FULLY PROFIT (ASIA) LTD v. THE SECRETARY FOR JUSTICE

Press Summary (English)

Press Summary (Chinese)

FACV 17/2012

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 17 OF 2012 (CIVIL)

(ON APPEAL FROM CACV NO. 87 OF 2011)

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J U D G M E N T

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Chief Justice Ma:

A       INTRODUCTION

1.  The plaintiff (the respondent in the present appeal[1]) is a developer and wishes to redevelop five Lots of land at Nam Kok Road in Kowloon City (“the five Lots”).  There stands a house on each Lot.  The plaintiff wishes to redevelop the five Lots (which are adjacent to one another) by building a 26 storey composite building[2] straddling across all five Lots.  The central question in this appeal is whether the relevant Government Leases under which each of the five Lots are held (“the Government Leases”)[3] permit the construction of the proposed building.  The issue before the court (as it was before all the courts below) is one of contractual construction.  The practical effect of the plaintiff not being permitted to build the composite building under the Government Leases is that they may be required to pay a premium for the privilege.

2.  Before identifying the relevant issues to be determined, I should first set out the relevant facts and the relevant contractual documentation.

3.  By Conditions of Exchange dated 4 January 1952 (“the Conditions of Exchange”), the then owner of a property on Kennedy Road in Hong Kong surrendered this land to the government in exchange for two Lots of land at Nam Kok Road in Kowloon City on the terms set out in that document.  These two Lots[4] were identified as NKIL Nos. 3665 and 3666.[5]  As we shall presently see, it was anticipated under the Conditions of Exchange that the lessee[6] would build on the Mother Lots.

4.  The Conditions of Exchange contained the following terms:-

(1)     The General Conditions of Exchange

(a)     By clause 7(a) thereof, the lessee of the Lots was to build within a period of 18 months from being given possession “one or more good and permanent buildings” on the Lots, spending it least $400,000 for Lot No. 3665 and $160,000 on Lot No. 3666.

(b)     Where more than one building was built on the Lots, the lessee could be required to take up separate leases in relation to the site of each building and would have to pay a “prescribed fee”[7] for each additional lease required to be taken up (clause 6(b) thereof).  It was by virtue of this clause that the five Lots became subject to five individual Government Leases.

(2)     The Special Conditions

(a)     Clause (3) restricted the user of the two Mother Lots.  It stated :-

“The new Lots shall not be used for industrial purposes and no factory building shall be erected thereon”.

(b)     Clause (6) stated:-

“Not more than 20 houses shall be erected on NKIL No. 3665 and not more than eight houses on NKIL No. 3666.”

5.  I highlight some aspects of the Conditions of Exchange:-

(1)     By General Condition 7(a), the lessee was able to build one or more buildings on the Mother Lots.

(2)     The only restrictions on the buildings to be built were two-fold: first, any building could not be used for industrial purposes, therefore no factory building could be built (Special Condition (3)); and secondly, in the event houses were built, no more than 20 houses could be built on Lot No. 3665 and no more than eight houses could be built on Lot No. 3666 (Special Condition (6)).

(3)     The Conditions of Exchange use the terms “building” (or “buildings”) and “houses”. In their context, it is difficult to see how they can be used interchangeably. A house may be a type of building, but not all buildings must be houses.

6.  As recorded by the relevant Occupation Permits, in about October 1952, 20 houses were erected on Mother Lot No. 3665.[8] These houses, described in the two Occupation Permits as “Chinese type houses”, were identical in design each having five storeys: a ground floor, a cockloft, three floors and a flat roof.  The 20 individual, sub-divided Lots, on which the houses stood, each occupied areas of about 1,143 sq. ft. (it will be recalled that the total area of Mother Lot No. 3665 was 22,886 sq. ft.).

7.  These houses having been erected in October 1952, it was not, however, until the 1960s that, pursuant to General Condition 6(b) of the Conditions of Exchange[9], individual Government Leases[10] were entered into in relation to each of the Lots on which the houses stood.  Accordingly, Mother Lot No. 3665 became sub-divided into 20 separate Lots, each with a house.  The five Lots (the subject matter of this appeal) which became governed by Government Leases created on various dates in the 1960s, are:-

(1)     NKIL No. 3665 (Government Lease dated 11 September 1965).[11]

(2)     NKIL No. 4036 (Government Lease dated 14 October 1965).

(3)     NKIL No. 4037 (Government Lease dated 2 October 1965).

(4)     NKIL No. 4038 (Government Lease dated 2 February 1966).

(5)     NKIL No. 4039 (Government Lease dated 9 August 1965).

8.  The construction of the terms of these Government Leases is crucial to the resolution of the central question in these appeals.  The relevant terms are those restricting user and the right to erect houses.  The parties have referred to these terms as restrictive covenants.  The effect of these restrictive covenants is the same although the wording of them differs in the following way:-

(1)     In the Government Leases for Lot Nos 3665, 4036, 4038 and 4039, it is stated:-

“… 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 …”

(2)     In the Government Lease for Lot No. 4037, the covenant states:-

“… 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 …”

9.  Since 2006, the lessee[12] of the five Lots has wanted to redevelop and for this purpose appointed the plaintiff as the authorized developer.  Building plans for the redevelopment being principally the erection of the composite building earlier described were duly submitted to the Lands Department.  They were rejected.  The position of the Director of Lands (the defendant in the present proceedings and the appellant in the present appeal) was that the proposed redevelopment breached the restrictive covenants set out in para 8 above.  The plaintiff disagrees.

10.  It is this point that separates the parties and which has led to the present proceedings.

B       THE ISSUES

11.  The parties’ respective stances can be simply stated:-

(1)     The plaintiff maintains there is no bar to the proposed redevelopment.  It is said by Mr Edward Chan SC[13] that nothing in the Government Leases prohibits the building of a 26 storey composite building which straddles across the five Lots.  The only prohibition is against industrial user, the building of a factory and, if houses were to be built, building more than one house on each Lot.  If the proposed building was a house for the purposes of the restrictive covenants, it straddled all five Lots so that only a part of a house would be on each Lot.  Therefore, there would be no breach of the restriction on building more than one house.  Alternatively, if the proposed building could not be defined as a house, then, providing it was to be used for non-industrial purposes and was not a factory, then the restrictive covenants had no application either since they only applied to houses; no restrictions were placed on the erection of any other type of building.  Mr Chan gave the example in this context that his client could freely build swimming pools, hospitals or schools on the Lots.  In support, Mr Chan referred to the Conditions of Exchange[14] and made the point that nothing in those conditions would have prevented the erection of a building such as the proposed building (which could have straddled across the whole of the Mother Lots), the only prohibition being against industrial user, the building of factories and building (on the Mother Lot No. 3665) more than 20 houses.  He made the point that nothing in the Conditions of Exchange (referring I assume to General Condition 6(b)) required the imposition of more onerous terms on the lessee in the event any new leases were entered into, than was the case under the Conditions of Exchange themselves.[15]

(2)     The defendant, on the other hand, submits that the word “house” in the restrictive covenants ought to be given what counsel[16] described as an ordinary and natural meaning.  Thus construed, the proposed building was not a house.  It was also contended that the effect of the restrictive covenants was that the only redevelopment that could take place on each of the five Lots was the erection of a house, no more and no less.  Nothing in the Government Leases permitted the erection of any building other than a house; it would be absurd for restrictions to be placed on the building of houses, yet no restrictions at all on the erection of any other type of building.  Further, in any event, nothing in the Government Leases permitted the erection of a single building straddling the five Lots.  Finally, it was contended that in the event the restrictive covenants could be regarded as being ambiguous, the court should apply the principle that in any grant made by the Government, covenants should be construed strictly against the grantee: reliance was place on Feather v The Queen.[17]

12.  In the Court of First Instance, Deputy Judge Pow SC concluded that the building to be erected under the proposed redevelopment was not a house.  He was of the view that the definition of the word “house” in the Government Leases had to be considered in the light of what that term meant at the time the Leases were created.  At that time, the learned Deputy Judge observed, houses on the five Lots were already in existence.  As he said, “The plaintiff submitted that the building standing on each Lot in 1965 must have been considered as a ‘house’.  This must be right.”[18] After examining the plans for the proposed redevelopment, the Judge concluded that it would be a “quantum leap” for the proposed building to be described as a house.  He accordingly found in favour of the defendant.

13.  The Court of Appeal reversed the Judge’s decision and found in favour of the plaintiff, thus allowing the appeal.  Like the judgment of the learned Deputy Judge, the judgment of the Court of Appeal[19] analyzed a large number of authorities (of both the Hong Kong and English courts), although the conclusion reached was quite different.  In arriving at the view that the proposed composite building did constitute a “house” under the Government Leases, the Court of Appeal relied much on the effect of General Condition 7(a) and Special Condition (6) of the original Conditions of Exchange.  Under those conditions, the original lessee of the Mother Lots could have built a building which occupied the whole of the Mother Lots.  It therefore followed that a large composite building could come within the definition of house; in context, the term “house” was synonymous with the term “building”.  Straddling caused no difficulties because under the original Conditions of Exchange, a building or buildings could have occupied the whole of the Mother Lots.

14.  It is clear from the way the parties and the courts below have approached the case that it becomes necessary in this appeal principally to construe the meaning of the word “house” in the restrictive covenants and to ascertain the intention behind the restrictive covenants.

C       CONSTRUCTION OF THE RESTRICTIVE COVENANTS AND APPLICATION TO THE FACTS

15.  We have been referred to the very well-known statement of principle regarding the construction of contracts contained in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society[20], to which can be added the judgment also of Lord Hoffmann NPJ in Jumbo King Ltd v Faithful Properties Ltd[21]. What emerges from these cases – and other authorities on contractual interpretation – is the overall importance of context when construing contractual terms.  The statements of principle in Investors Compensation Scheme and in Jumbo King refer time and again to the relevant background against which the relevant contract and contractual terms must be viewed.  It is in my view not particularly helpful in most cases to refer to the “ordinary and natural meaning” of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words.  The surer guide to interpretation is context.  Here, I would just add that in the area of statutory and constitutional interpretation, it is context that is key; context is the starting point (together with purpose) rather than looking at what may be the natural and ordinary meaning of words.[22]

16.  The word “house” is a good example of where there is no ordinary or natural meaning; at least this is open to much debate.  The number of authorities referred to in the judgments below and in the parties’ written Cases before us amply demonstrate this point and, for my part, very little assistance can be derived from these authorities.  This Court has already stated that a “search for a free-standing meaning of the word house, valid for all time in all circumstances, is fruitless.”[23] Reference was made in Wah Yick to the judgment of Lawrence J in Annicola Investments Ltd v Minister of Housing and Local Government[24] where he said the word had a “distinct fluidity of meaning, and that it is best construed in relation to the context in which it is found.”

17.  In context, it is clear that the meaning of the word “house” under the Government Leases must have reference to those characteristics of the houses which were actually standing[25] at the time the Government Leases were entered into.  In this respect, I agree with the learned Deputy Judge.  Unlike in the case of the Conditions of Exchange when that document came into existence (when there were no buildings on the Mother Lots that could be described as houses), houses were actually standing on each of the individual, sub-divided Lots at the time the Government Leases were created.  In the context of those Leases, the meaning of the word “house” must be taken to mean the type of house existing on the individual Lots.  It is significant that the word “house” should be used, rather than the word “building”.  In the Conditions of Exchange, as seen earlier, both words are used.  They have different meanings.  General Condition 7(a)[26] allowed the lessee to build one or more “buildings” on the Mother Lots but if “houses” were to be built, then under Special Condition (6)[27] , this was limited to 20 houses (on the former Mother Lot No. 3665) and eight houses (on the former Mother Lot. 3666).

18.  I have not lost sight of the user part of the restrictive covenants.  The argument here was that since there was an express prohibition in the restrictive covenants to the erection of a factory building, it therefore followed that any other type of building[28] could be erected.  There are two answers to this construction: first, it ignores the meaning of the word “house” in context; secondly, the reference to “factory building” in the restrictive covenants is really to emphasize the prohibition against industrial use.

19.  Construed in this way, it is clear that the building that is proposed to be built on the five Lots cannot be regarded as a house for the purposes of the restrictive covenants.

20.  What then of the plaintiff’s point that the restrictive covenants only contained a restriction as to the number of houses that could be built (no more than one on each Lot) but had no application to limiting either the type or number of other buildings that could be erected?  I cannot agree with this construction of the effect of the restrictive covenants:-

(1)     First, on a general note, it seems extremely surprising that while a limit is placed on the type and number of houses that can be built on each individual Lot, yet there is no limitation in the event of a redevelopment either on the type or number of other buildings that can be erected.  I have already referred to Mr Chan’s submission regarding swimming pools, hospitals and schools.

(2)     Secondly, the context of the restrictive covenants militates against the construction contended for by the plaintiff.  Relevant to this discussion are the Conditions of Exchange.  Under the Conditions, as we have seen, the lessee was entitled to build one or more buildings on the Mother Lots (provided they were not for industrial use and were not factory buildings) and within this entitlement, to build houses.  The lessee having chosen to build houses on Mother Lot No. 3665[29], it is in this context against which the restrictive covenants have to be viewed.  The individual Government Leases entered into in the 1960s therefore concerned houses and nothing else.  By then, the Mother Lots had been sub-divided and there was no question of going back to the previous state of affairs where the two Mother Lots had not yet been divided up or built on.  Seen in this way, I agree with Ms Eu’s submission that in the case of any redevelopment of the individual, sub-divided Lots, only houses were contemplated, and no other type of building.  Such construction is, I believe, the inevitable effect of the restrictive covenants and the intention behind them.  I have earlier dealt with the effect of the user part of the restrictive covenants.

(3)     Where the Court of Appeal principally fell into error was in the treatment of the Conditions of Exchange.  While it was right to regard that document and what transpired under it as part of the context of the Government Leases, it was wrong to assume that the state of affairs envisaged under the Conditions of Exchange (namely that there were two Mother Lots on which one or more buildings could be erected) remained the same when the Government Leases were created.  The factual circumstances had clearly changed.

21.  The only permitted redevelopment under the Government Leases being the building of houses, and no more than one house on each Lot, and no other type of building, the proposed redevelopment by building a 26 storey building is also for this reason prohibited.

22.  In view of the construction of the restrictive covenants reached above, it is unnecessary to consider the arguments based on straddling or whether it is permissible to build only a part of a house on each Lot.  It does seem to me, however, on straddling it is unlikely that the Government Leases would, without modification, allow for this.  Each Government Lease, as stated above, dealt with an individual Lot.  The previous state of affairs when the Mother Lots were much larger and before sub-division, no longer exist.

23.  It is also unnecessary to deal with the principle (if it exists and if so, its ambit) in Feather v The Queen.

D       CONCLUSION

24.  The proposed redevelopment not being permitted under the Government Leases, this appeal should be allowed and the order made by the learned Deputy Judge, restored.  As to costs, I would order that the plaintiff should pay the defendant’s costs in this appeal and in the Court of Appeal, such costs to be taxed if not agreed.  The costs of the action shall be  as ordered by the learned Deputy Judge.  If any party wishes to have a different order for costs, written submissions should be served on the other party and lodged with the Court within 14 days of the handing down of this judgment, with liberty on the other party to lodge written submissions within 14 days thereafter.  In the absence of such written submissions, the order nisi will stand absolute at the expiry of the time limited for these submissions.

Mr Justice Chan PJ:

25.  I agree with the judgment of the Chief Justice.    

Mr Justice Ribeiro PJ:

26.  I agree with the judgment of the Chief Justice.

Mr Justice Bokhary NPJ:

27.  I agree with Chief Justice Ma’s judgment.

Lord Hoffmann NPJ:

28.  I agree with the judgment of the Chief Justice.

Chief Justice Ma:

29.  This appeal is unanimously allowed.  The order of the learned Deputy Judge should be restored.  The Court also makes an order for costs as set out in para 24 above.