FULLY PROFIT (ASIA) LTD v. THE SECRETARY FOR JUSTICE for and on behalf of the DIRECTOR OF LANDS

CACV 87/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 87 OF 2011

(ON APPEAL FROM HCMP NO. 82 OF 2010)

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BETWEEN

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J U D G M E N T

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Hon Tang VP:

1.  The Plaintiff is the developer of New Kowloon Inland Lot ("NKIL") Nos. 4036 to 4039 and 3665, and wishes to build a composite 26-storey building thereon. We are told that Government as lessor has no objection in principle to the proposed building. At stake is whether a premium is payable, which would depend on the construction of a covenant.

2.  This appeal is concerned with one issue, namely, whether the proposed development or some other similar development, would be in breach of the following covenants of the relevant Government leases ("the covenant"):

"And will not erect or allow to be erected more than one house on the demised premises …" (for NKIL Nos. 4036, 4038, 4039 and 3665)

"And will not erect or allow to be erected more than one house on the said piece or parcel of ground …" (for NKIL No. 4037)

3.  This is the Plaintiff's appeal from the judgment of Deputy High Court Judge Pow, SC, who held that the proposed development would breach the covenant because a composite 26-storey building is not a house.

Background

4.  By conditions of exchange dated 4 January 1952 ("the Conditions of Exchange"), Wong Kam Kwong agreed to surrender Inland Lot No. 1890 in Kennedy Road with a site area of 24,615 sq. ft. valued at $295,380 to the Government in exchange for a grant of New Kowloon Inland Lot No. 3665 at Nam Kok Road, Kowloon City, with an area of about 22,886 sq. ft. and NKIL No. 3666 also at Nam Kok Road with a site area of 9,934 sq. ft., valued respectively at $205,974.00 and $89,406.00.  As will be seen Inland Lot No. 3665 as granted was subsequently carved up into 20 lots, of which one remains to be known as Inland Lot No. 3665.  We are not concerned with NKIL No. 3666 at all. 

5.  General Condition 6(a) provided that when the conditions in the Conditions of Exchange had been complied with, the lessee would be entitled to a lease of for the 99 years from 1 July 1898 less the last 3 days thereof.  It does not appear that the Government was entitled to dictate the terms of the new leases to be granted, which presumably would not impose more onerous obligations on the lessee.  General Condition 6(b) provided:

"(b) The lessee of the new lots shall execute and take up Crown Leases for the new lots[1] when called upon to do so by the Land Officer. … In the event of more than one building being erected on the said lots the lessee may be required to take up separate leases for the site of each separate building and shall pay the Land Officer the prescribed fee for every additional leases so required to be taken up."

6.  General Condition 7(a) required the lessee to :

"7.(a)   … build … before the expiration of 18 calendar months …, one[2] or more good and permanent buildings upon some part of the new lots … and shall expend thereon a sum of not less $400,000 on N.K.I.L. 3665 … in rateable improvements and shall maintain all buildings now standing or hereafter erected on the lot in good and tenantable repair and condition throughout the tenancy and in such repair and condition deliver up the same at the expiration or sooner determination of the tenancy."

7.  The following Special Conditions should be noted:

"(3) The new lots shall not be used for industrial purposes and no factory building shall be erected thereon.

……

(6) Not more than 20 houses shall be erected on N.K.I.L. No. 3665 and not more than 8 houses on N.K.I.L. No. 3666."

8.  There is a Statement of Agreed Facts.  I set out the relevant paragraphs below:

"4. Building plans for the proposed buildings on N.K.I.L. No. 3665 were subsequently submitted to the Building Authority.  On 1 May 1952, the Building Authority approved building plans of '8 dwelling houses' at Nam Kok Road on N.K.I.L. No. 3665.  On 9 July 1952, the Building Authority approved building plans of '12 tenement houses' on N.K.I.L. No. 3665 at Nam Kok Road.

5. In about October 1952, 20 'Chinese type houses' were erected on N.K.I.L.  No. 3665.  This was evidenced by 2 occupation permits dated 2 October 1952 and 10 October 1952 granting permission to occupy 'eight Chinese type houses at Nos. 59-73 Nam Kok Road on N.K.I.L. 3665' and 'twelve Chinese type houses at Nam Kok Road on N.K.I.L. 3665' respectively.

6. According to the approved building plans, the 20 'Chinese type houses' then erected were a row of town houses, each house or building had 5 storeys, viz. the ground floor, cockloft, 1^st, 2^nd and 3^rd floor and a flat roof on top of the 3^rd floor. Access to the ground floor was directly from Nam Kok Road, with a back door opening into the service land running behind the row of town houses.  Access to the upper floors (including the cocklofts) was via a flight of staircases running from Nam Kok Road right through to the roof which was to be shared by 2 adjacent town houses.  With the exception of the cockloft, each floor would have its own bathroom so that each floor could be used as a separate dwelling.[3]

7. By a memo dated 17 October 1952, the Director of Public Works certified that the 'B.C.' (i.e. the building covenant, General Condition No. 7(a) of the Conditions of Exchange) of N.K.I.L. No. 3665 had been fulfilled.

8. A certificate of compliance in respect of N.K.I.L. No. 3665 was issued by the Director of Public Works on 9 June 1959.  As seen from the certificate of compliance, the original N.K.I.L. No. 3665 had already been sub-divided into 20 smaller lots, viz. the new N.K.I.L. No. 3665 and N.K.I.L. Nos. 4032 to 4050.

9. Between 1 March 1960 and 2 October 1969, the owner of each of the 20 sub-divided lots was granted a formal Government lease.  In the present proceedings, the Court is to consider the Government leases of N.K.I.L. Nos. 4036, 4037, 4038, 4039 and 3665 only ('the Land').  The Crown leases of N.K.I.L.  Nos. 4036, 4037, 4038, 4039 and 3665 were granted on 14 October 1965, 2 October 1969, 2 February 1966, 9 August 1965, and 11 September 1965 respectively.

……

13. As revealed from the Redevelopment Plans, Fully Profit intends to replace the 5 existing houses by one composite multi-storey building with some 26 storeys.  The composite building will straddle across all 5 lots of the Land.  The ground floor of the building is to be occupied by 2 shops each having direct entrance from Nam Kok Road and another small back door opening to the service lane.  Entrance to the upper residential floors is gained from Nam Kok Road through a separate entrance and a corridor leading to the lift hall and staircases on ground floor.  There is also another flight of back staircases serving all the upper floors opening into the service lane.  The said corridor separates the 2 shops so that there is no direct access from one shop to the other without passing through Nam Kok Road or the service lane.

14. On 6 December 2006, BD approved the Redevelopment Plans."

9.  As the Statement of Agreed Facts shows 20 leases were granted.  We are concerned with 5 such leases.  There are minor differences in language but they are not materially different.  In respect of NKIL Nos. 4036, 4038, 4039 and 3665, there are these covenants:

"… AND will not use or allow to be used the demised premises for industrial purposes and will not erect or allow to be erected thereon any factory building AND will not erect or allow to be erected more than one house on the demised premises …"

10.  In NKIL No. 4037, the covenant reads:

"… AND that the said Lessee will not use or allow to be used the said piece or parcel of ground or any part thereof or any building erected thereon or any part of such building for any purpose other than for non-industrial purposes and will not erect or allow to be erected any factory building on the said piece or parcel of ground AND will not erect or allow to be erected more than one house on the said piece or parcel of ground …

The Appeal

No Straddling

11.  Ms Audrey Eu, SC, appearing for the Government, submitted first that the covenant would not permit the owner to build a house straddling more than one lot.  Thus, even if the structure to be built is uncontrovertibly a house that would not be permitted.  She submitted that the covenant requires a house to be built on each lot.  Mr Edward Chan, SC, for the Appellant, submitted that Ms Eu's submission would effectively rewrite the covenant and turn it into a covenant "not to erect … other than one house on the lot".  The learned Deputy Judge rejected Ms Eu's submission.  He said:

"49. I have some difficulties accepting this submission.  It is certainly true that General Condition No 6(b) of the Conditions of Exchange contemplated that each building will be governed by a separate Crown Lease.  It is also true that it was so achieved eventually.  However, as explained in Doe D. The Marquis of Bute v. Guest, Bart, ibid, there is a difference between what the contracting parties contemplated as to certain state of affair and what they had actually agreed to be contractually bound.  The question is whether by agreeing to the subject covenant, the lessee can be said to have agreed not to build 'other than one house' on each lot.  The wording of the subject covenants is 'not to erect…more than one house'.  In my judgment, the Court cannot re-write the covenants into 'not to erect…other than one house'. I can test the argument by using this example:  assuming that the Plaintiff has acquired two such adjoining lots and intends to build one house (with all usual attributes of an ordinary house) straddling both lots with the rest of the land decorated as garden.  Then, in relation to each lot, the Plaintiff is only erecting part of a house.  The Plaintiff will then be in breach of a covenant 'not to erect …other than one house' because he is building less than one house.  However, the Plaintiff will not be in breach of a covenant 'not to erect … more than one house'.  I cannot read into the subject covenant a promise by the lessee that he will not erect a structure on one lot that would connect to or form part of another structure on the adjoining lot.  In other words, the mere fact that the proposed structure will straddle five lots is not a ground for holding that the subject covenants will be infringed.  What matters, in my judgment, is the nature and extent of the structure that is intended to be built straddling the five lots.  As I have held in para. 47 above, the nature and extent of the composite multi-storey building intended by the Plaintiff to be erected on the five lots are such that each portion of the composite multi-storey building resting on each of the five lots should fairly be regarded as 'more than one house', and hence will infringe the subject covenants."

12.  I respectfully agree that the covenant "not to erect … more than one house" is not a covenant "not to erect … other than one house".

House

13.  What would the covenant "not to erect … more than one house …" entail?

14.  For the meaning of the word "house", the learned Deputy Judge looked for guidance from Wah Yick Enterprises Co. Ltd. v Building Authority (1999) 2 HKCFAR 170.  He said: 

"44.   As observed by Litton PJ in Wah Yick Enterprises Co Ltd v Building Authority, a 20-odd storey residential block in today’s language would be 'a block of flats'.  It may well be difficult in 2011 to be sure as to what exact term one would adopt in 1965 to describe such a structure.  However, in my judgment it is most unreal to expect a reasonable person in 1965 to understand the word 'house' as including the proposed development which must have been a mega structure to him.  The size, height, complexity and appearance of the building structure as well as the number of separate tenements contained therein are far removed from the ordinary notion of a 'house'.  In all probabilities, a person in 1965 (if asked) would describe the structure as a 'high rise block of flats/apartments' or 'a multi-storey building of flats/apartments'. It is interesting to note that the Multi-storey Buildings (Owners Incorporation) Ordinance was first promulgated in 1970 to regulate the management of multi-storey buildings erected in Hong Kong.  It is thus most likely that the term 'multi-storey building' would have been in common use several years prior to 1970.  In my judgment, the word 'house', when used in the subject covenants, was not wide enough to encapsulate a building structure of such size, height, complexity, appearance and number of separate tenements as envisaged in the plaintiff’s proposed development.  Although the exact delineation between what is and what is not a 'house' may not be easy to draw, I have no hesitation in finding that the plaintiff’s proposed development falls clearly outside the description of 'a house'."

15.  The following passages from the judgment of Litton PJ[4] in Wah Yick should also be noted. 

"… A search for a free-standing meaning of the word house, valid for all time in all circumstances, is fruitless.  The word has, as Lawrence J in Annicola Investments Ltd v Minister of Housing and Local Government [1968] 1 QB 631 at p.640 remarked, a fluidity of meaning; it takes its flavour from the context in which it is used.  It is clear that, as a matter of the ordinary use of language, a residential block with one common entrance but containing a number of flats within the building envelope can be considered a house.  An example of this, in the context of restrictive covenants attaching to the grant of land located on Hong Kong Island, is Real Honest Investment Ltd v A-G [1997] 2 HKC 182, where it was common ground that an apartment block of seven storeys, with one common main entrance, 85 ft in height, consisting of 14 residential flats, was a house.  That was a result arrived at by concession by the grantor, not by adjudication in court.  The examples from English cases cited in the course of argument were old cases, decided at a time when residential tower blocks of over 30 storeys were unknown.  In this regard, it is worth noting that the Town Planning Ordinance (Cap.131) was first passed in 1939 when Hong Kong’s population was approximately one and a half million and multi-storey buildings were few: see the observations of Leonard J in Singway Ltd v A-G [1974] HKLR 275 at p.283 to this effect.  In such a setting, a residential block might well, in ordinary parlance, be referred to as a house, whatever its internal divisions.  It does not follow that, in the ordinary use of language today, a 30 storey residential block can be referred to as a house: most people would simply call it a block of flats." at 176

16.  Wah Yick was concerned with an area zoned for "village type development" in an outline zoning plan in the New Territories.  One of the "uses always permitted" in relation to such zoning was "house".  The appellant proposed to build a 33 storey block of flats, with one common entrance on the land.  The Building Authority refused to give approval under section 16(1)(d) of the Buildings Ordinance (Cap. 123) on the ground that it would contravene the outline zoning plan.  Both at first instance and in the Court of Appeal, and then finally in the Court of Final Appeal, it was held that the proposed building could not be regarded as a "house" in such context.  The observation of Litton PJ cited above was made in such context.

17.  Ms Eu also relied on Jasmin Enterprises Ltd. v Chan Yuk Hon [1998] 4 HKC 224.  It was concerned with requisition on title.  There, a term in a 1934 Government lease provided that no building should be erected on the land "other than two houses of a European Type".  But, a 22-storey multi-storey building had been built.  On the question whether the Government lease had been contravened, Sahkrani J said at page 227:

"… Each case must be decided on its own facts and one has to bear in mind that in 1934 when the Government lease was executed, it is doubtful whether there were any 22 storeys multi-storey buildings existing in Hong Kong. … It is clear in my view that the proper construction is that only two houses are to be erected and the erection of one house would be in breach of the covenant. …"

18.  Wah Yick and Jasmin show clearly that the meaning of "house" depends on its context.  It has "a fluidity of meaning; it takes its flavour from the context in which it is used".[5] 

19.  However, the learned Deputy Judge came to the conclusion that the word "house" would not include a block of flats because 

"… it is most unreal to expect a reasonable person in 1965 to understand the word 'house' as including the proposed development which must have been a mega structure to him. … In all probabilities, a person in 1965 (if asked) would describe the structure as a 'high rise block of flats/apartments' or 'a multi-storey building of flats/apartments'. … Although the exact delineation between what is and what is not a 'house' may not be easy to draw, I have no hesitation in finding that the Plaintiff’s proposed development falls clearly outside the description of 'a house'." para. 44

20.  But, with respect, whether "house" would include a block of flats would depend on the context.  To say that a building is not a house merely because in common parlance the building would be called a block of flats underappreciates the possible width of the word.

21.  In Kimber v Adams [1900] 1 Ch 412, the court was concerned with a plot of land which had a frontage of 400 sq. ft., which Cozen-Hardy J called "a block of flats" in his judgment.  The defendant who had acquired 2 of the plots proposed to erect 4 blocks of residential flats, each with a frontage of 50 feet.  Each block was to contain 2 flats on the ground-floor and 2 flats on the first floor.  Each flat would consist of 2 living-rooms and a kitchen, with scullery and offices. The court was concerned with a covenant (1) that no house shall be erected on any part of the 4 plots of less value than £500; and (2) that not more than 10 houses shall be erected on the said 4 plots.  At first instance, Cozen-Hardy J said:

"I think on this point I must hold that the erection of the block of flats is not a breach of the covenant which, for the purpose of the argument to-day, is assumed to be running with the land.  It is after all nothing more nor less than a question of the construction of this particular document, and one has to consider what is the meaning of the word 'house' in a deed or document where there is no context to cut it down or to alter its popular interpretation.  On that point I have the authority of Sir George Jessel in Attorney-General v. Mutual Tontine Westminster Chambers Association ((1876) 1 Ex. D. 469), where he said that a building of this nature is, both in ordinary parlance and in legal meaning, a dwelling-house, although it may also be for certain purposes regarded as a number of separate messuages.  He illustrated the proposition by saying that any one of the buildings in the Temple or Lincoln's Inn, which, as we all know, are divided into separate chambers, is nevertheless one house. … There is in the present case nothing whatever to limit the user of the building – nothing whatever beyond this covenant that no house shall be erected of less value than 500l., and a limit to the number of houses.  I have seen the plans. That which it is proposed to erect seems to me to be a house of the value of more than 500l., and none the less a house of that value because it is proposed to be used as a series of flats." (my emphasis)

22.  The decision was affirmed on appeal, where Vaughan Williams LJ said:

"… I do not think that any one who is familiar with building estates in London would have any difficulty in ascertaining the object of this covenant, if we construe it as a covenant in which the word ‘house’ means the physical erection and not the interior arrangement."

23.  Bokhary PJ's judgment in Wah Yick is instructive.  He said at 182C:

"… A block of flats with a single common entrance can sometimes be treated as a house.  The proposed development has a single common entrance; and I will proceed on the footing that it can be treated as a house.  The question is then reduced simply to whether a 33-storey block of flats can reasonably be considered a village type development. …"

and concluded that although it was not easy to draw a line, the proposed development fell on the wrong side of the line because:

"… Even in present-day Hong Kong, a 33-storey block of flats simply cannot, in my opinion, reasonably be considered a village type development."

24.  The learned Deputy Judge also took the view that:

"46. … the object of the subject covenants was to control the nature and extent of building activities on each lot.  The overall concern was to prevent overcrowdedness.  Accordingly, restriction under the covenant can consists of both quantitative and qualitative aspects.  In common parlance, the phrase 'more than' is not confined to sheer quantity and can also mean 'to a greater extent' (see Shorter Oxford English Dictionary on Historical Principles).  In that sense, the phrase embodies quantitative as well as qualitative notions.  If a building structure intended to be erected on the lot is qualitatively describable as a 'house', then the covenant exerts a quantitative control, namely only one such structure can be erected thereon.  On the other hand, if the building structure intended to be erected on the lot cannot be described as a 'house', one is then required to examine whether the nature and extent of the intended erection exceed the ordinary attributes of a 'house' in terms of size, height, complexity, appearance and/or the number of separate tenements involved. …"

25.  With respect, I agree with the learned Deputy Judge that the object of the covenant was to prevent overcrowdedness.  But in my view the control was limited.  For example, there was no limit on the number of flats which could be built (provided, on the learned Deputy Judge's reasoning, the building would not thereby be called a block of flats rather than a house.  Nor the size of such flats).  In my view, Special Condition (6) is concerned with the maximum number of buildings permitted, in other words, their minimum size (in the reasonable expectation that the full potential of the land would be utilized).  I believe the overall effect of General Condition 7(a) and Special Condition (6) is that if one building is built it could be as big as the lot could accommodate[6] but no more than 20 buildings could be built. 

26.  Moreover, as noted, General Condition 7(a) required the building of "one or more good and permanent buildings upon some part of the new lots …" (my emphasis).  Special Condition (3) provided that "no factory building shall be erected thereon" and that "new lots shall not be used for industrial purposes".  Other than that there is no restriction on the type of building which may be built. Having regard to the express prohibition against industrial use and the absence of any prohibition against other uses, I believe under the Conditions of Exchange, the owner could build a wholly commercial building with no residential element at all or a predominantly commercial building.

27.  If "house" in Special Condition (6) has the meaning attributed to it by the learned Deputy Judge, but Special Condition (6) is not to be construed as requiring 20 such houses, indeed, any such house, to be built, it could lead to the absurd conclusion that there was no limit to the number of buildings which could be built[7].  I believe General Condition 7 and Special Condition (6) permitted one building to be built and prohibited the building of more than 20 buildings.  That is all there was to these conditions.

28.  Suppose that in 1952 within the building covenant period of 18 months, the owner built only onebuilding on the entire lot, or say, 5 buildings

on the lot.  I believe, in the former, one Government lease would have been granted and in the latter 4 leases.  What might one expect to find by way of covenants in such Government leases?  In my opinion, it is likely that, in the former event, the Government lease would contain the same covenants in the Conditions of Exchange, namely, no industrial use, and no more than 20 houses. If 5 buildings had been built, I believe 4 Government leases would have been granted, and it is likely that each of these leases would contain a covenant against industrial use and a covenant not to build more than 5 houses on each of the 4 lots. 

29.  If so, this supports the view that the purpose of Special Condition (6) was to impose a numerical limit.

30.  Another approach is to read the word "building" in General Condition 7 as "house" so that at least one house satisfying the requirements of General Condition 7 must be built.  Suppose what was built in 1952 was a house with the same volume as the 20 houses which were eventually built.  It is true that the house could not be higher than whatever the height restriction was for air traffic at the time, but the building would have been a large one.  Probably one which, in common parlance, would be called "a block of flats".  I do not believe the use of the word "house" in the Special Condition (6) was intended to preclude the building of a massive composite building, even one which would be called "a block of flats".  The Conditions of Exchange is a formal document, no doubt drafted by persons familiar with the law.  The pertinent question is what did they intend when they used the word "house"? Did they intend the meaning to depend on common parlance?  I think not.  In other words, I do not believe it was intended that the meaning to be attributed to the word "house" should depend on whether in common parlance the structure would be called a house or a block of flats.  In its context, I believe the word "house" should be read synonymously with "building".  Or that the word should be construed as including what might in common parlance be called a block of flats.

31.  Even in 1952, multi-storey commercial buildings were not unknown in Hong Kong.  Certainly, multi-storey buildings, whether commercial or residential, could be found in many major cities of the world.  I do not believe it would have been beyond the contemplation of the Government and land owners in Hong Kong, that one day there might be similar multi-storey buildings in Hong Kong.  By 1965, when the first of the individual leases was granted, multi-storey composite building were not uncommon in Hong Kong although not in Kowloon City, where there were height restrictions due to the proximity of the Airport[8].

32.  In my view, the parties' intention should be gathered from the language they used.  Given the general language used in the Conditions of Exchange, I would not be prepared to read into the Conditions of Exchange, nor into the covenant in the individual leases, provisions which the parties might or might not have agreed.

33.  So for the above reasons, I would allow the appeal with an order nisi as to costs and make the declaration sought.

Hon Fok JA:

34.  I agree with the judgment of Tang VP.

Hon Chu JA:

35.  I agree.