VERDER & CO (HONG KONG) LTD AND ANOTHES v. LI CHUN AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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DECISION

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The Background

1. The 1st Plaintiff ["Verder"] is the Crown lessee of Yau Tong Marine Lot No. 21 ["the Lot"]. As originally granted on 19.1.1959, the Lot was of an area of 76,000 sq. ft. Special Condition 2(a) of the Crown Grant provides that "the lot and all buildings to be erected thereon shall not be used for any purposes other than shipbuilding and/or as a sawmill and timberyard". On 13.12.1971, an extension to the Lot was granted in favour of Verder subject to the condition that the extension area of 7,468 sq. ft. "shall not be used for any purpose other than for the water storage of logs". By letter dated 13.5.1992, in consideration of a premium of $777,000, the Crown granted a waiver in favour of Verder so as to permit the Lot and its extension to be used "for the purpose of storage of non-dangerous goods" for 1 year expiring on 31.3.1993.

2. By a lease dated 4.4.1995, Verder granted in favour of its subsidiary the 2nd Plaintiff ["Sun Dah"] a lease ["the Head Lease"] in respect of the Lot and its extension for a term of 3 years expiring on 31.3.1998 at the rent of $190,000 per month. Clause 2(n) of the Head Lease provides that Sun Dah shall not use the said Lot "for any purpose other than in accordance with the provisions of Conditions of Grant". By Clause 12, Verder consented to the subletting of the premises by Sun Dah to the 1st Defendant ["Li"] for a term of 3 years less the last 1 day on terms that "are not in contravention of the terms of [the Head Lease]". Clause 6 provides that Verder shall permit and authorise Li to apply to the Government for modification of the Conditions of Grant in respect of the Lot so as to permit the same being "used for the purpose of storage of non-dangerous goods". Sun Dah is under an obligation to procure Li to bear all fees in respect of the waiver.

3. By a lease also dated 4.4.1995 ["the Sub-Lease"], Sun Dah let to Li the Lot and its extension for the term of 3 years less 1 day at the rent of $382,000 per month. Recital (B) of the Sub-Lease expressly referred to the Head Lease. Clause 2(n) of the Sub-lease provides that Li shall not use the Lot and its extension "for any purpose other than in accordance with the provisions of the Conditions of Grant". Clause 6(a) of the Sub-Lease is the mirror image of Clause 6 in the Head Lease. By Clause 12, Sun Dah consented to the subletting by Li on terms that "shall not be inconsistent with the terms herein contained". Such subletting shall not be more than 38,000 sq. ft. in total. Li is to keep Verder and Sun Dah indemnified against any loss or damage or expense which Verder and/or Sun Dah may suffer arising out of such subletting.

4. According to a business registration dated 15.9.1987, Li carries on a transportation business in the name of Yiu Wah Transportation Company.

5. By a tenancy agreement dated 7.4.1995 ["the Sub-sub-lease"] and made between Yiu Wah Stevedore & Transportation Co. ["Yiu Wah"] and the 2nd Defendant, Yiu Wah agreed to let 50,005 sq. ft. of the Lot in favour of the 2nd Defendant for the period between 15.5.1995 to 14.5.1998 at a rent of $200,020 per month. The Sub-sub-lease provides that the 2nd Defendant shall use the premises demised "for public car park purpose and cannot store prohibited goods". The terms of the Sub-sub-lease were amended on 27.4.1995. The area of the premises demised was reduced to 49,005 sq.ft. with corresponding reduction in rent to $196,020 per month.

6. By letter dated 8.5.1995, the District Lands Office drew Verder's attention to the wrongful user of the Lot for "fee-paying carpark and cargo handling purposes". Whilst threatening reentry, the District Lands Office was prepared to grant Verder 3 to 6 months to remedy the breach conditional upon payment within 28 days of $1,843,993 in respect of the initial 3 months period. This letter was copied off to "Queen's Parking". By letter dated 11.5.1995, Sun Dah drew Li's attention to this letter from the District Lands Office and threatened proceedings should the breach persist after 1.6.1995. Li replied 4 days later seeking an authorization letter to her surveyor representative Albert So Surveyors Ltd. ["Albert So"] for application of modification of user on behalf of Verder. Li made it clear that all the waiver fee and necessary charges regarding the modification will be borne by Yiu Wah. Verder duly issued a letter of authorization dated 16.5.1995 authorising Li to apply for waiver so as to permit storage of non-dangerous goods; fee-parking carpark and loading docks. Verder kept the District Lands Office informed of this arrangement by their letter of 17.5.1995. The District Lands Office in turn pressed for prompt payment of the forbearance fee for the period up to 7.8.1995.

7. Albert So initiated application for waiver in the name of Verder on 19.5.1995. The waiver sought was for storage of non-dangerous goods and for a public fee paying car park. Verder was apparently informed by the District Lands Office that enforcement action will be withheld pending application for temporary modification despite non-payment of the forbearance fee as previously demanded.

8. According to the 2nd Defendant, in July 1995, they used the portion of the Lot subletted to them fully as a public fee paying car park.

9. By letter dated 20.11.1995, the District Lands Office informed Verder the terms whereby the Government was prepared to grant a temporary waiver for storage of non-dangerous goods and public fee paying car park. Those terms entailed payment of a waiver fee of $4,734,000 in respect of the period between 8.5.1995 to 7.5.1996. Those terms were open for acceptance until 7.12.1995. On 4.12.1995, Albert So sought from the District Lands Office on behalf of their "clients" a 2 weeks extension from 7.12.1995 so as to consider the offer. Albert So indicated on 20.12.1995 that their "clients" considered the annual waiver fee of $4,734,000 "excessive and beyond their means". Pending a valuation appeal, Albert So offered on behalf of their clients $1,500,000. By their letter of 22.12.1995, Albert So sought Yiu Wah's instructions in relation to the payment of $1,500,000. A cheque for that amount was tendered by Albert So to the District Lands Office on 29.12.1995 with an intimation that "the existing carpark on site will cease to operate on 31st January, 1996". District Lands Office informed Verder on 10.1.1996 that they are prepared to tolerate current user pending appeal conditional upon payment of the sum of $1,500,000.

10. Albert So lodged an appeal against the waiver fee demanded on 12.1.1996. Yiu Wah however notified the 2nd Defendant on 17.1.1996 that they will surrender the Lot on 1.3.1996. In the meantime, various meetings (on 5th and 27th January and 2nd February 1996) allegedly took place in the office of Verder/Sun Dah attended by Tommy Yip (husband of Li) and the 2nd Defendant. Those meetings did not yield any fruit. The $1,500,000 cheque which Albert So tendered in favour of the District Lands Office was dishonoured when presented for payment in early February 1996. Following 2 letters of demand addressed to Li on 6th and 9th February, 1996, the writ in the present action was issued on 17.2.1996. By their summons dated 16.2.1996, Verder and Sun Dah sought various injunctions restraining Li and 2nd Defendant from using the Lot and its extension for purposes other than their permitted users. Verder and Sun Dah further sought mandatory injunctions directed against Li for removal of a ship/boat moored at the said Lot and against the 2nd Defendant for removal of "all the vehicles and/or other goods present on the premises as a result of their use of the same as a public car park".

Case for Verder/Sun Dah

11. It is said that Li is in clear breach of the Sub-lease and has no reasonable defence.

12. As far as the 2nd Defendant is concerned, Miss Wee relies on the following proposition in Para. 85 of Vol. 27(i) Halsbury's Laws of England which states :

"... it is the undertenant's duty to inform himself of the covenants which are contained in the lease under which the underlandlord holds; and he is bound in equity to observe such of those covenants as are of a negative character, on the ground that he takes with notice, and he is liable to be restrained by injunction from committing a breach of them. The tenant, although personally liable on the covenant, will not be included in the injunction unless he has caused or facilitated the breach..."

13. Miss Wee contended that Verder/Sun Dah was unaware of the presence of the 2nd Defendant. Whilst signs displayed on the Lots referred to Queen's Parking, Verder/Sun Dah believed that Li was operating the same.

14. Verder/Sun Dah maintain that there is a real threat of the Government effecting re-entry if the current breach persists. The loss is estimated to be near $300 million and there is no reason to believe that Li or the 2nd Defendant will be able to pay this amount.

Case for Li

15. According to the affidavit of Ip Muk Kan [said to be Managing Director of Yiu Wah Stevedown (sic) & Transportation Co] placed before this Court at the hearing of the Summons, Verder/Sun Dah had knowledge of the Sub-sub-lease in May 1995 and had consented to such subletting. There is no real risk of re-entry as "the Government is still willing to grant the said waiver on agreeable terms". No vessel can be found on the Lot and its extension since 6.3.1996. The content of this affidavit was challenged by Miss Wee who obviously did not have sufficient time to prepare any affidavit in reply.

16. An adjournment of the Summons was sought by Li but refused.

Case for the 2nd Defendant

17. Verder/Sun Dah knew since May 1995 that the 2nd Defendant was operating a fee paying car park on the Lot. No step was taken by Verder/Sun Dah to evict the 2nd Defendant from the Lot. Verder had further retained Albert So to apply for short term waiver. Verder/Sun Dah have acquiesced and/or waived the alleged breach. The 2nd Defendant had incurred $700,000 in levelling and putting concrete on the Lot so as to facilitate its use as a car park. If an injunction is granted, the 2nd Defendant will suffer loss of about $770,000.

18. In paragraph 7 of Wan Chi Hing's affirmation on behalf of the 2nd Defendant, he admitted that shortly after the commencement of its tenancy, the 2nd Defendant was informed that Verder had to apply for short term waiver from the District Lands Office and he recommended Albert So to handle the short term waiver application.

My decision

19. Li is fully aware that she is not permitted to use the Lot other than for purposes permitted under the Crown Grant. Verder/Sun Dah repeatedly protested against her wrongful user. They refrained from taking any action upon the assurance of Li that she would pay waiver fees as demanded by the Government. Li acted in breach of such assurance. The cheque of $1,500,000 was dishonoured upon presentation for payment. She facilitated the breach. There is no evidence to suggest that she in fact surrendered her tenancy in favour of Sun Dah. I am not satisfied with the bare assertion of Ip Muk Kan tendered at the hearing of the Summons that no vessel was moored at the Lot on 6.3.1996. The injunctions craved for should lie against her.

20. In relation to the 2nd Defendant, it is arguable that as at the date of the Sub-sub-lease, they had notice of the negative covenants in the head leases. The onus is on them to demonstrate that Verder/Sun Dah had acquiesced and/or waived the alleged breach by them. Although the Sub-sub-lease envisaged further subletting by Li, Verder/Sun Dah assert that they thought it was Li who was conducting the business in the name of Queen's Parking. The photographs of the Lot produced before me lend some weight to the suggestion that visitors to the site would not be aware of the presence of the 2nd Defendant. It therefore remains arguable whether Verder/Sun Dah had unconditionally acquiesced or waived the alleged breach by the 2nd Defendant or whether they had merely agreed to the temporary user by Li subject to Li's due compliance with conditions (including payment) imposed by the Crown. Verder/Sun Dah therefore have a good arguable claim against the 2nd Defendant. No evidence has been adduced in relation to the financial standing of the 2nd Defendant. I reject the submission that their financial position is an irrelevant consideration on the basis that damage to Verder/Sun Dah had already accrued. The risk of re-entry by the Crown is a real one. To refuse interlocutory relief would force Verder/Sun Dah to either suffer the re-entry or to pay waiver fees for the full duration of the 2nd Defendant's lease. I have not lost sight of the claims that might be made against the 2nd Defendant by owners of vehicles that had purchased monthly tickets from them. However given the fact that the state of the 2nd Defendant is wholly unclear and the fact that their estimated loss is minimal as compared with those of Verder/Sun Dah, the balance is decidedly in Verder/Sun Dah's favour.

I would therefore accede to their application and grant the orders as embodied in the draft minutes submitted by Miss Wee. The 2nd Defendant is given 7 days from the date of this decision to remove the vehicles on the Lot.

21. I further order that there be an order nisi for costs in favour of Verder/Sun Dah against Li and the 2nd Defendant with certificate for counsel.