GOLD SHINE INVESTMENT LTD v. SECRETARY FOR JUSTICE

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J U D G M E N T

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Introduction

Introduction

1.  This is the Plaintiff’s application by way of originating summons for firstly, the Court’s construction of the Government grant of Rural Building Lot No. (“RBL”) 368RP, now known as 26-30 Beach Road, Repulse Bay, and secondly, declarations consequential to the Court’s construction of the Government grant in relation to the aforesaid land and findings of conduct of the Government from time of grant to the present day.

2.  RBL 368RP is part of three rural building lots, namely RBL 366, 367 and 368, granted under Conditions of Exchange set out in a Memorandum of Exchange of Land No. 3381 executed on 11 May 1932 between the Government and the first grantee (“Memorandum”) for a term of 75 years from 12 January 1922 with provision for renewal.  The first grantee was Hong Kong Realty and Trust Co. Limited (“HKRT”).  By virtue of the Government Leases Ordinance (Cap. 40), a new Government lease was deemed to have been granted upon the expiry of the original term of 75 years on 12 January 1997 for a further term of 75 years up to 11 January 2072.  RBL 366, 367 and 368 were called Lots A, B and C respectively in the Conditions of Exchange.  Some of the terms of the grant were stipulated as “general conditions” (“GC”) and some as “special conditions” (“SC”).  They were sometimes referred to in correspondence from both sides as “lease conditions”.  The conditions in the grant for which the Court’s construction is sought are: SC4, SC5 and SC24.  In addition, SC(2) and SC(3) are also relevant.  These conditions are as follows:

(2)             Except with the consent of the Governor not more than 15 houses shall be erected on Lot B.  The Purchaser shall not erect on the said Lot B any buildings other than detached or semi-detached residential premises of European type with garages and all proper out-buildings thereto.

(3)             Except with the consent of the Governor not more than 8 houses shall be erected on Lot A and save as hereunder mentioned the Lessee shall not erect on the said Lot any buildings other than detached or semi-detached residential premises of European type with garages and proper out-buildings thereto PROVIDED that the Lessee may in lieu of the whole or any part of such premises as aforesaid erect on the said Lot such servants’ quarters and garages as the said Director may deem to be necessary in connection with the use of Lot C.

(4)             The Lessee shall remove the existing bungalows Nos. 2, 3, 4 & 5 on Lot C and shall erect in lieu thereof a pavilion on the lines of that shown on the plan dated July 1931, prepared by Messrs. Palmer & Turner (“P & T”) or on such other lines as the said Director [of Public Works] may approve.  Save as aforesaid the Lessee shall not without the consent of the Governor erect any building on the said Lot C.

(5)             The design of the exterior elevations plans height and disposition of any building to be erected on any of the said three Lots shall be subject to the special approval of the said Director [of Public Works] and no building shall be erected on any of the said three Lots save in accordance with such approval.

(24)   The Lessee shall have the right of free and uninterrupted access to the sea covering the area running immediately parallel with the frontage of Lot “C” for the purpose of the use of that Lot as a public bathing pavilion and pleasure resort, but save as aforesaid shall not have any right whatsoever over the foreshore and sea bed in front of the said Lot.

3.  In due course, pursuant to SC(4), a pavilion on the lines of the plan prepared by P & T or such other lines as approved by the Director of Public Works (“DPW”) was built by 1937 (“Lido Complex”) on part of RBL 368 known as RBL 368RP.  With the approval of the Government, extensions were added to the Lido Complex between then and 2000.

4.  In 1994, the Plaintiff acquired 93% interest in RBL 368RP.  In 2000, the Plaintiff demolished the Lido Complex and erected in its place a new building (“New Complex”) in accordance with plans approved by the Building Authority between 2006 and 2007.  However, since late July 2003, the Director of Lands has been refusing to give his consent under SC(4) to the erection of the New Complex.  This led to the present litigation.  The dispute between the parties turns principally on the construction of SC(4).

The construction contended by the Plaintiff

5.  There are two limbs in SC(4).  Under the first limb, the lessee shall build a pavilion on the lines of the plan prepared by P & T or such other lines as the DPW may approve.  The second limb provides that save as provided under the first limb, the lessee shall not without the consent of the Governor erect any building on RBL 368.  There is no dispute about the construction of the first limb.

6.  The basis of the Plaintiff’s argument is that there are no user restrictions in the Conditions of Exchange and as this is a lease for 150 years, the lessee was granted the full development potential of the land.  The construction of the second limb contended by the Plaintiff is that the Governor’s power to give consent to erect any building otherwise than in accordance with the first limb refers only to the initial building erected pursuant to SC(4) and not to any subsequent building.  In other words, once the initial pavilion was erected, and indeed it was, SC(4) was spent.  The Plaintiff can build anything approved by the Building Authority without the consent of the Governor.  If contrary to that construction the Governor’s consent was required, the Government would be in derogation of grant if the Governor and now the Chief Executive of the HKSAR was to withhold consent for the erection of the New Complex.

7.  The Plaintiff’s further contention is that the DPW’s power to approve the design of the exterior elevations plans, height and dispositions of any future building to be erected are planning controls.  As the New Complex complied with all statutory requirements, the Government would be in derogation from grant by withholding consent under SC(5).  The Plaintiff also contends that SC(24) which confers a right of free and uninterrupted access to the sea for the purpose of the use of RBL 368RP as a public bathing pavilion and pleasure resort implies that the Plaintiff was given the right of redevelopment of RBL 368RP.

The construction contended by the Government

8.  Ms Eu SC, counsel for the Defendant, submits that this case is about the landlord’s right of redevelopment of RBL 368RP.  The issue is whether on the true construction of the Conditions of Exchange this right had been granted to the lessee or still remains with the Government as landlord.  Ms Eu SC draws a distinction between the Government’s power as the public authority responsible for and in control of town planning and building matters and its rights as landlord.  The thrust of the Government’s case is that although Government discharges many functions as public authority it also enjoys the capacity to contract like any private landlord.  Thus, while some of the general conditions and special conditions in the Conditions of Exchange are town planning control provisions, SC(4) sets the limit of the development potential over the land which Government as landlord had by contract disposed of to HKRT.  Based on the above, the Government’s construction of SC(4) is that the second limb is a consent to erect clause which subsists and applies throughout the entire term of the grant to any building other than the pavilion which was being envisaged at the time.  The right to redevelopment of RBL 368RP still vests in the landlord and the lessee may not redevelop the land without the landlord’s consent.  The power to consent concerns the Government’s right as landlord.  The landlord is entitled to exact a premium for giving the consent.  The grant of consent for redevelopment is similar to the making of a fresh agreement.  Hence, the reasons for refusing consent are not relevant.

9.  Ms Eu SC concedes that there is no user restriction clause under the Conditions of Exchange, but argues that issues such as town planning, user, volume, density, form, height and whether the New Complex blends in with the neighbourhood heavily relied on by the Plaintiff are secondary considerations which may or may not have any bearing on granting or refusing consent or in assessing the premium.  She accepts that in deciding whether to give consent, and if so on what terms, for any future building, the Government is entitled to take into account a wide range of factors including the design, user, form and volume of the proposed building as well as the payment of premium, if any.  But she emphasises strongly that this case is not about the similarities or differences between the ex-Lido Complex and the New Complex, although user may be one of the considerations the Government takes into account when deciding whether to give consent.  The Government has indicated that it will consent to something like the ex-Lido Complex as the “before” value of the land for the purpose of assessing the premium.

10.  Ms Eu SC is of the opinion that the primary question in this case is whether the New Complex has the consent of the Government as landlord and whether without such consent the erection of the New Complex is a breach of SC(4).  She thinks the questions raised in the Amended Originating Summons are showboxing and skirting the issue in dealing with those secondary considerations instead of the primary issue. 

The principles of construction of document

11.  It is well settled principle that interpretation of a document or a contract is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.  It is not the same as interpretation of the meaning of the words used in the contract or the meaning of a particular provision.  The document must be read and construed as a whole.  The principles of interpretation of document or contract has been summarised by Lord Hoffmann in Investors Compensation Scheme Ltd And West Bromwich Building Society [1998] 1 WLR 896 at 912 to 913 as follows:

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated.  The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life.  Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded.  The principles may be summarised as follows.

(1)   Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)   The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)   The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.  They are admissible only in an action for rectification.  The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life.  The boundaries of this exception are in some respects unclear.  But this is not the occasion on which to explore them.

(4)   The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words.  The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.  The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749.

(5)   the ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.  Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] A.C. 191, 201:

             ‘if detailed semantic and syntactical analysis of words   in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ ”

These principles have been affirmed by Lord Hoffmann sitting as a Non Permanent Judge of the Hong Kong Court of Final Appeal in Jumbo King Ltd v Faithful Properties Ltd & Ors [1999] 4 HKC 707.  His Lordship said at 726-727:

“The construction of a document is not a game with words.  It is an attempt to discover that a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.  In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant.  Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  The court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession.  Or one of the parties may simply have made a bad bargain.  The only escape from the language is an action for rectification, in which the previous negotiations can be examined.  But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

The first three principles in Investors Compensation Scheme Ltd are pertinent.  So also is the fact that the document was a formal legal document which must have been carefully drafted and as a result of legal advice.

12.  Another principle of construction applicable to grants by the Crown is that contrary to the ordinary rule applicable to grants by a subject, grants by the Crown usually fall to be construed in the manner most favourable to the grantor: see Earl of Lonsdale v Attorney General And Another [1982] 1 WLR 887.  In that case, Slade J, quoted the dicta of Cockburn C.J. in Feather v The Queen (1856) 6 B & S 257 and said at 283-284:

“Cockburn C.J. expressed the principle very clearly in Feather v. The Queen (1856) 6 B & S 257 and said:

 “It is established on the best authority that, in construing grants from the Crown, a different rule of construction prevails from that by which grants from one subject to another are to be construed.  In a grant from one subject to another, every intendment is to be made against the grantor, and in favour of the grantee, in order to give full effect to the grant; but in grants from the Crown an opposite rule of construction prevails.  Nothing passes except that which is expressed, or which is matter of necessary and unavoidable intendment in order to give effect to the plain and undoubted intention of the grant.  And in no species of grant does this rule of construction more especially obtain than in grants which emanate from, and operate in derogation of, the prerogative of the Crown.”

  Though this case happened to concern the grant of a patent, the observations of Cockburn C.J. were in general terms.

  Viscount Birkenhead L.C. reaffirmed the principle in Viscountess Rhondda’s Claim [1922] 2 A.C. 339, saying, at p. 353, that a grant by the Crown

 “… is construed most strictly against the grantee and most beneficially for the Crown, so that nothing will pass to the grantee but by clear and express words.”

  The effect of these cases, as I read them, is that, if the wording of a grant by the Crown is clear and unequivocal, the grantee is entitled to rely on it as much as if the grantor had been any other subject of the Crown; if, on the other hand, the wording is obscure or equivocal, the court must lean towards the construction more favourable to the Crown, unless satisfied that another interpretation of the relevant words in their context is the true one.”

13.  Before going into counsel’s arguments about the true construction of the Conditions of Exchange, I shall first set out the background or the factual matrix as it is often called in which the Memorandum containing these special conditions was executed on 11 May 1932 between the Government and the first grantee, HKRT.  The factual matrix includes the factual background connected with the execution of the Memorandum as well as the Government’s land administration policy and practice.

The factual matrix

The factual background

14.  It would be convenient to begin with RBL 200.  The area covered by what used to be RBL 200 is no longer ascertainable from the copy of the Memorandum and the attached plan, but it is clear from a contemporaneous letter from the Government House dated 8 July 1932 that it was practically identical with Lots B and C referred to in the Memorandum, i.e. the present RBL 367 and 368.  The lot of land in issue formed part of what was originally known as RBL 200.  Thus, the circumstance in which RBL was granted formed an important part of the factual matrix.

15.  RBL 200 had originally been granted to Hongkong Hotel Co., Ltd (“HK Hotel”) in 1921 on very favourable terms in consideration of the pioneering work which they had done in the Repulse Bay area and in retaining the area as an European reservation.  The grant contained restrictions on the number and type of houses which may be built on the land and on the free transfer of the property.  This is evidence in a minute dated 18 October 1921 written by the DPW to the Colonial Secretary.  The DPW wrote:     

 “I submit herewith the terms on which it is proposed to offer the area edged red on the attached plan containing about 387300 sq. feet to the Hongkong Hotel Co. Ltd without auction.

  …

  The terms are as follows : -

(a)  Term of lease to be 75 years, renewable for a further term of 75 years at a re-assessed Crown Rent.

  …

(d)  Buildings to a value of not less than $135,000.00 shall be completed and ready for occupation upon the lot within 48 months of the date mentioned in (b).

  …

(f)  Except with the consent of the Governor-in-Council, not more than 25 houses to be erected on the lot.

(g)  The purchaser of the lot will not be allowed to erect any buildings on the lot other than houses of European Type.

(h)  The design of the exterior elevations and the disposition of any buildings to be erected on the lot to be subject to the special approval of the Director of Public Works.

  …

(o)  The purchaser his executors administrators or assigns shall not sell assign mortgage charge demise sublet or part with the possession of the lot sold to him or any part thereof to any person corporation or company without the consent in writing of the Governor of Hongkong or other person duly authorized by him in that behalf nor permit any person corporation or company (other than a domestic servant) without the consent to the said Governor or other person duly authorized by him in that behalf to reside in or upon or have the use and enjoyment of the lot so sold or any part thereof, provided that in any case in which such consent as aforesaid shall be requisite the grant or refusal thereof shall be in the absolute discretion of the said Governor or the person duly authorized in manner hereinbefore appearing, and the Crown Lease of such lot shall contain a covenant by the purchaser to this effect.

  …”

Then following some further exchanges of minutes, the Colonial Secretary agreed to charge a premium of $30,000 for the lot after noting the DPW’s comment that the lot would probably fetch more if put up to public auction.  The offer was accepted by HK Hotel.

16.  In 1923, HK Hotel encountered financial difficulties and was unable to perform the building covenant under term (d).  It applied to the Government for approval to assign the lot to HKRT.  After consulting with the Executive Council, the Governor consented to the assignment.  In his minute dated 9 April 1923, the DPW repeated to the Colonial Secretary that HK Hotel was granted the favourable terms under the lease in consideration of the pioneering work which they had done in this locality and of the scheme outlined by it for the rapid development of the lot as a residential area at a time when numerous other applications for land in the immediate vicinity were being received and refused.  Thus, it was under such circumstances that RBL 200 was assigned to HKRT.  The land was a preferential grant by private treaty with restriction on transfer and subject to other conditions.

17.  Then, in 1931, HKRT found that it was unable to derive revenue from the bungalows already built on RBL 200.  At the time, the Government was facing calls for it to build a “pavilion” for use by members of the public at Repulse Bay, HKRT took the opportunity to propose a scheme whereby bathing facilities would be built on part of the lot as a useful public service and as a quid-pro-quo to entice the Government into relaxing the lease restrictions including the restriction against free transfer so as to enable the rest of the area to be sold off as small lots for the building of private bathing huts.  On 20 May 1931, HKRT’s solicitors, Messrs Deacons, wrote to the Government outlining HKRT’s scheme, which included adapting the two bungalows situated at the northwest end of the lot as bathing pavilion with cubicles to accommodate one hundred men and fifty women with restaurant and fresh water showers.  The rest of the area would be divided into small lots upon which small permanent pavilions would be erected for sale or for letting.  On 10 July 1931, P & T wrote to the DPW on behalf of HKRT, enclosing a tentative plan of the proposed pavilion.  It showed a swimming pool which would be supplied with fresh water from the adjacent nullah during the summer and by warmed sea water during the winter.  There would be twenty-four family bathing boxes along the front of the building, one hundred and twenty bathing boxes for men and one hundred and twenty for women behind.  The mezzanine floor would be the main entrance floor with a hall, lavatories and a balcony overlooking the swimming pool.  The first floor would be a large dancing floor with space for tiffins, teas and dinners.  The scheme involved annexing Lot A, i.e. RBL 366, to RBL 200 which was already owned by HKRT.  This is the plan referred to in GC(4).

18.  On 11 May 1932, the Memorandum was executed and became effective upon approval by the Secretary of State for Colonies as provided in SC(26).  RBL 200 was surrendered in exchange for RBL 366, 367 and 368.  On 8 July 1932, the Officer Administering the Government of Hong Kong, a post which was later called “Acting Governor” wrote to the Secretary of State for Colonies seeking permission to dispose of RBL 366 by private treaty.  The proposal was approved on 20 August 1932.

19.  The pavilion was subsequently built.  It is apparent that changes were in fact made to P & T’s plan inasmuch as the pavilion was built in such a way which did not necessitate the removal of bungalows Nos. 2, 3, 4 and 5.  Formal request was made for permission to retain them.  The bungalows were retained until after the war.  RBL 368 was then sub-divided with modification of the Conditions of Exchange upon payment of premium.  The bungalows were demolished and redeveloped.  Extension of time for compliance with the building covenants relating to RBL 366 and 367 was granted but not for RBL 368, suggesting that the pavilion was completed with the thirty-six month period imposed by GC(7).

The “pavilion” envisaged by SC(4)

20.  Mr Neoh SC, counsel for the Plaintiff, argues that the words “pavilion” and “resort” have dictionary meanings which can easily encompass large buildings.  He referred to the definitions in Oxford Encyclopedic English Dictionary and quoted the Brighton Royal Pavilions as an example of such a huge structure.  He argues that the New Complex falls clearly within these concepts and they constitute uses which are consistent with SC(4).  I think this demonstrates Ms Eu SC’s argument that this case is not about similarities or differences.  The issue is whether the second limb of SC(4) survives after the Lido Complex was built in 1937.  If it does not, the Plaintiff can build whatever stately building it wishes so long as the building plan had the approval of the Building Authority.  If it does survive, then it is a matter for the Government as landlord to decide whether to consent to the erection of the New Complex and the premium to be charged for giving the consent.  For the purpose of assessing the premium, the Government has indicated its agreement to accept the value of the land with the ex-Lido Complex as the “before” value.  In that connection, what is relevant is only the meaning of the word “pavilion” as conveyed by SC(4).

21.  The word “pavilion” was raised during the Legislative Council meeting on 26 April 1928.  At the time, there was some pressure from the public for bathing facilities in Repulse Bay.  The issue was debated in the Legislative Council on 26 April 1928 and recorded in Hong Kong Hansard.  According to the Plaintiff, the concept of a pavilion in the sense of a “stately leisure dome with a kiosk and possibly band stand, Ionic columns and so forth” was discussed.  The Plaintiff argues that it was in that context, the word “pavilion” was used in Messrs Deacons’ letter which later found its way into SC(4).  However, Ms Eu SC referred to the Hon Sir Pollock’s speech as recorded in the Hong Kong Hansard.  The Hon Sir Pollock, who mooted the idea of a pavilion, precisely confirmed that he was not talking about a stately leisure dome but what he intended was nothing more serious than a matshed in which people could sit out either before or after bathing with their children and stop there in comfort for sometime.  P & T’s letter explained the meaning of the word “pavilion” as it was subsequently used in the Conditions of Exchange.  According to that letter, the bathing boxes and the fresh water swimming pool were the essential components of the pavilion.  It was just a permanent structure with shower and changing facilities, dining and related facilities as shown in the pictures of the ex-Lido Complex.  It was nothing near to a stately pleasure dome with band stand, Ionic columns and so forth.  But whatever it is, it is not anything which is relevant for my consideration for the purposes of the present application.

The Government’s policy and practice in land administration matters in 1930s

22.  In addition to the factual circumstances surrounding the execution of the Memorandum, the Government’s land administration policy and practice at the time also formed part of the factual matrix.  The Hong Kong Annual Report is a useful source of information.  There is little information to be gained from the post war reports in 1950’s.  The 1960 Hong Kong Annual Report is the earliest Hong Kong Annual Report conveniently available in the High Court library which contain some description of land administration in Hong Kong.  Save and except the plot of land on which St John’s Cathedral stands, all land in Hong Kong are held as leasehold land from the Crown, i.e. the Government.  The Government is the sole landlord in respect of all land in Hong Kong.  The Crown sold or granted leasehold interests.  In the early days, Crown leases in Hong Kong island were for terms of 75, 99 or 999 years.  Crown leases in the New Territories and New Kowloon were usually sold for the residue of a term of 99 years less the last three days from 1 July 1898. 

23.  According to the 1960 Hong Kong Annual Report, back in 1960, land administration in Hong Kong and Kowloon was the responsibility of the DPW who was both the Building Authority and the Chairman of the Town Planning Board.  He was also responsible for land administration relating to that part of the New Territories between Boundary Street and the Kowloon hills which is called the New Kowloon.  The District Commissioner was responsible for land administration throughout the rest of the New Territories.  That probably was also the position in 1932 when the Memorandum was entered into.  Land sales, land property valuations, land acquisition, estate management and clearance services were the responsibility of the Crown Lands and Survey Office of the Public Works Department: see 1980 Hong Kong Annual Report 102-103.  Since 1 April 1982, the Public Works Department was split up into different departments.  Responsibility for all land matters was brought under the Director of Lands: see 1983 Hong Kong Annual Report 118-119. 

24.  At the time when the Memorandum was entered into,         town planning was very rudimentary.  According to Nissim’s Land Administration and Practice in Hong Kong, 2^nd Ed at 87, the first town planning ordinance was not enacted until 1939, but because of the Second World War, it was not brought into effect until 1947.  As noted by Bokhary PJ in Ying Ho Co. Ltd & Others and Secretary for Justice [2005] 1 HKLRD 135 at 144, early Crown leases were also designed to achieve town planning objectives.  Until 1973, the planning restrictions that existed were confined to controlling the use to which that land could be put to with no attempt to control the density or volume of development.  The density of development was controlled either by the lease conditions or, in the case of unrestricted leases, by the First Schedule to the Building (Planning) Regulations, Cap. 123.  In 1980s, the Government imposed statutory plot ratio controls under the Town Planning Ordinance and it became the Government’s policy for all the old density control areas and areas of special control to be incorporated in their respective outline zoning plans.  As the authority of the Planning Department increased, the authority of the Lands Department was reduced as gradually the full effect of statutory planning control took over from the previous arrangements for administrative control.  

The Government’s right as landlord in land administration

25.  When selling or granting leasehold interests, the Crown or the Government did so in the capacity of a landlord.  In addition, the Government is also the public authority in respect of a number of land related matters, such as town planning and building matters.  As can be seen from the Government minutes exhibited in this case, the Memorandum was executed by the DPW.  It was the DPW who proposed the general conditions and special conditions in the Conditions of Exchange.  That was the position before the change of sovereignty before  1 July 1997.  Thereafter, all land within the Hong Kong Special Administrative Region (“HKSAR”) is state property and the Government  is responsible for its disposal and management.  The position of the Government as landlord of all land in HKSAR remains unchanged.

26.  In Hang Wah Chong Investment Co. Ltd And Attorney General [1981] HKLR 336, the Judicial Committee of the Privy Council distinguished between the Government’s function as statutory authority and its contractual power as landlord under the Crown lease.  That case concerned the conditions of sale which operated in lieu of the terms of the contemplated Crown lease which was never granted.  In 1931, a parcel of land was sold by the Crown at an auction.  The conditions of sale contained limitations on the buildings to be erected on the land.  In 1951, the appellants’ predecessors in title wished to purchase the land from the Crown lessee for the purpose of erecting apartment buildings.  They sought and were granted permission from the DPW to build apartment buildings up to a certain height.  They purchased the land and built a seven-storey building known as the Grand Court.  In 1973, the appellants acquired the site.  They wished to demolish the Grand Court and redevelop the site into three new blocks of seventeen storeys and one of fourteen storeys.  The DPW was prepared to grant permission to redevelop the site on payment   of a premium.  The appellant applied to the Supreme Court seeking a declaration that no consent was needed from the DPW and hence no premium was due.  The application was dismissed and so was the appeal to the Court of Appeal.  The appellants then appealed to the Privy Council which dismissed their appeal.

27.  The conditions of sale in that case was executed in the same year as the Memorandum in the present case.  It contained special conditions (6) and (7) which were of a like nature as SC(4) and SC(5) in the present case.  They provided:

“6.  Save as provided herein the Purchaser shall not erect on the Lot any buildings other than detached or semi-detached residential premises of European type or such other buildings of European type as the Director of Public Works may approve … Provided that, subject to the provisions of Special Conditions 7 and 8, the Purchaser shall be at liberty to erect flats, …

  Save as herein provided no buildings erected on the Lot shall be used otherwise than as a private dwelling-house without the written consent of the Governor.

  7.  The design of the exterior elevations plans height and disposition of any buildings to be erected on the Lot shall be subject to the special approval of the Director of Public Works and no building shall be erected on the Lot save in accordance with such approval.

  …

21.  Where under these conditions the consent or approval of the Governor or of the Director of Public Works is required the grant or with-holding of such consent shall be in the absolute discretion of the person named.”

28.  Lord Edmund-Davies held at 341:

“It has to be observed in the first place that it is common ground that the Conditions of Sale operate in lieu of the terms of the contemplated Crown lease which was never granted.  Secondly, no difference relevant to the present appeal can be drawn between a lease granted by a public body, or indeed the Crown, and a private lease (Wade, ‘Administrative Law,’ 4^th Edn. P.644).  Thirdly, the view expressed by Huggins, J.A. in the Supreme Court that “The Director of Public Works has many responsibilities besides those imposed by the Buildings Ordinance” appears well established, one of those responsibilities being that of acting as the Crown’s land agent.  And appellants’ counsel did not challenge the conclusion of Huggins, J.A. that “… the Director of Public Works can bind himself in his capacity as the Building Authority without binding himself in his capacity as land agent and vice versa”.

  The various Conditions of Sale well illustrate the wide range of roles played by the Director in exercising his discretion.  As regards some of the Conditions, the Director’s role may, almost certainly, be that of protector of the public interest.  The vital question is whether for the purposes of Special Conditions 6 and 7 he can properly be regarded as being entitled to act in his capacity of land agent for the Crown.  It is not open to serious doubt that those Conditions relate directly to the landlord’s interests, economic and otherwise, and their Lordships conclude that the Director was entitled to act, and did act, in that role when granting his qualified approval to the appellants’ plans in 1976.”

29.  Two points of interest arose from his Lordship’s judgment above.  First, his Lordship held that the DPW had many responsibilities as the public authority in land related matters.  He was the Building Authority, the Water Authority and the chairman of the Town Planning Board.  As noted by his Lordship, in addition to his capacity as the public authority in land related matters, the DPW was also the Government official charged with the responsibility as the Government land agent.  This confirmed my observation in paragraph 25 of the Government’s dual capacity as landlord and as the public authority in land related matters, including town planning and building control.  Secondly, his Lordship held that conditions such as those in special conditions 6 and 7 in that case related directly to the landlord’s interests, economic and otherwise and that when granting approval under those conditions the DPW was acting in his capacity as the Government land agent.  Of particular relevance to the present case is that those conditions related to building height. 

30.  In 2003, the Court of Final Appeal had the occasion to further examine the nature of the Government’s right as landlord in Director of Lands And Yin Shuen EnterprisesLtd & Another [2003] 6 HKCFAR 1.  That was a case which concerned the interpretation of section 12 of the Lands Resumption Ordinance (Cap. 124).  In that case, the lessees held agricultural land under Government leases on terms which did not permit building, but which had significant residential development potential.  The Government resumed the land for public housing.  The lessees produced comparables for the purpose of compensation which reflected a price in excess of the value of the land subject to the building restrictions.  Purchasers were willing to pay such prices in the hope of obtaining a modification of the terms of the lease to permit development.  The Director of Lands argued that section 12(c) of the Lands Resumption Ordinance excluded this element of the value of the land from compensation.  The section provided that “no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government … of any licence, permission, lease or permit whatsoever.”  The Lands Tribunal and the Court of Appeal ruled in favour of the lessees.  On appeal, the Court of Final Appeal allowed the appeal by the Director of Lands. 

31.  Lord Millett NPJ rejected the Court of Appeal’s view that intrinsic value of land includes all its potentialities which could not be realised without a modification of the terms of the lease.  His Lordship held at paragraph 50:

“The Court of Appeal reached a different view for two reasons.  In the first place, it said that the Government’s argument failed to acknowledge the intrinsic value of the land “with all its potentialities”; and in the second place it failed to have regard to what it called “the realities of the commercial world” to which s.12(d) required observance.  But insofar as the intrinsic value of the land includes its development potential, it cannot be realised without a modification of the terms of the lease, and the prospect of obtaining such a modification falls squarely within the words of s.12(c).  And insofar as “the realities of the commercial world” include the willingness of purchasers to pay a speculative price in the hope of obtaining a modification of the terms of the lease, s.12(d) is subject to s.12(c).”

His Lordship went on at paragraph 57:

“ Secondly, compensation is only required to be paid for “the property concerned”, that is to say for the interest acquired.  In the present case, that means for the land for the duration of the Crown lease and subject to the user restrictions in the lease.  The right to exploit the development potential of the land by using it as building land was not disposed of by the Crown and remains the property of the Government for which it ought not to be required to pay.  If the claimants’ argument is correct, then the Government’s practice in charging a full premium on modification of the terms of a Crown lease is also open to challenge under the Basic Law; and I do not consider that that is right.”  

32.  Lord Millett NPJ made it explicitly clear that in disposing of a leasehold interest, the Crown as landlord did not necessarily divest all interest in the land or all its development potential.  Mr Neoh SC submits that that case dealt with the issue as to whether section 12(c) of the Lands Resumption Ordinance operates as a deprivation of property without compensation under article 105 of the Basic Law and has no relevance to the construction of the Conditions of Exchange in the present case.  I respectfully disagree.  I think the above quoted dicta of Lord Millett NPJ in Yin Shuen Enterprises Ltd & Another is a statement of general principle that whatever rights or interests not disposed of in a lease remains the property of the Government.

33.  Unlike the case of the transfer of a freehold interest, the landlord may divest such interest in a leasehold as he may wish to divest by contract.  Whatever rights or interests not disposed of remains the property of the Government which it is free to dispose of by granting modification to the lease and charging such premium as it sees fit in the exercise of its absolute discretion.  The interests which were not divested were preserved by way of restrictions under the terms of the lease.  In Yin Shuen Enterprises Ltd & Another, it is clear that what the Crown divested was the potential to use the land for agricultural purposes whereas the residential development potential was not divested.  In Hang Wah Chong Investment Co. Ltd, the development potential limited to buildings of up to seven storeys was granted under the Crown lease.  The purchaser of the land had to pay premium to actualise the further development potential.  Development potential is therefore an interest which may be divested in a lease.  It may be reserved in whole as in Yin Shuen EnterprisesLtd & Another, or released partially as in Hang Wah Chong Investment Co. Ltd.

34.  As submitted by Ms Eu SC, the lessee’s right to exploit the development potential can be restricted in any number of ways.  The restrictions may take the form of specifying the maximum volume or gross floor area, height, or the user.  Such restrictions may be regarded as planning control restrictions.  But equally the restriction can take the form of prohibition against erecting any building on the land other than that specified, or any building at all, without first obtaining the consent of the Government as landlord.  These restrictions go to the development potential of the land.  The Government normally charges a premium based on what is granted.  Insofar as the Government has not fully divested of the development potential in the land, it is entitled to charge a premium as a consideration for modifying the lease to enable more of the development potential to be released to the lessee.  Whether it does so by modifying the lease conditions or by giving consent, it involves a new agreement, a fresh grant of development potential.

The construction of the Conditions of Exchange

The terms of the Conditions of Exchange

35.  The Conditions of Exchange set out sixteen general conditions.  These were the usual and standard conditions in a Crown lease.  They provided for payment of a premium of $34,850, Crown rent and the costs for putting up boundary stones by the DPW etc.  GC(2) provided for the surrender by HKRT of RBL 200 to the Crown.  GC(7) provided for the construction within thirty-six months of buildings of not less than $50,000, $70,000 and $100,000 in value for RBL 366, 367 and 368 respectively.  GC(12) provided that HKRT shall be entitled to a lease from the Crown for a term of 75 years commencing on 12 January 1922 when the conditions have been complied with.  There is no dispute that the conditions have been complied with but no formal lease has been executed.  By virtue of the Government Leases Ordinance, a new Government lease was deemed to have been granted upon the expiry of the original term on 12 January 1997 for a further term up to 11 January 2072.  GC(13) provided for His Majesty’s power to retain the property should the lessee neglect or fail to comply with the conditions and to re-sell the same as His Majesty shall seem fit.  These were usual conditions.  The manifest intention of the parties was to enter into a Crown lease in respect of RBL 366, 367 and 368 upon satisfactory compliance of the general conditions and the special conditions by HKRT which included the building covenant and surrendering RBL 200 which was practically the same lots of land covered by the new RBL 366 and 367.

36.  There were twenty-six special conditions.  Under SC(1), the lessee shall supply within three months of the date of the Memorandum the general layout plan for the whole of the three lots.  SC(2) and SC(3) respectively provided that except with the consent of the Governor, not more than fifteen European type detached or semi-detached residential premises shall be erected on RBL 367 and not more than eight such premises shall be erected on RBL 366.  SC(4), SC(5) and SC(24) are the special conditions which fall to be construed.  SC(26) provided that so far as the particulars and general and special conditions relate to RBL 366, they shall be subject to the sanction of the Secretary of State of the United Kingdom for the sale of the lot by private treaty and if such sanction shall be refused, HKRT shall be at liberty to reconsider the whole scheme.  The other special conditions provided for the obligation of the Government to construct a road and HKRT’s obligation to construct drains, channels, drainage etc to the satisfaction of the DPW.

37.  In essence, under the Conditions of Exchange, HKRT was to surrender RBL 200 which was granted by way of private treaty under preferential terms including a reduced premium but subject to restriction of transfer.  The two lots were surrendered in exchange for the same two lots of land, i.e. RBL 366 and 367 but free from the restriction of transfer and together with the grant of an additional lot RBL 368 subject to a building covenant set out in GC(7), SC(4) and SC(5) and payment of a premium of $34,850. 

Whether a special purpose lease was contemplated by the Conditions of Exchange

38.  Ms Eu SC argues that a special purpose lease was anticipated by the Memorandum.  Mr Neoh SC argues otherwise.  He submits that the term “special purpose lease” has become a term of art.  He referred to the definition of “lease for special purpose” in section 3 of the New Territories Leases (Extension) Ordinance, Cap 150 which provides:

“(1)  In this Ordinance –

  …

  “lease for special purposes” means –

(a)  a lease that satisfies the description in subsection (2) but is not –

  …

(2)  The lease description referred to in the definition of “lease for special purposes” in subsection (1) is that the lease –

 (a)  contains a prohibition, expressed or intended by the parties to enure for the full term of the lease, against the assignment of the land that is the subject of the lease or of any interest therein; and

 (b)  contains no provision whereby the land that is the subject of the lease, and every interest therein, could be assigned by the lessee upon the occurrence of any event or contingency, or upon compliance with any condition,

  whether or not the express provisions of the lease permit the land that is the subject of the lease, or any interest therein, to be assigned with the consent of the lessor or any Government authority, or to be charged, mortgaged or sublet.”

Mr Neoh SC argues that the Conditions of Exchange in issue contain no prohibition against assignment of the land or provision for assignment upon the occurrence of any contingency etc.  Ms Eu SC replied briefly and succinctly that the New Territories Leases (Extension) Ordinance which was passed in 1988 could be of no assistance in ascertaining the intention of the parties in 1932 when the Conditions of Exchange was entered into.  I agree with that submission.  The term was used by Ms Eu SC as an aid to construction of the Conditions of Exchange.

39.  Besides, by virtue of section 2, the New Territories Leases (Extension) Ordinance applies to every New Territories lease that exists at the commencement of section 2 of that ordinance and that but for that ordinance would expire before 30 June 1997.  Furthermore, the statutory definition in section 3 only refers to a lease for special purposes referred   to in that ordinance.  Obviously, the ordinance does not apply to the Conditions of Exchange in question, which is not a New Territories lease. 

40.  As submitted by Ms Eu SC, the term was used as an aid to construction of the Conditions of Exchange.  She did not refer to any statutory definition.  I think the term was used loosely.  It is just a shorthand expression of the circumstance surrounding the grant.  There is no real legal consequence to be attached to the term other than the circumstances surrounding the grant of such a lease as part of the factual matrix.  A special purpose lease, commonly understood, is a lease of land granted for a limited purpose at a nominal or even nil premium.  In 1960, the Government’s basic land policy was to sell leases to the highest bidder at public auction.  All land available to the general public for commercial and industrial purposes and for residential sites was sold in this way.  Land required for special housing projects, public utilities, schools, clinics and other charitable purposes was usually granted by private treaty.  The premium charged in such cases varied from nothing for non-profit-making schools, etc, up to the full market value for public utilities: see 1960 Hong Kong Annual Report 151-152.  That presumably was the Government’s land administration policy in 1932 as well.  Nowadays, leases for certain special purposes, which have particular site requirements or other factors which would make a public auction inappropriate, are offered for sale by private tender.  Those special purposes include capital-intensive industries, which introduce higher technology and more technological skills into Hong Kong, that could not be appropriately housed in multi-storey buildings.  Such sales are initiated only in response to a formal application, and in certain circumstances may be concluded by private treaty, subject to the approval of the Governor in Council before 1997 or the Executive Council thereafter: see 1983 Hong Kong Annual Report 119.  That probably explains the legislative philosophy behind the term of “lease for special purposes” referred to in New Territories Leases (Extension) Ordinance. 

41.  Since 1928, there had been calls for the Government to build a pavilion in Repulse Bay for use by the members of the public.  HKRT’s offer to build the pavilion under the scheme to meet the public demand for bathing facilities was the quid-pro-quo for the Government granting RBL 368 and removing the restriction against transfer in what used to be RBL 200.  The Memorandum was effectively a grant of RBL 368 at a reduced premium for the special purpose of building a pavilion to provide bathing facilities for the public.  It was a special purpose lease.  But there is no particular legal consequence what the lease is called.  The intention of the parties falls to be determined in accordance with the meaning which the Memorandum and Conditions of Exchange would convey to a reasonable reader having all the background knowledge as I have outlined above.

The intention of the parties

42.  The intention of the Government and HKRT must be ascertained by reading the Conditions of Exchange as a whole.  The intention of the parties was to erect certain buildings in the three lots within thirty-six months at a stipulated minimum amount of expenditure.  Insofar as SC(4) was concerned, the intention was to remove the four existing bungalows and to erect in their place a pavilion in accordance with the special conditions.  HKRT shall be entitled to use, among other things, RBL 368 and the pavilion for the purpose of generating revenue.  That was the essential condition for which RBL 368 was granted.  To ascertain the intention of the parties insofar as the operation of two limbs of SC(4) is concerned, it is essential to identify the interest which was granted to HKRT under SC(4).

43.  Under the first limb of SC(4), HKRT was given the right to build a pavilion on the lines of that was shown on the P & T plan or such other lines as the DPW may approve and to use the pavilion for the purpose of generating revenue.  While conceding that there was no user restriction under the Conditions of Exchange, Ms Eu SC argues that HKRT was given the right to build not anything without restriction but to build precisely the pavilion as envisaged in the P & T plan submitted on behalf of HKRT.  HKRT was given some degree of flexibility to deviate from the P & T plan provided such deviations were approved by the DPW.  But what was permitted to be built must qualify as a pavilion as contemplated by the parties under the P & T plan.  This was the very limited interest which the Government as landlord divested to HKRT under SC(4) or the Conditions of Exchange as a whole.  To build anything else would be outside the interest divested by the Government as landlord.  The Governor’s consent was required.  Ms Eu SC argues that this case is not about user restriction and hence most of Mr Neoh SC’s arguments based on town planning and Building Ordinance are just red herrings which are only to be rejected. 

44.  Mr Neoh SC’s argument is that like those early leases, the Conditions of Exchange in this case were also designed to achieve town planning objectives.  He draws support for his proposition from Bokhary PJ’s dicta in Ying Ho Co. Ltd & Others and Secretary for Justice [2005] 1 HKLRD 135 at paragraph 6.  I have no quarrel with this proposition.  Hang Wah Chong Investment Co. Ltd is another good example that the Crown through the DPW exercised town planning control function and Building Authority function through lease conditions.  Mr Neoh SC submits that the Conditions of Exchange, in particular SC(4) and SC(5) controlled over the initial development layout and approval of plans for the initial pavilion as well as the design of the exterior elevations plans, height and disposition of the pavilion to be built, but there was no restrictions on volume, gross floor area or user.  I am also in agreement with this proposition.

45.  Mr Neoh SC submits that under the first limb of SC(4), HKRT shall build a pavilion on the lines of the P & T plan or on such lines as approved by the DPW and when read as a whole with the second limb, SC(4) means nothing could be built initially on the site save and except such a building unless the consent of the Governor is obtained.  I also have no difficulties with that submission.  He then argues that the consent power of the Governor in the second limb of SC(4) clearly refers only to the initial building and not to any subsequent building.  In other words, this limb was spent once the pavilion was built, whether it was built on the lines of the P & T plan, or other lines as approved by the DPW, or on some other plan as consented to by the Governor.  He submits that this construction is justified not only linguistically but is consistent with the factual matrix at the time of the grant.  Ms Eu SC takes issue with this construction.

46.  Mr Neoh SC draws a distinction between SC(2) and SC(3) on the one hand and SC(4) on the other.  He argues that while GC(7) ensured that houses answering to the user restrictions in the special conditions were to be built within the stipulated time frame and scale of expenditure, SC(2) and SC(3) use clearly restrictive language for RBL 366 and 367 by restricting the number of houses to be erected on those lots to fifteen and eight respectively except with the consent of the Governor.  Hence, he argues that these clauses clearly envisage RBL 366 and 367 will in future be redeveloped and the lessee may do so, so long as the user restrictions are complied with.  By contrast, he argues that the language of SC(4) is wholly geared to ensuring that the bungalows were removed and pavilion built in lieu thereof on the lines of the P & T plan or such lines as approved by the DPW with no restriction as to height and volume.  That was a positive duty to be performed within the time frame and up to the scale of expenditure as stipulated in GC(7).  He argues that the words “save as aforesaid” in the second limb of SC(4) referred to the pavilion required to be built and that the natural meaning to be given to the second limb must be that if the duty set out in the first limb is departed from, then the consent of the Governor is required.  From this conclusion, he argues that the corollary must be that this second limb is no longer necessary once the positive duty in the first limb has been performed.

47.  With respect, I am quite unable to draw any material distinction between SC(2), SC(3) and SC(4).  The effect of these special conditions together with GC(7) was that the lessee shall build not more than a specified number of houses under SC(2) and SC(3) and to build a pavilion on the lines of the P & T plan or such lines as approved by the DPW under SC(4) within thirty-six months and up to a specified scale of expenditure.  The obligations to build were all positive covenants.  The restriction under SC(2) and SC(3) was that the lessee shall not build more houses except with the consent of the Governor, whereas that under SC(4) was that the lessee shall not erect some other building without the consent of the Governor.  I do not think the use of the words “except with the consent” and “without the consent” or the drafting of the three special conditions as a whole could lead to the very different intentions as contended for by Mr Neoh SC.

48.  Mr Neoh SC also argues that there is good evidence that his construction of SC(4) was adopted by the Government when consent was given to allowing the lessee to build the pavilion without removing the bungalows as required by the first limb of SC(4).  There is no dispute that the pavilion was built without removing the four bungalows.  However, there is no dispute also that consent not to remove the bungalows was sought and granted.  Furthermore, modifications to the Conditions of Exchange were subsequently granted with subdivision of RBL 368 and the bungalows were sold and redeveloped upon payment of premium. 

49.  Mr Neoh SC then tests the construction of the Government by arguing that the future buildings will have to meet the needs of the Repulse Bay area in the futures and that over the 150-year term the pavilion required by the neighbourhood may well be very much different from what the original pavilion could offer.  Therefore, he argues that it is distinctly odd if the second limb of SC(4) was to be construed to apply to future buildings other than the original pavilion.  He argues that in the absence of user restriction in the Conditions of Exchange, it is illogical that the Government should be vested the absolute right to withhold consent to redevelopment and that the Government’s construction is to introduce restriction where there was none in the Conditions of Exchange.  He repeats his argument that to achieve that purpose very clear language along the lines of SC(2) and SC(3) or a similar condition such as special condition 21 of the conditions of sale in Hang Wah Chong Investment Co. Ltd expressly giving the Government absolute discretion would be necessary. 

50.  I respectfully disagree.  The second limb under SC(4) refers to “any building” on RBL 368.  It would be rather strained to restrict that term to the building already built and nothing else.  A reasonable reader would readily assume the term to refer to any building to be built immediately after the commencement of the grant as well as any building to be built in its place thereafter.  If indeed Mr Neoh SC is right, the drafting of SC(4) was hopelessly redundant.  The intention as suggested by Mr Neoh SC, if indeed it was the true intention of the parties, could be achieved more simply by adding the words “or such other building with the consent of the Governor” after the word “Director” in the first limb and the entire second limb could be dispensed with altogether.

51.  But what I find most difficult to accept is that Mr Neoh SC’s argument is premised on the assumption that by SC(4) or the Conditions of Exchange as a whole the Crown had granted to HKRT the maximum development potential.  He argues that the basic proposition of landlord and tenant law is the tenant’s right to make use of the demised premises for any lawful purpose and that it is an implied term in any lease that the landlord shall ensure that the tenant shall have quiet enjoyment of the leased premises.  I think Mr Neoh SC is certainly right insofar as the position between the Crown lessee and his subsequent assignee is concerned in which the assignment assigns the entirety of the interest in land.  This is what I call the ordinary landlord and tenant situation.  The position is different when construing a Crown lease.  Sale of Crown land and the determination of conditions of sale are matters of land administration which have no place in an assignment between the Crown lessee and his assignee or between that assignee and his subsequent assignees and so on.  Though conceptually speaking all land belongs to the sovereign, in reality it is not the sovereign’s personal or private property.  It is state property as it is more properly called after the change of sovereignty.  It is used to generate revenue to meet public expenditure and social needs.  The Government therefore has to decide how best to use this scarce resource to meet the needs of the society.  It imposes restrictions which may delineate the nature of the interest that is being divested to the Crown lessee or restrictions for town planning or other planning purposes.  The Crown does not necessarily divest the entirety of the interest in land to the Crown lessee.  It may retain whatever it has not so divested in the Crown lease.  By way of contrast, in the ordinary landlord and tenant situation, the landlord who is a subsequent assignee from the Crown lessee divests the entirety of the interest in the Crown lease to his assignee.  Hence, in construing a Crown lease, Ms Eu SC is right to ask the question what was the interest in land that was being divested by the Crown.  Mr Neoh SC seems to have assumed that because of Ms Eu SC’s concession that SC(4) was not a user restriction clause and that there were no restrictions on volume or gross floor area, the Crown had divested all its interest in the land.  I think the absence of such planning restrictions in the Conditions of Exchange is neither here nor there. 

52.  So far as is relevant to the present dispute, what was granted was the right to build a pavilion in SC(4).  The pavilion was described as “a pavilion on the lines of that shown on the [P & T] plan or on such other lines as the [DPW] may approve”.  Is this a statement of the extent of the interest granted under the Conditions of Exchange as argued by Ms Eu SC or is it just a planning restriction while the entirety of the interest in land had been divested to the Crown lessee as suggested by Mr Neoh SC?

53.  In Hang Wah Chong Investment Co. Ltd,which I have referred to above, Lord Edmund-Davies held that conditions such as those in special conditions 6 and 7 in that case which restricted building height related directly to the landlord’s interests.  Thus, the restriction, even if it was a town planning restriction, delineates the interest the Government as landlord divested to the lessee under the Crown lease.

54.  While Ms Eu SC concedes that SC(4) was not a user restriction clause in the sense of restricting the use of the land to a particular user, such as domestic or industrial use or other categorisation, she argues that the Conditions of Exchange were not without restriction.  As submitted by Ms Eu SC, restriction may take many different forms.  Restriction may be in the usual form as to user, or user restriction.  It may take the form of restriction on gross floor area, plot ratio and height.  Or as in the present case, it may take the form of restriction on the type, style and number of houses to be built.  The restrictions in SC(2), SC(3) and SC(4) were drafted in the same manner.  SC(2) and SC(3) restricted the number of houses to be built to fifteen and eight respectively on RBL 366 and 367 except with the consent of the Governor.  Likewise, SC(4) specified the building to be built as a pavilion on the lines of the P & T plan or on such other lines as approved by the DPW.  In other words, it limited the extent of the interest in land which the Crown as landlord had divested to the lessee.  That was the extent of the interest in land which was divested to HKRT under        the Conditions of Exchange.  It was a limited interest to exploit the development potential in the land. 

55.  The Governor’s consent to build more houses under SC(2) and SC(3) is no different in nature from the DPW’s approval required in Hang Wah Chong Investment Co. Ltd for erecting any buildings exceeding the height restriction formerly imposed by the DPW.  They are all related to exploiting the development potential of the land.  The difference, if any, is that the development potential in the present case is a horizontal development potential whereas that in Hang Wah Chong Investment Co. Ltd was a vertical development potential.  In my view, that is a distinction without any difference.  Likewise, the Governor’s consent under SC(4) to build something else other than the pavilion as envisaged in the P & T plan or as formerly approved by the DPW on RBL 368 is no different from the DPW’s consent to relax the height restriction.  It is also related to exploiting the development potential of the land.  Hang Wah Chong Investment Co. Ltd is on all four with the present cases.

56.  The conditions of sale in Hang Wah Chong Investment Co. Ltd was granted upon an ordinary auction, whereas the Conditions of Exchange in the present case formed part of a special purpose lease.  They were granted under preferential terms and by way of private treaty (see paragraphs 16, 36 and 37).  Land has always been a scarce resource.  It has always been an important financial source to provide for the public and social needs of Hong Kong.  Land administration has always been carefully planned and received the personal attention of the Colonial Secretary, the Governor and the Secretary of States of the United Kingdom.  It was under those circumstances that RBL 368 was granted to HKRT.  It was granted by way of a private treaty so that HKRT had the exclusive privilege to contract for a Crown lease without having to compete with other contestants.  Not only that RBL 368 was granted at a reduced premium but also that the restriction against transfer on the two pre-existing lots used in the exchange was lifted, which significantly enhanced the value of those lots.  The restrictions under the special conditions, including SC(4) were imposed under such circumstances.  It is obvious that HKRT had not paid for the full price for the land.  In view of the concession given to HKRT, it could not have been the parties’ intention that HKRT was to be given the full development potential of RBL 368.  Under such factual matrix, the only reasonable inference is that RBL 368 was granted to the lessee for the purpose of building a pavilion as contemplated under the first limb of SC(4) and nothing else.  The pavilion was to serve a public purpose required at the time and thereafter.  Hence, should HKRT or its successor wish to erect any other building whether in fulfilment of the building covenant which deviates from the pavilion contemplated under SC(4), it has to obtain the Governor’s consent.  Likewise, if it wishes to replace the pavilion built in compliance with SC(4), it may only erect a new building which is on the lines of the P & T plan or on such lines as approved by the Building Authority who replaced the DPW.  But, if the replacement building deviates from the pavilion as contemplated under SC(4), it has to obtain the Governor’s consent and to pay a premium if so required.  Given the factual matrix, it is simply absurd that HKRT could build the pavilion as envisaged under SC(4) and then pull it down on the next day and build something else wholly different.

57.  Furthermore, from the Conditions of Exchange, it is obvious that all governmental functions and public authority functions were to be exercised by the DPW.  Under SC(1), the DPW approved the layout plan of the buildings to be erected on the three lots.  No alteration may be made in relation to the nature or dimensions of the buildings shown on such a plan without the written consent of the DPW.  Under SC(3), the DPW approved the erection of servants’ quarters and garages in connection with the use of RBL 368.  Under SC(4), the DPW approved alterations to the P & T plan in respect of the pavilion to be built.  Under SC(5), the DPW also approved the design of the exterior elevations plan, height and disposition of any building to be erected on any of the three lots.  These were clearly town planning and building control functions of the DPW as the public authority.  However, the consent to build more than fifteen houses on RBL 366 and more than eight houses on RBL 367 were specifically reserved to the Governor under SC(2) and SC(3).  Furthermore, the differentiation of function between the Government’s capacity as landlord and as public authority under the Conditions of Exchange in the present case was very distinct.  The DPW had authority to grant approvals under the special conditions relating to town planning and building control matters while the authority to give consent under SC(2), SC(3) and SC(4) and was reserved to the Governor personally.  The differentiation must, in my view, reflect the important distinction between the Government as the public authority  in land related matters and the Governor as the representative of the sovereign and landlord in whom all interests in land vested.  Thus, the inference that the Governor’s consent under SC(2), SC(3) and SC(4) related to landlord’s interest is even much stronger in the present case than the DPW’s approval required to relax the height restriction in Hang Wah Chong Investment Co. Ltd.

58.  Mr Neoh SC draws support for his construction from SC(24) which grants a right of free and uninterrupted access to the sea for the purpose of the use of RBL 368 as a bathing pavilion and pleasure resort.  His argument is that the language of SC(24) refers to use of the lot and does not restrict the use to the original pavilion and therefore the Conditions of Exchange as a whole envisage not only that a right of way would be granted so long as the lot retained the usage as a bathing pavilion and pleasure resort, but also the right of redevelopment.  With respect, I am unable to see how the right of redevelopment must necessarily follow the use of the lot as a bathing pavilion and pleasure resort.

59.  Mr Neoh SC also draws support for his construction by arguing that SC(5) is the only condition which controls redevelopment and it clearly deals with future buildings.  Hence, he argues that if SC(4) applies to future building, there will be no need for SC(5) and furthermore, SC(5) envisages that all lots would be redeveloped in the future.  With respect, SC(5) applies to any building to be erected on any of the three lots, whereas, the second limb applies only to the pavilion to be built on RBL 368RP under the first limb of SC(4).  I fail to see how the construction contended by Ms Eu SC would have the effect of rendering SC(5) which also applies to the other lots redundant.  Furthermore, SC(5) was clearly a town planning provision which gave the DPW as the Building Authority and Chairman of the Town Planning Board back in 1930s the authority to control the town planning in Repulse Bay area.  The second limb of SC(4) is a landlord’s provision which defines the extent of the interest granted under the Conditions of Exchange.  There are good reasons for the two provisions to co-exist.

60.  Next, Mr Neoh SC queries whether there is any place for a free standing consent clause in SC(4) with the effect contended for by the Government if there is no restriction on user, form, volume or gross floor area in the Conditions of Exchange.  He submits that a clause conferring absolute discretion on the Government to prohibit redevelopment would be oppressive, given the general law giving the tenant use for any lawful purpose, the long duration of such a lease and the lack of compelling language.  Again, this argument is premised on his assumption that the Crown had divested all its rights over RBL 368 by virtue of the Conditions of Exchange, a proposition which I have rejected as not being contrary to the authorities I have referred to above.

61.  In conclusion, I think it is impermissible to make the quantum leap as Mr Neoh SC does without ascertaining the nature of the interest or the extent of development potential divested to HKRT under the Conditions of Exchange to argue that the Crown had divested all or the maximum development potential to HKRT such that in the absence of any user restriction the Plaintiff as its successor in title of HKRT is entitled     to build anything else once the initial pavilion was built.  To conclude therefore that the second limb was spent once the initial pavilion was built must lead to a result which is absurd.  I find that on the true construction of the Conditions of Exchange, SC(4) delineated the extent of the interest in land which the Crown as landlord had divested to the Crown lessee.  Under the first limb of SC(4), HKRT was given the right to build a pavilion on the lines of the P & T plan or on such lines as approved by the DPW and nothing else.  That was the extent of the interest in land which was divested to HKRT under the Conditions of Exchange.  It was a limited interest to exploit the development potential in the land.  Such restriction reserves to the landlord the maximum development potential.  Put in the other way, by means of such restriction, the landlord divested the least of the development potential in land.  If the lessee wishes to build something else, he has to seek the landlord’s consent for the release of more development potential under the second limb of SC(4).  In the case of scarce resource such as land, the consent has to be paid for by way of premium.

Derogation from grant and unreasonably withholding consent

62.  The Plaintiff’s alternative position is that if the Governor’s consent, now the Chief Executive’s consent, required under the second limb of SC(4) applies to the initial pavilion built as well as to any buildings to be built thereafter on RBL 368RP, the consent may not be exercised in derogation from the grant and the refusal by the Chief Executive to give consent was a derogation from the grant.  This argument falls together with its construction of SC(4) which I rejected.  As submitted by Ms Eu SC,   the argument on derogation from grant begs the question as to what        was granted under the Conditions of Exchange.  While there is no user restriction under the Conditions of Exchange, HKRT was granted the right to build not anything, but the pavilion as described under the first limb of SC(4).  In building the New Complex which is not on the lines of the P & T plan or as approved by the DPW, the Plaintiff is in clear breach of covenant and the consent of the Chief Executive as landlord is required.  There is no question of derogation from grant.  Even according to an authority submitted by the Plaintiff, Nissim’s Land Administration and Practice in Hong Kong, 2^nd Ed., p. 88, where a proposed development is permitted under the draft or approved plan but would contravene a covenant in the lease, the developer must still apply for a variation of the lease and may have to pay a premium for such variation. 

63.  Next, Mr Neoh SC submits that consent is a function to be exercised in the context of the lease.  It is not an occasion to extract premium and there is no history of the Government extracting premium for giving consent.  The pavilion was allowed to be extended at least twice in 1976 and 1984 without payment of premium.  He argues that this is because the fact that a premium representing the full consideration was paid at the beginning of the term and there is a mechanism for re-assessment of annual Government rent when the option is exercised for the remaining term of 75 years and that Government rents have since 1997 been payable at 3% of rateable value of the tenement.  He quotes Nissim, Land Administration and Practice in Hong Kong, 2^nd Ed., pp 82-83, in which the learned author expressed the opinion that design disposition and height clauses which impose restrictions should not be used by the Government to achieve payment of premium but only to control development in accordance with current planning requirements.  He suggests that if there are restrictions under the Conditions of Exchange, there will be no warrant for the Government to withhold consent because of form or volume or use.  By requiring consent, the Government is introducing restriction by the backdoor and therefore derogates from grant.

64.  Again, Mr Neoh SC’s argument is premised on the assumption that the Crown had granted all rights and interest in RBL 368 to HKRT under the Conditions of Exchange when it had not.  Lord Edmund-Davies’ dicta in Hang Wah Chong Investment Co. Ltd which I have quoted above provide the complete answer to his argument.  As with the height of the building to be built in Hang Wah Chong Investment Co. Ltd, the pavilion specified under SC(4) to be built in the present case also relates to the landlord’s interest.  That was the extent of the interest granted to HKRT under the Conditions of Exchange.  That was the basis on which premium was calculated back in 1932.  It is therefore wrong for Mr Neoh SC to argue that the full consideration had been paid.  Indeed, according to the factual matrix, HKRT had not paid the full value of the land: see paragraphs 15, 16, 37, 41 and 56. The Plaintiff, in the shoes of HKRT, is now seeking to exploit development potential which had not been granted to its predecessor.  It is open to the landlord to demand additional premium as a quid-pro-quo for giving its consent under SC(4).  All along in the past, the Government’s consent had been sought for redevelopment of the then existing pavilion.  Sometimes, consent was given and sometimes not.  It is also true that hitherto where consent was given, no premium was charged.  But that is besides the point.  The Government might have considered the redevelopment minor, within the lines of the P & T plan or such plan as approved by the DPW or conducive to public good.  But there was never any waiver of the requirement to seek consent.  As was held by Lord Edmund-Davies, it is not incumbent upon the landlord to show that it was justified to charge a premium.  I adopt what his Lordship said, it is sufficient, for the present purposes, simply to say that, the Plaintiff is seeking a concession from the Government as landlord in relation to the development of the land leased, the Government is entitled to make the granting of that concession conditional upon the payment of a premium.

65.  In respect of SC(5), Mr Neoh SC submits that it is plainly a development control clause devised in the days when planning controls were minimal.  He argues that today, development controls in relation to unrestricted leases are catered for in the Town Planning Ordinance through outline zoning plans and the Buildings Ordinance through section 16(1)(d) and in this case, the Building Authority saw no need to invoke section 16(1)(g).  He also referred to Ying Ho Co. Ltd & Others in which it was held that consent clauses are subject to the limitation of the concept of derogation from grant.  He submits that given that the New Complex completely complies with all extant public development control, including height, plot ration, site coverage and user under the outline zoning plans and the Buildings Ordinance, there is no conceivable policy reason for the Government to withhold consent.  As SC(5) is a development control clause and had nothing to do with the landlord’s interest, if the new pavilion completely complies with all extant statutory and public requirements, I agree that there is no conceivable policy reason for the Government to withhold consent.  But the consent under SC(5) is not at issue. 

Estoppel

66.  The Plaintiff’s final fall back position is estoppel.  Initially, Mr Neoh SC emphasised the fact that prior to the Plaintiff acquiring the pavilion in 1993, its solicitors had written to the District Lands Officer enquiring if the erection of the pavilion was in compliance with the Conditions of Exchange and to which the District Lands Officer replied in a letter dated 17 February 1994 that his office confirmed that “there would be no contravention to the lease provided the building(s) existing on the lot are in accordance with the plans approved by the [District Lands Office] and the Building Authority”.  It was then submitted that it was on the faith of that letter that the Plaintiff completed the purchase.  This must be the factual basis of the Plaintiff’s estoppel claim.  In paragraph 7 of the Plaintiff’s Amended Originating Summons, the Plaintiff seeks a declaration that the Government is estopped from denying that the ex-Lido Complex was approved under and complied with SC(4) and from asserting that the New Complex was in breach of the lease.

67.  Given the very guarded and even equivocal language used in the letter and in particular the proviso, it is arguable if the District Lands Officer had represented anything in his letter of 17 February 1994.  It is not seriously disputed by the Government that the ex-Lido Complex did not comply with SC(4).  I am fully conscious of the Plaintiff’s case that the New Complex complied with all plans approved by the Building Authority and is within the meaning of the “pavilion” as defined in the Oxford Encyclopedic English Dictionary.  But I also note the Government’s disagreement to the above contention.  As rightly pointed out by Ms Eu SC, this case is not about similarities and differences between the ex-Lido Complex and the New Complex, but about construction of SC(4), i.e. about the extent of the development potential granted under that special condition.  Those similarities and differences are not relevant for my consideration.  Suffice it is to say, it is difficult to see how that representation in 1994 could bind the Government in respect of the New Complex built some twelve years later and amidst protest by the District Lands Officer of breach SC(4). 

68.  In his closing reply, Mr Neoh SC resurrected the point of estoppel.  He referred to the approvals given in the past in respect of developments of the pavilion and argues that those approvals indicate a wide range of usage but volume has never been an issue.  He argues that as there are no restrictions on use and volume under the Conditions of Exchange, the consents of the Government have always been premised on the public policies for development controls in published documents, the Government is estopped from withholding consent in the present case.  He quoted the case of Attorney General v Fairfax Ltd [1997] 1 HKC 17. 

69.  That argument is well outside the scope of the Amended Originating Summons.  Be that as it may, the facts of Fairfax Ltd is wholly distinguishable from those of the present case.  In that case the lease contained a covenant that the lessee would build one or more villa residences on some two acres of land in Hing Hon Road and Bonham Road.  The land was sub-divided and the appellants became the owner of two of the twenty-eight sub-lots.  The appellants proposed to build a high-rise building and the Government demanded premium.  The appellants sought a declaration that the Crown could not enforce the covenant contending that it had abandoned the covenant by acquiescing over many years in the development of the lot in a manner inconsistent with the covenant.  The Judicial Committee of the Privy Council held that the whole area of the lot bore no resemblance to what the original lease had contemplated, namely, a low density area of villa houses, but was now a high density high-rise area of apartment blocks and the Crown knew of the development and the breach.  Therefore, the Judicial Committee held that was a clear case of abandonment.  That case was readily distinguishable from the present case.  Over the years there were applications for consent made by HKRT.  Some applications were approved and some were not, but applications for consent were made.  Though no premium was charged where consent was granted, it can hardly be argued that the Government is estopped from asserting its right to grant or to withhold consent.

Plaintiff’s challenge to THE Government’s seven core propositions

70.  The above is sufficient to dispose of the Amended Originating Summons now before me.  In his closing reply, Mr Neoh SC attacked on the Government’s seven core propositions which formed the basis of Government’s argument.  Many of his arguments have been canvassed above.  However, it would be convenient to specially address those points separately below.

Proposition 1 - whether the redevelopment right of RBL 368RP remains with the Government

71.  This issue forms the bulk of the discussion above.  The question is not really whether the redevelopment right remains with the Government, but what interest has the Crown as landlord divested to the lessee under the Conditions of Exchange.  Whatever interest not so divested of course remains with the Government.  It is because of Mr Neoh SC’s failure to acknowledge the limited interest given to the lessee under the Conditions of Exchange that he launched the argument that because of the absence of restrictions as to height, gross floor area or volume in the Conditions of Exchange HKRT had been given the maximum development potential and hence the question of implied covenant of quiet enjoyment arose.  The argument has been fully canvassed in the section above, except for the point about quiet enjoyment. 

72.  I now come back to the point about quiet enjoyment which I have left behind.  In the absence of a covenant to the contrary the tenant is entitled to use the premises demised to him for any lawful purpose.  An undertaking by the landlord for quiet enjoyment is to be implied from the mere relation of landlord and tenant.  This covenant in law for quiet enjoyment entitles the tenant to enjoy his lease against the lawful entry, eviction or interruption of any man, but not against tortuous entries, evictions or interruptions.  The basis of this implied covenant is that the landlord, by letting the premises confers on the tenant the right of possession during the term and impliedly promises not to interfere with the tenant’s exercise and use of the right to possession during the term: see Woodfall on Landlord and Tenant, paragraphs 11.179 and 11.267.  This legal principle is equally applicable to the relation between the Government as landlord and a lessee under a Crown lease.

73.  Ms Eu SC argues that the principle applies only in the absence of covenant to the contrary and as there was a covenant to the contrary in the lease, the principle does not apply.  I think a more precise way of putting that proposition is that on the true and proper construction of the Conditions of Exchange, there is no breach of the implied covenant of quiet enjoyment of the limited interest given to the lessee under the Conditions of Exchange.  HKRT was entitled to build a pavilion, it built the pavilion and had quiet enjoyment until its successor, the Plaintiff, demolished it to build something else in breach of the Conditions of Exchange.  HKRT and the Plaintiff in its shoes never ceased to have quiet enjoyment of the limited interest divested to HKRT under the Conditions of Exchange.

Proposition 2 - the right to redevelopment still vests with the Government

74.  I think this is the same as Proposition 1 but viewed from nine different angles.

75.  First, Mr Neoh SC argues that the Government seems to seek support for this proposition because the Conditions of Exchange represented some kind of a “special purpose lease” drawing from its background as an exchange for RBL 200 containing restrictions against transfer and the social need for a pavilion.  Two points are raised by Mr Neoh SC.  The first one is that the lease for RBL 368RP is not a “special purpose lease” as it contains no restriction against alienation.  I have already dealt with this point in paragraphs 38 to 41 above.  I think the term was loosely used by Ms Eu SC without reliance on any technical meaning or legal consequence under common law or statute.  What Ms Eu SC sought to rely on was the factual circumstance under which the Conditions of Exchange were entered into as an aid in their construction.  This brings me to Mr Neoh SC’s second point.  He argues that RBL 200 was exchanged for RBL 366 to 368 in 1932 and the terms of the grant under RBL 200 are no longer relevant.  He argues further that any pre-contractual negotiations are not relevant for the construction of the Conditions of Exchange and so we are thrown back onto the terms of the Conditions of Exchange.  These points have also been dealt with in paragraphs 38 to 41 above.  The grant of RBL 200 at preferential terms, the exchange of RBL 200 for RBL 366 and 367 at preferential terms, the lifting of the restriction against transfer etc are factual backgrounds which may properly be relied upon by the Plaintiff as part of the factual matrix.

76.  Second, Mr Neoh SC argues that the proposition fails to recognize that the Conditions of Exchange allow free alienation of the land during the 150-year term.  The premium paid up front plus the Crown rent (now Government rent) paid annually are the considerations paid by        the lessee for the permitted uses during the term.  Changes in the neighbourhood within the 150-year term must be unimaginable.  Hence, he submits that it is unfair that the Government should be allowed to benefit twice and to retain the right to redevelopment.

77.  Premium and Government rent are payments for different purposes, though both relating to the use of the same lot of land.  Premium was assessed based on the terms of the lease.  It was the consideration for which the lease was granted.  If the lessee wishes to have modification to the lease, additional premium is payable.  Government rent, on the other hand, is a recurrent annual payment payable for the use and occupation of the land.  It is a liability to pay under the terms and during the duration of the lease.  The Government Leases Ordinance makes provision for the renewal of certain Government leases.  Section 9(1) of the Ordinance fixed the Government rent at 3% of the rateable value of the land in question.  Rateable value is assessed as the market value of the land together with building, if any, thereon.  Naturally, it increases with the gross floor area built on the land.  The greater the extent of the development of the land, the higher is its rateable value and Government rent.  There is simply no logical basis for the argument that by continuing to charge Government rent it implies the lessee can build whatever he wishes which he was not permitted to build under the terms of the lease.

78.  Third, Mr Neoh SC argues that any building built according to the building covenants cannot last for 150 years.  The possibility of natural disasters, wars and fair wear and tear must be within reasonable contemplation of the parties.  Hence, he submits that redevelopment was or should have been within the reasonable contemplation of the parties to the Conditions of Exchange.  I do not think the Plaintiff or the Government is seriously contending that the lessee may not, without paying additional premium, maintain, repair or even reinstate any building on the land if damaged by wear and tear, natural disaster, negligence, accident such as fire or even deliberate act of destruction: provided the lessee does not   build anything else other than what was permitted under the terms of       the Conditions of Exchange.  Redevelopment is of course not permissible as additional development potential will be exploited.  The fact that redevelopment was within the contemplation of the parties does not necessarily lead to the conclusion therefore that the lessee may be allowed to exploit the development potential of the lot beyond that which had been given to him under the Conditions of Exchange.  On the contrary, this contemplation precisely supports the construction that the second limb of SC(4) was intended to operate throughout the term of the lease.  The Governor’s consent is required for any future building to be erected otherwise than on the lines of the P & T plan or those approved by the DPW.

79.  Fourth, Mr Neoh SC argues that there is no provision within the lease to maintain and rebuild the same building according to the positive covenants in the Conditions of Exchange.  If a new lease was granted in accordance with GC(12), it would incorporate the maintenance clause of nearby lots which do cater for the possibility of redevelopment.  He quotes the following maintenance clause from the Crown lease for RBL 159 of 10 South Bay Road, granted in 1936 which states:

“… and also shall and will from time to time and at all times hereafter when and as often as need or occasion shall be and require at his/her/their own proper costs and charges well and sufficiently Repair Uphold Support Maintain Pave Purge Cleanse Empty Amend and keep the messuage or tenement messuages or tenements and all other erections and buildings now or at any time hereafter standing upon the said parcel of ground hereby expressed to be demised …”

Mr Neoh SC particularly emphasises on the words “now or at any time hereafter standing” as implying possibility of future redevelopment.

80.  I am unable to agree with that submission.  GC(12) provides that the Crown lease which HKRT shall be entitled to

“… shall be subject to, and contain, all Exceptions, Reservations, Covenants, Clauses and Conditions inserted in the Crown Leases of similar Lots in the Colony of Hong Kong or which may be required for the purpose of carrying out any of the General and Special Conditions herein contained affecting the Lots or the title thereto.”

Thus, the clause in the Crown lease for RBL 159 will be incorporated into the Crown lease for RBL 368RP subject to the purpose of carrying out the special conditions in the Conditions of Exchange, in particular SC(4), SC(5) and SC(24) etc.  There could be no question of any implied right to redevelopment.  I do not think there is any ambiguity in GC(12) or the above clause in the Crown lease for RBL 159 relied on by Mr Neoh SC.  Even if there were, it shall be resolved in favour of the Government under the principle in Earl of Lonsdale v Attorney General And Another quoted above.

81.  Fifth, under the terms of the Conditions of Exchange, the lessee has exclusive possession and quiet enjoyment of the land for a term of 150 years.  Mr Neoh SC argues that the lease will be worthless once the original pavilion is demolished for whatever reason including natural disaster, if the right to redevelopment is vested in the absolute discretion of the landlord.  He submits that this could not be the case in the absence of clear language as in this case.  This argument is again premised on the assumption that there is no right to reinstate and should be rejected as distorting the common intention of the parties.

82.  Sixth, Mr Neoh SC argues that in the light of the basic legal position vesting the right to exclusive possession to a tenant for his quiet enjoyment for the duration of this 150-year lease, no lease of land without user restrictions can be interpreted in a way which deprives the tenant of a right of redevelopment.  I think this argument has been fully disposed in the earlier sections.

83.  Seventh, GC(12) envisages a re-assessment of the annual Crown rent when the option to extend the lease for another 75 years is exercised.  Mr Neoh SC argues that redevelopment must be contemplated and the Crown rent or Government rent would be re-assessed on the basis of the uses at the time of exercise of the option.  This argument has been disposed of in paragraphs 76 and 77 above.

84.  Eighth, Mr Neoh SC submits that in a lease where there are no restrictions as to user as conceded by Government in the present case, it must follow that the lessee must have a right to redevelopment, given the long duration of the term for which the land was demised.  This argument has also been disposed of in the earlier section.

85.  Ninth, Mr Neoh SC argues that the case of Director of Lands v Yin Shuen Enterprises Ltd & Another is about section 12(c) of the Lands Resumption Ordinance and is irrelevant to the present dispute.  This argument has been rejected because what is relied on in that case is a principle of general application: see paragraph 32 above.

Proposition 3 - since no redevelopment right has been granted, there is no derogation of grant

86.  Mr Neoh SC repeats his argument that in a lease where there are no user restrictions or restrictions as to height, gross floor area or volume, the tenant may use the land leased for any lawful purpose, including redevelopment.  He submits that the corollary is that in the absence of any restriction, consent where needed cannot generally be withheld unless there are good public policy reasons.  This is all a matter of construction of the Conditions of Exchange.  If on the true construction of the Conditions of Exchange no redevelopment right has been granted, the question of derogation from grant does not arise.  It would only arise if the Government attempts to cut down the development potential which has been granted for example by requiring a reduction of the gross floor area of the pavilion which had been built on the lines of the P & T plan or as approved by the DPW.

Proposition 4 - consent for redevelopment is similar to the making of a fresh agreement

87.  Mr Neoh SC attacks Ms Eu SC’s proposition that the Governor’s consent required under SC(4) operates similar to the making of a fresh agreement.  His argument is that there is a distinction between modification of a Crown lease and the giving of consent under a lease.  Modification involves change to the terms of a lease as to which premium is normally payable on the basis of the change in land value between the terms under which the land may be used under the pre-modification terms and the new terms.  Thus, there are the “before” and “after” modification values, the difference between which represents the premium.  This method of assessing premium has been in place for a long time and was recognized by paragraph 5 of Annex III of the Joint Declaration.  He argues that consent, on the other hand, is a completely different matter.  It derives from a term in the lease and never involves a fresh agreement.  He also refers to the application sought in relation to RBL 368 for rebuilding the bungalows instead of removing them as required under the first limb of SC(4) as genuine modifications for which premium was payable.  He argues that Hang Wah Chong Investment Co. Ltd did not decide that consent equates to a new agreement or that Government may exact premium for granting consent or approval but merely that the Government may exact premium for modification.

88.  In Hang Wah Chong Investment Co. Ltd, the Government indeed proceeded on the basis that modification to the conditions of sale was required.  But in fact the case was about the right of the Government to exact a premium for approval of the DPW.  It appeared that the Judicial Committee of the Privy Council attached no significance to the word “modification”.  At page 340, Lord Edmund-Davies even rejected the appellant’s contention that no premium may be demanded because there was no lease and no modification of a lease as a question which cannot be so simply answered.  His Lordship then went on to consider the DPW’s discretion as to the granting of approval.  His Lordship referred to the appellant’s argument that the DPW was not entitled to take into account matters which were wholly extraneous to the purpose of special conditions 6 and 7, such as the raising of revenue and said:

“This submission is in substance similar to that upheld by the Court of Appeal in Viscount Tredegar v Harwood [1928] Ch 59, but rejected by the House of Lords [1929] AC 72.  There Lord Shaw of Dunfermline rejected the Court of Appeal’s implication of a new clause in a lease to the effect that the lessor’s consent to insurance of the leased property with any responsible insurance company was not to be withheld unreasonably, and added (at page 80):

 “The Court [of Appeal] then proceeds to attach to these terms and to this contract … that the lessor must furnish a justification for his refusal, and further that such a justification must be something incidental to the individual contract itself and also to the financial standing or responsibility of the alternative insurance company.  I am humbly of opinion that this process of piling implication upon implication is not a legitimate mode of construing a very simple and plain condition.  It is clogged neither by the one implication nor the other.”

  In the same way and for a like reason, their Lordships reject the objection taken in the present appeal that a premium is not exigible because it is “wholly extraneous to the purpose of
Conditions 6 and 7.”

Then, after referring to the passage which I quoted in paragraph 28 above regarding the Government’s right as landlord, his Lordship dealt with the basis for charging a premium.  He said at 342:

“On that view, can it properly be said that it is for the respondent to establish the reasonableness of the demand for a premium?  In the light of Viscount Tredegar v. Harwood [1928] Ch. 59 (ante), their Lordships are of the opinion that the question requires a negative answer.  But they must not thereby be taken as holding that the requirement was capriciously advanced (and, indeed, appellants’ counsel expressly disclaimed any such suggestion) or that, were it incumbent upon the respondent to justify the requirement, he would be unable to adduce good reasons for demanding a premium.  It is sufficient, for present purposes, simply to say that, the appellants seeking a concession from their landlords in relation to the development of land leased, the landlords were entitled to make the granting of that concession conditional upon the payment of a premium.”

89.  Thus, the legal basis for exacting a premium is not, as what Mr Neoh SC suggests, because of a modification to the terms of a lease as such.  It is simply because the lessee is seeking a concession from the landlord in relation to the development of land leased.  It makes no difference whether the concession is by way of modification to the Crown lease or by way of the landlord’s consent.  The premium can be assessed in a like manner as the difference in land value with the consent and without the consent which are the “after” and “before” values.  Where the consent is given and premium agreed, it must of necessity be a fresh agreement.

90.  Mr Neoh SC also argues that a clear distinction has to be drawn between SC(2) and SC(3) on the one hand which contain restrictions as to the number of houses which may be built on RBL 366 and 367 save with the consent of the Governor and SC(4) on the other.  I have dealt with this point in paragraphs 46 and 47 above.  With respect, I do not see any material distinction between any of these special conditions.  These special conditions simply demonstrate the invalidity of Mr Neoh SC’s argument.

Proposition 5 - there is no user clause, although user may be one of the considerations for giving consent

91.  Mr Neoh SC argues that if there is no user clause or other restrictions in relation to RBL 368RP, there cannot be any restraint against redevelopment.  He criticizes Ms Eu SC’s argument that the Government may take into account user restrictions in giving or withholding consent as bringing into the lease a user restriction by the back door.  This argument has been repeated in some other form.  It is a red herring.

Proposition 6 - not a case about similarities between new and old building, although the Government has indicated it will consent to “something like” the old building as the “before” value

92.  Mr Neoh SC criticizes the above proposition of Ms Eu SC on the basis that there is no “before” value without a modification of the lease or Conditions of Exchange and that the Governor or the Chief Executive since the change of sovereignty could not have unfettered right to withhold consent.  These points have been dealt with before and shall not be repeated.

Proposition 7 - prayers in the Amended Originating Summons are like shadow boxing and skirting the issue

93.  In the light of the analysis above, Ms Eu SC is plainly correct with that proposition.

conclusion

94.  On the true construction of the Conditions of Exchange, the first limb of SC(4) imposes a positive obligation on the lessee to remove the existing bungalows and to replace them with a pavilion to be built.   The pavilion as contemplated by the parties was one along the lines of the P & T plan.  However, the lessee was given limited liberty to deviate from the P & T plan provided what was built qualified as a pavilion and was approved by the DPW.  This was the limited interest in land which was divested to the lessee under the Conditions of Exchange.  The lessee may not build anything else on the land except with the consent of the Governor obtained under the second limb.  The Governor’s consent is of the nature of a landlord’s consent because it would involve a further disposition of the Crown’s property by enlarging the lessee’s right to exploit the development potential of the land.  The second limb applies to the initial building to be built as well as any building to be built thereafter whether in its place or otherwise. 

95.  While it is conceded by the Government that there are no user restrictions under the Conditions of Exchange, the lessee may not erect any building other than the pavilion contemplated by the parties under SC(4) except with the Chief Executive’s, formerly the Governor’s, consent.  The Government is entitled to restrict the use of any building, including the New Complex, which was erected on RBL 368RP in breach of the first limb of SC(4) and without the consent of the Chief Executive.  Declarations (1) and (2) relating to the use of such a building must be refused.

96.  Having reached the above construction, the question of derogation from grant does not arise in relation to the Chief Executive’s or the Government’s refusal to grant consent to erecting the New Complex.  Declarations (3) and (4) relating to the question of derogation from grant must be refused.

97.  SC(5) is concerned with the design of the exterior elevations plans height and disposition of any building to be erected on any of the three lots.  It is clearly a town planning provision.  At the time of the grant of the Conditions of Exchange in 1932, there was no town planning legislation in place.  Obviously, the Crown as landlord had reserved unto itself the power to control these matters by contract.  Statutory town planning was introduced during the term of the lease.  It does not necessary follow that the legislation has taken away the Crown’s power to control these matters as landlordor that the Crown has abdicated in favour of legislation.  The Government as landlord is entitled to impose tighter control than the minimum standards which the public are prepared to accept under the town planning provisions.  SC(5) was part of the terms on which the grant was made.  The question of derogation from grant cannot arise from the Government’s refusal to approve those matters in its capacity as landlord.  Declarations (5) and (6) relating to the question of derogation from grant arising out of such refusal under SC(5) by the Government must be refused.

98.  As a final fall back, the Plaintiff seeks declaration (7) that by reason of the District Lands Officer’s letter dated 17 February 1994, the Government is estopped from denying that the ex-Lido Complex was approved under and complied with SC(4) and from asserting that the    New Complex was in breach of the lease.  For reasons as given above, there is no basis for an argument based on estoppel.  Declaration (7) must also be dismissed.

99.  Accordingly, the Plaintiff’sAmended Originating Summons must be dismissed with costs and certificate for two counsel.  I thank counsel for their thorough research and mind searching arguments.