ROLLING DEVELOPMENT LTD. v. EASE KING LTD. and Another

IN THE COURT OF APPEAL

1997, No. 128
(Civil)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. This is an appeal from Barnett, J., who in an action between Rolling Development Limited ("the assignee") as plaintiff, Ease King Limited ("the lessee") as 1^st defendant and Hui Shek To ("the guarantor") as 2^nd defendant, dismissed on 3 June 1997 the guarantor's application for leave to appeal out of time against a judgment entered against the guarantor, under the provisions in that behalf contained in O.14 of the Rules of the Supreme Court, on 31 August 1995. The action was an action to recover against the guarantor in respect of loss of rent occasioned by the default of the lessee under a lease to which the guarantor was a party. It was for the guarantor to satisfy the judge that he had a good defence to the action on the merits. He failed to do so. The guarantor now appeals.

Background

2. The background is as follows.

3. By an instrument dated 10 May 1993 described as "A lease and guarantee and indemnity" ("the lease") and made between Open Worth Investments Limited ("the lessor"), the lessee and the guarantor, the lessor let and the lessee took some premises on the Ground and First Floors of 92-94 Woosung Street, Kowloon, Hong Kong for a term commencing on 1 January 1993 and expiring on 28 February 1996 at an initial rent of $150,000 rising to $180,000.

4. The lessor assigned its interest in the reversion to the assignee on 10 October 1994. The assignment of the reversion did not include any express assignment of the benefit of the guarantor's covenants. The lessee defaulted in the payment of the rent due on 3 December 1994 and it made no further payments of rent. Hence this action by the assignee against the guarantor.

The lease

5. I now turn to the provisions of the lease upon which the assignee founds its claim against the guarantor.

6. Clause 8 of the lease reads as follows :

"8. (a) In consideration of the Lessor having agreed at the Guarantor's request to enter into this Lease, the Guarantor hereby :-

(i) guarantees the payment by the Lessee to the Lessor the rent stipulated in this Lease and the performance and observance by the Lessee of the terms, conditions and covenants of this Lease and agrees to pay the rent and/or perform or observe the terms, conditions and covenants of this Lease if the Lessee shall fail to do so;

(ii) covenants with the Lessor that the Guarantor or his personal representatives will at all times hereafter keep the Lessor and his successors in title indemnified against all losses, expenses, costs and damages suffered or incurred by the Lessor by reason of the failure of the Lessee in the payment of rent and/or performance or observance of the any of the terms, conditions and covenants hereof as aforesaid.

(b) This Guarantee and Indemnity shall continue during the term of this Lease and extend to the acts and defaults of the Lessee during that period but during that period it shall not be revocable or discharged by the liquidation of the Lessee and without prejudice to the foregoing provision of this clause this Guarantee and Indemnity shall not be discharged by the Lessor's giving the Lessee time in which to meet the rent or other indulgence in respect of its obligations under this Lease."

The law

7. In P. & A. Swift Investments (A Firm) v. Combined English Stores Group PLC [1989] 1 AC 632, the House of Lords settled a point of some interest which had been the subject of disagreement among judges. The point in question was whether the covenant on the part of a guarantor contained in a lease was to be treated as a covenant which, to use the old expression, "touched or concerned", or, to use a more modern expression, "related to" the land. If it did, then the benefit of the guarantor's covenant would run with the reversion. (It would do so, I may add, irrespective of any statutory provision, such as we have here in Hong Kong in s.39 of the Conveyancing and Property Ordinance, Cap. 219.) If the covenant did not touch or concern, or relate to, the land, then the benefit of the covenant could only be acquired by an assignee of the reversion if it were expressly assigned to him. It was not the practice to include any such express assignment in an assignment of the reversion.

8. The issue was resolved, with clarity and precision, by Lord Templeman in his speech in the case to which I have referred. Lord Templeman says this (at pp 637, 638) :

"My Lords, the appellant, the surety, joined in a lease to guarantee the performance and observance of the covenants by the tenant contained in the lease. A covenant by a tenant which touches and concerns the land runs with the reversion; the benefit of such a covenant vests in the successors in title of the landlord; the successors in title of the landlord may sue upon the covenants although the benefit of the covenants may not have been expressly assigned. For this purpose a successor in title of the landlord is the person who, at the date of the breach of covenant, is entitled to the reversion expectant on the expiration or sooner determination of the term demised by the lease. In the present case the original landlord assigned the reversion to the respondent landlord; there was no express assignment of the benefit of the tenant's covenants or of the benefit of the surety's covenant. The tenant defaulted in payment of the rent reserved by the lease and thereby committed a breach of a covenant which touched and concerned the land. The respondent landlord, failing to recover the rent from the tenant, brings these present proceedings against the surety to recover the amount of the unpaid rent. The surety denies liability, pleading that the surety's covenant does not touch and concern the land and does not run with the reversion so as to be enforceable by the respondent landlord. The respondent landlord replies that a covenant by a surety, in whatever form or expression the surety covenant may take, is a covenant that the tenant's covenants shall be performed and observed. ....."

9. So far, it will be seen that our case falls precisely within these parameters. Lord Templeman continued :

"..... A covenant by a surety that a tenant's covenant which touches and concerns the land shall be performed and observed must itself be a covenant which touches and concerns the land; the benefit of that surety's covenant will run with the reversion, and the covenant is therefore enforceable without express assignment. I agree. A surety for a tenant is a quasi tenant who volunteers to be a substitute or twelfth man for the tenant's team and is subject to the same rules and regulations as the player he replaces. A covenant which runs with the reversion against the tenant runs with the reversion against the surety. ....."

10. There is no dispute between the parties as to all this. The only dispute is as to whether, on the true construction of clause 8 of the lease in our case, the covenant on the part of the guarantor upon which the assignee now sues is a covenant which was expressed to be personal to the original lessor. It is common ground that a covenant expressed to be personal to the original lessor would not avail the assignee in the instant case.

The guarantor's case

11. The case for the guarantor here is that the guarantor's covenant is expressed to enure for the benefit of the original lessor only. It contains no extended definition of the expression of lessor (e.g. "in this lease the expression 'the lessor' shall include the reversioner for the time being immediately expectant on the term thereby created") such as was to be found in the Swift Investments case, and is indeed a commonplace : see the speech of Lord Oliver of Aylmerton, in the case cited, at p.639 F-G.

12. There being no such provision, says the guarantor, the covenants contained in clause 8 ought to be construed as having been taken for the benefit only of the original lessor, and not for the benefit of any successor in title of the original lessor. Further, says the guarantor, not only is there no such provision; there is an express reference in clause 8 to "successors in title" which should be treated as having been used deliberately in one of the branches of clause 8 but not the other. Accordingly, it is said that in the first branch of clause 8 where references to "the lessor" are made without any concomitant reference to "his successors in title", the references to "the lessor" should be treated as references to the lessor personally, and only to the lessor, and not to any successor in title of the lessor.

Is the guarantor's construction correct?

13. The case for the guarantor raises a short and, in my judgment, simple question of construction. The construction sought to be placed on clause 8 by the guarantor produces, as it seems to me, a commercial absurdity. It treats the parties as having solemnly agreed that the guarantee shall become virtually useless in the event of an assignment of the reversion by the original lessor, notwithstanding that as we have seen the benefit of the covenant given by the guarantor runs with the land.

14. In my judgment, a covenant by a guarantor enures for the benefit of any assignee of the reversion, unless a contrary intention is clearly expressed. Unless "the contrary intention is expressed" (to borrow the words used in s.39 of the Conveyancing and Property Ordinance, Cap. 219) clause 8 ought not to be construed as exhibiting such a contrary intention. I appreciate that the words "and his successors in title" occur only in the second branch of the covenant contained in clause 8, but, reading the clause as a whole, I am quite satisfied that the parties intended the whole covenant to enure for the benefit of the lessor and any successor in title of the lessor. Clause 8 contains nothing, as it seems to me to express any contrary intention. The use of the words "and his successors in title" in the second branch of the covenant are, in my view, mere surplusage.

15. All sorts of anomalies would arise on the guarantor's construction. It would be difficult for either the lessor, or any successor in title of the lessor, to recover rent from the guarantor in the event of such a failure as occurred here on the part of the lessee to pay the rent. The lessor would be unable to prove any post-assignment loss, and the assignee would be unable to prove any pre-assignment loss and, in some circumstances, the guarantor could escape liability altogether.

Result

16. For these reasons, I am of the opinion that the guarantor has not shown any prospect of success in the action. Since the guarantor has no defence on the merits, the judge was right not to accede to his application for leave to appeal out of time. We should affirm the judge, and, accordingly, dismiss this appeal.

Liu, J.A. :

17. Much has been said of what can at best be taken as a lack of precision in the language of Clause 8, but there is no clear contrary intention expressed in that clause for excluding the effect of s. 39 of the Conveyancing and Property Ordinance or the running of the covenant with the land. There is no substance in the submissions of counsel for the appellant. I agree with the judgment just delivered by my lord, Godfrey J.A. I, too, would dismiss this appeal.

Nazareth, V.-P.:

18. I also agree.

19. At bottom Mr Warren Chan's submission is that the absence of the words "successors in title" in para. 8(a)(i) of the lease, in the context of their presence in para. 8(a)(ii), means that the word "lessor" in the former does not include "successors in title". Upon that basis, it is argued that "lessor" in sub-paragraph (1) could only mean the lessor mentioned in the schedule to the lease.

20. I can readily see that such an argument can be run. But equally I have no hesitation in rejecting it. The meaning contended for would have the result of severely eroding the value of the guarantee. For such an extraordinary meaning to be accepted, it would have to be spelt out clearly and not in the oblique and inferential way relied upon.

21. The appeal is accordingly dismissed. There will be an order, which is not resisted by the appellant, that the appellant is to pay the respondent's costs of the appeal.