CHIAPHUA INDUSTRIES LTD v. HUA CHIAO COMMERCIAL BANK LTD

HEADNOTE

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JUDGMENT

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1. This is an Originating Summons. The Plaintiff entered into a Lease dated the 29th of March, 1979. They took on Lease the greater part of factory premises known as Chiap Luen Industrial Building for a term of five years from the 1st of February 1979. The landlord was Fook Kin Enterprises Company Limited which I will refer to as the Landlord. As is customarily the case, the Plaintiffs paid a deposit which represented two months' rent which amounted to $277,896.80. The deposit was paid pursuant to the provisions contained in clause 4(h) of the said Lease. The clause was in the usual standard form and provided that if the Plaintiffs duly complied with and observed the covenants terms and conditions contained in the Lease, the deposit would be returned to them at the expiration of the term granted.

2. On the 5th of February, 1982 the Landlord entered into a mortgage with the Defendants. Under the terms of the mortgage which is couched in the usual terms, the factory premises were mortgaged to the Defendants to secure banking facilities which were granted to the Landlord. The Landlord did not comply with the terms and conditions contained in the mortgage and the Defendants exercised the powers which were exercisable by them and took possession of the factory premises.

3. On the 15th of January, 1983 the Defendants' solicitors wrote to the Plaintiffs informing them that in future they should pay the rent payable under the Lease to the Defendants. The Plaintiffs complied with this instruction. At the end of 1983, there was an exchange of correspondence between the Plaintiffs and the Defendants and negotiations proceeded for a further term to be granted to the Plaintiffs so as to enable them to continue occupying the factory premises.

4. The Plaintiffs then sought the return of the deposit they had paid to the Landlords in view of the fact that they had duly complied with the covenants and conditions contained in the Lease under which they occupied the factory premises for the original term of five years. Needless to say, there would not appear to be any prospect of their being able to recover the deposit from the Landlords who have apparently gone into liquidation.

5. Mr. Geoffrey Ma who was representing the Plaintiffs mainly based the Plaintiffs' claim for the recovery of the deposit on the covenants and conditions contained in the Lease. He submitted that the Defendants took their interest in the Lease subject to all the covenants contained in the Lease.

6. The legal position is not entirely satisfactory. The Law of Property Act 1925 is not applicable in Hong Kong. Nor are the Conveyancing Acts 1881 to 1911. It is, therefore, necessary to consider the English Law prior to the enactment of this legislation. Mr. Ma argued that it was necessary to consider the provisions contained in the Graunties of Reversions Act 1540 (32 Hen. 8c 34). It was evident on perusing the somewhat archaic wording of this statute that the benefit and burden of all covenants provisions and conditions contained in a Lease passed with the reversion. However, this was not the interpretation of the statute which found favour in Spencer's case ⁽¹⁾. It was Mr. Ma's contention that I should have regard to the actual wording of the statute which did not appear to qualify the manner in which covenants would be binding. This being so, he invited me to come to a different conclusion to the decision reached in Spencer's Case. He found support for this approach from a passage in the judgment of Upjohn L.J. on page 490 of re King . ⁽²⁾ :

"Where the language of a statute is clear and unambiguous it is wrong to interpret the statute by reference to earlier law. The language of the statute prevails. Where the proper construction of the statute is doubtful or it appears to be ambiguous, it may be necessary to inquire into the relevant law before the passing of the statute, but in my opinion section 141 for all relevant purposes is clear and unambiguous. Furthermore, great as is my respect for the Master of the Rolls as such and also as one of the editors of Smith's Leading Cases, I cannot agree that section 10 of the Act of 1881 was declaratoryof the existing law. Section 10, as was plain not merely from the long title but the contents of the Act itself, is an enactment intended to amend the law. The old law stems, of course, from 32 Hen. 8, c. 34. It is in terms in language so entirely different from the Act of 1881 that it seems to me hardly possible that the draftsman of section 10 thought that he was reenacting the old law, merely putting it in modern phraseology. But what the draftsman may have thought is not only irrelevant; it is positively dangerous to rely on his thoughts ^(3). The court must still perform its primary duty of construing the words of the statute".

I regret that I do not think that this passage affords Mr. Ma as much assistance as he would claim. Although Upjohn L.J. was addressing himself to the problems which arise with the 1540 Act, he was primarily considering the terms and consequences of section 10 of the 1881 Act. I do not think that Upjohn L.J. was necessarily being critical of the decision arrived at and the principles propounded in Spencer's Case. In any event, I do not consider, it to be feasible or practicable in the late 20th century to attempt to re-try Spencer's Case and come to different conclusions based simply on a different interpretation of the 1540 Statute. I am satisfied that the correct legal position of Assignees in a Deed is as stated in Spencer's Case and that it is only covenants touching and concerning land which pass with the estate. This being the case I must now decide whether a covenant to repay a deposit paid under a Lease to a tenant is a covenant touching and concerning the land.

7. There is a commentary on this subject in the 4th edition of Megarry & Wade which commences on page 724. It would appear that the position is similar for covenants made by a lessee and covenants made by a lessor. A number of examples are given of covenants which have been field to touch and concern land and those which have not done so. At one end of the spectrum, clearly a covenant to pay rent touches and concerns land. At the other extreme, a covenant to pay an annual sum to a Third Party would not touch and concern the land. The question which has to be decided is where the dividing line lies. Mr. Bharwaney who was representing the Defendants referred me to the case of Thomas v. Hayward ^(4). The position is set out by Channell B. on page 312 of the report.

"I am of the same opinion. A covenant runs with the land only when it touches, that is, when its operation directly, and not merely collaterally, affects the thing demised. It cannot be said that this covenant does so".

On the same page of the report, Cleasby B. has this to say:

"I am of the same opinion. It has been argued that this covenant falls within the second resolution in Spencer's Case, but the covenant there referred to, is described as relating to something 'to be done upon some part with the thing demised', such as a new wall to be built will form part of it, or to some matter otherwise distinctly and directly connected with it, such as rent issuing out of it But the covenant is rather within the latter part with the same resolution, where instances are given of covenants which do not run, as 'to build a house upon the land of the lessor which is no parcel of the demise'. This covenant concerns, not the condition of the land itself but only the value of trade carried on there, and is in that sense collateral to the land"

A case with a, perhaps, greater relevance to the present one is in Re Hunter's Lease ^(5). Here it was held that a covenant by a Landlord to pay the Tenant $500 at the end of the Lease unless a new Lease is granted was not a covenant which touched and concerned the land. This case was the closest case I have been able to find amongst English Authorities dealing with this position. Mr. Bharwaney did refer me to a Canadian case which is almost exactly on the point. He referred to Dollar Land Corporation Ltd. v. Soloman^(6). In this case, the Ontario High Court which referred to Spencer's Case held that a covenant to repay a deposit did not touch and concern the land. I regret that I am not persuaded by the arguments advanced by Mr. Ma that the covenant to repay the deposit relates to the performance of all of the other covenants in the Lease. I am satisfied that this covenant does not touch and concern the land and accordingly, the Plaintiff cannot succeed in this Originating Summons. I would observe that I heard this Originating Summons as an appeal from the judgment of Master Boa who arrived at a similar conclusion to the one I have referred to in this judgment. The appeal will, therefore, be dismissed and the Defendants will be entitled to their costs.

(1) 1583 5 Co. Rep. 16a

(2) 1963 1 Ch 459

(3) see In re Ryder and Steadman's Contract

(4) 1869 4 exchequer 311

(5) 1942 1 ch p. 124

⁽⁶⁾ 1963 39 DLR 2d 221