CHIIAPHUA INDUSTRIES LTD v. HUA CHIAO COMMERCIAL BANK LTD

Headnote

                Deposit paid under a clause in a lease expressly for the purpose of securing compliance with tenants covenants most of which were covenants running with the land held to be itself a covenant running with the land and thus enforceable by the assignee of the reversion principle in Lord Howard de Walden v. Barber and another ((1903) 19 T.L.R. 183) applied.

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REASONS FOR JUDGMENT

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Sir Alan Huggins, V.-P.:

1. The issue we had to decide was within a very small compass, viz. whether a deposit paid by a tenant to secure the performance of his covenants could properly be claimed from an assignee of the reversion.

2. The Plaintiff, under its former name of Chiap Hua Clocks and Watches Ltd., took a lease from Fook Kin Enterprises Co. Ltd. By the terms of the lease "Landlord" and "Tenant" included assigns where the context so admitted. Clause 4(h) of the Lease was in these terms:

The deposit was paid. The tenancy came to an end and it seemed to be an agreed fact that the Plaintiffs "had duly complied with the covenants and conditions contained in the Lease". In the mean time the Landlord had mortgaged the reversion to the Defendant by means of a legal assignment, and, upon default by the mortgagor, the Defendant entered into possession. There being no prospect of recovery of the deposit from the original covenant or the Plaintiff took out an originating summons for a declaration that the Defendant was liable to repay it. The Originating Summons referred to a ''rental deposit", but no point was taken as to that and it was accepted that the deposit was paid under c1.4(h). Master Boa dismissed the application and, on appeal to Mayo J., his decision was affirmed on the ground that the covenant to repay the deposit did not touch and concern the land.

3. The plaintiff Tenant appealed to this court and submitted that the covenant in question was one which ran with the land, so that it was enforceable against the Defendant. There was discussion as to the test which should be applied in deciding which covenants did run with the land, but in the end I thought that all the tests suggested were merely different ways of expressing the same thing. Moreover, it mattered not whether one described those covenants which ran with the land as covenants which "touched and concerned the land" (the old phrase) or covenants which "had reference to the subject matter of the lease" (the language used in the Conveyancing and Property Ordinance 1984): see Davis v Town Properties. Investment Corp. Ltd. 1931 1 Ch. 797.

4. The general rule undoubtedly was that a mere covenant for the payment of money prima facie did not run with the land: Boyer v. Warbey 1953 1 Q.B. 234, 243. However, the fact that the covenant reauired the payment of money was not per se a bar to its running with the land: Mansel v Norton (1883) 22 Ch. Div. 769. Furthermore it was immaterial whether the covenant was one by the landlord or one by the tenant: Idem.

5. Mayo J. appeared to have followed the English case of Re Hunter's Lease 1942 Ch. 124 and the Canadian case of Re Dollar land Corp. Ltd. v. Solomon. (1963) 39 D.L.R. (2nd Ed.) 221. The latter was, as he said, almost exactly in point, but Mr. Ma, for the Appellant, submitted that it was not an authority which we ought to follow. There the lease of an apartment contained a covenant by the tenant to pay a sum of $165 to be held by the landlord during the term of the lease to assure the performance by the tenant of the payment of rent and his other obligations under the lease. There was no direct covenant to repay, but the judge found that it was the intention of the parties that the deposit should be repaid at the conclusion of the lease provided that the tenant had paid all the rent and performed all obligations required of him under the lease. The landlord assigned the reversion to Dollar Land Corp. Ltd. ("Dollar Land"). Dollar Land then granted a lease of the building of which the apartment was part to the assignor, but that lease contained by way of security a conditional assignment to Dollar Land of the assignor's reversion to the apartment. The conditional assignment having taken effect, the question arose whether Dollar Land was liable to the tenant for the sum paid by the tenant to the assignor. Grant J. held that the obligation was "a personal obligation only between the immediate landlord and his lessee" and that Dollar Land as assignee was not liable to pay. He based his decision on two grounds. One was the fact that the covenant was expressed to be "by the lessor herein", a phrase which precluded the interpretation of the word "lessor" in the context as including the assigns of the lessor. The second was that the arrangement did not deal with the subject matter of the lease. In so saying the judge appeared to have been purporting to follow Spencer's Case (1583) 5 Co.Rep. 16a, The Mayor & Corporation of Congleton v Pattison (1808) 10 Last 130, Woodall v Clifton 1905 2 Ch. 257, Hill v Booth 1930 1 K.B. 381 and Re Hunter's Lease supra. Mr. Ma submitted that Grant J. misapplied those cases. He contended that the judge did not appreciate that Spencer's Case was concerned with an assignment of the term and not with an assignment of the reversion, because he had said:

"In Spencer's Case reference was made to a situation where money was paid to the landlord which was to be redelivered to the tenant at the end of the term".

In truth the covenant sought to be enforced was one to deliver to the lessor at the end of the term stock and a sum of money handed over to the tenant with the land. The court held that the covenant was not enforceable against an assignee because, (1) "although the rent reserved was increased in respect of the stock or sum, yet the rent did not issue of the stock or sum, but out of the land only"; and (2) "it is not certain that the stock or sum will come to the assignee's hands, for it may be wasted, or otherwise consumed or destroyed by the lessee". While it was true that the judge might have been under a misapprehension whether the covenant was a landlord's covenant or a tenant's covenant, the possibility that the money might be "wasted" existed in either case. Accordingly I thought that Grant J. was right to think that Spencer's Case was relevant. The cases cited to him did support the general proposition that a covenant by a party to a lease to pay a sum of money at the end of the term was personal to the original parties.

6. However, Grant J. did not have the benefit of the citation of two cases which have put a gloss upon that general rule: nor, it seemed, did Mayo J. in the present case. In Mansel v Norton (supra) the owner of a farm granted a lease of it for seven years and agreed to pay at the expiration of the term for the tenant's property in and upon the farm at a valuation. The owner devised the land to trustees to raise money for making specified payments and thereafter to hold in trust for the plaintiff for his life, with divers remainders over. On the testator's death the plaintiff took possession. On the expiration of the term the tenant claimed from the plaintiff the value of his property in and upon the farm. The plaintiff then agreed with the defendant (one of the assignees of the reversion) that, if the estate of the testator was liable for the payment of the money, the defendant would pay hint out of the estate. The plaintiff paid the tenant and claimed payment out of the testator's estate. In the course of the argument it was assumed by Jessel, M.R. that the covenant ran with the land and, in the course of his judgment, he said at p.772:

"The liability attaches to the lessor's interest in the land; it is a liability in respect of the cultivation of the land, and the tenant for life takes the land subject to that liability".

Accordingly it was the plaintiff who was solely liable to pay and he had no recourse against the testator's estate or against the remainder man.

7. In Lord Howard de Walden v Barber (1903) 19 T.L.R. 183 the material covenant was:

"And that in case the said premises or any part thereof shall at any time during the said term be used for a brothel or bagnio or as a disorderly house, or for any immoral purpose, the lessee, his executors, administrators or assigns shall (without prejudice to the proviso for re-entry hereinafter contained or any other remedy, whether by way of injunction or otherwise) pay to the said trustees or trustee for the time being or other the person or persons entitled as aforesaid the sum of £800 by way of liquidated damages for each and every case of such user, and not by way of penalty."

Wright J. was reported at p. 184 as having said:

"As to the covenant running with the land. It was a strong thing to hold that a covenant, to pay damages could run with the land. It seemed to him that the only way to regard it was that the covenant was inserted for the express purpose of binding the assignee. It was not a separate provision, but an annex to the general covenant. If it was treated as a buttress to the general covenant, there was no objection to treating it as running with the land; and the proviso for re-entry showed that view was correct."

8. Mr. Ma's argument was that c1.4(h) in the present case was similarly a buttress to all the covenants by the tenant and there was no reason why the context should require the interpretation of the word "Landlord" as not including the assigns of the original lessor: there was no material distinction between a promise by a tenant to pay liquidated damages for an actual breach of covenant and a promise by a tenant to pay a deposit as security against a possible breach of covenant with a promise by the landlord to repay a deposit if no breach of covenant occurred. It was implicit in the argument that the mutual promises of landlord and tenant in relation to a deposit were inseparable and were both inextricably bound up with the covenants which they were intended to buttress. Mr. Bharwaney, for the Defendant, confined his reply to this argument to the contention that the principle in Lord Howard de Walden v Barber was confined to cases where all the covenants buttressed by the deposit clause were themselves ones which ran with the land. He conceded that the majority of the tenant's covenants contained in c1.2 did run with the land, but contended that some did not (e.g. c1.2(f) and c1.2(n)) and that that was fatal to the Appellant's case. In addition, Mr. Bharwaney relied upon the use of the word "return" in c1.4(h) as negativing the interpretation of "Landlord" in that clause as including assigns, since an assign could not "return" something which he had never received.

9. The answer to the last argument was that the word "return" had to be construed from the point of view of the Tenant, for whom a payment at the expiration of the lease of the money deposited, by whomsoever it was made - would be a return of the deposit. The deposit would then "be returned" within the meaning of c1.4(h).

10. I thought it was sufficient answer to the main argument for the Defendant that the majority of the Tenant's covenants sought to be buttressed by the deposit clause were covenants which were admitted to run with the land. It might well have been enough if only one of them had run with the land, but it was not necessary so to hold in the present case. In cases of this kind an assignee would necessarily be aware of the existence of the deposit clause and could make it a condition of the assignment that the deposit be paid over by the assignor. In particular, in the case of an assignment by way of legal mortgage - a transaction which is no longer possible in Hong Kong since the comming into operation of the Conveyancing and Property Ordinance 1984 - it was open to the mortgagee to take the deposit into account in deciding upon the terms of the advance. Therefore no hardship would result from this decision to an assignee.

11. I therefore thought the appeal should be allowed. We were then asked to make the declaration sought by the Oridinating Summons, with an amendment to provide for interest from the date on which the deposit should have been repaid. The terms of that declaration were

"That the Defendant as Mortgagee in possession is liable to return to the Plaintiff the sum of $277,896.80 being the security deposit for the premises known as Ground Floor, 8th floor to 18th floor (inclusive) and All Those Car Parks on 1st floor (save and except Nos. L1, I2 and L3) of Chap Luen Industrial Building, Nos. 30-32 Kung Yip Street, Kwai Chung, New Territories, together with interest upon that sum from the 31st January 1984, being the date of expiration of the lease at a rate 1% above the mean prime rate."

McMullin, V.-P. :

12. The facts in this case have been set out fully in the judgment of the learned Vice-President and it is unnecessary for me to enter upon them any further.

13. The question for decision before this Court is whether the defendant Bank, as assignee in possession of the premises, by virtue of the powers exercised by it under the mortgage, is bound by the terms of Clause 4(h) in the lease between the plaintiff and the Fook Kin Enterprises Co. Ltd. to pay to the plaintiff a sum of $277,896 which as is not contested - was paid by the plaintiff to the Fook Kin Co. in compliance with that clause wherein it is described as a "security payment" against breaches by the tenant of any of the lessee's covenants which are principally set forth in Clause 2 of the Lease.

14. It is common ground that by the end of the term of the lease there had been no such breaches and if the Fook Kin Co. had still been the landlord in possession at that date the return of this sum would have been legitimately claimed by the plaintiff.

15. The case was argued before Mayo, J. in the court below on the footing that no legislative provisions equivalent to Sections 141 and 142 of the Law of Property Act 1925 existed in Hong Kong. That was not correct. Mr. Geoffrey Ma concedes that Sections 31 and 32 of the Law of Property and Conveyancing Ordinance 1984 are in terms identical with the sections in the 1925 Act. This is however of no consequence since, as is common ground before us, the older law deriving from the Statute 32 Henry VII C. 34 - as expounded by the court of King's Bench in 1585 (Spencer's case⁽¹⁾) - established that only such covenants in a lease will bind an assignee of the reversion as can be described (using the language of the court in Spencer's case) as "touching and concerning the land". That phrase has, in turn, been held to be equivalent to the formula which appears alike in the Hong Kong and English sections wherein the covenants that are to pass with the reversionary estate are described as those "having reference to the subject matter of the lease".

16. Upon this hearing, Mr. Bharwaney for the defendant Bank supports the exposition of the words "touching and concerning the land" which can be found in the judgment of Channell B. In Thomas v. Hayward ⁽²⁾ where that learned judge says:

"A covenant runs with the land only when ... its operation directly, and not merely collaterally, affects the thing demised."

This passage in the judgment of Channell B was relied on by the judge in the court below.

17. Mr. Ma for the plaintiff asks us to say that the proper test is proposed by Scott L.J. in Bream's property Investment Co. v. Stroulger⁽³⁾ and that it consists in asking the question: "Does the covenant affect the landlord qua landlord or the tenant qua tenant?"

18. For my own part I do not see much advantage in endeavouring to distinguish between these several terms as to their precise reach and intendment. I say that because both counsel in the present case eventually concurred - correctly as it seems to me - in the view that a covenant to pay money would be a covenant running with the land (or of course with the reversion) if it were one which - following the line taken by Evershed L.J. in Boyer v. Warbey⁽⁴⁾ - is so bound up with the covenants which patently do run with the land as to be inextricable from them, in the sense that in order to determine whether or not the obligation to pay could have arisen against any one it would be necessary to survey the other covenants which were not contended to be other than covenants running with the land.

19. With due respect to Mr. Bharwaney's careful argument I am not persuaded that any valid distinction can be drawn in this respect between a lessee's undertaking to pay a sum of money by way of liquidated damages in the event of breach of covenant touching the land and a landlord's covenant to repay a sum of money deposited by way of liquidated damages against such breach - which latter is the form of the covenant with which we are now concerned. No doubt as Mr. Bharwaney says the deposit might be pursued in a personal action against the original landlord but this possibility is of no assistance in resolving the question: is the covenant to repay so closely bound to the other covenants touching and concerning the land so as necessarily to run with them?

20. It is clear that the great majority of the lessee's covenants in the present case are such as would run with the land and Mr. Bharwaney does not argue to the contrary. He has however made a valiant endeavour to persuade us that there are some few of these which cannot be said to run with the land and he maintains - conceding the view to be an extreme one - that even if one such covenant could be so described then Clause 4(h) could not be said to be one touching and concerning the land in the sense that it was inextricably bound up with what I may, for convenience, refer to as the "running covenants".

21. I do not think it would serve any useful purpose to recapitulate the fairly extensive and frequently subtle considerations pressed upon us by counsel in his survey of these particular covenants and I find it unnecessary to decide whether any of them are of the character which he ascribed to them. The plain fact is that the provisions of Clause 4(h) are so clearly intended to encourage compliance with the very many covenants enjoining the lessee to make proper use of the land and not to cause a diminution in its value that it would be wholly unrealistic to regard it as being otherwise then inextricably bound up with those undertakings generally.

22. An alternative, but ultimately very similar, approach to the whole question is to be found in the case of Lord Howard de Walden, v. Barber and another ⁽⁵⁾ where Wright J. held that a covenant to pay liquidated damages for breach of a covenant against using premises as a disorderly house was one that ran with the land on the basis that it was "not a separate provision but an annexe to the general covenant". He added "if it was treated as a buttress to the general covenant there was no objection to treating it as running with the land". Clause 4(h) of the present lease is similarly such a buttress. I cannot see that it makes any difference that, in the English case, the undertaking to pay appears in the same general clause against misuse of the premises and not as a distinct and separate clause, whereas Clause 4(h) is separated from the other covenants in the text of the lease in the present case. Nor do I think it matters that Clause 4(h) might be described as creating an obligation which is in a sense secondary to the many obligations imposed upon the tenant under Clause 2. 4(h) remains as a support for the due observation of these obligations so as to promote the landlord's interest in the safety and integrity of his estate and I do not think that Mr. Bharwaney's ingenious endeavour to turn aside the force of the decision in the Lord Howard de Walden case ⁽⁵⁾ by what he termed a structural and a functional analysis of Clause 4(h) succeeds.

23. I agree with Mr. Ma that the case of Hunter's lease in re. Giles v. Hutchings ⁽⁶⁾ - the case which Mayo, J. regarded as coming closest amongst the English decisions to the present case - is, upon analysis, seen not to be helpful to the defendant since it was a case in which the promise to pay money could not be said to touch and concern the land. It was neither a buttress clause bound up with a due performance of the "running" covenants nor yet a bare covenant to renew. Uthwatt J. - at page 131 - noted that the established rule that a covenant to renew does run with the land had been held by the Court of Appeal in Woodall v. Clifton⁽⁷⁾ to be an anomaly which it was then "too late to question though difficult to justify". Uthwatt, J. refused to extend that rule any further, holding that a covenant to pay money as an alternative option to granting a further term was not something which touched and concerned the land.

24. Mr. Bharwaney strongly relies upon the Canadian case of Re Dollar Land Corporation v. Solomon ⁽⁸⁾ which, at first sight, comes so close to the circumstances of the present case. The High Court of Ontario was there dealing with a covenant relating to the return of a deposit paid by the tenant to a landlord to assure the performance by the lessee of the terms and conditions of the lease. It was held that this was not a covenant which ran with the land and was therefore not one binding upon the assignee. Mr. Ma sought to distinguish that case from the present case on the facts. His argument at that point turns upon the difference in the wording of the two clauses and in particular the use of the phrase "the lessor herein" which appears in the Canadian clause and which, counsel suggests, might support the conclusion that the parties to the contract in the Canadian case intended to restrict the burden and benefit of the particular covenant to the named lessor and lessee. For my own part I am not persuaded that this is a valid distinction but I find it unnecessary to decide that matter since I am quite satisfied that the principal ground upon which Mr. Ma's criticism of the decision in Re Dollar Land Corporation Rests is sound and that that case is not an authority which we should follow.

25. For one thing, Grant, J. expressly relying upon a passage from the judgment in Spencer's case says (at page 225 of the report):

"In Spencer's case ,, reference was made to a situation where money was paid to the landlord which was to be redelivered to the tenant at the end of the term and consideration given as to the liability of an assignee of the landlord to return the money at the end of the term ..."

This was, with respect, quite simply a misstatement of the facts set out in the third resolution of the court in Spencer's case where - in the passage from that case immediately thereafter quoted by Grant, J. - it is apparent that the court was dealing with the situation which arises when the tenant is under obligation to return money and Chattels to the landlord at the end of his term. The hypothetical case being considered by the court in Spencer's case posited an arrangement whereby the landlord gave a lease of the land together with some stock and some money to the tenant on the understanding that the stock and the money should be returned at the end of the term.

26. Mr. Bharwaney argues that, notwithstanding this mistake, the principle upon which the judge relied from Spencer's case should nevertheless apply on the basis that no valid distinction can be drawn between an obligation owed by a tenant to his landlord and one which goes the other way. With this latter observation as a general principle I would not disagree but it is of no assistance here. There is all the difference in the world between a "buttress" covenant to pay money to secure due performance of "running" covenants coupled with a counter-undertaking to repay upon due performance, and the gratuitous munificence of a landlord in supplying starting stock and cash to his agricultural tenant on the understanding that these things must be restored. That is an interpersonal arrangement which clearly of itself does not touch and concern the land and which cannot be said to be linked with the performance of any other obligation or duty which does so.

27. Lord Howard de Walden⁽⁵⁾ does not appear to have been cited to Grant, J. and quite apart from this flaw in the analysis of the propositions out of Spencer's case, there does not appear to be anything else in the decision in Re Dollar Land Corporation v. Solomon ⁽⁸⁾ which could be regarded as even persuasive authority against the view that a covenant to repay a money deposit given in earnest of due performance by the tenant of the "running" covenants is such as may run with them and, since the facts are so closely similar to those in the present case, I feel compelled to say that I think that case was wrongly decided.

28. I agree that the appeal should be allowed and that we should make the declaration sought in the originating summons as amended.

(1)    (1585) Co. Rep. 16(a)

(2)    L.R. IV Exch. 311 at page 312

(3)    (1948) 1 K. B. 1

(4)    (1953) 1 Q. B. at page 243

(5) (1903) T.L.R. 183

(6)    (1942) 1 Ch. 124

(7)    (1903) 2 Ch. 257 at 259

(8)    39 D.L.R. 2d 221

Cons, J.A. :

29. I agree with the reasons given by my Lords the Vice-Presidents and would only add that my task in this appeal was made considerably easier by the clarity with which Mr. Ma advanced his arguments for the Appellant.

18th April 1985