GUOJI TRANSPORT CO LTD v. THE COLLECTOR OF STAMP REVENUE

1995, NO. SA 30

IN THE DISTRICT COURT OF HONG KONG

CIVIL JURISDICTION

STAMP APPEAL NO. 30 OF 1995

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J U D G M E N T

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1. This is an appeal upon a case stated by the Collector of Stamp Revenue, the Respondent. It follows his assessment contained in a letter dated 21st July 1995 that an agreement dated 29th December 1992 ("the agreement") between the Appellant, Guoji Transportation Company Limited ("Guoji") and China National Trade Transportation Corporation (Guangdong) Huangpu Branch ("Sinotrans") is chargeable to Stamp Duty under Head 1(2)(a) of the First Schedule to the Stamp Duty Ordinance Cap. 117 in the sum of $303,424 as a lease.

2. In paragraph 10 of the case stated the Collector states that "upon adjudication (he) has formed the opinion that the Agreement was either an agreement for a lease for a consideration of $11,033,561.83 or alternatively, an agreement for sale of an equitable estate or interest in immovable property to which Section 26(1) of the ordinance applies."

3. Miss Chung for the Collector has not sought to uphold the assessment on the basis referred to by the Collector in this paragraph. She has argued that the agreement was either a lease (as was stated in the Collector's letter of 21st July 1995) or an actual conveyance on sale of an equitable interest. She has not sought to argue that the agreement was "a contract or agreement for the sale of any equitable estate or interest in any immovable property" or to rely on S26 Stamp Duty Ordinance.

4. The Collector's position before me has been that the agreement is either chargeable under Head 1(2)(a) of the First Schedule to the ordinance as a "lease" or under Head 1(1) of the same Schedule as a "Conveyance on sale". It has not been disputed that when an instrument liable to stamp duty fills within two different Heads the Crown is entitled to only one of the duties but it is entitled to choose the higher (Speyer Brothers v I.R.C. 1908 AC 92). In this case Miss Chung has argued that it is immaterial whether the agreement is chargeable under Head 1(2)(a) or Head 1(1) as the amount of duty payable would be the same (i.e. $2.75 of every $100 or part thereof of the amount of the consideration, which in this case amounts to $303,424.)

Jurisdiction of the District Court on an Appeal

5. It has been argued by Mr. Liao on behalf of the Appellant that this is an appeal on the Assessment and that this court has no jurisdiction to entertain the matter on any basis other than the basis contained in the assessment, namely that the agreement is chargeable as "a lease" in particular he has argued that the court has no jurisdiction to entertain alternative arguments for the Collector on appeal.

6. Although, in the light of my findings which appear hereafter, the matter is academic, I do not accept Mr. Liao's argument. The terms of S14(3) Stamp Duty Ordinance make clear the jurisdiction of this court. It must "determine the question submitted, and if the instrument in question is in the opinion of the court charegable with any stamp duty the court shall assess the stamp duty chargeable thereon." The questions submitted for the opinion if the court are

"(1) Whether the Agreement is chargeable with any stamp duty under the Ordinance; and

(2) If so what amount of stamp duty is chargeable".

This court is not confined to the basis of assessment referred to by the Collector in the letter of 21st July 1995.

The Agreement

7. The agreement is an unusual one. Its terms are complex and carefully drafted.

8. Those terms were summarised by the Collector as follows:

"By (the agreement ..... Guoji ..... as the legal and beneficial owner of the Property known as Units A to G on the 19th Floor of Seabright Plaza, Nos. 9 - 23 Shell Street, Hong Kong ("the Property"), granted to ... Sinotrans the rights and licences set out below. Under the Agreement, Sinotrans agreed to pay the Appellant a sum of HK$11,033,561.83 ("the total sum") which is payable by instalments in a manner as stipulated in Clause 1 of the Agreement.

(1) In accordance with Clause 2 of the Agreement, a licence to enter upon, occupy and use exclusively the portion of the Property identified as Units A, B and C ("the Portion") with the ancillary rights to use the facilities of the Property including gas, water, air-conditioning and electricity that are necessary and incidental to the use and occupation of the Portion; the right to have access to and from the lifts, and to use the common areas and common facilities as defined in the Deed of Mutual Covenant and Grant and Management Agreement of the Building of which the Property forms part;

(2) In accordance with Clause 5 of the Agreement, the entitlement to give notice in writing at any time after three years from the date of the Agreement to the Appellant stating that it wishes the Property to be sold. Thereupon, the Appellant shall EITHER sell and complete the sale of the Property within three months from the effective date of the Sinotran's notice or within such extended period as is provided for and to pay to Sinotrans a sum ascertained pursuant to Clause 5(2)(a) of the Agreement which, broadly, is:

[(1/2.2303) x the actual sale price] less the outstanding unpaid balance of the total sum, if any, under the Agreement; OR,

within one month of the effective date of the notice pay an "alternative" sum to Sinotrans to be determined pursuant to Clause 5(2)(b) of the Agreement which, broadly, is:

[(1/2.2303) x the market price (determined under Clause 6)] less the outstanding unpaid balance of the total sum, if any, under the Agreement.

2. Prior to the Agreement, it was in fact the intention of the Appellant and Sinotrans to share and join in the use and occupation of the Property and investing therein. It was also the opinion of the Appellant and Sinotrans that the value of the Property as a whole was or would be higher than that of partitioned portions thereof. In the circumstances, both the Appellant and Sinotrans agreed to the arrangement as set out in the Agreement wherein Clause 7 provides that the extent of the investment of the Appellant and Sinotrans in the Property respectively is in the proportion or ratio of 1.2303 to 1.

3. Clause 2(3) of the Agreement provides that the licences and the rights shall extend to the officers, agents, employees, customers and invitees of Sinotrans and Sinotrans shall ensure the compliance with the Deed of Mutual Covenant and Grant and Management Agreement of the Building and the Crown Lease. Furthermore, the Appellant and Sinotrans shall pay and contribute to payment of all charges and fees for the use of the facilities of the Building, all other charges and fees payable under the Deed of Mutual Covenant and Grant and Management Agreement, and rates and other outgoings all in the ratio of 1.2303 (applicable to the Appellant) to 1 (applicable to Sinotrans). If any of such charges, fees and other payments is attributable solely to the Portion, Sinotrans shall bear it solely.

4. Clause 2(5) of the Agreement provides that notwithstanding anything contained in the Agreement or otherwise, Sinotrans shall NOT be a tenant of the Portion, or the Property, or any part thereof, and nothing contained in the Agreement or otherwise shall constitute or create a tenancy under which Sinotrans is a tenant.

5. By virtue of Clause 3(2) and Schedule II to the Agreement, Sinotrans is obliged, among other things:

(a) to observe such house rules as may from time to time be established introduced, amended or adopted by the Manager or the Incorporated Owners of the Building of which the Property forms part;

(b) to keep all the interior of the Portion including the partitioning, flooring and interior plaster or other finishing materials etc. in good clean and proper repair condition; and deliver up the same to the Appellant at the expiration or sooner determination of the licences or rights in good clean and proper repair condition, provided that Sinotrans shall at the request of the Appellant and at its own cost to remove the partitioning and fixtures not owned by the Appellant;

(c) to repair and amend any defect in the interior of the Portion;

(d) to permit the Appellant and its agents at all reasonable times upon prior appointment to enter the Portion or any part thereof to view the state of repair and condition thereof and to carry out repairs or works;

(e) to deliver up vacant possession of the Portion to whomsoever is the owner of the Property on the termination or sooner determination of the licences and rights;

(f) not to sub-licence or otherwise part with the possession of the Portion or any part thereof; and

(g) to fully indemnify the Appellant against all claims, demands, costs, expenses, actions and legal proceedings caused by or through or in any way owing to activities in the Portion or the defective or damaged conditions owing to Sinotrans's exercise of the licences and the right.

6. Under Clause 5A of the Agreement, the Appellant is entitled to give notice in writing to Sinotrans at any time after the period of three years from the date of the Agreement that it wishes the Property to be sold. Thereupon, Sinotrans shall EITHER purchase the Property at the market price (as determined under Clause 6 of the Agreement) within one month from the effective date of the Appellant's notice, OR empower the Appellant to sell the Property at not less than the market price within three months from the effective date of the notice from the Appellant or within such extended period as is provided for. In the event that the Property is sold to a third party pursuant to Clause 5A(1))(b) of the Agreement, Sinotrans shall be entitled to a sum as ascertained under Clause 5(2)(a), whereas in the event of a sale of the Property to Sinotrans, the price payable to the Appellant shall be the market price determined by Clause 6 less a sum payable to Sinotrans ascertained pursuant to Clause 5(2)(b).

7. Under Clause 4 of the Agreement, the licences and rights granted to Sinotrans shall terminate on completion of the sale and purchase of the Property to the third parties [pursuant to Clause 5(1)(a) or the proviso (2) thereto or Clause 5A(1)(b) or the proviso (2) thereto]; on completion of the sale and purchase of the property to Sinotrans [pursuant to Clause 5A(1)(a)]; on expiration of the time limit for the payment by the Appellant to Sinotrans as referred to in Clause 5(1)(b); or on the lawful termination of the Agreement pursuant to the provisions of the Agreement or pursuant to any rights or powers otherwise conferred by law.

9. Further by Clause 10 it is provided that the agreement was personal to the parties and that the agreement and the benefits and rights under it including the licences referred to were not assignable.

Construing the Agreement

10. Certain clauses in the agreement, such as Clause 2(5) and Clause 10 purport to determine its legal effect. Clause 2(5) of the agreement for instance expressly provides that Sinotrans shall not by virtue of the agreement become a tenant of the whole or any part of the property. It has been accepted by the parties that the terminology used by the parties in the agreement is not decisive. Although the terminology used by the parties can be taken into account by the court in deciding its legal effect, "the consequence in law of the agreement once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfies all the requirements of a tenancy then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence" (per Lord Templeman in Street v. Mountford 1985 AC809 at 819).

A LEASE

11. The terms of the agreement contemplate two elements : a user of the property by Sinotrans and an investment in it. (see recital to the Agreement para (3)). The user would continue for a substantial period of at least more than 3 years (Clause 5(1) and 5A(1)) until the investment is realised. The initial question for the court to decide is the status of Sinotrans as occupier during that period.

12. The traditional view is that for a tenancy to arise the occupier must be granted exclusive possession for a term at a rent or premium.

(a) Exclusive Possession

13. While exclusive possession is if first importance in considering whether an occupier is tenant, and will usually be indicative of a tenancy, it is not decisive. In this case the Agreement makes clear that Sinotrans was granted exclusive possession of the part of the property specified. It is expressly so provided by Clause 2(1)(a).

(b) Term Certain

14. While the terms of an agreement may be suggestive of a tenancy, a tenancy cannot arise as a matter of law unless it is granted for a term certain. It has been argued for the Appellant that this agreement is not for a term certain, despite the fact that it contains detailed provisions for its determination, in that it does not provide for a commencement date and it can continue indefinitely.

15. The rule which requires the maximum duration of a term of years to be ascertainable from the outset was described by Lord Browne-Wilkinson in Prudential Assurance Co. Ltd. v LRB (1992 2AC 386 at 396) as "ancient and technical". He went on to say "No one has produced any satisfactory rationale for the genesis of the rule. No one has been able to point to any useful purpose that it serves at the present day" yet he felt unable to depart from it.

16. Three alternative submissions have been made on behalf of the Collector. Firstly that the agreement constitutes a periodic tenancy, namely a monthly tenancy. Alternatively that certainty is provided by the fact that it cannot be determined for at least 3 years. Alternatively since Guoji's interest in the land is a leasehold one and Sinotrans interest must have been carved out of that interest, the maximum duration of Sinotrans lease is certain (i.e. the unexpired term of the reversionary interest of Guoji less one day).

The Commencement Date

17. I am satisfied that there is no uncertainty as to the date of the commencement of Sinotrans interest under the agreement. Notwithstanding the fact that it is recited that prior to the agreement Sinotrans has been in occupation of the portion of the property owing to its urgent requirement for accommodation (para 3 of Recital) Clause 2 makes clear that Sinotrans interest under the agreement takes immediate effect upon the signing of the agreement (29th December 1992).

A periodic monthly tenancy?

18. If the agreement did purport to create a periodic monthly tenancy it would be saved from uncertainty because each party would have the power to terminate it at the end of any monthly period of the tenancy. I am however not satisfied that a monthly periodic term is created by the terms of the agreement., It was argued that an inference that the agreement is for a periodic term arises from the fact that the payments under Clause 1(1)(b) are made monthly. That might be a reasonable inference if those monthly instalments could be shown to be rent for the month in question. I am not satisfied that they have been shown to be rent. I find that the 66 monthly instalments referred to in paragraph 1(1)(b) are what they purport to be, namely the payments by instalments of the consideration to be paid by Sinotrans for entering the agreement. If they were rent for the month in question, one would not expect interest to payable on rent not yet paid. Yet that would be the effect of clauses 1(1)(c). One would expect the fact that there were 66 such payments to have some relevance to the length of the tenancy. It does not. One would not expect such "rent" to be credited to the tenant on the sale of the property, yet such would be effect of Clauses 5 and 5A.

A tenancy for 3 years certain?

19. I accept the argument the Clause 4 of the agreement does provide a period of certainty of at least three years. Even S4(1)(e) cannot result in an earlier determination of the tenancy by virtue of S122 (2) Landlord and Tenant (Consolidation) Ordinance Cap. 7. However the certainty provided by those three years does not of itself satisfy the technical rule, as there is no provision that the three year period is the maximum duration of the term. On the contrary the agreement contemplates the term continuing until determined by the provisions for notice in Clause 5 and 5A.

20. If the provisions of the agreement could be construed as providing for a term of three years certain and thereafter from, month to month, then in my view the objections as to uncertainty could be overcome. However I find it impossible to infer a periodic term arising after the three years certain by reason of the complexities of the provisions for its termination.

21. If, for instance, there was a simple provision that after the expiry of three years the agreement could be terminated by one month's notice on either side, then it might be possible to infer a continuing monthly periodic tenancy. The agreement does provide the right to each party to give one month's notice to the other but the effect of that notice is not to terminate the agreement at the expiry of that month. The agreement only terminates on the occurrence of the events provided for in Clause 4 - principally the completion of sale and purchase of the property, an event that could occur within a wide range of dates according to the terms of the agreement. As a result I find it would be impossible to infer the duration of any periodic term after the three year certain.

A term equal to Guoji's interest less one day?

22. I am satisfied that the final submission advanced on behalf of the collector is a good one.

23. Guoji's title to this land is by way of leasehold. Guoji was not in a position to grant a term to Sinotrans longer than its own interest. It is the duration of that reversionary interest that provides the maximum duration of the term so as to satisfy the technical requirement for certainty of term. The situation is analogous to the situation in Siew Soon Wah v Yong Tong Hong 1973 AC 836 where the Privy Council upheld the construction of the Federal Court of Malaysia that a tenancy expressed to be "permanent" showed an intention that the landlord should let the premises only for as long as he had power to do so (which by statute was 33 years). In that case reference is made to the case of Kusel v Watson 1879 11 Ch. 129 in which an underlease which was otherwise uncertain was construed to be limited by the residue of the term of the head lease. I am satisfied therefore that a tenancy on the part of Sinotrans is not precluded by any uncertainty of term.

(C) Rent or other consideration

24. The reservation of rent is one of the factors that a court can look at in deciding whether or not an agreement creates a tenancy.

25. It is not however a decisive factor. The fact that rent is reserved does not preclude a letting (see Ashburn Ansalt v Arnold (W and J) & Co. 1989 1 Ch. 1 Birrel v Carey 1989 58 P and C.R. 184, Canadian Bank of Commerce v Bello 1991 64 P and C.R. 48). It is merely one of the factors that a court will look at in deciding whether a tenancy is created. It is obvious that a landowner is less likely to intend grant a tenancy when he obtains no financial benefit for the agreement.

26. As I have already mentioned, the agreement provides that on a sale of the property Sinotrans' share of the proceeds will take into account (and be increased by) the proportion of the $11,033,561.83 already paid by Sinotrans to Guoji at the time of the sale. It cannot be said therefore that that sum was paid by Sinotrans to Guoji as "rent" (in the sense of money exclusively referable to the occupation by Sinotrans of their portion of the property for a particular period). But having said that, there can be little doubt that the agreement to pay $3,533,561.83 immediately and the balance of $7,500,000 by instalments was consideration for Sinotrans being allowed to occupy their portion of the premises. As paragraph 3 of the recital points out Sinotrans was interested in two things, using part of the property and making an investment. Unless it was prepared to make the investment, Sinotrans would not be allowed to use the property.

27. The granting of exclusive use of part of the premises to Sinotrans was therefore part of a commercial transaction for a very substantial consideration.

The Nature of the Agreement

28. The fact that Sinotrans was granted exclusive possession of part of these premises as part of a commercial transaction for a very substantial consideration makes it more likely, in my view, that something more substantial than a licence, a mere personal privilege, was intended.

29. That view is reinforced by other terms of the agreement.

30. Sinotrans undertook a large number of obligations to Guoji, which are set out in Schedule II. I have born in mind the fact that those obligations are obligations that commonly appear in tenancy agreements does not of itself mean that this must be a tenancy agreement.

31. Certain of those obligations are however suggestive of something more than a licence. The obligation for insistence to permit Guoji and its agents to enter the portion reserved to Sinotrans to view the state of repair of the premises (Clause 8) emphasises the exclusively of possession otherwise granted to Sinotrans. The obligation on Sinotrans in Clause C to keep the interior of the premises (including things so intrinsic to the premises as partitioning, flooring, plastering, wiring and drains) in good clean and proper repair at its own expense and "deliver up" (my emphasis) the same to Guoji at the expiration of the occupy suggests something more than a mere licence to use them. The implication in Clause L that it was within the contemplation of the parties that Sinotrans might wish to effect structural attention to the premises (and should not do so without Guoji's consent) is also suggestive of something more than mere personal privilege on Sinotrans' part use the portion of the premises. If it had been contemplated that Guoji would be responsible for the cost of any facility or the management fees exclusively referable to Sinotrans portion that might have suggested as a mere licence on Sinotrans part. It is however specifically provided by Clause 2(3) of the Agreement that such charges shall be born solely by Sinotrans.

32. Taking all these matters into account and bearing in mind that the agreement was for at least 3 years and that Sinotrans interest was only determinable after compliance with the complex provision of Clause 4, I am of the view that the agreement does bear all the indications of and satisfy all the requirements of a tenancy, notwithstanding the provisions of Clause 2(5).

33. In view of my finding that the agreement constitutes a lease to Sinotrans of the portion to which it is granted exclusive possession, the agreement is therefore chargeable to stamp under Head 1(2)(a) of the First Schedule to the Stamp Duty Ordinance Cap 117. This is tax legislation and this court needs look no further than the consideration expressly provided by the agreement. That is the sum of $11,033,561.83. That sum is chargeable at $2.75 for every $100 or part thereof of the amount of the consideration, namely $303,424.

34. In the light of these findings it unnecessary for me to go on to consider the arguments which arise from the Collector's alternative argument that the agreement constitutes a conveyance on sale. If correct the Collector would be entitled to no greater sum by way of Stamp Duty.

35. My answer to the first question of the Collector namely "whether the Agreement is chargeable with any stamp duty under the ordinance" is "yes".

36. My answer to his second question namely "if so what amount of stamp duty is chargeable" is "$303,424".

37. The Respondent's costs to be taxed and paid by the appellant. Certificate for Counsel.

Certified True Copy

Connie Yip
PSII
13.9.96