J & F GARMENTS FACTORY LTD v. 虛境世界有限公司

LDPE 393/2019

[2019] HKLdT 36

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 393 OF 2019

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J U D G M E N T

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Background

1.  The applicant is the owner of Workshop 6C, 6^th Floor (of Block A), Hong Kong Industrial Centre, No 489-491 Castle Peak Road, Kowloon (“the Premises”).

2.  By a tenancy agreement dated 22 June 2018 (“the Tenancy Agreement”), the Premises was leased to the respondent for the period from 1 July 2018 to 30 June 2020 at a rental of $14,200 per month (inclusive of government rent, rates and management fee).

3.  Clause 3 of the Tenancy Agreement specifies that the Premises “shall be used for Industrial purpose”.

4.  On 15 April 2019, the applicant applied to the Tribunal for recovery of possession of the Premises on the ground that the respondent has breached the above clause conducting a pornographic video centre. It also revealed that on 3 October 2018, the applicant, through its solicitors,  Messrs Au-Yeung, Cheng, Ho & Tin, sent a letter to the respondent alleging that the respondent was “in breach of the terms and conditions of the Tenancy Agreement dated 22^nd June 2018 ... by using the Property for non-industrial use. You are hereby given notice that the said Tenancy Agreement has been terminated and you are require (sic) to yield up the Property to our client within 14 days from the date hereof.” (“the solicitors’ letter”)

5.  Webpress coverage on 11 April 2019 also revealed that the Premises have been installed with a number of VR AV machines inside 9 cubicles for private watching and entertainment at a minimum of $250 per hour[1].

6.  Notwithstanding the above, the respondent filed a Notice of Opposition dated 25 April 2019 denying any breach, stating that the Premises are only occupied for altering, processing VR machines and for the storage of their accessories before sale:

「(1) 本公司於租用之單位作工業用途， 主要業務為虛擬實境一體機 簡稱： VR一體機）及其配件之更改、加工、出售前的改裝及再包裝轉售。 單位內其中部份地方為貨倉。 因應VR一體機乃高科技之新技術， 客人可於入貨前到本公司試機及試玩體驗。

(2) VR一體機內包含多種類的遊戲及影片， 例如戰爭、運動、競速、愛情等。 其中部份亦涉及敏感內容， 本司有於門口及當眼地方貼上 「未滿十八歲人士， 禁止內進」 及完整十八禁告示。

(3) 業主與本司簽訂了兩年租約， 但租約生效不足一個月， 業主便開始以口頭及發律師信的形式， 聲稱本司違反租約 ......」

Inspection on 9 May 2019

7.  At the beginning of the hearing on 9 May 2019, Ms Shek Sau Chun Sandra (“Ms Shek”) acting on behalf of the applicant conceded that apart from the solicitors’ letter, no other warning letter had ever been sent to the respondent. Indeed, Ms Shek submitted that the applicant received from the respondent’s solicitors’ letter dated 16 October 2018 denying that the respondent had breached any of the terms or conditions of the Tenancy Agreement, following which the applicant took no further action but continued to collect rent from the respondents.

8.  Ms Shek supplemented however a letter from the Lands Department dated 20 February 2019 which stated that “portions of the Workshop A6” (of which the Premises form part) “are being used for non-industrial purposes”, breaching the Government lease conditions. Following this letter, another letter dated 16 April 2019 from the Lands Department stated that the breach of Government lease condition had not been remedied.

9.  Notwithstanding the above, Mr Ng Ka Wang (“Mr Ng”) of the respondent maintained that the respondent had not breached any of the terms or conditions of the Tenancy Agreement.

10.  In view of the dispute on the change of use, a joint inspection was carried out after the hearing on 9 May 2019. There I found a reception counter besides which is a long corridor with a total of 9 cubicles, each about 15 sq ft on both sides. At the end of the corridor is a glass shelf with a toilet behind. This matches what has been reported by the webpress[2]. Save from one cubicle which is occupied for storage purposes, each of the other cubicles has a big sofa inside. There is no sign of any manufacturing process.

11.  According to Mr Ng, the cubicles are reserved for private VR experience of the use of a head gadget “VR一體機” which can be for sale. On the contrary, there will be a charge for the experience[3].

12.  In Raider Ltd v Secretary for Justice [2000] 3 HKLRD 300, (2000) 3 HKCFAR 309, the appellant used part of the premises concerned to manufacture pagers and another part to operate a paging service. Approximately 13% of the total area of the premises concerned was used for the appellant’s paging service. At issue, was whether its use, in operating a pager service, was something beyond the permitted user of the lot. On appeal to the Court of Final Appeal, the appellant argued, inter alia, that it was entitled to carry on any trade on the premises provided that the paging service was the final stage of, or ancillary to , the pager manufacturing process, or that it was so closely linked as to be regarded as use for an industrial purpose. Dismissing the appeal, the Court of Final Appeal held that “the word “industrial” as used in special condition 2(a) refers to the sort of activities which are carried on in a factory.” It then relied on the definition of “factory” in the Factories and industrial Undertakings Ordinance, Cap 59 which provides that factory:

"… means any premises or place, (other than a mine or quarry), in which articles are manufactured, altered, cleansed, repaired, ornamented, finished, adapted for sale, broken up or demolished or in which materials are transformed, and within the close or curtilage or precincts of which —

(a) any machinery other than machinery worked entirely by hand is used; or

(b) 20 or more persons are employed in manual labour."

13.  The Court of Final Appeal was of the view that whilst research design and testing prior to the process by which articles were actually made and then inspected were properly to be regarded as ancillary to the industrial process, as were the packing and dispatch from the factory of articles after they had been made and inspected, the paging service did not pertain to any of that. It was an activity distinct from manufacture and was not ancillary thereto. Further, the link between the paging service and the process by which the pagers were manufactured could not be considered so close as to render the paging service itself “industrial” within the meaning of special condition 2(a) unless such service was the final stage of that manufacturing process or at least ancillary to it.

14.  In the present case, neither am I persuaded that the activities being conducted by the respondent is ancillary or closely linked to a manufacturing process and therefore, industrial in the manufacturing sense.

15.  In Mexx Consolidated (Far East) Ltd v Attorney General [1987] HKLR 1210, at p1219A-C, Deputy Judge Cruden said:

"... I accept that the primary user of the premises must be for industrial purposes, before compliance with the user covenant can be achieved. I accept that if the research and development work carried out at the premises is considered in isolation, some parts of that work could equally well be carried out in non-industrial premises such as commercial offices. But I am satisfied that it is an entirely wrong approach to consider those, or any elements of the plaintiff's overall activities, in isolation. All of the plaintiff's activities within the suit premises must be considered as a whole. Where it is technically possible to break down those activities into separate elements, it is still their cumulative effect and not their individual characteristics, which is more important.

When this broader approach is adopted, it is clear that the research, design and testing functions are merely successive stages in one continuous industrial process, resulting in the creation of manufactured garments, which are finally packed and exported overseas from the suit premises."

16.  Deputy Judge Cruden’s judgment above was referred to and approved by the Court of Final Appeal in Raider: “Research, design, testing, making, inspection, packing and despatch form a chain of activities pertaining to bringing the articles into existence, seeing that they are fit to be supplied to customers and getting them to customers.” Having inspected the Premises, I am not convinced that the primary user of the Premises is for industrial purposes.

Section 58 Notice

17.  Under section 58(1) of the Conveyancing and Property Ordinance, Cap 219 (“the CPO”),

“A right of re-entry or forfeiture under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice—

(a) specifying the particular breach complained of; and

(b) if the breach is capable of remedy, requiring the lessee to remedy the breach; and

(c) specifying the compensation, if any, which the lessor requires in respect of the breach,

and the lessee fails, within a reasonable time thereafter, to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach.” (“the section 58 notice”)

18.  Despite the applicant claimed in the Notice of Application (Form 22) that it had served a warning letter (已發警告信) to the respondent, the solicitors’ letter failed to require the respondent to remedy the breach (if any) within a reasonable time. The applicant should have notified of its proposed application for forfeiture of the Tenancy Agreement and of its reasons for having concluded that the breach was otherwise irremediable and that therefore there was no need for it to serve a notice to remedy.

19.  The challenge is, of course, to identify the nature of a breach which, in the context of the section 58 notice, is capable of remedy. The only jurisprudence which affords assistance relates to the interpretation of the clause in section 146(1) of the Law of Property Act 1925 of England and Wales (“the 1925 Act”) that "if the breach is capable of remedy…". Section 146(1) of the 1925 Act contains exactly the same wordings as section 58(1) of the Conveyancing and Property Ordinance and I see no difficulty in borrowing from it.

20.  In Savva v Hussein (1996) 73 P & CR 150 the breaches by the lessee were of negative covenants not to change the exterior sign and not to alter the premises without consent. The Court of Appeal held that the breaches were remediable. The answer to the question whether a breach is remediable was stated to be found by a practical inquiry whether and if so how the mischief can be redressed: per Lord Wilson JSC in Wickland (Holdings) Ltd v Telchadder [2014] UKSC 57, [2014] 1 WLR 4004 at para 31 following the suggestion of Neuberger LJ (as he then was) in Akici v LR Butlin Ltd [2006] 1 WLR 201 that the proper approach to the remediability of a breach should be practical rather than technical. Also, Neuberger LJ conjectured at §65 of Akici that the great majority of breaches of covenant should be capable of remedy.

21.  On the other hand, in Rugby School (Governors) v Tannahill [1935] I QB 87, the school owned a property which, in breach of her covenant not to do so, its lessee allowed to be used as a brothel. Although the lessee had closed the brothel, the English Court of Appeal held that the stigma attaching to the property and the resultant loss of value rendered the breach irremediable (Greer LJ, p 91) or, at least, irremediable within a reasonable time (Maugham LJ, pp 93-94).

22.  This is later affirmed by O'Connor LJ in the Expert Clothing Service and Sales Ltd v Hillgate House Ltd [1986] Ch 340, at p 362:

"To stop doing what is forbidden by a negative covenant may or may not remedy the breach even if accompanied by compensation in money. Thus to remove the window boxes and pay for the repair of any damage done will remedy the breach, but to stop using the house as a brothel will not, because the taint lingers on and will not dissipate within a reasonable time."

23.  And in Wickland (Holdings) Ltd v Telchadder, supra, the majority of the United Kingdom Supreme Court were of the view that the general requirement for a notice to remedy cannot sensibly be understood as carrying with it the implication that every breach, however grave, must be treated by the court as remediable.

24.  Whereas the general approach has not changed materially, at least since the Rugby School case in 1935, the result of the narrowing of categories of breach regarded as incapable of remedy is conveniently summarised in Woodfall: Landlord and Tenant para 17.132.1, after referring to the "stigma" cases:

“Until recently it was assumed that breach of a covenant against carrying out alterations without consent was also irremediable. However, the position appears to have changed. The test is now one of fact and degree as to whether in reality the mischief can be remedied. Similarly, it now appears that parting with or sharing possession, at least where it falls short of creating or transferring a legal interest, is a remediable breach.

In addition, the following breaches have been held to be incapable of remedy:

1. running catering premises contrary to the licensing laws in breach of a covenant to conduct them according to those laws[4];

2. contravening the Food and Drugs Act resulting in 14 convictions;

3. assigning the lease without the landlord's consent;

4. sub-letting the premises or part thereof;

5. using the property for the sale of obscene material;

6. using the premises for espionage resulting in convictions under the Official Secrets Act."

(The references to all but the last of the six examples are from cases decided before 1983.)

25.  Notwithstanding the above, I consider the non-industrial use is capable of remedy. Since the solicitors’ letter sent on 3 October 2018 failed to provide the same, it was not a valid notice and the applicant had failed to satisfy the requirement under Section 58 of the CPO.

Conclusion

26.  Since the applicant had failed to serve any valid section 58 notice on the respondent, no cause of action for forfeiture of the Tenancy Agreement has been accrued and this application must be dismissed.

Costs

27.  Costs order nisi that there be no order as to costs.  Unless any of the parties applies by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.