RANK PROFIT INDUSTRIES LTD v. SECRETARY FOR JUSTICE

CACV 125/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 125 OF 2007

(ON APPEAL FROM HCA NO. 1076 OF 2004)

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JUDGMENT

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Hon Tang VP

Introduction

1.  The plaintiff’s claim against the defendant arose out of the plaintiff’s purchase of New Kowloon Inland Lot No. 6268 (“the Lot”) in 1998 at a premium of $361 million.  The lease was for the term of 50 years commencing from the date of the memorandum of agreement, 6 May 1998.  The Lot was offered for sale by tender on 6 February 1998.  The plaintiff’s tender was accepted on 24 April 1998.

2.  Under the Special Conditions (“SC”), the Lot:

“… shall not be used for any purpose other than for non-industrial (excluding godown, hotel, residential, cinema and petrol filling station) purposes.”

3.  However, the combined effect of SC(8), (11) and (17) is that the plaintiff was obliged to erect, construct and maintain a building / buildings on the Lot with a total gross floor area of not less than 38,300 square metres and not exceeding 63,672 square metres, such floor area to include a multi-storey car park for the parking of not less than 200 cars, not less than 100 goods vehicles of different sizes and not less than 20 motorcycles.  SC(18) required, in particular, that “The Purchaser shall operate, conduct and manage the Multi-Storey Car Park at all times …”.

4.  At the time of the transaction, the Lot was covered by the Ngau Tau Kok and Kowloon Bay draft Outline Zoning Plan (“OZP”) No. S/K13/9.  That draft OZP was prepared under the direction of the Governor of the 9 May 1984 under section 3 of the Town Planning Ordinance, Cap. 131 (“the Ordinance”) and was gazetted for public inspection under section 5 of the Ordinance on 22 August 1986.  The plan which was gazetted was S/K13/1.  There had been several amendments to the draft plan, and that the revised plan No. S/K13/9 was gazetted on 7 April 1995.  Under S/K13/9, the Lot was zoned “Commercial”.

5.  The Lot fell within the Kowloon Bay industrial area described in the Explanatory Statement accompanying the plan S/K13/9:

“6.4.2   Existing industrial developments are mainly concentrated in the Kowloon Bay industrial area which is bounded by Wai Yip Street and Tai Yip Street to the east, Shun Yip Street to the south, Kai Fuk Road to the west and Kai Wah Street and Kai Shun Road to the north.  Most of the sites have been developed for general industrial and godown purposes.”

6.  In the plaintiff’s claim, however, it claimed that the Lot fell with the Kowloon Bay Industrial Area (“KBIA”) as defined by the plaintiff.  The plaintiff’s KBIA covered a smaller area and was chosen, according to Mr Neoh SC, who appeared for the plaintiff, because it was bound on 3 sides by trunk roads.  The difference is unimportant.  I shall refer to the plaintiffs’ KBIA in this judgment.

7.  In January 2001 KBIA had been rezoned by means of the Draft Ngau Tau Kok and Kowloon Bay OZP No. S/K13/16 which had the effect of increasing the supply of office and commercial space in the KBIA by 8.8 times that deriving from the Lot and the 5 other lots permitted for commercial use under S/K13/9.  Furthermore, much higher internal parking provision for private cars would have to be provided on these newly rezoned lots, whereas as industrial lots, the stipulated requirement for such parking provision is minimal.  Consequent on such rezoning the government was willing to modify leases at premium to permit development under S/K13/16.

The claim

8.  Put briefly, the fundamental assertion in the plaintiff’s claim is that when the government agreed to lease the Lot to the plaintiff, it implicitly came under a duty to keep the land use in the neighbouring area unchanged for 50 years.  The plaintiff’s principal complaints are that government had derogated from grant or breached an implied term when government procured and /or permitted rezoning in the KBIA which increased the supply of commercial area and reduced the demand for a public car park.  In August 2005, the plaintiff paid to the government the sum of HK$11,833,200 being the building covenant extension premium and HK$771,780,000 the lease modifications premium which deleted the requirement for the public car park.

9.  By this action the plaintiff sued the government for, inter alia, damages.  The plaintiff based its case on derogation from grant, breach of an implied term, breach of covenant for quite enjoyment.  Mr Neoh has rightly accepted in the context of this case there is no relevant difference between implication of a term and the principle of non-derogation from grant.  Also that the covenant for quite enjoyment did not require separate consideration from the claim based on derogation from grant.

10.  This is the plaintiff’s appeal against the order of Deputy Judge Muttrie striking out its claim.  For the purpose of this appeal, we have used the 2^nd proposed amended statement of claim introduced by summons dated 10 May 2006, although leave to amend was refused by the learned judge because he took the view that it would not have saved the claim from being struck out.

11.  The plaintiff’s case has been carefully crafted.  In order to appreciate its full flavour it is necessary to set out many parts in full.

12.  The plaintiff relied on the following as surrounding circumstances at the time of the transaction:

“4. At the time of this aforesaid invitation to tender, the said General and Special Conditions of Sale (the full terms and effect of which, the Plaintiff shall refer to at the trial), past practice of the Government and the lease conditions of various land lots in the area bounded by Wai Yip Street on the East, Kai Cheung Street on the North, Kai Fuk Road and Kwun Tong Bypass on the West, and Sheung Yee Road on the South, and in particular the lease conditions of sites immediately surrounding the Lot some of which like the Lot were undeveloped, clearly indicated that the Lot was intended to be one of only six land lots permitted for  commercial development and, for two of the lots including the Lot, for public carpark development as well, designed to serve the aforesaid area, hereinafter referred to as the Kowloon Bay Industrial Area (‘KBIA’). Such clear intention constituted representations on the part of the Government, in reliance of which the Plaintiff decided to tender for the Lot. Such intention may be more particularly inferred from the following circumstances, as to which the Plaintiff reserves the right to supplement after discovery:

(a) That within the KBIA there were, apart from two land lots allocated to the Housing Authority, several land lots for Government, institution and community uses, open space and bus depot uses, 40 land lots or thereabouts which, under their respective General and Special Conditions of Sale, were restricted as to their user to industrial and godown or godown purposes and to offices ancillary and directly related to an industrial or godown operation.

(b) That within KBIA there were only four land lots other than the Lot which could be used for non-industrial purposes (also commonly known as ‘commercial purposes’ which include office and other commercial spacing such as shops and restaurants) under their respective General and Special Conditions of Sale. These four lots, namely NKIL Nos. 5971, 5974, 6115 and 6145, had been fully developed at the time of the aforesaid invitation to tender. In addition, there was one lot within KBIA which had been zoned ‘C’ (Commercial), but at the time of the aforesaid invitation to tender it had not been put up for disposal by the Government.

(c) That the Lot and the other four lots with similar Conditions of Sale, being the only lots permitted for commercial development under their respective Conditions of Sale, were intended to serve as commercial space and the Lot and another lot were also intended to provide public car parking facilities to meet the demand within the KBIA, such demand being predicated upon then extant studies and conclusions of demand for public car parking spaces by the Transport Department (‘TD’) created by the then land use pattern in the KBIA.

(d) That compared with other more well established industrial areas like Tsuen Wan, Kwun Tong and Cheung Sha Wan, KBIA was in 1998 a relatively new industrial area, its development as such having only begun in the 1980s and there was a demand for commercial space and for which only the Lot and the other five lots were intended to meet.

(e) That the Government had prior to the tender caused studies to be published which indicated that the Government would not implement fundamental land use changes in the relatively new industrial areas.

PARTICULARS

(1) Study on the Provision of Industrial Premises & the Development of Planning Guidelines & Design Parameters for New Industrial Areas & Business Parks, completed in late 1996 and endorsed by the Town Planning Board (‘TPB’) in February 1997

(2) Case Studies Arising from the Study on the Restructuring of Obsolete Industrial Areas, also completed in late 1996 and endorsed by the TPB in February 1997

(f)  The Government had prior to the time of the aforesaid invitation to tender objected to any application to the TPB for planning permission for proposed redevelopments of commercial/office buildings on land zoned ‘Industrial’ in the KBIA, and the TPB had refused all such applications, indicating that the Lot and the other five lots were clearly intended to serve the commercial space needs of KBIA. In the relevant explanatory statements made by the TPB in relation to the lots which were zoned ‘C’ (Commercial), it was stated that these lots were intended to serve the KBIA.

(g) At the material times, the Chairman of the TPB was the Secretary for Planning, Environment and Lands, the Vice Chairman was the Director of Planning, and the Director of Lands was an ex officio member of the TPB.”

13.  Paragraph 5 of the amended statement of claim went on to say:

“5. By the aforesaid representations, the Plaintiff was led to believe by the Government that there exists in the KBIA a scheme of development and/or a pattern of land use controlled by the Government Lease Conditions therein, whereby the Lot and the already developed four lots, and the not yet disposed lot referred to in paragraph 4(b) hereof, were the only commercial lots designed to serve the KBIA and the demand for public car parking spaces within the KBIA could only be met by the 320 parking spaces required under the Agreement for Grant to be built on the Lot and North Kowloon Inland Lot No. 6145 with a public car park with 140 car parking spaces.” (Emphasis added)

14.  Although the implied term pleaded in para. 5 included a reference to the fact that the Lot:

“… and the already developed four lots, and the not yet disposed lot referred to in paragraph 4(b) hereof, were the only commercial lots designed to serve the KBIA”,

the plaintiff did not complain of the rezoning of other industrial lots to permit commercial use as such, nor government modifying such leases to permit such user, save for their impact on the demand for the car park.  Thus, Mr Neoh said the learned judge had correctly identified (and so found) as the main plank of the plaintiff’s case that the change in the underlying demand for public car parking within the KBIA made it impossible, or not viable, for plaintiff to operate the car park throughout the lease.

15.  Furthermore, as the learned judge said, although paras. 4 and 5 of the amended statement of claim appeared to have raised a plea of representation, Mr Neoh had confirmed that:

“36.   … the facts and inferences pleaded were relied on as part of the background matrix of facts, to be taken into account for the purposes of establishing the implied terms pleaded and as representations for the purposes of estoppel.”

16.  The breaches of agreement relied on by the plaintiffs were that the government had caused KBIA to be rezoned with the result that demand for the car park had been greatly reduced, alternatively, that following such rezoning, the government was prepared and had indeed allowed lease conditions for other lots in KBIA to be modified with the same result.

17.  The amended statement of claim went on to state:

“10.   Sometime between late 1988 or early 1999 and October 1999, the Government caused a study to be undertaken in order to review the planning framework for the reservation and provision of industrial land in Hong Kong’ (‘the Study’).

11.    The key conclusions of the Study were, inter alia, that:

(a) a new zoning mechanism, namely ‘Business’ zone, be introduced to allow more flexibility in building usage and property type for employment use;

(b) business buildings, commercial buildings, industrial buildings or industrial-office buildings of certain characteristics would be allowed as of right to be erected in land lots within the ‘Business’ zone; and

(c) Area Assessments of industrial land in Hong Kong be undertaken using a proposed set of criteria.

12.    Various departments and bureaux of the Government including the Lands Department had been consulted on the Study.

13.    On 22^nd September 1999 the findings and recommendations of the Study including the recommendation concerning ‘Business’ zone were considered and endorsed by the Government's Committee on Planning and Lands Development for consultation with certain professional bodies and business organizations.

14.    In the meantime, the Government commenced the said Area Assessments in July 1999, which were completed in July 2000

15.    As a result of, inter alia, the said Area Assessments, in or about October 2000, in breach of the implied terms set out in paragraphs 8 to 8A above, the Government proposed to the TPB that all the land lots previously zoned ‘Industrial’ in the KBIA should be rezoned ‘Other Specified Uses’ annotated ‘Business’.

16.    On 19^th January 2001, the TPB by means of the Draft Ngau Tau Kok and Kowloon Bay Outline Zoning Plan No. S/K13/16 (‘Draft OZP No. S/K13/16’) so rezoned the KBIA whereby all 50 lots or thereabouts previously restricted to industrial use were rezoned to ‘Other Specified Uses’ annotated ‘Business’. Under such zoning, all 50 lots or thereabouts may immediately be put to commercial use and upon redevelopment, internal provision for car parking would be required.

17.    Accordingly, the said rezoning in Draft OZP No. S/K13/16 has, inter alia, increased the supply of total permissible gross floor area of office and commercial space in KBIA to 2,464,063 m² or thereabouts, about 8.8 times the office and commercial space deriving hitherto from the Lot and the five other lots permitted for commercial use. At the same time, the future demand for public car parking spaces for private cars, light goods vehicles and heavy goods vehicles in KBIA became greatly diminished since upon development or redevelopment of the 50 lots or thereabouts rezoned as ‘Other Specified Uses’ annotated ‘Business’, much higher internal parking provision for private cars would have to be provided, whereas as industrial lots, the stipulated requirement for such parking provision is minimal. Further, upon the said development or redevelopment, the number of industrial buildings within the KBIA will greatly decrease resulting in a corresponding sharp decrease in demand for public car parking spaces for light goods vehicles and heavy goods vehicles.

18.    In the Government’s proposals to the TPB set out in paragraph 15 above, the Government indicated that the Lands Department would process in parallel premium payments for government lease modifications of industrial lots rezoned as ‘Other Specified Uses’ annotated ‘Business’ to the full extent of such zoning, whereas the Government could have followed a narrower modification policy so as to preserve the scheme of development and/or land use pattern within the KBIA so as to maintain the level of supply of commercial space and the demand for public car parking spaces within the KBIA.”

18.  The plaintiffs claimed that these were breaches of the following implied term:

“8. … that the scheme of development and/or pattern of land use set out in paragraph 5 above would be maintained, or alternatively would not change, for the duration of the Government Lease, so as to maintain the commercial justification, namely the efficacy of the bargain between the Plaintiff and the Government contained in the Agreement for Grant.”

19.  In the plaintiff’s skeleton argument, the implied term is put as follows:

“… that the Government would not change the scheme of development or pattern of land use in the KBIA, in order that the plaintiff may be able to operate, manage and maintain the car park viably throughout the term of the grant.”

Implied term/ derogation from grant

20.  In Canon Kabushiki Kaisha v Green Cartridge Co. (Hong Kong) Ltd [1997] AC 728 Lord Hoffmann when delivering the judgment of the Privy Council on an appeal from Hong Kong said:

“The principle of non-derogation is however based upon the presumed intention of the parties ... It is the conveyancing equivalent of an implied term derived, in a broad sense, from the construction of the transaction into which the parties have entered.”  Page 736.

21.  In Platt & Ors. v London Underground Ltd [2001] 2 EGLR 121, Neuberger J said at page 122:

“4.   There is a close connection, indeed a very substantial degree of overlap, between the obligation not to derogate from grant, the covenant for quiet enjoyment and a normal implied term in a contract. Thus, in words that apply equally to an implied term in a contract, Bowen LJ said in Myers v Catterson (1889) 43 ChD 470 at p481, in relation to the derogation from grant principle, that one should give effect to what he called ‘the obvious intention of the parties, so as to give the transaction between them a minimum of efficacy and value which upon any view of the case it must have been their common intention that it should have’. In Southwark London Borough Council v Mills [1999] 4 All ER 449 at p467F, Lord Millett explained that, to a large extent, the covenant for quiet enjoyment, and the obligation of a landlord not to derogate from his grant amounted to much the same thing.”

22.  According to Lord Lowry:

“…    In order that a term may be implied, there has to be a compelling reason for deeming that term to form part of the contract, and that compelling reason is missing in this case, unless it was essential that Mr. Hughes should live in the house in order to do his job, but the facts found contradict that proposition. Without going into detail, I need only refer to Luxor (Eastbourne) Ltd. v. Cooper [1941] A.C. 108, 125, 137, and (a case on which Mr. Reynold relied) Liverpool City Council v. Irwin [1977] A.C. 239, 258. I may perhaps illustrate my view by referring to what I said in the Court of Appeal in J. M. Reilly Ltd. v. Belfast Corporation [1970] N.I. 68, 83-84, in a passage which has no claim to originality of thought:

‘It is not enough for the court to conclude, (and I guard myself against doing so), that such a term would have made the contract more reasonable; terms will be implied not in order to make for the parties a contract which the court considers fair, but only to make effective the contract which the parties have made for themselves. The principle is clearly and authoritatively stated in Luxor (Eastbourne) Ltd. v. Cooper [1941] A.C. 108, and even in Devonald v. Rosser [1906] 2 K.B. 728, which may at first sight appear to give a more liberal expression to the doctrine, one finds on analysis a loyal adherence to the rule of necessary implication in the passage (at p. 743) where Farwell L.J. asks, “What, then, are we to infer would be a reasonable bargain such as the parties, being businessmen, must have intended to make?”’  Hughes and anor v Greenwich London Borough Council [1994] 1 AC 170 at page 177.

23.  Mr Neoh also agreed that the correct approach is that stated by Nicholls LJ (as he then was) in Johnston & Sons Ltd v Holland [1988] 1 EGLR 264 at 267M:

“3. [The exercise of determining the extent of the implied obligation not to derogate from grant] involves identifying what obligations, if any, on the part of the grantor can fairly be regarded as necessarily implicit, having regard to the particular purpose of the transaction when considered in the light of circumstances subsisting at the time the transaction was entered into …”

24.  The principle of non-derogation from grant also embodies a rule of common honesty, but Mr Neoh accepted and I agree that whilst the concept of common honesty might help to identify what obligations, if any, on the part of the grantor can fairly be regarded as necessarily implicit, in ascertaining what is necessarily implicit, one must be guided by the test which regulates the implication of contractual terms, namely, necessity.

25.  One helpful test is whether:

“… the lessor had done or proposed to do something which rendered or would render the demised premises unfit or materially less fit to be used for the particular purpose for which the demise was made …”  per Parker J in Browne v Flower [1911] 1 Ch 219 at 226.

26.  Another way of putting it is to say that the grantor may not act so as to frustrate the purpose for which in the contemplation of both parties the grant was made.  Harmer v Jumbil (Nigeria) Tin Areas, Ltd [1921] Ch 200.

Rezoning

27.  Mr Yu, SC, who appeared for the defendant submitted that, the matters complained of in paras. 15 to 17 of the amended statement of claim which resulted in the rezoning, cannot support the plaintiff’s claim.  He submitted in the granting of the lease, the government acted as a private landlord, and in performing its function and duties under the Town Planning Ordinance, the government was performing a public duty and the proposal to change or the change in zoning by the Town Planning Board (“TPB”) or the approval by the Chief Executive of Draft OZP No. S/K13/16 were performances of public duty, and the doctrine of derogation of grant could not prevent the government from performing its public duty.  I agree.

28.  Mr Yu relied on Spurling v Bantoft [1891] 2 QB 384 and Commissioners of Crown Lands v Page [1960] 2 QB 274.  It is sufficient to refer to Page.

29.  In Page the defendant was the lessee under a crown lease made in 1937 for a term of 25 years.  In February 1945, the Minister of Works on behalf of the Crown, and in exercise of the powers conferred by statute requisitioned the premises, the subject of the lease, took and retained possession until 3 September 1955, of those premises.  No rent was paid from the date of such requisition.  In a claim for rent allegedly due under the lease from 5 April 1945 until 5 July 1955, the defendant alleged that she had been evicted by the requisitioning and that payment of the rent has been suspended.  It was held that since the entry was by the Crown in the proper exercise of his executive authority, it did not amount to an eviction.  At page 291 Devlin LJ (as he then was) said:

“When the Crown, or any other person, is entrusted, whether by virtue of the prerogative or by statute, with discretionary powers to be exercised for the public good, it does not, when making a private contract in general terms, undertake (and it may be that it could not even with the use of specific language validly undertake) to fetter itself in the use of those powers, and in the exercise of its discretion.  This principle has been accepted in a number of authorities; it is sufficient to mention Ayr Harbour Trustees v. Oswald; Rederiaktiebolaget Amphitrite v. The King; Board of Trade v. Temperley Steam Shipping Co. Ltd. and William Cory & Sons Ltd. v. City of London Corporation.

… When the Crown, in dealing with one of its subjects, is dealing as if it too were a private person, and is granting leases or buying and selling as ordinary persons do, it is absurd to suppose that it is making any promise about the way in which it will conduct the affairs of the nation.  No one can imagine, for example, that when the Crown makes a contract which could not be fulfilled in time of war, it is pledging itself not to declare war for so long as the contract lasts.”

Modification of leases

30.  Mr Neoh’s other submission was that even if the government could not be said be derogating from its grant by reason of any executive act insofar as the government invited and/or granted modifications of government leases consequent on the rezoning, the government had indeed derogated from grant or was in breach of the implied term.  Mr Neoh accepted that, for the purpose of this action, the government in granting modification of leases must be regarded as acting in its private capacity.  I say for the purpose of this action, because in related proceedings, namely, CACV 94/2007, on appeal from HCAL 126/2005, the plaintiff has sought a judicial review in relation to the modification of the lease.  CACV 94/2007 was heard immediately after this appeal.  Our judgment in CACV 94/2007 will be delivered at the same time.

31.  Mr Neoh submitted that the car park had ceased to be viable as a result of the new OZP plan.  Mr Neoh referred to a Parking Demand Study Report prepared in September 2001 commissioned by the plaintiff from Maunsell Consultants Asia Limited (“Maunsell”), which was submitted to the District Lands Officer in support of the plaintiff’s application for lease modification.  According to Maunsell’s report, even prior to the rezoning, the average occupancy rate for private car (“PC”) spaces was around 75% and that the overall occupancy rate for light goods vehicle (“LGV”) and heavy goods vehicles (“HGV”) was about 50% and:

“5.1.7  The findings of this study indicated that the existing supply of public parking spaces for both PC and LGV/HGV in the area well exceeds its demand.  Therefore it would be waste of resources to provide public PC and LGV/HGV parking spaces in the Subject Site.  Thus the requirement for the provision of public car/lorry parking spaces within the [Lot] should be omitted.”

32.  The plaintiff also relied on the fact that during the TPB Meeting on 10 August 2001, the then Director of Lands (an ex officio member of the TPB) invited the plaintiff to seek a government lease modification to omit the public car park requirements, despite the government’s policy that applications for major modification of a lease sold by option or tender will not normally be entertained within 5 years from sale.  Also the Director of Lands had accepted in correspondence that a change to the OZP plan could not have been envisaged at the time of the transaction.  The plaintiff also relied on the fact that the government was willing to modify the lease and delete the requirement for a public car park as evidence that there was no need for a public car park.

33.  The question here is whether in the light of circumstances subsisting at the time of the transaction and having regard to the particular purpose of the transaction, it could fairly be regarded as necessarily implicit that the scheme of development and/or pattern of land use set out in paragraph 5 of the amended statement of claim would be maintained or would not change for the duration of the government lease, such that government should not modify any of the leases in KBIA to permit commercial use because that would have the effect of reducing the demand for a public car park.

34.  What was the purpose of the transaction?  As noted the Lot was leased to the plaintiff for 50 years and that the lease required the plaintiff to build and maintain a building or buildings on the Lot with a total gross floor area of not less than 38,300 square metres and not exceeding 63,672 square metres, such floor area to include a multi-storey car park for the parking of not less than 320 vehicles.  I should add, and Mr Neoh relied much on it, that the plaintiff was required to operate a public car park at all times.  But as the learned judge pointed out in paras. 56-58 of the judgment, essentially it was a lease of the Lot, which carried a right to develop and use the Lot as a commercial building, though it also included the obligation to build and maintain car parking spaces as part of the development.  Indeed, as Mr Yu submitted, the plaintiff’s original complaint was not about the car park but the diminution in value of its commercial building because of increase of supply of commercial Lots within the area as a result of the zoning changes.  It is common sense, that the premium of $361 million together with the substantial cost in the building represented to a large extent the value of the Lot as a commercial Lot.

35.  The purpose of the transaction should be considered in the light of circumstances subsisting at the time the transaction was entered into, and one must ask what can fairly be regarded as necessarily implicit with regard to the public car park.  Mr Neoh submitted that the operation of a public car park must have been an important purpose of the lease, so that there was an implied term that supply should not increased or demand reduced so as to make the public car park impossible or not viable.  Mr Neoh submitted that the evidence showed that it was at least arguable that it was impossible or not viable for the plaintiff to operate the car park throughout the lease.  I proceed on the basis that demand would be reduced and supply increased. But I do not agree it is arguable that it was necessarily implicit that supply should not increase or demand reduced.

36.  Indeed the Notes, which formed part of the Plan S/K13/9 made clear that for lots in the KBIA which were zoned “Industrial” permission could be given by TPB for such industrial lots to be used for “Public Car/Lorry Park”.  So even without the 2001 rezoning, the supply of public car park could have been increased.

37.  I also agree with Mr Yu that:

“The mere fact that many of the other lots are zoned ‘Industrial’ cannot possibly indicate an intention that commercial or car parking uses will not be permitted in the next 50 years.”

Representations

38.  I turn to consider the implied term and the publications relied on as a representation of government’s clear intention to preserve the status quo in relation to KBIA for 50 years.  They are the Provision of Industrial Premises and the Development of Guidelines and Design Parameters for New Industrial Areas and Business Parks Study (“PIPNIB Study”), Restructuring of Obsolete Industrial Areas Study (“ROBINA Study”) and a press release dated 18 February 1997.  KBIA was a relatively new industrial area and was not covered by the ROBINA Study.

39.  The Studies were commissioned by the Planning Department, as Mr Neoh said because:

“44.   In the 1990s, as is well-known, the demand for industrial space in Hong Kong decreased, because many companies moved their industrial processes to the mainland.  … The plaintiff relies on the PIPNIB Study and case studies arising from the ROBINA Study as indicating that the Government would not implement fundamental land use changes in the relatively new industrial areas.

……

46.    The recommendations of the two studies were announced at a press conference on 18 February 1998.  The press release stated, inter alia, that there would be a surplus of 300 hectares of land for general industrial uses, and that the consultants had recommended changes to the planning system to broaden the commercial uses to be allowed in industrial areas, and to increase the percentage of total floor area permitted to be used for ancillary office purposes in industrial buildings for 30% to 50%, and to facilitate the development of more ‘industrial/office’ buildings.”

40.  The press release quoted the Director of Planning as saying that there would be a surplus of 300 hectares of land for general industrial use most of which was undeveloped land, that the consultants have forecasted a deficit of about 185 hectare of land for ‘special industrial uses’ and that the Government was actively looking into the concept of a Business Estate. The same press release stated that consultants had recommended amendments to the statutory planning system including broadening the commercial use to be permitted in industrial areas and facilitating the development of more industrial/office buildings.

41.  I agree with Mr Yu that the plea that these were representations that the government would not implement fundamental land use changes in KBIA is a non-sequitur and incontestably bad.  It is illogical to deduce from the fact the changes were contemplated (in one or more studies) in some areas that no change would occur in others, and impossible to derive from them a duty to keep the status quo for the duration of the lease.  Indeed, the fact that planning studies were conducted on industrial areas suggests that planning changes were likely.

Authorities relied on

42.  I turn to some of the authorities on derogation from grant and implied term relied on by Mr Neoh.  These decisions turned on their own circumstances although they provide helpful illustration of the application of well-known principles.

43.  In Platt, the decision of Neuberger J referred to above, a 5-year lease of a kiosk, in an underground station, which was sited near the exit and was let for the purpose of the sale of cold food and drinks.  The principal entrance to the station fronted the station.  The exit was only opened for part of the day as the defendant otherwise used the main entrance as an exit.  The claimant closed the kiosk in February 1994, contending that they were unable to trade successfully because the defendant denied passengers access through the exit for a large proportion of a time during which the station was open.  They claimed damages for derogation from grant.  The defendant accepted that by shutting the exit three quarters of the time the station was open, there would be derogation unless:

1)   by the lease, it was entitled to shut the exit;

2)   there were something in the surrounding circumstances at the date of the grant justifying the action;

3)   the functioning of the station at the time the lease was negotiated and granted had not changed.

It was held that:

“The surrounding circumstances at the time of the grant indicated that it was contemplated by the parties that the exit would function as such during the time the station was open (subject to the possibility of it being shut in the evenings and at weekends).”

There is a helpful summary of the principles concerning derogation of grant by Neuberger J but essentially this is a decision which turned on its own facts.

44.  Oceanic Village Ltd v Shirayama Shokussan Co Ltd [2001] 3 L&TR 478, is about a lease of a gift shop in connection with the London Aquarium (“the Aquarium”) at the Riverside Building which contained a covenant by the landlord not to permit any other gift shop to be operated “in the Building” but the lease did not define the extent of “the Building”.  Between the facade of the Riverside Building and the river wall, is a wide walkway forming part of Queen’s Walk.  The landlord proposed to erect 2 kiosks on Queen’s Walk and used them for the sale of gift items, including items relating to the Aquarium.  The tenant brought proceedings claiming that the walkway formed part of the building for the purposes of the landlord’s covenant and that, in the alternative, their use of the proposed kiosks to sell aquarium-related items would be in derogation of the landlord’s grant.

45.  Nicholas Warren QC, sitting as a Deputy Judge of the Chancery Division, held that the walkway did not form part of the building for the purpose of the landlord’s covenant, but that the use of the proposed kiosk to sell aquarium-related items would be in derogation of the landlord’s grant.  At page 500, the learned deputy judge said:

“In my judgment, the purpose for which the lease was granted to OVL was to run the aquarium gift shop; a purpose which carried with it an exclusivity over the sales of aquarium-related products … the landlords were leasing not just a separate and independent gift shop but such a shop in its place in the Riverside Building as the Aquarium Shop: that was the ‘particular purpose’ for which the shop was hired.”  (Emphasis added)

Again this case turned on the application of facts to well known principles.

46.  In Chartered Trust PLC v Davies [1998] 76 P & CR 396, Henry LJ said in the English Court of Appeal that:

“The central point to be got from the circumstances surrounding the lease at the time that Mr Davies took it was that what the landlords were marketing was not just a separate and independent retail unit, but such a shop in its place in a shopping arcade or (in the modern usage) mall. That was the ‘particular purpose for which the land was hired’. The lease makes that clear. The mall was described in the lease as being ‘the Centre’, the common parts (including the passages required for access and the cloakrooms) were defined and kept within the responsibility of the landlords, who were entitled to charge a service charge therefor. It was implicit in the form of the lease that other tenants would be subject to similar forms of lease, as the pawnbroker was. All tenants were obliged to keep open during shop opening hours. They could not, without the landlords’ consent, make any alterations or additions to the property. They could not use the property for ‘any use ... similar to any other use for the time being permitted in any other part ... of the Centre’. There was a covenant restraining tenants from committing a nuisance. They could not obstruct the windows without consent. The landlords retained a rule-making power for better use of the Centre, and in particular the common parts, and the power to make the tenants obey such rules. It was plain from the surrounding circumstances that the uses to which other units were put, the manner in which other tenants carried on their business, and the impact of those matters on the user of the common parts, could have a great influence both on the business of the individual tenants, and on the success of the development itself.”  Page 403

47.  On those facts it was held that a derogation from grant occurred because the landlord, having agreed to confer a particular benefit on the tenant, acted in such a manner as to deprive the tenant of the enjoyment of the benefit conferred.  Thus, the decision depended on the particular benefit which it was held had been agreed to be conferred on the tenant.

48.  Another case that Mr Neoh relied on is Aldin v Latimer Clark, Muirhead & Co. [1894] 2 Ch 437, there the court was concerned with a lease of premises to a timber merchant to carry on the business of a timber merchant and the lessee covenanted to carry on such business.  The question was whether the assigns of the lessor was entitled to build upon adjoining property acquired by them from him, so as to interrupt the access of air to sheds upon the demised property used for drying timber, so as to interfere with the carrying on of the business in ordinary course.  The complaint was that the new erections injuriously affected the access of air to the sheds, so as to render them substantially less useful for the purpose of the business which the plaintiff was bound by the lease to carry on upon the demised premises.  Stirling J, after reviewing the authorities said at 444:

“… The result of these judgments appears to me to be that where a landlord demises part of his property for carrying on a particular business, he is bound to abstain from doing anything on the remaining portion which would render the demised premises unfit for carrying on such business in the way in which it is ordinarily carried on, but that this obligation does not extend to special branches of the business which call for extraordinary protection.”

Mr Neoh in particular relied on this passage at page 447:

“In the present case, the lease of the 1^st of July, 1878, was not merely granted for the purpose that the land demised might be used by the Plaintiff for the purpose of carrying on his business as a timber merchant, but it contains an express covenant binding him to carry on that business. In my opinion, Munro became subject to the obligation to abstain from doing anything on his adjoining property which would substantially interfere with the carrying on of that business in the ordinary course; and that obligation binds the present Defendants, as assigns from him, subject to the existing lease.”

49.  Aldin was a case about the landlord or its assigns rendering the leased premises physically unfit or substantially unfit for the purpose for which the premises were leased.  It was not a case about increased competition.

50.  In Karaggianis and Anor v Malltown Pty Ltd [1979] 21 S.A.S.R. 381, the lease in question was of an area on the sixth floor of a building to be used as cafeteria.  The area was served by 4 lifts and 2 escalators.  When the third, fourth and fifth floors of the building became unoccupied, the lessor discontinued the escalators beyond the second floor, and reduced service by lifts, the question on the lessee’s application for a mandatory injunction enjoining the lessor to maintain service by lifts and escalators, the question was whether a covenant to maintain services should be implied.  It was held by Wells J that such a covenant should be implied:

1)   upon the terms of the lease itself;

2)   upon the ground that such a covenant was necessarily to be implied to give business efficacy to the transaction between the parties; and

3)   upon the ground that the landlord should not be permitted to derogate from his grant.

51.  On the implication of the terms, he said at page 392:

   “‘At least it is true, I think, that, if a term were never implied by a judge unless it could pass that test, he could not be held to be wrong.’

In my opinion, whether one applies the business efficacy test of Scrutton L.J. and Bowen L.J., or the testy answer to the hypothetical bystander test of MacKinnon L.J., I am of the opinion that there ought to be implied a covenant that the defendant would not, during the term of the lease, by its own act (other than for the regulatory purposes referred to above) so vary or withhold the facilities provided to the plaintiffs to such an extent that there would be a substantial deprivation of the facilities provided when the lease was executed.”

52.  However, he went on to say that on derogation from grant that at page 392:

“… Let it be assumed that the covenant is not to be read into the words of the lease or implied by invoking either of the two tests just referred to. What remains, ex hypothesi, is an instrument from which the covenant contended for is absent, and into which it cannot be imported by virtue of either of the principles and modes of reasoning so far examined.”

53.  Even so, he felt able to find that the landlord was liable for breach of the implied covenant not to derogate from one’s grant. 

54.  With respect to Wells J, if the amenities of the lifts and the escalators were not necessarily implicit, so that there should not be an implied term in favour of the lessee in relation to such amenities, it is difficult to understand why it could be said that it was their presumed intention that the tenant should have such amenities.

55.  In my opinion, each case must depend on its own circumstances, one important circumstance being the nature of the particular transaction.

56.  Mr Neoh submitted that the fact that very substantial amount of money was involved in this transaction makes it easier for a term to be implied.  With respect, I do not agree.  The effect of the plaintiff’s claim is that for 50 years, the government could not agree to any modification permitting commercial case in KBIA or public car park without the consent of the plaintiff.  Here, we are concerned with an invitation to tender for a lease in respect of which a substantial premium would be payable and when paid, a substantial building would have to be built.  In such circumstances, it is inconceivable that the parties would have been content to leave any important matter to implication.  Indeed, different persons tendering might have different views about the car park.  Some might regard it as a loss leader, and adjust the premium accordingly.  Some might see the potential for conversion of the floor area required for the car park to future commercial use and tender accordingly.  Whether there should be an implied term and if so what it is cannot depend on the subjective view of the particular tenderer.  This is the sort of case where if an undertaking to preserve the status quo was required, one would have expected an explicit request for one.

57.  In Clark’s Gamble of Canada Ltd v Grant Park Plaza Ltd [1967] 64 DLR (2d) 570, a decision of the Supreme Court of Canada, the plaintiff entered into a lease for 25 years with the defendant under which the plaintiff leased spaces in the shopping centre to be built by the defendant.  The defendant then proposed to erect a building more than twice the size of that leased to the plaintiff and leased that to be used in such a way as would provide “stern competition” for the plaintiff.  The plaintiff’s claim for an injunction failed.  The Supreme Court was of the view that:

“But this is far from conduct which would render the premises leased to the appellant unfit for it to carry on its business.  To adopt the words from Browne v Flower, supra, ‘After all, a purchaser can always bargain for those rights which he deems indispensable to his comfort.’” At 580.

58.  Mr Yu also relied on Port v Griffith [1938] 1 All ER 295, where the tenant of a lease for 21 years who had covenanted to use and occupy the premises and to permit the same to be used and occupied as a shop for the retail business for the sale of wool and general trimmings failed in his claim that the landlord had derogated from grant when the landlord let the adjoining shop subject to a similar covenant.  Luxmoore J said at 300:

“I am unable to hold that it was within the reasonable contemplation of the plaintiff and defendants that the defendants were putting themselves and their remaining property under such an obligation to the plaintiff as that contended for by her.”

59.  Mr Neoh submitted that the question here is not about competition, but whether it would amount to derogation from grant or frustration of the purpose of the lease, if, on the one hand, the plaintiff was required by the landlord not only to erect a public car park but also to operate it for the duration of the lease, whilst on the other hand, the landlord took steps to substantially reduce their demand.

60.  As the authorities cited by Mr Neoh shows, the fact of increased competition per se is not sufficient, the relevant question is whether it was necessarily implicit in the particular grant that there should be no competition or increased competition.  I do not agree that Oceanic Village Ltd, was about increased competition.  There, it was inferred from the language used that the lessee’s shop should be the only aquarium gift shop. 

61.  Mr Neoh criticized findings which he said Deputy Judge Muttrie had made, but I see nothing in those criticisms.  It is clear from the learned judge’s judgment that he found that the implied term relied on by the plaintiff was not reasonably arguable.  No doubt he was of the view that if an officious bystander had asked the parties at the time of the transaction whether there was indeed such an implied term, it was inconceivable that government would have said “of course”.

62.  I am of the view that this is a plain and obvious case for striking out of the claim.

General Condition (“GC”) 5

63.  Mr Yu also relied on GC 5.  He submitted that GC 5 made it plain that the government has given no warranty, expressed or implied, as to the suitability of fitness of the Lot, or any part thereof, for development, whether in accordance with conditions or otherwise.

64.  The condition reads as follows:

“5. (a) The Purchaser hereby expressly acknowledges:

  (i)    that the Government shall be under no liability whatsoever to the Purchaser (which expression shall for the purpose of this Condition only include his successors, assigns, mortgagees, tenants or other occupiers of the lot whether lawful or otherwise) for any loss or damage howsoever arising in connection with or as a consequence of his purchase of the lot and its subsequent development;

  (ii)   that he has purchased the lot based upon his own evaluation of land records and available geotechnical information whether obtained from Government sources or otherwise and has satisfied himself as to the state and condition of the lot in relation to the purposes for which the lot is to be developed or redeveloped;

  (iii)  that he takes the lot, whether on, above or below the surface of the ground, in the state and condition as it exists on the date on which possession of the lot is deemed to be given in accordance with Special Condition No. (1) of these Conditions; and

  (iv)  that he shall not be entitled to revoke, withdraw, cancel or resile in any way whatsoever from this Agreement nor be entitled in any way whatsoever to compensation or a reduction in the sale price or any other compromise whatsoever should he subsequently determine that the lot is not fit for the purposes for which he purchased the lot.

   (b)   (i)    The Government has given no warranty, express or implied, as to the suitability or fitness of the lot or any part thereof for development whether in accordance with these Conditions or otherwise.  The Purchaser for himself, his successors or assigns undertakes not to make any claim against the Government for any loss or damage whatsoever which he may suffer as a result of or arising from the state and condition of the lot making it either unfit for the purpose for which he purchased the lot or rendering it impossible to achieve the scale of development originally intended; and

  (ii)   the Government in no way warrants the accuracy or correctness in any way whatsoever of any information made available or obtained, and in particular does not warrant that the lot is fit and suitable for any particular purpose.”

Mr Neoh submitted that the GC 5 is restricted to matters related to the state and condition of the Lot, and has no application.  Mr Yu, however, submitted that GC 5(b)(ii) is not restricted to any matter relating to the state and condition of the Lot.  Mr Yu relied on GC 5(b)(ii) to show that the term sought to be implied term is contrary to the express terms of GC 5(b)(ii).  I am inclined to agree although I do not find it necessary to rely on GC 5(b)(ii) for the conclusion that the alleged implied term or derogation from grant is unarguable.

Estoppel

65.  The plaintiff also relies on an estoppel as an alternative case.  Mr Neoh relied on his skeleton argument:

“39.   Without prejudice to the rule that there should be no trial on affidavit in an application to strike out, it is submitted in light of the following it cannot be said that P’s claim of estoppel is inarguably bad:

(1)  At the TPB meeting on 10 August 2001, the then Director of Lands invited P to seek a lease modification to omit the Car Park requirement (§ 19 A of 2^nd ASOC). The fact that the public car park was no longer necessary was confirmed by the Commissioner for Transport and accepted by the DLO/KE in the course of their dealings with P.

(2)  In detrimental reliance on the implied representation or promise that an application to omit the Car Park would be accepted, P stopped all work on the Lot in order to mitigate its loss (§19 of 2^nd ASOC). P also expended monies and time to employ consultants to re-draw architectural plans in the assumption that the Government would not insist on the building of the public car park. P could not proceed with the development until the lease modification was completed, because the public car park would necessarily occupy the first floors of the development.

(3)  Applications for lease modification by P were favourably received by the Government but legal documentation of the final lease modification was not completed by the Government until 14 December 2005.

40.    On these facts, the Government is estopped from enforcing the building covenants during the period of negotiations (see Hughes v Metropolitan Railway Co (1877) 2 AC 439, at 447-448 and Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] 1 QB 133, at 153D-E and 154F-G).”

66.  As Mr Yu had submitted, it is not clear upon what basis the plea of an estoppel is based.  If it is an estoppel by representation, there is no plea of an unequivocal and unambiguous representation of fact giving rise to an estoppel.  The representations relied on have not been specified, and one is left to sift through paragraphs 4 to 24S, that is pages 2 to 40 of the amended statement of claim to guess what the alleged representations are.  Moreover, the same representations were relied on for the implied term, and I am of the view that they are unarguable.

67.  For the above reasons, I would dismiss the appeal.

Hon Le Pichon JA:

68.  I agree with the judgment of Tang VP.

Hon Sakhrani J:

69.  I agree with the judgment of Tang VP.

Hon Tang VP:

70.  The appeal is dismissed.  We also make an order nisi that the defendant is to have the costs of the appeal, such costs to be taxed if not agreed.