PAK WAI CHING v. THE SECRETARY FOR JUSTICE

HCMP 255/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 255 OF 2003

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J U D G M E N T

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1. By these proceedings, which were commenced by Originating Summons on 17 January 2003, the Plaintiff, Madam Pak Wai Ching, the owner of premises known as Factory Shop No. 1, G/F, Wing Wah Industrial Building, No. 677 King's Road, Hong Kong ("the Property"), seeks declaratory relief against the Defendant, the Secretary for Justice. The relief sought relates to the use to which the Property can properly be put.

Brief background to these proceedings

2. The Property is at street level, with frontage on and access from King's Road. It is in a building which adjoins the Hong Kong Funeral Parlour in North Point. It was acquired by the Plaintiff in June 1978, and has since early 1979 (with the exception of a period from September 1994 until August 1997, during which it was vacant) been used by the Plaintiff or her tenants as a flower shop, selling flowers and wreaths mainly to patrons of and visitors to the neighbouring funeral parlour.

3. In late 2000, the Plaintiff received a letter dated 31 October 2000 from the District Lands Office/Hong Kong East of the Lands Department of the Government ("DLO/HKE"), alleging that the Property was being used for commercial purposes, in contravention of the Conditions of Sale under which the lot on which the Wing Wah Industrial Building stands is held from the Government, which restricted its use to industrial and godown purposes.

4. The letter warned that this breach of the lease conditions would entitle the Government to re-enter by having the Property vested in the Government, and called on the Plaintiff to remedy the breach. The letter went on to indicate that it was possible, in some cases, to regularise non-conforming commercial uses in industrial buildings, subject to terms which might be imposed by the Government.

5. On 10 May 2001, DLO/HKE wrote to the Plaintiff, offering to waive the breach of the lease conditions for a period of 3 years from 1 June 2001, on payment of a waiver fee of $83,000 per annum. On receipt of this letter, the Plaintiff sought legal advice, and following a period of correspondence between her legal advisers and DLO/HKE, she commenced these proceedings, by which she seeks declarations which, if granted, will mean that the Property can continue to be used as a flower shop without the payment of either a periodic waiver fee, or a premium for a permanent change in the lease conditions relating to the Property.

The issue for determination

6. The Originating Summons seeks three declarations, in the following terms:-

(1) that the Plaintiff's user of the Property does not breach and has not breached special condition 2(a) of the Conditions of Sale No. 10151 of Inland Lot No. 7954;

(2) that the primary user of the Property by the Plaintiff is and was at all times "commercial"; and

(3) that the Defendant has by conduct waived the right to enforce the special condition of sale and the permitted user of the Property should be "commercial".

7. However, at the trial, Ms Hui, who appeared for the Plaintiff conceded that the use of the Property as a flower shop did, at all material times, constitute a breach of the lease conditions, and indicated that the only issue for determination was whether the Government as landlord had acquiesced in the user or waived its rights to insist on compliance with the covenant. As a result of this concession, it is only necessary for me to consider whether or not the Plaintiff is entitled to the third of the declarations sought.

The evidence before me

8. The evidence before me consisted of an affirmation by the Plaintiff in support of her claim and an affirmation of Ms Chan Shuk Fan ("Ms Chan"), an Estate Surveyor of DLO/HKE, on behalf of the Defendant, together with a bundle of the correspondence which had passed between the parties and their legal advisors. Neither of the deponents was cross-examined on their affirmations, and no challenge was made to the truth of any of the primary factual matters to which they deposed. In these circumstances, it is possible for me to set out relatively briefly the facts which I am satisfied are established by the evidence.

The facts

9. Prior to acquiring the Property, the Plaintiff had for some time operated a fixed pitch flower stall opposite the Hong Kong Funeral Parlour. Some time after 1975, she was required by the Government to remove that stall. She noticed that there was a flower shop adjacent to the funeral parlour in what was then the fairly new Wing Wah Industrial Building, and that the Property, which was the neighbouring shop space in the same building, was for sale. She decided to buy the Property in 1978.

10. The Plaintiff says that, at the time, she was told by solicitors handling the sale for the developers of the building that the shop space could be used for selling flowers and wreaths. I would accept, for present purposes, that this was the case.

11. In fact, as Ms Chan deposes, the Agreement and Conditions of Sale under which the lot on which the Wing Wah Industrial Building had been constructed, which were dated 20 March 1972 and registered in the Land Registry as Conditions of Sale No. 10151 contained the following material stipulations:-

(1) Special Condition 2(a), which stated:-

"The lot shall not be used for any purpose other than industrial or godown purposes or both. ..."

(2) General Condition 14, which stated:-

"The fulfilment by the purchaser of his obligations under these General and Special Conditions shall be a condition precedent to the grant or continuance of the tenancy and in the event of any default by the purchaser in complying therewith such default shall be deemed to be a continuing breach and the subsequent acceptance by or on behalf of the Crown of any Crown Rent or Rates or other payment whatsoever shall not (except where the Crown has notice of such breach and has expressly acquiesced therein) be deemed to constitute any waiver or relinquishment or otherwise prejudice the enforcement of the Crown's right of re-entry for or on account of such default or any other rights, remedies or claims of the Crown in respect thereof under these Conditions which shall continue in force and shall apply also in respect of default by the purchaser in the fulfilment of his obligations under the General and Special Conditions within any extended or substituted period as if it had been the period originally provided."

12. As I have noted above, Ms Hui concedes that the use of the Property as a flower shop was, in fact, a breach of Special Condition 2(a).

13. Nonetheless, the Plaintiff acquired the property on 16 June 1978, fitted it out as a flower shop, and commenced business on her own account from the Property in early 1979. She continued this business until 1984, when she decided to rent out the shop instead. From September 1984 onwards, she rented the Property to a tenant, who continued to run the flower shop until September 1994. In September 1994, that tenant did not renew the lease. Although the Plaintiff tried to find a new tenant, she was not able to do so until August 1997. In these circumstances, the shop was vacant for a period of just under three years. In August 1997, a new tenant was found, and he has remained in occupation, running a flower shop from the Property, since then.

14. As I have noted, the Property fronts on and can be entered from King's Road. It is apparent from photographs which have been put in evidence that it has openly been used as a flower shop.

15. In her evidence, Ms Chan explained how the Government has, through DLO/HKE, carried out its functions as landlord, in particular in relation to enforcement of lease terms from 1 July 1982 onwards (prior to that date, these functions were carried out by the Registrar General's Department). Lease enforcement duties for districts on Hong Kong Island are carried out by the Lease Enforcement Unit/Hong Kong Region, which makes site checks on new buildings and on buildings where there are suspected breaches of lease conditions, checks on lease conditions, obtains legal advice, makes recommendations whether or not to proceed with enforcement action and deals with enforcement action. The unit has not had more than 10 staff at any time since 1982. These staff were split between DLO/HKE and District Lands Office/Hong Kong West up until 1995, and thereafter have been split between those offices and District Lands Office/Hong Kong South as well. Despite the small number of its staff, it is responsible for a very large number of buildings on Hong Kong island. Since 1982, in excess of 30,000 cases of lease enforcement have been handled by the unit for DLO/HKE alone.

16. Ms Chan says (and this evidence was not directly challenged, although Ms Hui suggested that an inference could be drawn as to acquiescence by the Government notwithstanding it) that the first time that it came to the notice of DLO/HKE that the Property (and the adjoining shop space) were being used as flower shops selling wreaths was in the course of a routine inspection in the middle of 1993, and that prior to the making of this inspection, DLO/HKE were unaware of any breach of Special Condition 2(a) of the Conditions of Sale. It appears that two inspections were made in 1993, the first in May, and the second on 30 June 1993. Thereafter, further inspections were made on 8 December 1994, 27 March 1995, 22 June 1995, 7 July 1995, 17 January 1996 and 30 July 1996. On each of these occasions, however, the Property was vacant (as it happens, this was because it was not let out at the time, although it was available for lease or sale), but the adjoining unit was still being used as a flower shop. It was decided in 1996 that, as there had been no breach of the lease conditions in respect of the Property since at least December 1994, no further action should be taken.

17. On the other hand, enforcement action was taken against the owner of the adjoining shop in February 1995. This resulted in the owner of that property obtaining planning approval from the Town Planning Board to allow commercial use of that property (the lot on which the Wing Wah Industrial Building was built being at that time zoned for industrial use only), following which arrangements were reached with DLO/HKE for a waiver of the terms of Special Condition 2(a) on payment of an annual waiver fee.

18. On 18 April 2000, following a complaint to DLO/HKE the previous month that the Property was being used as a flower shop (by the tenant who had taken it over in 1997), a site inspection was carried out. Further site inspections were conducted on 8 May 2000, 13 June 2000 and 25 September 2000, and on each occasion the Property was being used by the Plaintiff's tenant as a flower shop. This led to the warning letter of 31 October 2000, to which I have referred above, and the ensuing correspondence, first between the Plaintiff and DLO/HKE, and thereafter between her legal advisers and that office.

19. Although the Plaintiff paid an initial forbearance fee, and subsequently paid annual waiver fees for a time, it seems clear that at least some of these payments were made without prejudice to the Plaintiff's claim to be entitled to use the Property without payment of waiver fees, and Ms Tsui, appearing for the Defendant, did not take any point against the Plaintiff on the basis of such payments. I therefore do not regard such payments as being relevant for present purposes. I note in passing that the Plaintiff (unlike the owner of the neighbouring shop) did not have to make any application for planning approval to the Town Planning Board, as by this time, the lot on which the building was built had been re-zoned as "commercial", so that no planning permission to allow for use as a flower shop was required, and such an application was accordingly unnecessary.

The applicable legal principles

20. There was some debate before me as to the correct principles to apply in relation to the question of whether or not there was acquiescence or waiver on the part of the Government in this case. Ms Tsui submitted that there could be no waiver or acquiescence without knowledge (see Attorney General of Hong Kong v Fairfax Ltd [1997] HKLRD243; Halsbury's Laws of England (4th edition), Vol. 16, para 924). However, Ms Hui suggested that to require the Plaintiff to supply proof of knowledge on the part of the Government was too narrow an approach, and suggested that the Court of Final Appeal had laid down a different, and wider test, based on whether or not there was a reasonable likelihood of enforcement, in Jumbo Gold Investment Ltd v Yuen Cheong Leung [2000] 1 HKLRD 763.

21. Insofar as Ms Hui was suggesting that it was not necessary for concrete proof of knowledge on the part of the Government to be adduced by the Plaintiff, in the sense of the Plaintiff being able to lead evidence that some particular official or department of the Government was aware of the breach of the relevant condition of sale, I think that this is correct. It is clearly open to the court to infer such knowledge in a suitable case, even in the absence of such direct proof of knowledge. This follows from the decision of the Privy Council in the Fairfax case, where the Privy Council had no difficulty in inferring the necessary knowledge to support an allegation that the Government had abandoned a covenant which prohibited the building of anything other than villas on a piece of land, so as to disable the Government from enforcing the covenant against the owners of a part of that land who wished to redevelop their property by erecting multi-storey buildings on it. In that case, the land to which the covenant applied extended beyond the particular property in question, and consisted of some 2 1/2 acres, which had been subdivided into many smaller parcels, on which numerous buildings had been erected in breach of the covenant over a period of some 40 years. In the absence of any explanation from the Government, the Privy Council concluded that the inescapable inference from those facts was that there had been an abandonment of the covenant (see the speech of Lord Browne-Wilkinson at p. 246A-D of Fairfax).

22. If, however, Ms Hui was suggesting that the Plaintiff could succeed on its case of waiver or acquiescence without establishing (whether by direct evidence or by inferences which could properly be drawn from the facts proven) knowledge on the part of the Government of the breach of the relevant condition of sale, then I disagree. It is clear from the speech of Lord Browne-Wilkinson in the Fairfax case (at p. 245J) that proof of knowledge (however it may be established) is essential, since a person cannot be held to have acquiesced in conduct of which he is ignorant.

23. I do not think that any different principle is established by the decision of the Court of Final Appeal in the Jumbo Gold case. That case, unlike Fairfax (which involved a contest between the developer and the Government, both of whom were parties to the covenant under consideration), involved a question as to whether certain requisitions, raised by an intending purchaser of the properly concerned, as to a covenant under a Crown Lease specifying a height restriction (which had on the face of it been breached) had been satisfactorily answered. The Government, in whose favour the restrictive covenant operated, was not a party to the proceedings, which involved a vendor and purchaser summons.

24. There was no doubt that the building in question exceeded the height restriction. In answering the requisitions, the vendor stated that there was nothing in writing to show that the Crown had consented to the excess height beyond the occupation permit and certain official letters, that it was likely that there had been an informal grant of a modification to the restriction by the Director of Public Works, and that since no enforcement action had been taken in 40 years, the risk of enforcement action was remote. The Court of Final Appeal held that in such cases, where concrete proof of the Government's knowledge and attitude was hard to find, the court should not take a narrow approach by requiring the vendor to show proof of knowledge of the breach on the part of the Government, but should instead ask the broader question of whether there was a real risk of enforcement action being taken.

25. In concluding that there was no real risk of enforcement action being taken, so that the requisition should be regarded as having been satisfactorily answered, and good title shown, Bokhary PJ drew a distinction between the question of waiver, and that of risk of enforcement (see his judgment at p. 771B-C), and took the view that the evidence in the case did not exclude a reasonable possibility of an unwaived breach of condition. Litton PJ (with whom the other members of the court agreed) does not appear to have drawn such a distinction (the form of waiver he mentions at p. 769 G and p. 770 H-I relates only to a narrow argument as to express waiver by the Director of Lands at a particular point in time). Notwithstanding this, it seems to me that he considered that a waiver by the Government could be inferred from the fact that the height restriction was a common provision in building leases in respect of land on the south side of Hong Kong island, well known both to conveyancers and the Government, and that the building in question had obviously and visibly exceeded the height limit for some 40 years. Litton PJ went on to suggest that it would be difficult, in those circumstances, for the Government to suggest that it was unaware of the breach of the restrictive covenant.

26. I would also observe that it was of importance to the reasoning of Litton PJ in concluding that the risk of enforcement was remote that the only enforcement action that was open to the Government in the Jumbo Gold case would have been to re-enter onto the whole of the lot, thereby resulting in a forfeiture of the rights of innocent third parties, as a result of a breach of covenant by the developer. In this case, by contrast, the only re-entry or re-vesting would be in relation to the Property itself. Enforcement of the terms of the conditions of sale would be against the Plaintiff (who is conceded to be in breach of them) and would not, therefore, have the impact on third parties that enforcement action would have had in the Jumbo Gold case.

27. It seems to me that while the "risk of enforcement" test has obvious advantages and is likely to be well-suited to being deployed in the context of vendor-purchaser summonses, and in other situations in which the Government is not a party, it is not a test which is so readily applicable in cases such as the present, where the contest is between the Government and landowner who is the other party to the covenant, and the Government is in fact seeking to enforce the covenant, so that the "risk of enforcement" is not only not remote, but has actually eventuated. In such a case, it seems to me that there is no getting away from the need to establish knowledge in order to found a basis for a case of waiver or acquiescence.

28. For all of these reasons, I do not consider that the Jumbo Gold case detracts from the need for the Plaintiff to prove knowledge on the part of the Government (whether directly or by inference).

Is waiver or acquiescence established in this case?

29. I turn therefore to consider whether or not, on the evidence in this case, knowledge on the part of the Government of a breach of condition of sale 2(a) has been established.

30. The Plaintiff's case at the hearing was that the Government had waived the relevant condition as to user, or acquiesced in its breach so as to disentitle it from complaining of the breach by September 1994, given that the Property had been openly used as a flower shop in contravention of that condition for some 15 odd years, and that the nature of such user would have been apparent to anyone seeing the shop, located as it was on the main road. Reliance was also placed on the fact that the main entrance to the building was next to the shop, and the words "Wing Wah Industrial Building" appeared above that entrance.

31. However, it seems to me that the Plaintiff is immediately faced with the difficulty that the uncontradicted and unchallenged evidence of Ms Chan is that the relevant officers or department of the Government, DLO/HKE, did not know of the offending user of the Property at any time before May 1993, and that following the discovery that the Property was being used for retail purposes, a number of inspections took place, resulting in enforcement action being taken against the neighbouring shop, although no enforcement action was taken in respect of the Property because it was by then no longer being used for commercial purposes.

32. I do not think that there is any basis on which I can find, in the face of Ms Chan's evidence, that the Government must have known of the offending user prior to May 1993. Quite apart from her evidence to this effect, Ms Chan has provided an explanation of the manner in which the Government has deployed the limited resources which it has available for lease enforcement action, which in my view provides a credible basis for the Government's failure to become aware of the use of the Property, or that this was a breach of the terms of the conditions of sale, so that I would not, in any event, have felt able to infer that the Government had knowledge of the breach prior to May 1993.

33. Accepting, as I do, that the Government first became aware of the use of the Property as a retail flower shop in May 1993, the period of some 14 years use from 1979 until May 1993 cannot, in my view, assist the Plaintiff.

34. That being so, I do not consider that the two authorities cited by Ms Hui in relation to the length of time needed to establish acquiescence or waiver are of particular relevance. The first of these was Tang Wing Leung David v Chung Chi Keung Frederick (HCMP 2766 of 1988, unreported, CFI, Barnett J, 5 February 1999), which again involved a vendor and purchaser summons, to which the Government was not a party, in which there had been a period of nine years inaction by the Government in relation to an apparent breach of a height restriction for a building development. It was, moreover, decided before the Jumbo Gold case, and would, I think, have been decided the same way had the "real risk of enforcement" test been applied. The second was Sayers v Collyer (1884) 28 Ch D 103, in which a period of three years' inaction was held to suffice to establish acquiescence. I note that in both those cases there was evidence of knowledge of the breach of covenant (in Tang v Chung this consisted of, among other things, approved building plans which clearly demonstrated a breach of the relevant covenant, and in Sayers v Collyer it is apparent that the Plaintiff had visited the premises in question personally and knew of the breach of covenant on which he relied). In this case, given that I have found that it is not established that the Government knew of any breach prior to May 1993, the question of the length of time during which no action was taken does not arise in respect of this period.

35. The question then arises whether the Government can be taken to have acquiesced in such use by reason of its failure to take action against the Plaintiff until October 2000.

36. In my view, it cannot. Between May 1993 and September 1994, the Property continued to be used as a flower shop. During this period of a year and four months, the Government had carried out a further inspection, and was preparing to make further inspections. I do not think that the failure to take immediate action, or to take action within the space of 16 months, is sufficient to establish acquiescence or waiver on the part of the Government, particularly in the light of the evidence as to the number of staff available to carry out enforcement work, and their generally heavy workload.

37. Thereafter, a further inspection was carried out, following which enforcement action was taken against the neighbouring shop in February 1995. It seems to me that had the Property still been used as a flower shop at this time, enforcement action would have been taken against it as well, there being no basis on which it would have been open to the Government to have treated the two neighbouring shops differently. Moreover, the continued monitoring of the position in relation to the shop for a period of nearly a further year and a half is, to my mind, evidence that the Government had not, at any time until at least July 1996 (the date of the last inspection) abandoned or waived the restrictive covenant in clause 2(a) of the conditions of sale. There would have been no point to such inspections had it not been the intention to take enforcement action if necessary.

38. As it happens, the Property was unoccupied from September 1994 onwards, and in the light of this, no enforcement action was taken in respect of it. It seems to me that the reasons given by Ms Chan for the failure to take action in respect of the Property during this period, and for the decision in mid 1996 to cease taking further steps in relation to the Property, are valid ones, and clearly point away from there having been any abandonment or waiver by the Government of the terms of condition of sale 2(a) by this time.

39. Thereafter, no further monitoring of the position in relation to the Property took place, until the receipt by DLO/HKE of a complaint in respect of the use of the Property as a flower shop. It seems to me that the failure to continue monitoring action following the decision to discontinue action against the property in mid 1996 would not amount to a waiver of or acquiescence in the breach of the terms of the relevant condition of sale.

40. Looked at another way, it seems to me that from at least December 1994 (when an inspection was made but the Property was unoccupied) and October 2000, Ms Chan's evidence establishes that the Government was not aware of any breach of condition of sale 2(a), so that the question of acquiescence cannot arise in relation to this period.

41. I therefore conclude that the Plaintiff has failed to establish that the Government has waived or acquiesced in the breach of condition of sale 2(a), so as to disentitle it from seeking to enforce that condition. In these circumstances, I do not consider that the Plaintiff is entitled to the third declaration prayed for in her Originating Summons, and I therefore decline to make such a declaration.

42. In the circumstances, it seems to me that these proceedings must be dismissed. So far as costs are concerned, I see no reason why these should not follow the event, and I therefore make an order nisi that the Plaintiff should pay the Defendant its costs of these proceedings, to be taxed on the party and party basis if not agreed.