EASTRADE HOLDINGS LTD v. SECRETARY FOR JUSTICE FOR AND ON BEHALF OF THE DIRECTOR OF LANDS

HCMP 1736/2021

[2023] HKCFI 3356

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1736 OF 2021

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J U D G M E N T

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A. INTRODUCTION

1.  The Plaintiff, Eastrade Holdings Limited, is the Government lessee of the Lot, namely New Kowloon Inland Lot No. 886 (known as No. 8 Kent Road) in Kowloon Tong, on which the Plaintiff has constructed a two-storey building with basement for residential use since around 2015 (“Current Building”). The Current Building appears to be the fourth consecutive building erected on the Lot since the Lot was first demised and the first building was erected thereon in around 1930. When the Plaintiff applied to the Director of Land (“Director”) for consent to construct the Current Building, the Director proposed to give consent subject to payment of a premium of HK$106,240,000, which the Plaintiff did not accept. Hence this action.

2.  This action is concerned in the main with the interpretation of the terms of grant made on 2 October 1930 on which the Lot is held (“Lease”). The Plaintiff says that:-

(1)  On the proper construction of the Lease, it is entitled to construct the Current Building without the consent of the Director at all.

(2)  In the alternative, even if the Director’s consent is required, the proposal to charge substantial premium would amount to derogation from grant on the part of the Government because (on the Plaintiff’s case) the purpose of the grant is for the occupation of the Lot for residential purposes, and the Current Building falls within such purpose.

(3)  In the further alternative, if premium is chargeable, the exercise of contractual discretion under the Lease to demand substantial premium was improperly and/or unreasonably exercised, in that while the formula adopted by the Director (the “after value” of the Lot less the “before value” of the Lot to arrive at the enhancement in value of the Lot) is not disputed, the Director has applied the wrong “before value”.

B.  BACKGROUND

(B.1)  The Kowloon Tong Garden Estate

3.  The Lot, which was demised on 2 October 1930, was part of a building scheme known as the “Kowloon Tong Garden Estate” (“Estate”) initiated in around 1921 and completed in around 1930.

4.  The Estate covered 100 acres (40 hectares) of land just east of the Kowloon-Canton Railway tracks, bounded by Cornwall Street, Waterloo Road, Boundary Street and the present day East Rail line.

5.  The Estate project began life in around 1921, when the Kowloon Tong and New Territories Development Company (“Company”), which was non-profit making, was established under the aegis of Mr Charles Montague Ede, then Manager of the Union Insurance Society of Canton, Limited.

6.  The object of the Company, as explained in a report of the committee appointed by the then Governor to advise the Government of Hong Kong with respect to the Company and the Estate in or around 1930, was to build houses for persons of small means whose work or circumstances caused them to regard Hong Kong as their home, and to enable such persons to reside in their own houses or homes in more healthy and pleasant surroundings than the then usual alternative, namely flats (Chinese or otherwise) in congested areas. A small community, living in detached or semi-detached houses with small gardens and enjoying common recreational grounds, was contemplated, borrowing from the “garden city” concept which had become popular in the United Kingdom around the turn of the 20^th century.[1]

7.  To that end, the Estate provided for 250 detached houses with gardens, with streets named after English counties (including Devon, Kent and Cumberland) and public parks and playgrounds, and offered 4 main types of houses, each with standardized layout, ranging from 5,000 to 10,000 square feet in size, of two-storey and designed with verandas, arched windows and a pitched roof, and equipped with modern amenities including electricity and flushed toilets.

8.  By an Agreement dated 26 October 1922 between the Crown and the Company:-

(1)  the Company undertook to submit layout plans, development plans and plans of the houses to be erected for the Estate for approval by the Director of Public Works (predecessor of the Director), to complete development of the Estate in accordance therewith, and to build roads within the Estate area which upon completion would be taken over and maintained by the Government;

(2)  the Government undertook to form the area to approved general levels in accordance with an agreed timetable, and to complete drainage and other works affecting the use of the Estate;

(3)  the Company would pay premium at the rate of 12 cents per square foot for the whole area of the Estate by 3 instalments tied to different stages of development of the Estate;

(4)  it was expressly provided that the Company could enter into subsidiary agreements with prospective purchasers of the lots with completed houses thereon in the Estate – clearly with the intent that such purchasers could then shoulder the actual cost of development and the land premium charged by the Government – and that upon completion of the houses the Crown Leases for the respective lots would be issued directly to such purchasers; and

(5)  it was further provided that the Crown Leases to be issued would contain a five-year non-alienation clause (subject to consent of the Governor-in-Council which consent would not be granted in the case of speculation or obtaining any enhanced profit), would in other respects be “in the usual form” and be for the term of 75 years renewable for 24 years less 3 days.

9.  Difficulties were encountered in the development of the Estate, on the Government’s side by unforeseen natural causes as well as the strikes in 1925 which delayed formation and levelling of the area, and on the Company’s side by unforeseen natural causes, failures of the construction teams and strikes, and the untimely death of Mr Ede which caused loss in confidence and aggravated default in instalment payments by the purchasers. The delay in the works was such that it was only by 1928 that the Government completed handing over of the entire area of the Estate to the Company.

10.  Having done so, the Government demanded payment of the balance of land premium, which the Company at that time was not in a position to pay, as the estimated cost of construction had been exceeded and many of the purchasers refused to meet the Company’s calls for further contribution. In the face of unpaid premium and the purchasers’ demands for the Government to intervene, the Government exercised its forfeiture right and re-entered on 23 August 1929.

11.  After the re-entry, the Government proceeded to issue Crown Leases to those purchasers who paid the balance of the land premium attributable to their respective lots. A final solution was reached in 1930, between the Government, Mr Ede’s estate and the purchasers, effectively for the Government to grant relief in the form of remission of one quarter of the premia due, so that the remaining houses in the Estate could be completed, Crown Leases could be issued and the purchasers could obtain title to their properties.

12.  With that, the Estate was eventually completed in or around 1930.

13.  As can be seen from the above, the Crown Leases for lots in the Estate were issued at different times, depending on when the conditions for issuance (completion of building, payment of land premium etc) were satisfied. Nevertheless, it appears that the conditions of the Crown Leases for all lots within the Estate were the same; in fact there are references in the contemporaneous records to a “printed ‘Kowloon Tong’ form”. This can be seen from:-

(1)  the internal records of the Lands Department in the early 1950s, when a number of lots in the Estate had converted the single dwelling house into flats or had built an additional house in the garden, and the question of breach of the Crown Leases, and whether enforcement action should be taken or modification allowed, were raised, which cumulated in the Executive Council’s decision in (2) below;

(2)  the Memorandum for Executive Council dated 16 February 1955, whereby the Colonial Secretariat explained that the Estate was systematically planned and developed to have small, detached residences each standing in its own garden, with lease conditions deliberately designed to preserve the special character of the Estate, and sought the Executive Council’s decision on whether the lease conditions should be relaxed. The Executive Council’s decision, made on 22 February 1955, was that the existing garden estate should be maintained as such and there should be no relaxation; and

(3)  the 10 or so Crown Leases the Plaintiff placed before the Court in these proceedings (including a number which I have considered de bene esse, see further Section C below). With the exception of one (which was specifically identified in the Lands Department’s internal records), they all contained terms very similar if not identical to those found in the Lease in the present case; there were minor variations (for example using “dwellinghouse” instead of “tenement”) of no consequence, which were probably due to the fact that the Crown Leases were not issued in a single batch but at different times.

14.  The reason for the uniformity in the terms in the Crown Leases (as explained in the records in paragraph 13 above) is that the terms were drawn up for the Estate as a whole, which was planned for the erection of detached single family houses with surrounding garden areas, to preserve the particular nature of the Estate as a garden suburb.

(B.2)  The Lot

15.  With respect to the Lot, by a Purchase Agreement dated 26 February 1923 between the Company and Madam Lau Gee (劉子) (“Purchase Agreement”), the Company agreed to procure the Lot to be formed and a house to be constructed thereon for Madam Lau, the house to be built in accordance with the specifications annexed thereto in accordance with the development plan and house drawing submitted to and approved by the Director of Public Works, for a consideration of HK$13,000 plus an additional HK$1,600 for a higher ceiling specifically requested by Madam Lau.

16.  The specification annexed to the Purchase Agreement stipulated that the house to be built was a “Type 6 House” and set out the materials to be used for its foundations, walls, floors, roof, windows, stairs and finishes, and that it should be completed with boundary walls, electric wiring, and connections to electric light, water and sewer mains.

17.  The Crown Lease with respect to the Lot (ie the Lease) was granted to Madam Lau on 2 October 1930, consequent upon the arrangement described in paragraph 11 above and Madam Lau’s payment of the outstanding premium.

(B.3)  The Lease conditions

18.  The terms of the Lease lie at the heart of this action. I will identify below the overall structure of the Lease, and set out in full the pertinent terms.

(1)  The Lease began with a description of the parties (the Crown and Madam Lau), followed by provisions that (i) in consideration of the premium stipulated (HK$1,861.57) (ii) the Lot (by description and by reference to a plan annexed) was demised, (iii) excepting and reserving to the Crown the mineral rights etc under or upon the Lot, (iv) for the term demised (75 years renewable for 24 years less 3 days) and (v) the rent stipulated.

(2)  Thereafter there began the lessee’s covenants, each indicated by the use of “And” (as opposed to “and”) at the beginning of the sentence, the first of which was the covenant to pay rent, followed by the covenant to pay taxes rates charges and assessments.

(3)  Next followed the covenants which are at the centre of these proceedings –

(a)  “And will (i) before the expiration of Twelve calendar months from the Second day of May One thousand nine hundred and thirty (ii) at his her or their own proper costs and charges (iii) erect build and completely finish fit for use in a good substantial and workmanlike manner and with the best materials of their respective kinds one or more good substantial and safe brick or stone messuage or tenement messuages or tenements upon some part of the ground hereby demised with proper fences walls sewers drains and all other usual or necessary appurtenances and (iv) shall and will before the expiration of the said Twelve calendar months lay out and expend thereon the Sum of Four thousand dollars at the least (v) which said messuage or tenement messuages or tenements shall be of the same rate of building elevation character and description and shall front and range in an uniform manner with the buildings (if any) immediately adjoining in the same Street and (vi) the whole to be done to the satisfaction of His said Majesty’s Director of Public Works (hereinafter referred to as “the said Director”)”

(b)  “And the said Lessee shall not nor will at any time during the continuance of the term hereby granted erect any other messuage or dwellinghouse on the said piece or parcel of ground hereby demised or any part thereof without the consent in writing of the said Director first had and obtained in that behalf”

The words in italics and the crossings-out in the quotes above were done by hand in the Lease; the Roman numerals (i), (ii) etc are added by me.

(4)  The next covenant is also one that both parties referred to –

“And shall and will from time to time and at all times hereafter when where and as often as need or occasion shall be and require at his her or their own proper costs and charges well and sufficiently Repair Uphold Support Maintain Pave Purge Scour 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 piece or parcel of ground hereby expressed to be demised and all the Walls Banks Cuttings Hedges Ditches Rails Lights Pavements Privies Sinks Drains and Watercourses thereunto belonging and which shall in any-wise belong or appertain unto the same in by and with all and all manner of needful and necessary reparations cleansing and amendments whatsoever the whole to be done to the satisfaction of the said Director” (“Repair Covenant”).

(5)  Immediately following was another covenant that both parties also referred to –

“And the said messuage or tenement messuages or tenements erections buildings and premises so being well and sufficiently repaired sustained and amended at the end or sooner determination of the term hereby granted will peacefully and quietly deliver up to His said Majesty” (“Surrender Covenant”).

(6)  Next following were the lessee’s covenants to (i) pay a portion of the costs of repair of the roads etc in common use, (ii) permit the Director of Public Work to enter and view, (iii) not carry on any offensive trades, and (iv) not alienate the Lot without registering the same at the Land Office.

(7)  Then were provisos for (i) the Crown’s right of re-entry in the event of non-payment of rent or breach of covenants and conditions, (ii) the Crown’s right of resumption, and (iii) the lessee’s right to renewed lease of 24 years less 3 days without further payment.

(B.4)  The previous buildings on the Lot

19.  According to the Lands Department’s Lot file, the house on the Lot was not yet fully completed at the time of the Lease, and though there is no record available now of the appearance of this house upon completion, the plan annexed to the Lease indicated its outline. From that and the specifications to the Purchase Agreement one can deduce the original house constructed was a two-storey house of rectangular shape occupying a footprint of around 1,350ft² (or 125.4m²)[2] (“Original Building”).

20.  Not long after, in 1934, the Lot was assigned to another purchaser, before it was sold again in 1947. The aerial photographs (since there does not appear to be any other contemporaneous record on the same) indicate that by 1945, the outline of the Original Building had changed and expanded into a L-shape, by the addition of a rectangular wing at the southeast side of the Original Building, and the total footprint of this L-shape building increased to around 2,095ft² (or 194.6m²)[3] (“Second Building”).

21.  For the Second Building:-

(1)  The Lands Department has no record of consenting to the demolition of the Original Building or the erection of the Second Building.

(2)  The Plaintiff, who has caused a substantial amount of Lands Department documents concerning the Estate to be retrieved from the Public Records Office of Hong Kong and exhibited them as evidence in these proceedings (including the file pertaining to the Lot), has not located any record concerning the Second Building.

(3)  The only evidence of the Second Building are 2 aerial photographs taken in 1945 and 1949, which were very blurred and in any event only revealed the outline of the Second Building; they provide no information as to its external appearance. It is therefore wholly unclear whether the Second Building involved a demolition of the Original Building and wholesale rebuilding, or was a case of a wing being added to the then existing Original Building.

22.  In 1997, the Lot was assigned to Bourne Lloyd Limited. In the following year (1998), the aerial photographs reveal that while the L-shape structure remained, the bulk of the structure appeared to have expanded, so that the Plaintiff says, by calculating from the aerial photograph to scale, the total footprint of the two-storey building became around 3,123ft² (or 290.1m²). I will refer to this as the “School Building”.

23.  Around the time the aforesaid changes in the outline of the premises were observed, in mid 1998, an application for permission under section 16 of the Town Planning Ordinance (Cap.131) was submitted to change the user of the Lot from residential to a tutorial centre (“1998 Planning Application”). The 1998 Planning Application stated that (i) until 1997 the building thereon (ie the Second Building) was a single-user private residence; (ii) the School Building was then “undergoing renovation”, and (iii) it was “NOT A NEW BUILDING”. Therefore it appears that although the School Building was bigger in size than the Second Building, it was not a case of demolition and rebuilding, but one of expansion by renovation.

24.  The 1998 Planning Application was unsuccessful. It appears that thereafter, the School Building had been used as a shop and flee market.

25.  One year later, in June 1999, the section 16 application was renewed by a different prospective tenant of the School Building, Canadian Overseas International School, to operate a kindergarten there (“1999 Planning Application”). As part of the 1999 Planning Application, the applicant indicated that alteration and addition (“A&A”) works would have to be undertaken to add an external steel staircase between 1/F and G/F to satisfy the fire escape requirements.

26.  The 1999 Planning Application was approved subject to conditions on 27 August 1999. The approval letter issued by the Town Planning Board contained the following words:-

“The approval by the Board under section 16 of the Town Planning Ordinance should not be taken to indicate that any other government approval which may be needed in connection with the development, will be given. You should approach the appropriate government departments on any such matter.”

27.  The permission for A&A works contemplated in the 1999 Planning Application (external staircase) appeared to have been pursued in parallel. Relevantly for present purpose, the building plans for the A&A works had been forwarded by the Buildings Department to the District Lands Office, and by a letter dated 14 September 1999, the District Lands Office indicated the submission was not acceptable under the Lease conditions for (inter alia) breaching the “One House” restriction. There is a dispute between the parties as to what the “One House” restriction refers to, which I will return to below. In any event, the A&A works were approved by the Buildings Department on 5 October 1999.

28.  The Lot was assigned to the Plaintiff on 22 April 2002.

29.  Shortly thereafter, a section 16 application was made by another prospective tenant of the School Building, Delia School of Canada, to operate an elementary school cum kindergarten there (“2002 Planning Application”). The 2002 Planning Application specifically stated that the only change (from the 1999 Planning Application) was the change in school operation. The 2002 Planning Application was approved by the Town Planning Board subject to conditions on 12 July 2002. The approval letter contained the same wording in paragraph 26 above.

(B.5)  The Current Building

30.  In 2010, the Plaintiff:-

(1)  submitted demolition plans to and obtained the approval of the Buildings Department thereof on 5 February 2010 to demolish the School Building;

(2)  submitted general building plans for the Current Building (or an earlier design thereof) to the Buildings Department, which were circulated to the Building Plan Unit of the Lands Department, and the latter informed the Plaintiff’s authorized person by letter on 26 May 2010 that the submission was not acceptable under the Lease conditions as written consent of the Director was required under the Lease for the erection of a new messuage or dwelling house (see paragraph 18(3)(b) above); and

(3)  proceeded to and completely demolish the School Building by the end of 2010.

31.  In June 2012, revised drawings for the Current Building were submitted by the Plaintiff, and by letter dated 22 August 2012 the Lands Department again stated that the submission was not acceptable under the Lease conditions as written consent of the Director was required to erect any other messuage or dwelling house, and reminded the owner to obtain such consent before proceeding with the proposed development.

32.  Following that, on 18 September 2012, James Ng Surveyors Ltd (“JNS”) wrote to the Lands Department on behalf of the Plaintiff to seek consent under the Lease for the proposed development.

33.  Meanwhile, further revised drawings for the Current Building were submitted by the Plaintiff in August 2014, and by letter dated 17 October 2014 the Lands Department again indicated the submission was not acceptable under the Lease conditions, citing the same reason as before.

34.  The Plaintiff then further revised the drawings for the Current Building, which were approved by the Buildings Department on 13 February 2015. Following that, JNS wrote to the Lands Department on 6 March 2015 to follow up on the application for consent under the Lease.

35.  However, it appears that without waiting for the Lands Department’s response, the Plaintiff had proceeded to construct and complete the Current Building, as occupation permit therefor was issued on 16 July 2015.

36.  The Current Building, in comparison to the Original Building, has the following features:-

	Original Building	Current Building
Layout	Two-storey dwelling house	•  Two-storey single family building for domestic use •  One-storey basement with car park, plant rooms and ancillary accommodation for non domestic use
GFA	2,360.5ft2	•  6,531.54ft2 •  Basement excluded from GFA calculation and is said to have a size of some 3,000ft2
Site coverage	1,350ft2	3,571.4ft2

I should point out that there is no plan or photograph concerning the Current Building showing its actual physical state before the Court; the only information available (which have been set out above) are derived from the occupation permit and the limited information presented in the parties’ affidavit evidence.

37.  By letter dated 11 May 2017, JNS followed up on the consent application with the Lands Department. By letter dated 18 May 2018, the District Lands Office stated that the application for consent would be considered and processed. This was followed by a letter from the District Lands Office on 27 August 2018 that the Director was prepared to recommend to the Government to give consent, and set out certain basic terms for such consent, but without stating the amount of the premium payable, which was marked “to be determined”. On 7 September 2018, JNS confirmed that the basic terms outlined were acceptable to the Plaintiff, subject to the amount of premium chargeable, and indicated that the Plaintiff’s view was that any premium should be a notional, and not substantial, amount.

38.  By letter dated 28 January 2019, the District Lands Office informed JNS that the consent application was being processed, but reminded that such application and correspondence should not be treated as waiver of any breach of the Lease conditions.

39.  Then on 11 March 2019, the District Lands Office wrote to confirm that the premium charged would be HK$106,240,000.

40.  By letter dated 10 April 2019, JNS on behalf of the Plaintiff objected to the premium proposed, and lodged an appeal against the premium amount with the District Lands Office. Such appeal has since been suspended as the parties could not agree on which previous building on the Lot should be used for the “before” value (which is the issue raised in the Plaintiff’s third ground in these proceedings).

41.  On 3 November 2021, the Plaintiff issued the originating summons in these proceedings.

C.  A PROCEDURAL MATTER

42.  Both parties filed evidence in these proceedings in the normal course. In the reply evidence of the Plaintiff, specifically section D of the 2^nd Affidavit of Cheng Ching Yu, Viola dated 11 April 2022, the Plaintiff referred to and exhibited a substantial quantity of historical Lands Department materials concerning 8 other lots in the Estate as well as a file concerning enforcement action taken, which it contends to be relevant to the factual background. By summons issued on 4 May 2022, the Defendant applied to expunge the aforesaid materials, alternatively for leave to file responsive evidence thereto. By order dated 11 May 2022, Madam Justice Cheng adjourned the summons to the hearing of the originating summons, granted leave to the Defendant to file responsive affidavit, and directed all affidavits filed be admitted de bene esse.

43.  I can deal with this matter quickly. Although these materials relate to lots other than the Lot in question, given the Estate was developed collectively and having regard to the matters set out in paragraphs 13 and 14 above, I consider these additional materials to be relevant to the factual matrix against which the construction exercise is to take place. I will therefore dismiss the application to expunge. However, these materials were introduced only in the reply evidence, and the Defendant was entitled to respond to these new factual matters. As such I will order that costs of the Defendant’s summons be in the cause of the originating summons.

D.  CONSTRUCTION OF THE LEASE

44.  This is the main contention advanced by the Plaintiff, namely, on the proper construction of the Lease the requirement for the Director’s prior written consent as set out in paragraph 18(3)(b) above is limited to the case of an additional building on the Lot. In other words, the provision for consent simply has no application to a case of rebuilding, where there is still only one building situate on the Lot.

45.  There is no real dispute between the parties on the applicable principles. A recent pronouncement thereof can be found in Dairy Farm Company Ltd v Secretary for Justice [2022] HKCA 1902, CACV 77/2020 (unrep., 23 December 2022) at §33:-

(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 both parties in the situation in which they were at the time of the execution of the document.

(2)  The court will focus on the meaning of the relevant words in their documentary, factual and commercial context.

(3)  The meaning of the words is to be addressed in light of:-

(a)  the natural and ordinary meaning of the provision;

(b)  the other relevant provisions in the document;

(c)  the overall purpose of the relevant provisions;

(d)  the facts and circumstances known or assumed by the parties at the time that the document was executed;

(e)  commercial common sense.

(4)  The process is an objective one in which one disregards subjective evidence as to the intentions of the parties.

(5)  The general rule is that all relevant facts and circumstances can be taken into account as an aid to interpretation of the words used in the document.

(6)  As an exception to the general rule in (5) above, the court will not take into account the contents of pre-contractual negotiations save in so far as those negotiations reveal the existence of a background fact which is otherwise relevant.

46.  Ms Frances Lok, for the Defendant, submitted that I should take into account 2 further matters, namely:-

(1)  the principle of construction applicable to grants by the Crown that (contrary to the ordinary rule applicable to grants by subject) usually they fall to be construed in the manner most favourable to the grantor (ie the Crown), as set out in Earl of Lonsdale v Attorney General [1982] 1 WLR 887; and

(2)  the context that ownership of land, being property of the Crown[4], is parted with only for the duration of the lease and the user specified in the lease, and subject thereto land remains the undisposed property of the Crown, which the Crown is entitled to make a further disposal thereof by way of modification of the user restriction and charge full value therefor: Director of Lands v Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1, §27.

47.  Mr Benjamin Yu SC (leading Mr Anthony Ismail) disputes the relevance of the Lonsdale principle in this case, arguing that it is a principle of last resort, and has no application where the court is able to arrive at the true construction.

48.  I do not consider that the Lonsdale principle needs to be invoked in this case, given (i) regardless whether it is a matter of “last resort”, it is clear from Earl of Lonsdale itself that the principle is presumptive in nature, and would not be invoked where the wording is clear and unequivocal, or even where the wording is obscure and equivocal, if a true interpretation of the relevant words in their context can be arrived at (901F-G), and (ii) for the reasons below, I am able to arrive at a clear meaning of the words in question by the ordinary principles of construction.

49.  The Plaintiff’s arguments in support of its contention that consent is only required for an additional building can be summarized as follows:-

(1)  The purpose of the Lease is said to be two-fold, the main purpose was to allow people to build houses and reside, and the associated purpose was to have a garden city. Rebuilding, in circumstances where there is still a single building and the garden is retained, would not be inconsistent with these purposes. On the contrary, if there is no free right to rebuild on the part of the owner, the main purpose would be frustrated.

(2)  The relevant contexts are that (i) the Lease is for a long term (75 years plus 24 years), such that it must have been within the contemplation of the parties that replacement or rebuilding during such term would be required; (ii) insofar as there is a need to prevent developments which are of a different design or character from its immediate neighbourhood, the Director could rely on statutory power conferred under sections 6 and 203 of the then Public Health and Buildings Ordinance 1903.

(3)  Textually, the meaning of the words “erect any other messuage or dwellinghouse” (emphasis added) in paragraph 18(3)(b) above, read together with the manual deletions in paragraph 18(3)(a) above (namely “one or more” and “messuage or tenement messuages or tenements”), is clearly referring to an additional house.

(4)  Further, the contemplation of the possibility of an additional house (which paragraph 18(3)(b) above caters for) is consistent with the deliberate use of “messuage or tenement messuages or tenements” in the Repair Covenant and the Surrender Covenant (paragraphs 18(4) and 18(5) above).

(5)  In any event, the consent provision is not a “rate and range” clause (cf limb (v) in paragraph 18(3)(a) above), and should not be used to control rebuilding.

(6)  Finally, the Director has not been able to identify any example in the Estate where consent was sought for a replacement building, whereas the materials provided by the Plaintiff on other lots in the Estate (paragraph 42 above) show that the Director was concerned with the existence of additional buildings.

50.  With respect, I do not agree with the construction advanced by the Plaintiff.

51.  First, when one looks at the words used in paragraph 18(3)(a) above (essentially a building covenant) and paragraph 18(3)(b) above (a consent clause):-

(1)  They are separate covenants, but since the consent clause follows immediately from the building covenant, one must look at the building covenant to give meaning to the consent clause.

(2)  When one looks at the building covenant, it is an elaborate one with clear stipulations on the house to be built, covering the time within which it must be built, the minimal amount spent on the same, the materials used and the “rate and range” requirement, all of which would be subject to the approval of the Director of Public Works. In other words, the entirety of the house – including its design, layout, quality and location – would have to be approved by the Director of Public Works.

(3)  After such a house has been approved, the consent clause provides that the lessee shall not “erect any other” house on the Lot without the Director of Public Work’s consent.

(4)  The meaning of “any other” in the consent clause is thus very clear – it is referring to any house other than the one who had received approval of the Director of Public Works.[5] This means that consent would have to be sought whether one is seeking to replace the approved house, or build an additional house.

52.  The above meaning – which I consider to be very clear even before going into the purpose and context – is wholly consistent with the Repair Covenant and the Surrender Covenant. Since it is possible, pursuant to the consent clause, for additional house(s) to be built, it makes sense for the Repair Covenant and the Surrender Covenant to cover both scenarios of one house, and more than one houses.

53.  Second, the above plain meaning of the words is wholly borne out by the purpose.

(1)  As can be seen from paragraphs 6, 7, 13 and 14 above, the purpose of the Lease was to demise the Lot as part of the coherently-planned Estate, namely a garden suburb with fairly standardized detached single family houses with gardens and common recreational areas.

(2)  Thus, I do not accept the Plaintiff’s submission that the purpose of the Lease was to build a house and reside; that wholly ignores the factual matrix that the Lot was part of a building scheme in the form of the Estate.

(3)  Since the purpose is to have the Lot be part of, and maintain, the Estate (as a garden estate), it makes sense for consent to be required of any building other than the one approved by the Director of Public Works under the parameters clearly laid out for the Estate.

54.  Third, the context is also wholly consistent with the meaning in paragraph 51(4) above.

(1)  It is true that the Lease is of long duration. However, it is pertinent to consider what has been demised – the Lease is not a demise of the Lot (land) without restriction; rather it is limited by the house that can be erected thereon, which has to be the one approved by the Director of Public Works as was consistent with the parameters of the Estate and the concept of a garden estate. Such limitation is reflected in the amount of premium charged – for the Lot, the premium charged was HK$1,861.57, in contrast with the minimum expenditure on the house being HK$4,000, and the actual amount incurred by Madam Lau being in excess of HK$13,000 (in circumstances where the Company was non-profit making such that the amount paid should substantially if not wholly contribute toward the construction cost). The amount of premium is, in my view, a clear indication that the lessee would not be entitled to freely exploit the Lot.

(2)  I do not see how there existed a statutory power to control the design and character of buildings has any relevance in this case. The context in this case is the specific building scheme in the form of the Estate, which the Government was involved in developing and public funds had been incurred to that end, and the Lease terms (which from the selection of Crown Leases provided by the Plaintiff are substantially the same throughout the Estate) provide for a direct control mechanism which enables the Director to ensure the unique characteristics of the Estate are maintained. The statutory power under the Public Health and Buildings Ordinance 1903 cannot affect the construction of the consent clause, based clearly on the words used, the purpose and the context.

(3)  Mr Yu argues that the Agreement of 26 October 1922 provided for the Crown Leases to be issued “in the usual form” (paragraph 8(5) above) but there is no evidence that in the 1930 it was a usual covenant in Crown Leases to restrict the lessee’s right to rebuild. I do not see how this assists the Plaintiff. Whatever may be the meaning of “usual form” (which, as Ms Lok points out, may not be equated with “usual covenants”), the position of Crown Leases in Hong Kong in general in 1930 is not really relevant, when the facts are clear that Crown Leases for the Estate were the same, and the examples adduced by the Plaintiff borne that out, in that all but one (as identified in (iii) in paragraph 56 below) contained similarly worded building covenants and consent clauses.

55.  Fourth, I do not consider that there being no free right to rebuild during the whole term of the Lease to be unreasonable.

(1)  Firstly, as explained above one has to focus on what has been demised, and in this case what has been demised under the Lease is the Lot subject to the limitation of the approved house thereon, as reflected by the (low) premium charged.

(2)  Further, the existence of the consent clause provides a mechanism to address the need to rebuild.

(3)  There is no basis to assume that the consent clause would be used by the Director in such a way as to deny all rebuilding whatever may be the cause that gives rise to such a need, or to invariably charge substantial premia as to make the obtaining of consent illusory. In one of the lot examples put forward by the Plaintiff (New Kowloon Inland Lot No. 792), the house in question had become derelict during the Japanese occupation and the Director was demanding the lessee to repair the same under lease terms of the Estate similar to the Lease, but the lessee’s assignee eventually chose to rebuild the house, and the building plans for rebuilding were approved by the Director without any premium charged.

56.  Fifth, I do not consider the materials concerning other lots in the Estate adduced by the Plaintiff assist. Those cases were concerned with (i) applications for the construction of an additional building; (ii) applications to build a block on flats; and (iii) New Kowloon Inland Lot 719, which was identified by the Lands Department as an anomaly as its lease terms did not follow the standard “Kowloon Tong” form and did not contain any consent clause. The cases in (i) and (ii) would clearly also fall under the scope of the consent clause, so the fact that the relevant lessees had to seek consent from the Director would not disprove that consent would also be required in the different case of building a new single house.

57.  In the premises, I reject the Plaintiff’s case on the construction of the Lease. I find that the meaning of the consent clause in the Lease (paragraph 18(3)(b) above) is as set out in paragraph 51(4) above.

E.  DEROGATION FROM GRANT

58.  If consent of the Director is required (which I have found to be the case), the Plaintiff argues that the charging of substantive premium amounts to a derogation from the grant of the Lease, because (i) the purpose of the grant is the occupation the Lot for residential purposes, and (ii) the Director is not objecting to the Current Building on account of its design or character but is charging a premium on account of development intensity.

59.  Again there is no real dispute between the parties on the principles applicable. Both parties refer to Kung Ming Tak Tong Co Ltd v Park Solid Enterprises Ltd (2008) 11 HKCFAR 403, §§61-63, which provide that:-

(1)  There is an implied obligation that if a person agrees to confer a particular benefit on another, he must not do anything which substantially deprives the other of the enjoyment of that benefit: because that would be to take away with one hand what is given with the other.

(2)  The extent of the implied obligation involves identifying what obligations, if any, on the part of the grantor can fairly be regarded as necessarily implicit having regard to the particular purpose of the transaction when considered in the light of the circumstances subsisting at the time the transaction was entered into.

60.  In light of my findings in paragraph 53 above, the answer to this issue is clear, and I reject the Plaintiff’s submissions thereon.

(1)  The purpose of the Lease was not narrowly for occupation for residential purposes, but to grant and use the Lot as part of the Estate within the clearly set out parameters of the Estate.

(2)  It follows that to construct a replacement building, in place of the one approved by the Director of Public Works, would not fall within any implied obligation arising from the Lease. For this reason alone, this ground must fail.

(3)  For completeness, I do not see how the Plaintiff can contend that the Director is not objecting to the Current Building on account of its design or character. The fact remains that (as can be seen in Section B5 above) the Plaintiff had presented the Director with a fait accompli, in that it proceeded to construct the Current Building without first obtaining the Director’s consent. In these circumstances, unless the Director insists on the demolition of the Current Building as the means to comply with the Lease, the only other alternative would be to grant consent. It was in the context of calculating the premium that the Director took account of the increase in development density.

(4)  The Plaintiff advanced a further argument during oral submissions that the court should find that by demanding substantial premium, the Director was seeking to extract premium, which would be outwith the purpose of the grant. I have already addressed the issue of the purpose of the grant above; in any event, I cannot see how, in light of the facts in (3) above, there is basis to find that the Director’s offer was for the purpose of extracting premium instead of within the scope of the grant.

F.  CONTRACTUAL DISCRETION RE PREMIUM

61.  The Plaintiff’s further alternative case is that if premium is chargeable (which I have found to be the case), the exercise of contractual discretion under the Lease to demand substantial premium was improperly and/or unreasonably exercised, in that while the formula adopted by the Director (the “after value” of the Lot less the “before value” of the Lot to arrive at the enhancement in value of the Lot) is not disputed, the Director has applied the wrong “before value”, which should have been the School Building as opposed to the Original Building, because the Government has waived compliance with the consent clause by the Second Building and the School Building.

62.  The consent clause in the Lease (paragraph 18(3)(b) above) provides for a power of the Director to grant consent, as opposed to an obligation. The Plaintiff argues that this power or discretion is not unlimited (even though on its face the words contain no limit), and is subject to an implied obligation as set out in Braganza v BP Shipping Ltd [2015] 1 WLR 1661.

63.  In Braganza, the United Kingdom Supreme Court held that:-

(1)  Where contractual terms gives one party to a contract the power to exercise a discretion, it is not for the court to make that decision for them, but where the decision would affect the rights and obligations of both parties there is a conflict of interest and the court would seek to ensure that the power is not abused by implying a term in appropriate cases that the power should be exercised not only in good faith but also without being arbitrary, capricious or irrational in the sense in which that term is used when revising the decisions of public authorities.

(2)  Such a decision could be impugned where (i) it is one that no reasonable decision-maker could have reached, or (ii) where the decision-making process has failed to exclude extraneous considerations or take account of all obviously relevant ones.

64.  Although such implied limits on contractual discretion first originated in employment cases (in particular those concerning the grant of performance bonuses), they are not so confined, and have been applied in other circumstances, including leases: eg Waaler v Hounslow London Borough Council [2017] 1 WLR 2817. I do not accept Ms Lok’s attempts to distinguish such cases, or her contention that the Braganza principle has no application to government leases. I find that the Braganza principle does apply in the present case to the Director’s exercise of discretion.

65.  The next issue to consider is whether the Plaintiff can discharge its burden of showing that the Government has waived compliance with the consent clause, such that the School Building should be the appropriate one for computing the “before” value.

66.  The Plaintiff relies on the following to support its contention of waiver of compliance:-

(1)  the existence and visibility of the Second Building and the School Building;

(2)  the 1998, 1999 and 2002 Planning Applications;

(3)  the A&A application in 1999 (paragraph 27 above); and

(4)  the long time elapsed since the Second Building and the School Building stood on the Lot.

67.  Whilst I bear in mind the reminder from Attorney General of Hong Kong v Fairfax Ltd [1997] 1 WLR 149 that concrete proof of the Government’s knowledge and attitude is not easy to find and the court should look at the larger picture, I do not consider the Plaintiff has discharged its burden to show waiver of compliance in this case.

(1)  Although the Second Building appeared to have been erected since 1945, it is pertinent to note that (i) it remained a two-storey building; (ii) although its footprint had increase by the addition of a rectangular wing to make it into a L-shape building, there is no evidence to suggest that houses in the Estate were all in rectangular shape only and a L-shape house would have been obvious and visible as an anomaly; (iii) the Lands Department documents show that in the late 1940s and early 1950s (cumulating in the Executive Council decision in 1955), the particular issues concerning lease enforcement in the Estate that occupied the attention of the Director were converting houses into blocks of flats and building extra houses; those were clearly very visible from the outside. I therefore do not consider that the mere fact that the Second Building was in L-shape would in the circumstances have indicated to the Lands Department staff that there was a breach of the consent clause.

(2)  The same applies to the School Building, which was (i) a slight enlargement of the already existing L-shape Second Building; (ii) according to the 1998 Planning Application, the result of renovation works which did not involve any new building.

(3)  As to the 1998, 1999 and 2002 Planning Applications, only the 1999 and 2002 Planning Applications were successful, those were approvals granted by the Town Planning Board (and not the Director), and the approval letters were expressly subject to the caveat set out in paragraph 26 above.

(4)  As for the A&A application in 1999, it was in fact rejected by the Director (paragraph 27 above). I do not consider the “One House” restriction cited by the Director on that occasion to refer to the consent clause; based on the Practice Notes issued by the Lands Department in evidence (even though they related to period after 1999), I infer that the “One House” restriction relates to the existence of multiple entrances observable from the plans for the School Building, which might cause the Lands Department not to accept the School Building to be “one house” under the prevailing understanding at the time. Nevertheless, the A&A application would not have on its face suggested to the Lands Department that the building in question had been rebuilt; I therefore do not consider knowledge of breach of the consent clause could be attributed to the Director by such application.

(5)  On the contrary, the first time the general building plans for the Current Building were brought to the attention of the Director (indicating there was a demolition and rebuilding), the Director immediately stated that consent would be required; and that position remained the same throughout.

G.  CONCLUSION

68.  To conclude, I reject the Plaintiff’s case with respect to the first, second and third grounds. Accordingly I decline to make any of the declarations sought in paragraphs 1 to 3 of the originating summons.

69.  As to costs, I make an order nisi with respect to the costs of the originating summons (including the costs directed in paragraph 43 above) in favour of the Defendant.