TAI FAT DEVELOPMENT (HOLDING) CO. LTD v. THE INCORPORATED OWNERS OF GOLD KING INDUSTRIAL BUILDING

CACV 297/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 297 OF 2006

(ON APPEAL FROM HCA NO. 104 OF 2006)

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JUDGMENT

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Hon Tang VP (giving the judgment of the Court) :

Introduction

1.  This appeal concerns a multi-storey industrial building.  As is normally the case, the rights and obligations of the co-owners are regulated by a deed of mutual covenants, in particular, governing the exclusive right to use different portions of the building.  At the heart of the appeal is the question whether certain carparking spaces are common areas within the meaning of the deed of mutual covenants.

Background

2.  By a tenancy agreement in Chinese dated 25 November 2004, the plaintiff as “全權代理人” of South China Building Materials Limited, Pickford Development Company Limited and South China Cold Storage and Industrial Company Limited (“the First Owner”), let to the defendant at the monthly rent of $55,000 the storeroom between parking spaces Nos. 32 and 33 on the 3/F of Gold King Industrial Building (“the Building”), together with 12 parking spaces on the 1^st and 3^rd floors for the term of 2 years, commencing 1 December 2004.

3.  By letter dated 16 September 2005, Messrs Lau, Kwong & Hung, then solicitors for the defendant, asserted, inter alia, that:

“	1.	the Subject Parking Spaces are part of the Common Areas of Gold King Industrial Building;
	2.	each of the leasing agreements referred to in this letter is null and void to the extent of the purported leasing of the Subject Parking Spaces thereunder;
	3.	you will account to the Incorporated Owners for the rent received under the said leasing agreement in respect of the Subject Parking Spaces; and
	4.	you will repay the said rent with interests to the Incorporated Owners upon demand.”

4.  By writ dated 16 January 2006, the plaintiff claimed possession, rents in arrear in the sum of $275,000 for the period between 1 September 2005 and 31 January 2006, and mesne profits at a rate of $55,000 per month from 1 February 2006.

5.  The claim for possession is based on forfeiture for non-payment of rent as well as the defendant’s denial of the plaintiff’s title as landlord by the letter of 16 September 2005.

6.  The plaintiff applied for summary judgment, but the application was dismissed by Master B Kwan on 26 June 2006.

7.  On appeal, Deputy High Court Judge L Chan gave the plaintiff judgment as claimed.  The judgment turned on the learned judge’s construction of the Deed of Mutual Covenants (“DMC”) governing the Building.  The Deed of Mutual Covenants in question is dated 16 April 1987.  The parties to the DMC were the First Owner, the First Purchaser Madam Wong Mei-kuen, and one Selex Properties Management Company Limited (“the Management Company”).

8.  Essentially, the learned judge was of the view that neither the storeroom nor the 12 carparking spaces were part of the common areas of the Building.  He held that the storeroom formed part of the areas coloured green on the plan annexed to the DMC … and by Section V(3) of the DMC, the First Owner was entitled to “the exclusive right and privilege to hold use occupy and enjoy all those areas as shown coloured green on the Plan hereto annexed”.  There is no appeal against this part of the judgment.

The appeal

9.  The appeal is directed to the learned judge’s conclusion that the 12 carparking spaces were not common areas within the meaning of the DMC.  If they were common areas then by Section II Subsection B of the DMC they “shall be deemed to be common areas for the use and benefit of the Owners … ”.

10.  Section II of the DMC, where the mutual grants are to be found provides:

“	MUTUAL GRANTS
	1.	The First Owner shall at all times hereafter subject to and with the benefit of the Crown Grant have the full and exclusive right and privilege to hold use occupy and enjoy to the exclusion of the First Purchaser the whole of the Land and the Building Together with the appurtenances thereto and the entire rents and profits thereof save and except that portion of the Building described in the Second Schedule hereto and save and except the Common Areas and Common Service Facilities.
	2.	The First Purchaser shall at all times hereafter subject to and with the benefit of the Crown Grant have the full and exclusive right and privilege to hold use occupy and enjoy to the exclusion of the First Owner All That portion of the Building described in the said Second Schedule hereto Together with the appurtenances thereto and the entire rents and profits thereof.”

11.  In other words the First Owner was entitled to the Building save and except Flat D on the 19/F of the Building which was to be assigned to the 1^st purchaser:

“	… save and except the Common Areas and Common Service Facilities.”

12.  In Section I of the DMC, common areas is defined:

“	‘Common Areas’	shall, subject as hereinafter provided, mean and include:-
		(a)	the entrances, staircases, landings, lift lobbies, passages and other spaces of the Building which are intended for common use and not for the exclusive use occupation and enjoyment by an Owner as hereinafter specified,
		(b)	loading and unloading areas, hoisting platforms, common roadways and driveways,
		(c)	the lifts intended for use by all the Owners of the Building and not for the use and benefit of a particular Owner, and the motor rooms and accessories of such lifts, and
		(d)	the roof and flat roofs of the Building (save and except those portions intended for the exclusive use occupation and enjoyment by an Owner).”

The proviso in the definition is irrelevant.

13.  As is normally the case, it was recited in the DMC:

“

(3)

For the purposes of sale the Land and the Building have been notionally divided into 4,989 equal undivided shares which have been allocated hereto as more particularly set out in the Third Column of the First Schedule.”

14.  Contrary to Mr K M Chong’s submission on behalf of the plaintiff, we attach no significance to the fact that the notional division was said to have been done “For the purposes of sale”, which in the context meant no more than that the notional division was made to facilitate sale.

15.  After the allotment of various numbers of shares to different parts of the Building, the relevant part of the 1^st Schedule went on to provide:

“	Floor	Unit	No. of shares	No. of Management shares
	……
	Parking Space No. 3 on 2nd Floor		4	1
	Parking Spaces Nos. 7, 8, 9, 10, 15, 16, 17, 18 and 21 on 3rd Floor		45	18
			(9x5 shares each)	(9x2 shares each)
	Parking Spaces Nos. 6, 19, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34 and 35 on 3rd Floor		64	16
			(16x4 shares each)	(16x1 share each)
	Loading and Unloading Areas:
	Parking Spaces Nos. 1 and 2 on 1st Floor		10	--
			(2x5 shares each)
	Parking Spaces Nos. 4, 5, 11, 12, 13, 14, 20 and 39 on 3rd Floor		40	--
			(8x5 shares each)
	Parking Spaces Nos. 36, 37 and 38 on 3rd Floor		12	--
			(3x4 shares each)
	Common Areas		1	--
	External Walls		1	--	”

The management shares “mean the shares or units allocated to the Units and the Parking Spaces as set out in the First Schedule hereto for the purpose of sharing and contributing towards the Management Expenses and Manager’s Remuneration by the Owners”: Section I of the DMC.  It is to be noted that all the Units in the 1^st Schedule have been allotted management shares with the exception of the external walls, the common areas and the car parking spaces under the heading of “Loading and Unloading Areas”.

16.  The external walls were assigned one share, and by Section V(1) of the DMC, the exclusive right to use the external walls was given to the First Owner.

17.  This appeal concerns the parking spaces under the sub-heading or description of “Loading and Unloading Areas”.  There are 13 such parking spaces.  It will be seen 62 shares have been allotted to these parking spaces.

18.  However, the tenancy agreement covered only 12 of the parking spaces.  Parking space No. 36 has not been included.  Nothing turns on this.  It is the defendant’s case that such parking spaces under the sub-heading or description of “Loading and Unloading Areas” are part of the common areas, and as such under Section II Subsection B of the DMC, they were:

“	… deemed to be common areas for the use and benefit of the Owners … subject to the provisions of this Deed and of the House Rules;”

We will refer to these car parking spaces as the disputed car parking spaces.

19.  Mr Mak, who appears for the defendant, also relied on Section VII Subsection B2(16):

“

(16)

To manage, control and maintain the parking of cars, vans, lorries and other vehicles and the loading and unloading of goods within the Building and the Land and the flow of vehicular traffic over all driveways and other areas intended for such purposes and in particular to ensure that the Parking Spaces and loading and unloading areas are used solely for their intended purposes and remain unobstructed. The Manager may levy charges for the use of the loading and unloading areas as it deems appropriate.” (Emphasis added)

The levying of charges for the use of the loading and unloading areas probably refers to the car parking spaces set aside for that purpose.  The disputed car parking spaces are apt to be described as areas set aside for loading and unloading.  Indeed, the plaintiff has not contended otherwise.

20.  We turn to the reasons given by the learned judge for concluding that the disputed car parking spaces are not common areas.

21.  The learned judge noted that from the approved building plan:

“

18.

… apart from some parking spaces which were listed under the heading of “Loading and Unloading Areas,” there were also other loading and unloading areas inside the building.  They were close to the lift lobbies.  These areas had not been clearly delineated and no share of the lot and the building had been allocated to them. …”

22.  We derive little assistance from the approved building plans.  It is true that, in the 1^st floor plan, one could find indications that certain areas were meant to be used for loading and unloading, for example, the spaces outside the passenger cargo lifts, as well as a loading and unloading platform.  But the fact that such loading and unloading areas are available does not show that no further parking spaces might be required for loading and unloading purposes.  Nor that if car parking spaces have been reserved for such purposes, they should be disregarded.  The Building has 26 storeys and each storey has 10 units.  It is common sense that during certain hours of the day, many vehicles would be involved in loading and unloading and some such vehicles would have to wait their turn in parking spaces kept for such purposes.  Some support for this view can be found in the conditions of grant, special condition 12 of which required that:

“

12.

Space shall be provided within the lot to the satisfaction of the District Commissioner, New Territories for the parking, loading and unloading of motor vehicles at the rate of not less than one vehicle for each 10,000 square feet or part of 10,000 square feet of floor area but in any event not less than one vehicle for each 5,000 or part of 5,000 square feet of site area. The space so provided shall not be used for any other purpose.”

23.  Moreover, in the 3^rd floor plan, it appeared that car parking spaces Nos. 11, 12, 13, 14 as well as 4, 5, 39 were expressly designated for loading and unloading.

24.  The learned judge observed:

“	19.	If these 13 parking spaces were intended to be part of the common areas, I do not think the drafter would have listed them independently as a group.  It would also have been unnecessary to allocate any share to any one of them.  They can simply be listed under ‘Common Areas’ and to share the one share allocated for all common areas.  The total number of shares of the lot and the building can be reduced by 62.
	20.	Even if the drafter should have intended to give these parking spaces the same number of shares as have been given to the other parking spaces, these 13 spaces together with their 62 shares should still be listed under and form part of the common areas.  The total number of shares for the common areas would become 63.
	21.	To list these 13 spaces together under a separate category indicated that they belonged to another category and did not form part of the common areas.  If the drafter was contented to give one share to the common areas, then the common areas would not include the 13 parking spaces or the 62 shares allocated to them.”

25.  As noted, in the 1^st Schedule, parking spaces, presumably, depending on their size, were allotted 4 or 5 shares each.  That being the case, it is difficult to understand why the disputed parking spaces should have been listed and dealt with separately from the other parking spaces.  It seems to us that the most obvious answer is that the disputed parking spaces were meant to be part of the loading and unloading areas of the Building.  If that is correct such loading and unloading areas would be part of the common areas.

26.  We note the learned judge’s observation that common areas were allotted one share under the DMC.  We agree with the learned judge that the 62 shares allotted to the car parking spaces under the subheading of “Loading and Unloading Areas” could have been allocated to the common areas but this cannot override the fact that the disputed car parking spaces came under the description or sub-heading of “Loading and Unloading Areas”.

27.  It may be (and there is support for the view when one looks at the different versions of the sales brochures) that the First Owner did intend to reserve to themselves the exclusive use and occupation of the disputed parking spaces.  But it is at least arguable that the First Owner has not succeeded in doing so in the DMC.

28.  The learned judge also noted that no management share had been allotted to the disputed parking spaces.  He further observed that no management share for the external wall had been allotted either, although it had been expressly reserved in DMC for the First Owner.  However, there was no express reservation of the disputed parking spaces to the First Owner.  Moreover, we can readily appreciate why no management shares had been allotted to the external walls since the owners of the external walls were unlikely to use the Building’s common facilities.  We believe the fact that no management shares had been allotted to the disputed parking spaces supports the defendant’s case.

29.  Mr K M Chong submitted that if it can be clearly shown that on the correct construction of the DMC, the First Owner was entitled to the exclusive use and occupation of these parking spaces, then summary judgment should be given in favour of the plaintiff.

30.  We agree.  But we are satisfied that it is likely that on the correct construction of the DMC, the disputed parking spaces form part of the common areas such that the First Owner is not entitled to the exclusive use and occupation of them.  Since the matter will have to go trial, it is unnecessary for us and we do not come to a concluded view on the matter.

31.  Mr Chong referred us to one of the first assignments.  This was the assignment dated 11 June 1987, made by the First Owner in favour of a company called Giant Origin Company Limited, and the property to be assigned were Unit B, 26/F, together with storeroom, portion of flat roof, and portion of roof thereof, and parking space for lorry, No. 16 on 3/F.

32.  The only relevant portion of the 1^st assignment is in the 3^rd Schedule which provided:

“	Excepting and reserving unto the Vendors and each of them and their respective successors and assigns other than the Purchaser : -
	1.	the exclusive right to hold use occupy and enjoy each and every part of the Land and the Building other than the Property, save and except such areas (if any) as may be designated as common areas in the Deed of Mutual Covenant or are intended for common use …”

In other words, the exclusive right of the First Owner did not extend to the areas:

“	… as may be designated as common areas in the Deed of Mutual Convent, or are intended for common use.”

33.  We do not find this assignment assists the plaintiff in any way.

Tenancy by estoppel

34.  Mr Chong sought to support the judgment by reliance on tenancy by estoppel.  That is to say, even if the disputed car parking spaces are common areas and the defendant is entitled to the use and occupation of them on behalf of the owners as a whole, the defendant is estopped by the tenancy so to assert.

35.  The answer can be found in Industrial Properties (Barton Hill) Ltd and Others v Associated Electrical Industries Ltd [1977] 1 QB 580.

36.  The head notes to the report shows that the freehold of an industrial estate was owned by family trustees, who agreed to sell the industrial estate to the plaintiff company, the directors and shareholders of which were members of the family.  For stamp duty reasons, no conveyance of the property was ever made although the purchase price was paid and the agreement for sale was registered as a land charge.  The plaintiff and the defendant entered into a lease for 21 years determinable at the end of the first seven or 14 years.  It contained a covenant by the lessee to keep the premises in good and tenantable repair and condition and so to yield them up at the determination of the term.  There was a lessor’s covenant for quiet enjoyment.

37.  The defendant gave up possession after giving notice to determine at the end of the first 7 years.  By writ, the plaintiff claimed damages for breach of covenant to repair.  In defence, the defendant contended that since they had gone out of possession they could deny the plaintiff’s title and their liability on the covenant.

38.  This is what Lord Denning MR said in rejecting the defence at 596-7:

“	If a landlord lets a tenant into possession under a lease, then, so long as the tenant remains in possession undisturbed by any adverse claim – then the tenant cannot dispute the landlord’s title .  Suppose the tenant (not having been disturbed) goes out of possession and the landlord sues the tenant on the covenant for rent or for breach of covenant to repair or to yield up in repair.  The tenant cannot say to the landlord: “You are not the true owner of the property.”  Likewise, if the landlord, on the tenant’s holding over, sues him for possession or for use and occupation or mesne profits, the tenant cannot defend himself by saying: “The property does not belong to you, but to another.”
	But if the tenant is disturbed by being evicted by title paramount or the equivalent of it, then he can dispute the landlord’s title.  Suppose the tenant is actually turned out by the third person – or if the tenant, without going out, acknowledges the title of the third person by attorning to him – or the tenant contests the landlord’s claim on an indemnity from the third person – or there is anything else done which is equivalent to an eviction by title paramount – then the tenant is no longer estopped from denying the landlord’s title: see Wilson v. Anderton (1830) 1 B. & Ad. 450, 457, per Littledale J.  The tenant, being thus disturbed in his possession, can say to the landlord: “You were not truly the owner at the time when you demanded and received the rent from me.  I am liable to pay mesne profits to this other man.  So you must repay me the rent which I overpaid you.  Nor am I liable to you on the covenants during the time you were not the owner.”  See Newsome v. Graham (1829) 10 B. & C. 234, Mountnoy v. Collier (1853) 1 E. & B. 630 and Watson v. Lane (1856) 11 Exch. 769.  The tenant can also claim damages for the eviction if there is, as here, an express covenant for quiet enjoyment covering interruption by title paramount.
	Short of eviction by title paramount, or its equivalent, however, the tenant is estopped from denying the title of the landlord.  It is no good his saying: “The property does not belong to you but to a third person” unless that third person actually comes forward and successfully makes an adverse claim – by process in the courts or by the tenant’s attornment; or acknowledgment of it as by the tenant defending on an indemnity.  If the third person, for some reason or other, makes no adverse claim or is debarred from making it, the tenant remains estopped from denying the landlord’s title.  This is manifestly correct: for, without an adverse claim, it would mean that the tenant would be enabled to keep the property without paying any rent to anybody or performing any covenants.  That cannot be right.  That was the reasoning adopted by the Court of Queen’s Bench in Biddle v. Bond (1865) 6 B. & S. 225, a case of a bailor and bailee, but the court treated it as the same as landlord v. tenant.” (Emphasis added)

39.  Roskill LJ (as he then was) was to similar effect at 607:

“

I conceive this court to be free to hold as a matter of law and I do so hold that a lessee or tenant who has had possession for the whole of the term is thereafter estopped from denying his lessor’s or landlord’s title in respect of the period for which he has had possession unless after the termination of that possession a claim is made against him by title paramount in respect of some part of that period, so that he becomes in peril of an adverse claim by reason of that fact.  I think this conclusion is supported by a proper understanding of Cuthbertson v. Irving, 4 H. & N. 742, and to the extent that part of the reasoning in Harrison v. Wells [1967] 1 Q.B. 263 is to the contrary  effect I respectfully suggest that the relevant statements in the judgments were made per incuriam because of incomplete reference during the argument to the reports of Cuthbertson v. Irving..”

40.  Lawton LJ’s observation at 612-3 is particularly apposite:

“

The origins of this law lie in the middle ages, probably in decisions as to methods of proof and manner of pleading.  The earliest relevant reported case is James v. Landon, 1 Cro.Eliz. 36.  The most junior apprentice in the law who was present in court when this case was being tried must surely have known what the result was going to be.  The defendant had granted a 21-year lease to the plaintiff.  After it had expired a dispute arose between the plaintiff and the defendant as to which of them owned the freehold.  The plaintiff said he did as the heir at law of an earlier freeholder.  The defendant tried to defend this claim by saying that as the plaintiff had taken a lease from him he was forever barred from disputing his claim to the freehold.  This unmeritorious defence was rejected.”

41.  The essence of the estoppel is that it will not avail the tenant to say the property does not belong to you but to a third party.

42.  But, we do not believe the tenant is estopped from asserting that he himself has the better title.  The observation of Lawton LJ quoted above supports this view.  Suppose the landlord was the mortgagor and the tenancy was not binding on the mortgagee, and the tenant has acquired the mortgage, we do not believe the tenant would be estopped from asserting that he was entitled to remain in possession because of his better title as mortgagee.  It is at least arguable that he is not.

43.  We are of the view that the judgment for possession must be set aside. It is highly arguable that the defendant is entitled to assert its better title to possession.

44.  We turn to consider that the judgment for rent against the defendant.

45.  Mr K M Chong’s submission is clear.  There was a tenancy agreement under which the defendant agreed to pay rent.  The tenancy agreement included the storeroom as well as parking spaces.  It was not a divisible contract.  The plaintiff was entitled contractually to such rent.

46.  Mr Andrew Mak submitted that the plaintiff was not entitled to be paid because the plaintiff had warranted that the First Owner had title (in the sense the First Owner had the right to exclusive use) to the parking spaces.

47.  There was no express warranty.  As the judgment of Lord Russell CJ in Baynes & Co. v Lloyd & Sons [1895] 1 QB 820 at 825 shows no covenant for title is “considered annexed by reason of the relation of lessor and lessee, or landlord and tenant”.  Lord Russell CJ had explained earlier at 824:

“	… a lease is nothing more than a contract to deliver up possession to another for a fixed term, and provided this is secured the lessee seldom requires more.”

48.  Nor do we find any representation that the First Owner was entitled to exclusive possession of the disputed car parking spaces.  Moreover, even if there had been there was no clear evidence that the defendant had acted on it.  As the learned judge said “the defendant was aware of (the argument over the definition of “common areas”) prior to entering into the tenancy with the plaintiff.  It was raised fairly and squarely in a letter dated 6 September 2004 by the defendant’s then solicitors.”

49.  We agree that there is no defence to the claim for rent.  This is not a case where the defendant might be at risk of having to pay mesne profits to the true owner (being on the defendant’s case, the defendant) for the occupation of the parking spaces.  So this part of the appeal is dismissed.  However, the rent should only be calculated up to and inclusive of December 2005 because of the acceptance of repudiation by the letter of 14 December 2005, see paragraph 8 of the Statement of Claim.  The judgment sum should be for $220,000 only.

50.  The claim for mesne profits is different.  The claim for mesne profits and for possession are likely to succeed or fall together.  So we would also allow the appeal against the judgment for mesne profits.

Costs

51.  As for costs, we are of the view that in the circumstances, there should be no order as to costs.  The plaintiff and the defendant have been partially successful in the appeal.  It is true that more time was spent on the part in which the defendant succeeded, however, some of the reasons on the basis of which the defendant succeeded were supplied by the court and that may explain why less time was required.  As for the costs before the learned judge, there the parties were each partly successful too.  The learned judge seemed to have spent as much time on the storeroom as on the parking spaces.  Moreover, this is a case where part of the plaintiff’s claim for summary judgment might have been dismissed under O. 14 r. 7.  So we will also make an order that there be no order as to costs below.  That applies to the application before Master B Kwan as well.