tenancy Agreement. In the absence of a binding agreement to vary the terms of the Tenancy Agreement, I do not see how the mere fact that Talent was prepared to talk with System implies that System could disregard its contractual obligations. If System went ahead to convert the Premises into a hotel even though negotiations with Talent had not reached a conclusion, System must bear the risk that its renovation work will have to be undone.

20. Mr Lam argues that Talent is estopped from enforcing Tenancy Agreement cl. 2(p) and DMC cl. 20(e). Mr Lam says that, from at least July 2003, Talent must have been aware that System was converting the Premises into a hotel. But (Mr Lam continues) Talent did nothing to stop System's work.

21. The extent of Talent's knowledge (if any) of System's activities and the degree to which Talent represented (if at all) that System could safely proceed are matters which may well have to be investigated at the trial of this action. On the affirmation evidence currently before me, I am not persuaded that there has been a clear and unequivocal representation capable of giving rise to an estoppel.

22. As for maintenance of signs advertising the running of the hotel business outside the Building, System says that an interim mandatory injunction should only be imposed where the Court feels "a high degree of assurance that at the trial it will appear that the [interlocutory] injunction was rightly granted". In my view, an interim order for the removal of System's signage is the corollary of an interlocutory injunction to restrain it from acting in breach of Tenancy Agreement cl. 2(p) and DMC cl. 20(e). There is little point in announcing to the outside world by an external signboard that one is running a hotel business when in fact one is enjoined from doing so pending the trial of this action and further order. I do not think that the interests of justice would be served by allowing System's signage to remain when prima facie System is purporting to run a business from the Premises which it has agreed not to run.

23. In any event, on the evidence, Talent has never expressly consented to System displaying signs advertising a hotel business on the exterior walls of the Building. The maintenance of the signs would appear to breach Tenancy Agreement cls. 2(m) and 11.

24. I note that in Incorporated Owners of South Seas Centre, Mody Road the Court of Appeal overturned Yam J's refusal to grant an interim injunction and ordered the defendant not to maintain its signage outside the relevant building in breach of a negative covenant in the DMC prohibiting erection of signs without the plaintiff owners' approval. The case shows that, where there is a breach of a negative covenant (for example, not to put up signs), the Court may grant an interlocutory injunction to prevent the breach, even though the practical effect would be to require a person to perform a positive act (for example, to take down offending signs).

25. Finally, System suggests that the loss of income during the interim between the grant of any injunction and the hearing of the trial would cause it undue hardship, on the assumption that it should prevail in the end. It is claimed that the hotel earns about $3,600 daily on average with turnover anticipated to go up to $15,000 per day. System claims to have spent at least $2,132,216 in renovation works and hotel equipment. System also says that some 11 staff (6 cleaners, 1 cashier, 1 manager, 1 supervisor, 1 accountant and 1 clerk) earning a total of $90,100 per month may have to be laid off while the hotel is left idle pending trial.

26. In respect of lost income, that is quantifiable. There is evidence that Talent has sufficient resources from which, should System ultimately succeed, Talent can compensate System in damages.

27. The question of staff is more difficult. No one wishes to be made redundant needlessly. Certainly, System can retain its staff pending trial and claim as damages any non-productive portion of their wages attributable to the closure of the hotel business pending trial. The interim before trial should not be of long duration. A plaintiff is under an obligation, where an interlocutory injunction is granted, to proceed to trial with reasonable despatch. On the other hand, if Talent is right and System cannot run a hotel in the Premises, it would be little comfort to the staff concerned if an injunction were now refused on their account, only for them to be told after trial that their employment in the hotel cannot continue. On balance, I do not think that potential redundancy of System's hotel staff pending trial is a sufficient factor or special circumstance militating against the grant of an injunction.

Conclusion

28. For the reasons set out above, I granted the interim injunctions sought by Talent. I also made an Order that Talent's costs be in the cause.

29. Finally, I record that there was evidence that System initially wanted to put up Chinese signs outside the Building calling the Premises an "hourly hotel" ( 時鐘酒店). Talent objected to such signs, not just because running any type of hotel was against the Tenancy Agreement, but also because in Cantonese an "hourly hotel" can connote an immoral establishment. Mr Lam pointed out that System had, at least for now, dropped its plans to place exterior signs describing the Premises as an "hourly hotel". Accordingly, I did not attach weight on this factor in deciding whether or not to grant an injunction.