KUNG MING TAK TONG CO LTD v. PARK SOLID ENTERPRISES LTD AND ANOTHER

FACV No. 1 of 2008

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 1 OF 2008 (Civil)

(ON APPEAL FROM CACV No. 227 of 2005)

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Dates of Hearing:  7 – 11 July 2008

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J U D G M E N T

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Chief Justice Li:

1.  This is the judgment of the Court to which all of its members have contributed.

2.  This appeal raises questions concerning the rights and obligations of co-owners of property in a multi-storey building.  It falls to be determined whether and to what extent rights in the nature of easements or “quasi-easements” arise and whether the rule against derogation from grant applies in the present case.

A.    The dispute

3.  The dispute can shortly be described as follows. 

(a) It concerns properties in Fou Wah Centre in Tsuen Wan, a 23-storey building consisting of a 19-storey residential tower resting on a four-storey commercial podium (on the ground to third floors). 

(b) The appellant owns (to put it non-technically) a shop known as “Shop 2B” on the first floor as well as the entire second and third floors, having purchased those properties from the 1^st respondent  in early 2000.  They were bought subject to existing tenancies and Shop 2B is physically divided into two separately let portions, referred to as Shops 2B-A and 2B-B.  This appeal is concerned with Shop 2B-B and the second and third floors.

(c) The 1st respondent retained parts of the building, including a passageway on the first floor referred to as the “Entrance Lobby”.  It provides the most direct access into the commercial podium at first floor level for pedestrians using an external elevated public walkway connecting Fou Wah Centre with the Mass Transit Railway station at Tsuen Wan.  The Entrance Lobby leads to a staircase which goes up to the second and third floors where tenants operate two restaurants and a bookshop.

(d) Shop 2B-B is and has since 1998 been let to a tenant called Tin Tin Vegetarian Food Co Ltd (“Tin Tin”).  It is a small shop, long and narrow in shape.  Its longer side (measuring some 13 feet 3 inches in length) fronts the Entrance Lobby and is lined with display cabinets which serve as a counter over which food and drinks are sold to passers-by.  Its narrow side is only about 19 inches wide, opening onto the external pedestrian walkway and used as the entrance through which staff enter the shop.

(e) On 12 March 2001, the 1st respondent sold the Entrance Lobby to the 2^nd respondent.   Although the substance of this transaction was “hotly contested” at the trial before Madam Recorder J Leong SC,[1] nothing now turns on this sale, it being accepted that the respondents are to be treated as if they were the same person for the purposes of this appeal.

(f) On 26 April 2001 the appellant was informed that the respondents were about to put up a new shop which would occupy a large part of the Entrance Lobby and would abut upon and entirely block off Tin Tin’s shop counter.  A much narrower Entrance Lobby would continue to allow pedestrians to enter the commercial podium from the external walkway.  Alarmed at the effect this would have upon Shop 2B-B and at the possible effect on access via the staircase to the second and third floors, the appellant commenced the present proceedings and obtained interlocutory injunctions against the respondents proceeding with erection of the new shop.

(g) In the course of the trial the Recorder conducted a site visit and found that Shop 2B-B “is able to operate as a shop only because one side ... measuring over 13 feet in length is open to the [Entrance Lobby] forming a counter from which food is sold to customers standing in the[Entrance Lobby]”.[2] 

B.  The issues and the decisions of the courts below

4.  The appellant argues that upon purchase of the properties it became entitled by implication to a right of way as a legal easement or as a “quasi-easement” (in the sense explained below) over the Entrance Lobby for the benefit of Shop 2B-B as well as of the second and third floors, making it unlawful for the respondents to erect the proposed shop in the Entrance Lobby.  This argument was rejected both by the Recorder[3] and by the Court of Appeal.[4]  It was decided that since the parties hold their interests as tenants in common, the dominant and servient tenements necessary for the creation of an easement or quasi-easement cannot and do not exist.

5.  The appellant’s alternative argument was that the threatened blocking off by the respondents of Shop 2B-B would constitute a derogation from grant which ought to be restrained.  It also failed.  The Recorder thought that having rejected the implication of an easement, the issue of derogation did not arise.[5]  The Court of Appeal rejected the derogation argument on the basis that the respondents’ intended course of action would not render Shop 2B-B unfit or materially less fit for the purpose for which the grant was made.[6]

6.  These remain the principal arguments urged by the appellant.  Certain subsidiary arguments, including one based on section 16(1) of the Conveyancing and Property Ordinance[7] (“CPO”) do not require separate treatment.

C. The rights conveyed and acquired

7.  It is necessary to look more closely at the conveyancing background to the dispute.  The property upon which Fou Wah Centre stands is registered as Tsuen Wan Town Lot No 233.  It was granted to Fou Wah Weaving Mills Limited, the original developer (“the developer”), by a Crown Lease dated 14 June 1974 (which we shall call “the government lease”).  That lease was varied by a Modification Letterdated 3 March 1977 which inserted two special conditions of relevance.  Special condition 3(c), to which we shall return, restricted the manner in which the developer could assign away or part with possession of interests in the lot; and sc 5(h)(i) required the developer to construct the elevated pedestrian walkway encircling the building at first floor level and linking it to the MTR station, previously mentioned.

8.  By March 1978, the developer was in a position to sell off units in the property.  In accordance with the usual Hong Kong practice, the property was notionally divided into 9,700 equal undivided parts or shares and particular parts of the building were allotted to specified parcels of such shares.  As stipulated in the deed of mutual covenant dated 7 March 1978 (“the DMC”), the first floor was allotted to a parcel of 1,320/9,700 shares and the second and third floors were each allotted to parcels of 720/9,700 shares.  The rest of the undivided shares had allotted to them the ground floor and units in the residential tower.  Such residential units were sold to purchasers by assigning to them specified parcels of undivided shares together with “the right to exclusive use and enjoyment” of the unit in question, subject to and with the benefit of the DMC.  The developer initially retained all rights in the commercial podium.

9.  Until 1990, the Entrance Lobby did not exist.  It was only in that year that it was created out of what had been a shop space.  At that stage, it belonged, along with the rest of the commercial podium, to the developer.

10.  Parts of the podium were leased by the developer to tenants.  The tenancies presently relevant were granted in 1996 and 1997 to Joint Publishing (Hong Kong) Co Ltd (“Joint Publishing”) over the third floor for use as a bookshop; and to Fairwood Fast Food Limited (“Fairwood”) and Jardine, Matheson & Co Ltd (“Jardine”) for each of them to operate a restaurant on the second floor. 

11.  In 1997 the 1st respondent purchased the entire commercial podium from the developer with the intention of immediately on-selling certain shop units on the first floor to individual purchasers.  To cater for such on-sales, the newly partitioned spaces in the podium were allotted to defined parcels of undivided shares under a sub-deed of mutual covenant (“the Sub-DMC”).  The second and third floors each continued to be allotted to parcels of 720/9,700 shares, while Shop 2B and the Entrance Lobby were allotted to parcels of 65/9,700 and 26/9,700 shares respectively.

12.  The 1^st respondent’s purchase was effected by an assignment dated 27 June 1997, whereby it acquired from the developer 4,153 equal undivided 9,700^th shares in the property together with the exclusive right to hold use occupy and enjoy the whole of the ground, second and third floors of the building as well as portions of the first floor including Shop 2B and the Entrance Lobby, subject to and with the benefit of the DMC and also subject to existing tenancies. 

13.  In early 2000, the appellant acquired its interests in Fou Wah Centre.  By an assignment dated 24 January 2000, for a consideration of $52,000,000.00, the 1st respondent assigned to the appellant 785/9,700 shares in the property “together with the sole and exclusive right and privilege to hold use occupy and enjoy” Shop 2B on the first floor as well as the whole of the third floor, subject to and with the benefit of the DMC and the Sub-DMC and subject to existing tenancies.  By a similar assignment dated 24 February 2000, in consideration of $74,500,000.00, the 1st respondent assigned to the appellant 720/9,700 shares in the property together with exclusive occupation of the whole of the second floor.  As previously noted, the 26/9,700 shares to which rights over the Entrance Lobby had been allotted remained the property of the respondents.

14.  The appellant took over the tenancies which the 1st respondent had in the meantime renewed in favour of Joint Publishing, Fairwood and Jardine.  It also took over the tenancy which the 1st respondent had granted to Tin Tin over Shop 2B-B in 1998.

15.  One further transaction should be mentioned.  CLP Power Hong Kong Limited (“CLP”) purchased (to use shorthand) certain ground floor shops from the 1st respondent on 28 February 2001.  As the Entrance Lobby was not part of the common area but reserved for the 1st respondent’s exclusive use and occupation, CLP took the precaution of securing “a right of way” over part of the Entrance Lobby for persons seeking access to its premises.  This was done by a Deed dated 28 February 2001 (“the CLP Deed”) whereby the 1st respondent granted to CLP, its successors in title, its employees, customers, etc, the right to use a strip over the Entrance Lobby marked out on a plan for all purposes connected with the use and enjoyment of CLP’s property:

“... as a right of way and an easement appurtenant to [CLP’s] Property unto [CLP] absolutely for the residue of the term of years created by [the government lease]...”

The shop which the respondents were proposing to erect would leave the strip over the Entrance Lobby referred to in the CLP Deed unobstructed to permit access into the podium.

16.  The result of these transactions is that the appellant and respondents are tenants in common of the property.  The appellant holds the parcels of undivided shares to which have been allotted exclusive use and occupation of Shop 2B and the whole of the second and third floors, while the respondents hold the undivided shares allotted the exclusive use and occupation of the Entrance Lobby.  The first argument mounted by the appellant is that these rights of exclusive use and occupation are legal interests in land constituting Shop 2B and the second and third floors the dominant tenements and the Entrance Lobby the servient tenement, entitling the appellant to a right of way as a legal easement over the Entrance Lobby.

D.    The Hong Kong system of dealing with multi-storey buildings in multi-occupation

17.  The conveyancing techniques adopted in the present case reflect the usual Hong Kong practice for dealing with the ownership of units in multi-storey buildings in multiple occupation.  The system has been described in the textbooks[8] and is unique in the common law world.

18.  The first of the system’s main features is that persons owning interests in the property hold as legal tenants in common.  All land in Hong Kong is held on a government lease (referred to as a Crown lease before 1 July 1997).  The developer of the land, often the original government lessee, notionally divides such leasehold property into a specified number of equal undivided shares and allots exclusive rights of occupation over particular units or parts of the building to stated parcels of those undivided shares.  Individual owners acquire their interest by taking an assignment of undivided shares, making them tenants in common with other owners who do likewise.  It has been suggested that this approach – as opposed, for instance, to the creation of a series of sub-leases – was adopted to cater “for the desire of individuals to ‘own’ their own property as opposed to merely being a tenant of a landlord...”[9] 

19.  As Lord Hoffmann NPJ pointed out in Jumbo King Ltd v Faithful Properties Ltd, [10] merely taking an assignment of undivided shares without more, would entitle each to the use and possession of the whole building by virtue of their co-ownership of the property as tenants in common.   But naturally purchasers want to have exclusive use and occupation of their own unit, whether it be a flat or a shop, to the exclusion of their fellow co-owners.  This gives rise to the second principal feature of the Hong Kong system whereby individual owners execute a deed of mutual covenant (“DMC”) regulating by contract their rights inter se regarding the exclusive use and occupation of the units allotted to their respective parcels of undivided shares, their use of the common parts of the building, as well as their mutual obligations on such matters as management charges.  The operation of such covenants is underpinned by statutory provisions which ensure, among other things, that the burden of positive covenants can run with the land[11] and that such covenants may operate notwithstanding the absence of dominant and servient tenements.[12]

20.  Over the years, the form of the DMC has increasingly become standardised.  By the DMC in the present case each owner is granted “the exclusive use occupation and enjoyment and the rents and profits” of his unit and the right “without reference to the other owners and without the necessity of making them parties thereto to sell mortgage or otherwise dispose of his part of the Building and his share in the premises….. and to let or demise his part of the Building to any tenant or lessee”.  For all practical purposes, therefore, the owner of undivided shares to which a unit has been allotted is able, by virtue of the DMC, to exercise rights in relation to the property as if he was its absolute owner.

E.  Easements as between co-owners holding under the Hong Kong system

E.1 The basis of the decisions below

21.   It is against this background that the view has generally come to be held that the Hong Kong system does not permit the creation of easements as between co-owners.[13]  The courts below considered themselves bound on this point by the decision of the Court of Appeal in Chiu Shu-choi v Merrilong Dyeing Works Ltd,[14] in which Cons JA stated:

“The plaintiff and the defendant company do not have ownership of the eighth and the ninth floors as such; they have each an equal undivided tenth part or share in the land and the building as a whole, the result of conveyancing practice which has long been adopted with regard to multi-storeyed buildings in Hong Kong. It is well established that an owner cannot have an easement over his own land, so that any rights which the plaintiff may now have in this instance must be put upon some other basis.”

22.  In Sky Heart Ltd v Lee Hysan Co Ltd,[15] which was concerned with restrictive covenants, Lord Hoffmann NPJ said that the occupants of units in the building “do not own separate tenements. Each is owner of an undivided share in the whole building.”  And in Jumbo King Ltd v Faithful Properties Ltd,[16] where he was describing rights expressly granted by a DMC over the common parts, his Lordship stated:

“One could call these rights quasi-easements because one cannot have a real easement over one’s own property. But for practical purposes they were easements:” (Our emphasis)

23.  In a thorough and scholarly argument these statements were challenged by counsel for the appellant who submitted that the rights for which he contended, which were over an adjoining unit and not over the common parts, were real easements and not merely quasi-easements (in the sense used by Lord Hoffmann).  He pointed out that the same person must not only own both tenements but also occupy both of them before the existence of an easement is rendered impossible – a proposition which is plainly correct.[17]  But judges of the eminence of Cons JA and Lord Hoffmann can hardly have overlooked this elementary principle; their observations must have rested on an unstated premise, viz that the separate units in a multi-storey building in Hong Kong are not legally in different occupation.

E.2  Does the DMC create separate tenements capable of supporting legal easements?

24.  The aforesaid proposition, namely, that units in our multi-storey buildings are not separate tenements in different occupation, was also challenged by counsel for the appellant.  While he accepted that as an assignee of undivided shares in the property, each owner is prima facie entitled to possession of the entire building in common with all the other owners, he argued that the legal analysis cannot stop there.  He relied on the language of the DMC and the Sub-DMC by which each owner has the exclusive use occupation and enjoyment and the rents and profits of his unit.  Exclusive rights of occupation, he said, and the right to the rents and profits constitute exclusive possession and are distinguishing features of a legal estate in land.  He contended therefore that the DMC took effect as a grant of such a proprietary interest to each of the co-owners who thereby acquired tenements capable of supporting real legal easements.

25.  Although we are satisfied that the question whether the rights contended for in the present case are easements properly so called or only “quasi-easements” is not determinative of this appeal, we propose to take this opportunity to decide it, partly out of deference to the  arguments which have been presented to us, and partly from the need to remove any doubt as to the legal basis of the system of conveyancing which has long been adopted for multi-storey buildings in Hong Kong.

26.  The argument for the appellant starts from the proposition that under English law each co-owner is (or more accurately was before legal tenancy in common of land was abolished by the Law of Property Act 1925) free to alienate his undivided share, either to his co-owners or some of them or to a stranger.[18]  Thus if A, B and C were tenants in common of land in equal one third shares, A could convey his one third share to D, making B, C and D tenants in common in equal one third shares; or to B and C, making them tenants in common in equal one half shares; or A and B could convey their one third shares to C, making him the sole owner with the right to exclusive possession of the whole. 

27.  From this starting point, we were invited to treat the DMC as constituting a grant by all the other co-owners acting collectively to each of them of the exclusive right to possession and occupation of his unit. Although,  acting individually, each co-owner could not make a grant of exclusive possession, being himself only entitled to share possession of the whole building with all the others, exclusive possession could be granted if all the co-owners acted collectively.  We were invited to say that such a collective grant is what the parties must be taken to have intended in executing the DMC and Sub-DMC.  It follows, so the argument ran, that adjoining units are separate tenements in the occupation or possession of different parties and the easements contended for are true easements and not merely “quasi-easements”. 

28.  We are unable to accept that argument.  The DMC has never been read by practitioners in Hong Kong in this way.  It has always been understood as a secondary document regulating the reciprocal rights of the co-owners to the enjoyment of the building by means (as its name indicates) of mutual  covenants.  While it is possible to find ambiguous language in some judgments, the authorities are plainly against regarding the DMC as effecting a grant of exclusive possession as an interest in land. 

29.  Thus, in Lai Wing-ho v Chan Siu-fong,[19] Godfrey J (as he then was) emphasised the unity of possession enjoyed by co-owners and expressed himself strongly against the notion that co-owners could make a grant of exclusive possession over any particular part of the building:

“The solution many years ago found, in Hong Kong, to the problems created by the wishes of prospective purchasers to become owners of units in multi-storey buildings lay in turning to advantage the concept of the tenancy in common which has for centuries formed part of English land law.  But co-ownership in English land law (of which tenancy in common is one type) has a number of essential characteristics, among which is unity of possession.  Each co-owner is as much entitled to possession of every part of the property as each of his other co-owners. ‘Their occupation is individed, and neither of them knoweth his part in severall’ : see Coke on Littleton, s 292, at p 189b.  No doubt in practice, the provisions of the deed of mutual covenant would be construed so as to preclude any co-owner claiming under it to complain of an agreement in respect of the taking of exclusive possession of part of the building by a person expressed to be granted that right.  In theory, however, it is impossible for the co-owner's rights to possession of the whole to be limited in any way; for such limitation would be repugnant to the nature of his co-ownership.”

His Lordship continued:[20]

“The result is that while a tenant in common can assign his interest in the premises, ie, his shares which he holds in co-ownership, he cannot create, or convey, or assign any right to exclusive possession of part only of the premises, being a right capable of subsisting as a legal estate in land and binding on his co-owners as well as himself.”  (Our italics)

30.  When Jumbo King was in the Court of Appeal, Godfrey JA cited his aforesaid decision in support of a part of his judgment although, somewhat puzzlingly, he stated at the same time that:

“A right to such exclusive use (as an interest in land) can be created only as an incident to the ownership of an undivided share in the land.”[21]

31.  It is unlikely that his Lordship was intending to depart from the view he had earlier expressed, especially since in the same case, Rogers JA also cited Lai Wing-ho v Chan Siu-fong and forcefully reiterated the view (without dissent on the part of Godfrey JA) that exclusive possession was a matter of mutual covenant and did not involve the grant of an interest in land:

“Without a deed of mutual covenant, each co-owner of the property, that is those who hold undivided shares, would be entitled to the full use and enjoyment of the whole property.  The deed of mutual covenant governs the rights of the co-owners amongst themselves and regulates, amongst other things, the portions of the property in respect of which each owner would have the exclusive right of enjoyment.  That exclusive right of enjoyment cannot be assigned on its own, but it has to be assigned together with a part interest in the legal estate.  This point was discussed in Lai Wing Ho and Another v Chan Siu Fong [1993] 1 HKLR 319 ... It was pointed out that a co-owner could not create or carve out a right of exclusive possession so as to bind the other co-owners and assign it separately. The reason for that is quite simply that the right of exclusive possession of any part of the premises could only arise out of the deed of mutual covenant.”[22] (Our emphasis)

Mortimer VP, the other member of the Court, obviously did not consider his brethren to be differing from one another, stating: “On the ‘undivided shares’ point, I agree with [both] those judgments.”[23]

32.  When Jumbo King came to be decided in this Court, Mr Justice Litton PJ, apparently echoing what Godfrey JA had said in the Court of Appeal, stated:

“In relation to a multi-storied building there cannot be a proprietary right to the exclusive possession of part of the building except as an incident of common ownership in the land and building. ... Any person who acquires an undivided share can acquire the exclusive user of any space in the building and exercise proprietary rights over such space.”[24]  (Italics in the original)

However, a little later his Lordship put the right to exclusive user on the basis of the DMC and confined the co-owner’s proprietary rights to his right to an undivided share in the land:

“... the proprietary right of a co-owner in a multi-storied building is the right to an undivided share in the land and building: prima facie the owner is entitled to exert rights of possession to every part of the building, in common with his co-owners.  This is what is meant by the expression ‘unity of possession’.  But by the deed of assignment and by the DMC the rights of exclusive possession to individual parts are marked out as between the co-owners.” [25]

33.  Lord Hoffmann dealt directly with this point.  Counsel had sought to argue that the DMC should be construed against the original developer since it ought to be regarded as a grant and therefore as requiring a high degree of clarity from a grantor desiring to reserve something out of his grant.  Lord Hoffmann rejected that argument on the basis that the DMC did not involve any grant:

“I have some doubt about whether the principle for construing reservations applies to a DMC.  The grant is the assignment of the undivided share.  The DMC is, as its name says, mutual.  The parties contract as covenantor and covenantee and do not reserve anything.”[26]

34.  It is accordingly our view that the apparent grant by the DMC to the occupier of a unit of the exclusive use occupation and enjoyment of his unit is properly regarded as a separate contractual undertaking by every other co-owner not to exercise the rights of occupation and enjoyment which he would otherwise be able to do as co-owner over units other than his own.  It does not result in the creation of separate tenements capable of sustaining a legal easement.

E.3  Do the original and subsequent assignments grant exclusive possession of each unit as an interest in land to each co-owner?

35.  While counsel for the appellant, in advancing the foregoing argument, relied almost exclusively on the language of the DMC it is plain that a related argument could be made on the basis of the language of the deed of assignment.  As previously noted, in this as in most cases, the assignment is of the relevant undivided shares “together with the sole and exclusive right and privilege to hold use occupy and enjoy” the unit in question (subject to and with the benefit of the mutual covenants in the DMC).  Does not such language in the original deed of assignment and in successive assignments in like terms operate as a grant to each purchaser of exclusive possession of his unit as an interest in land? 

36.  In our view, the answer is in the negative.  The undivided shares in the property are the subject-matter of the assignment.  Their assignment immediately results in the assignor and the assignee becoming co-owners of the property with unity of possession, subject to and with the benefit of the DMC which is executed at the same time.  The apparent grant of exclusive possession is generally (and in our view correctly) read as a reference to the product – purely as a matter of contract – of the mutual covenants simultaneously being entered into, rather than of any proprietary grant under the deed of assignment.  To read such language otherwise would produce an unresolved tension between granting undivided shares in the property carrying the right to possession over all the building in common with all other co-owners on the one hand, and granting exclusive possession over one unit as an interest in land on the other.  It is of course possible that in a particular case, the co-owners may wish to make a collective grant of exclusive possession over a specific part of the building but such an intention cannot be ascribed to purchasers of undivided shares in general.  Indeed, ascribing such an intention to them makes the whole system of co-ownership otiose.

37.  Another reason for declining to read the deed of assignment as granting exclusive possession in a unit as an interest in land can be found in the terms of the Modification Letter mentioned in Section C above.  It materially provides that even after the general and special conditions of the government lease have been satisfied:

“... the grantee shall not assign, mortgage, charge, underlet or part with the possession of or otherwise dispose of the lot or any part thereof or any interest therein or enter into any agreement to do so except by way of the assignment or other disposal of undivided shares in the whole of the lot, but not part of the lot, together with the right to the exclusive use and occupation of individual floors or units in any building ... erected thereon ...”

38.  There was no evidence as to how widespread use of such a term is although counsel and solicitors on both sides suggested that its use became frequent in the 1980’s and 1990’s.  We would emphasise that our decision would not be different if no such term were applicable.  Nevertheless, it provides an additional reason for not reading the deed of assignment as effecting an assignment of exclusive possession of a unit as an interest in land since that would involve parting with possession otherwise than by way of assigning undivided shares in the whole property, in breach of the government lease.

39.  Accordingly we are of opinion that the units in a multi-storey building in Hong Kong, held under the system of co-ownership, are not separate tenements, and that rights granted over one unit in favour of the owner or occupier of another are not easements properly so called.

F.  Quasi-easements arising between co-owners in Hong Kong

F.1  The first sense in which the term “quasi-easement” is used

40.  Notwithstanding the absence of separate tenements, it is undoubtedly the practice for co-owners of multi-storey buildings in Hong Kong to deal with each other as if their mutually covenanted rights to the exclusive occupation of individual units were rights of property enjoyed by absolute owners.  Thus, conveyancers routinely (as in the present case) refer in the DMC to co-owners having the right without reference to other owners:

“to sell mortgage or otherwise dispose of his part of the ... building and his share in the said premises together with the benefit of and subject to these presents and to let or demise his part of the ... building to any tenant or lessee [etc] ...”

41.  And the rights of co-owners over the common parts are often described in the DMC as involving “easements” (as in Jumbo King Ltd v Faithful Properties Ltd[27]) even though, as we have noted, the view is generally (correctly) held that real easements do not arise as between such co-owners.  As Lord Hoffmann pointed out in that case,[28] while not real easements, they can be called “quasi-easements” and function for all practical purposes as if they were easements.  Similarly, in the present case, by the CLP Deed , the respondents agreed to CLP’s staff and customers (etc) having access over the Entrance Lobby “as a right of way and an easement appurtenant to the Grantee’s Property”.

42.  In the course of argument, the word “quasi-easement” was used in two different senses.  The first is in the sense just described, that is, as a shorthand description of rights arising between or among co-owners as a matter of express agreement or contractual implication being rights which mirror on a contractual plane the rights which the owner of a dominant tenement would enjoy by way of an easement over a servient tenement.  Thus, for example, the agreement between CLP and the respondents contained in the CLP Deed,  while unable to operate as an express grant of an easement for want of a dominant and a servient tenement, produces contractual rights and duties between the parties to the deed which are functionally the same as those arising under an easement.  We will refer to these as “contractual quasi-easements” to distinguish them from quasi-easements in the second sense.

F.2  “Quasi-easement” used in the Wheeldon v Burrows sense

43.  That second sense of the term is explained in Megarry & Wade[29] as follows:

“Rights habitually exercised by a man over part of his own land which, if the part in question were owned and occupied by another would be easements, are often called quasi-easements.  ... Quasi-easements are of some importance, for they may sometimes become true easements if the land is subsequently sold in separate parcels.”

44.  Since, as we have seen, a person cannot have an easement over his own land,[30] the rights referred to in the passage cited are referred to as “quasi-easements” and not as “real” easements.  However, if and when the land is later divided into separate tenements in different occupation, such quasi-easements become full legal easements taking effect as interests in land for the benefit of one or other of the newly created tenements.  This presupposes, of course, that they involve rights which are of such a character that they are in law capable of being treated as easements.  The contractual quasi-easements discussed above never “ripen” into easements in this way but operate throughout purely on a contractual plane.

45.  Wheeldon v Burrows[31] establishes the legal basis upon which such quasi-easements are recognized and implied into a grant which does not expressly deal with them.  It also establishes a stricter rule which requires the grantor expressly to reserve any rights he may seek to exercise in future over the land granted, subject to narrow exceptions.  The relevant rules were laid down in this well-known passage from the judgment of Thesiger LJ:

“... two propositions may be stated as what I may call the general rules governing cases of this kind. The first of these rules is, that on the grant by the owner of a tenement of part of that tenement as it is then used and enjoyed, there will pass to the grantee all those continuous and apparent easements (by which, of course, I mean quasi easements), or, in other words, all those easements which are necessary to the reasonable enjoyment of the property granted, and which have been and are at the time of the grant used by the owners of the entirety for the benefit of the part granted. The second proposition is that, if the grantor intends to reserve any right over the tenement granted, it is his duty to reserve it expressly in the grant. Those are the general rules governing cases of this kind, but the second of those rules is subject to certain exceptions. One of those exceptions is the well-known exception which attaches to cases of what are called ways of necessity; and I do not dispute for a moment that there may be, and probably are, certain other exceptions, to which I shall refer before I close my observations upon this case.”[32]

46.  An illustration of the implication of an easement under this rule is provided by Maugham J in Borman v Griffith:[33]

“... where, as in the present case, two properties belonging to a single owner and about to be granted are separated by a common road, or where a plainly visible road exists over the one for the apparent use of the other, and that road is necessary for the reasonable enjoyment of the property, a right to use the road will pass with the quasi-dominant tenement, unless by the terms of the contract that right is excluded...”

47.  As laid down by Thesiger LJ in the passage cited, the court will make the implication where it is clear that a “continuous and apparent quasi-easement” exists which, after severance of the land and creation of the two tenements would be “necessary to the reasonable enjoyment of the property granted”.  This involves taking into account the purpose for which the land granted is to be used, as pointed out by Lord Parker of Waddington in Pwllbach Colliery Co Ltd v Woodman:[34]

“The law will readily imply the grant or reservation of such easements as may be necessary to give effect to the common intention of the parties to a grant of real property, with reference to the manner or purposes in and for which the land granted or some land retained by the grantor is to be used. ... But it is essential for this purpose that the parties should intend that the subject of the grant or the land retained by the grantor should be used in some definite and particular manner. It is not enough that the subject of the grant or the land retained should be intended to be used in a manner which may or may not involve this definite and particular use.”

48.  As Thesiger LJ pointed out, [35] implication of easements under the rule in Wheeldon v Burrows is founded on the principle against derogation from grant.  This was emphasised by the House of Lords in Sovmots Investments Ltd v Secretary of State for the Environment,[36] where Lord Wilberforce stated:

“The rule is a rule of intention, based on the proposition that a man may not derogate from his grant. He cannot grant or agree to grant land and at the same time deny to his grantee what is at the time of the grant obviously necessary for its reasonable enjoyment.”[37]

And, as Lord Edmund-Davies explained:

“The line of cases to which Wheeldon v Burrows belongs are all illustrations of rights resulting from the rule against derogation from grant, which Younger LJ once described as ‘a principle which merely embodies in a legal maxim a rule of common honesty’: see Harmer v Jumbil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200, 225.” [38]

F.3  An overlap between the two senses of “quasi-easement”

49.  While the term “quasi-easement” is used in the two different senses indicated, this does not mean that there can never be an overlap between contractual quasi-easements and the rule in Wheeldon v Burrows.  Such an overlap may well exist in the process of deciding what rights in the nature of contractual quasi-easements should be implied into a transaction between co-owners.

50.  However, in considering the creation or reservation of rights, including the creation of rights consisting of contractual quasi-easements by implication, two different situations must be distinguished.   Where the right is sought to be implied as a right implicit in the DMC – for instance, as to whether there is contractual quasi-easement in the nature of a right of way over the common area or over certain other parts of the building (as in Chiu Shu-choi v Merrilong Dyeing Works Ltd[39]) – the question is simply one of construction of the DMC. The Court should apply the normal rules which govern the implication of terms in a contract and the rule in Wheeldon v Burrows throws no light on the matter since such cases involve no grantor and no grantee.

51.  But in the second situation, where the right is alleged to arise either on the subdivision of a unit and the assignment of part or on the assignment of one unit by the owner of two or more units (by assignment of undivided shares subject to mutually covenanted rights to exclusive possession), then the rule in Wheeldon v Burrows becomes highly relevant.  This is so because the content of that rule makes it readily adaptable to the process of contractual implication.  As noted above, it is a rule whereby the court implies an intention to convey as part of the assignment, continuous and apparent quasi-easements which are “at the time of the grant obviously necessary for the reasonable enjoyment of the land conveyed” given the purpose for which the land is to be used.  Where this is an appropriate description of a right sought to be implied as a contractual quasi-easement, the court will generally have little difficulty in holding that the contractual tests for implying such a right are met.  In our view, such a right is implied in law for this class of transaction in the manner explained in Liverpool City Council v Irwin,[40] but it may, in given circumstances, equally be implied as a matter of business efficacy.

F.4  Are there contractual quasi-easements enforceable in principle by the appellant?

52.  The present case is one where the principles laid down in Wheeldon v Burrows are applicable by analogy.  In January and March 2000, the respondents assigned to the appellant the relevant parcels of undivided shares to which were attached the right to exclusive use and occupation of Shop 2B and the second and third floors.  The respondents and the appellant are grantor and grantee thereof.  The respondents retained ownership of the 26/9,700 to which are allotted the exclusive use and occupation of the Entrance Lobby.  Actions which the respondents may take on the Entrance Lobby plainly may affect the use and enjoyment by the appellant of the property it acquired.

53.  If contractual quasi-easements are to be treated as if they were easements for all practical purposes, they must, as previously indicated, be of such a nature as to be capable of existing as easements.  There is no difficulty in treating the alleged right of way over the Entrance Lobby to the second and third floors as a contractual quasi-easement of this character.  We are satisfied that a right of way should be implied as a contractual quasi-easement applying the Wheeldon v Burrows approach described above.  Such a right of way is plainly a continuous and apparent quasi-easement which is obviously necessary to the reasonable enjoyment of the upper floors.  It provides access to the shops and restaurants to pedestrians entering from the walkway linked to the MTR station.  The tenancies over those floors were transferred by the respondents to the appellant as part of the sale.  If a dispute had arisen as to whether the sale and purchase agreement in respect of the second and third floors impliedly carried a right of way over the Entrance Lobby, it would have been resolved affirmatively in favour of the appellant.

54.  However, recognizing the existence of such a right of way in favour of the second and third floors over the Entrance Lobby does not mean that the respondents have infringed or will, by their intended conduct, necessarily infringe that right.  Russell LJ explained the position as follows in Keefe v Amor:[41]

“I would remark that it is sometimes thought that the grant of a right of way in respect of every part of a defined area involves the proposition that the grantee can object to anything on any part of the area which would obstruct passage over that part.  This is a wrong understanding of the law.  Assuming a right of way of a particular quality over an area of land, it will extend to every part of that area, as a matter, at least, of theory.  But a right of way is not a right absolutely to restrict user of the area by the owner thereof.  The grantee of the right could only object to such activities of the owner of the land, including retention of obstruction, as substantially interfered with the use of the land in such exercise of the defined right as for the time being is reasonably required. (I am, of course, talking now about private rights of way.)”

55.  That approach is applicable by analogy to a right of way constituted by a contractual quasi-easement.  The respondents’ intentions, which may in any case depend on the outcome of the present appeal in relation to Shop 2B-B, are presently obscure; and while we are prepared to declare that in principle, the appellant is entitled to a right of way as a contractual quasi-easement over the Entrance Lobby, we are not in a position to determine questions relating to any infringement of that right.

56.  Shop 2B-B is, however, a different matter. Its layout and method of operation have been described in Sections A and C above.  The appellant, on behalf of itself and its tenant, claims the right to continue to serve refreshments to persons standing in the Entrance Lobby, and contends that the right constitutes a contractual quasi-easement over the Entrance Lobby.

57.  We are satisfied that such a right cannot exist as an easement and accordingly cannot exist as such a quasi-easement.  The appellant describes it as a right of way over the Entrance Lobby for its customers to approach the counter in order to buy refreshments.  But the customers have and claim no such right.  The right, if any, is the right of the owner or tenant of Shop 2B-B to have customers enjoy unrestricted access through the Entrance Lobby to approach the counter in order to be served.

58.  The case must be distinguished from cases like Hammond v Prentice,[42] in which the owner of the dominant tenement has an established right of way over the servient tenement for himself, his servants and agents, to have access to and egress from his premises.  In such cases the existence of the right of way is not in dispute: the only question is as to the identification of the persons whom the dominant owner may authorise to use it.  In the present case the question is whether the Appellant can establish a quasi-easement at all. 

59.  Its claim to a right of way can be dismissed at once.  At the date of the assignment of Shop 2B to the appellant (which is the relevant date for this purpose) its customers were not gaining access to Shop 2B-B by way of the frontage which faced the Entrance Lobby.  The counter blocked all access to the shop by this means.  Indeed, it is doubtful whether the frontage facing the Entrance Lobby was ever “a continuous and apparent” means of access to and egress from the Shop.  It was at one time a shop window, and immediately before the erection of the refreshment counter it was simply a large open space, obviously intended to be filled either by a new window or, as in the events which happened, a counter.

60.  There remains the Appellant’s claim to a right to have its potential customers have unrestricted access through the Entrance Lobby to approach the counter and buy refreshments.  There is no easement known to the law for the access of air except through a definite aperture or channel;[43] or for the enjoyment of a right to an uninterrupted sight of an advertisement on the dominant owner’s premises by passers-by on the main road;[44] or for the enjoyment of an unrestricted flow of potential customers through the servient owner’s land to his kiosk.[45]  If a shop owner wishes to restrain the owner of adjoining premises from restricting the passage of potential customers to his premises, whether to view the display in his shop window or to buy refreshments, he must do so by way of a restrictive covenant or rely on the doctrine of derogation from grant, to which we now come.

G. Derogation from grant

61.  The rule that a man may not derogate from his grant is a general principle of law.  As noted above, it has been described as a maxim which merely encapsulates in a legal maxim a rule of common honesty.  As Bowen LJ put it in Birmingham, Dudley & District Banking Co v Ross: “... a grantor having given a thing with one hand is not to take away the means of enjoying it with the other.”[46]  This approach was endorsed by Lord Denning MR in Molton Builders Ltd v City of Westminster,[47] where he said:

“…. if one man 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.”

62.   As we have seen, the rule in Wheeldon v Burrows is founded on the doctrine of derogation from grant, but as one might expect, given its width, the doctrine is plainly not limited to cases about easements[48] and has been held to apply where the derogation involves a right which cannot constitute an easement.[49]  Indeed, the doctrine is not limited to grants of interests in land but has been applied, for instance, to contracts for the sale of motor cars.[50]

63.  In Platt v London Underground Ltd, Neuberger J summarises the case-law and helpfully indicates how the non-derogation doctrine is to be applied:[51]

“3.  [The exercise of determining the extent of the implied obligation not to derogate from grant] 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: per Sir Donald Nicholls VC in Johnson & Son Ltd v Holland (1988) 1 EGLR 264 at 267.

...

6.  When considering a claim based on derogation from grant, one has to take into account not only the terms of the lease, but also the surrounding circumstances at the date of the grant as known to the parties: see Chartered Trust plc v Davies (1997) 2 EGLR 83 at 87C, per Henry LJ.

7. One test which is often helpful to apply where the act complained of is the landlord’s act or omission on adjoining land is whether the act or omission has caused the demised premises to become unfit or substantially less fit than the purpose for which they were let: see Browne v Flower (1911) 1 Ch 219 at 225, as per Parker J, and also Aldin v. Latimer Clark Muirhead & Company (1894) 2 Ch 437. …”

64.  We turn to the application of these principles to the present case.  By the assignment of 24 January 2000, the 1st respondent assigned Shop 2B to the appellant at which stage it had already been sub-divided to Shops 2B-A and 2B-B and let to two different tenants.  The grant was of a corner shop with a long return frontage facing the Entrance Lobby readily visible to passers-by on the external walkway.  Whether the return frontage was used as a display window or to house a counter for the sale of refreshments to passers-by using the Entrance Lobby, it was not merely a right or privilege appurtenant to the shop but a major feature of its structure and location.  The importance of that frontage must plainly have been in the parties’ contemplation and must have represented a significant part of its value.  The respondents, the very parties which had sold the shop to the appellant, now threaten to block the frontage to the Entrance Lobby, thereby depriving the appellant and its successors in title of a major and valuable feature of the shop which it bought.  As previously noted, the Recorder made a finding that Shop 2B-B is able to operate as a shop only because it was able to utilise that frontage to sell to customers in the Entrance Lobby and it is obvious that blocking off that frontage by erecting the intended shop would render the property substantially less fit for the purpose for which it was acquired.  Indeed, it is difficult to imagine a clearer case of derogation from grant and the respondents must be restrained by injunction from blocking off Shop 2B-B’s return frontage.

Conclusion

65.  We accordingly allow the appeal and set aside the judgments of Madam Recorder J Leong SC dated 5 May 2005 and of the Court of Appeal dated 12 March 2007 and make the following Orders.

66.  We grant a declaration that the appellant, by virtue of its rights acquired as owner under the assignments dated 24 January 2000 and 24 February 2000 in respect of the second and third floors of Fou Wah Centre, 210 Castle Peak Road, Tsuen Wan, is entitled, together with its successors-in-title, tenants and licensees from time to time of the said premises and any of them, to a right of way for themselves and their respective staff, customers and other visitors from and to the external public walkway on the first floor over the Entrance Lobby, including the staircase giving access to the said second and third floors.  We direct that a plan showing the aforesaid Entrance Lobby and staircase marked out in colour be annexed to the draft Minutes of Order after agreement, if possible, between the parties, to be submitted for approval by a single Permanent Judge.

67.  We order that the 2^nd respondent be restrained (whether acting by itself, its servants or agents, or otherwise howsoever) from obstructing the opening approximately 13 feet 3 inches wide between Shop 2B-B on the first floor of Fou Wah Centre and the Entrance Lobby adjacent thereto in any manner which impedes the normal operation of Shop 2B-B.

68.  We make an order nisi that the respondents do pay to the appellant its costs here and in the courts below to be taxed if not agreed.  We direct that any submissions in respect of costs on the part of the respondents be filed and served in writing within 21 days from the date of this Judgment, in the absence of which, the said order nisi shall stand as an order absolute; and in the event of submissions being served, that any submissions in reply on behalf of the appellant be filed and served in writing within 21 days thereafter.

69.  The parties have liberty to apply to a single Permanent Judge in connection with the implementation of these Orders.

[1]  HCA 1926/2001 (5 May 2005) at §16.

[2]  Ibid at §13.

[3]  Ibid at §§21-23.

[4]  [2007] 3 HKLRD 510 at 518-519, §35, per Yuen JA, with whom Le Pichon JA and Chu J agreed.

[5]  As indicated when dealing with a subsequent stay application: HCA 1926/2001 (2 September 2005) at §§8 and 9.

[6]  [2007] 3 HKLRD 510 at 519, §37.

[7]  Cap 219.

[8]  See, for instance, Sihombing & Wilkinson, Hong Kong Conveyancing (Lexis Nexis) IV[20] et seq; Halsbury’s Laws of Hong Kong (2007 Reissue) Vol 16, [230.428] et seq;Hartley Bramwell, Conveyancing in Hong Kong (Butterworths 1981) Ch 13; Sarah Nield, Conveyancing and Property Ordinance 1984 (1985) 15 HKLJ 48.

[9]  Hartley Bramwell, op cit at 266.

[10]  (1999) 2 HKCFAR 279 at 295, citing Bull v Bull [1955] 1 Q.B. 234, 237.  Mr Justice Litton PJ similarly stated at 290: “... the proprietary right of a co-owner in a multi-storied building is the right to an undivided share in the land and building: prima facie the owner is entitled to exert rights of possession to every part of the building, in common with his co-owners.  This is what is meant by the expression ‘unity of possession’.”

[11]  CPO, s 41(2) and (3).

[12]  CPO, s 41(7).  See Sky Heart Ltd v Lee Hysan Co Ltd (1997-98) 1 HKCFAR 318 at 338-339.

[13]  Eg, Sihombing & Wilkinson, op cit, at XII[273]: “It must be borne in mind that co-owners of a multi-storey building cannot enjoy easements inter se, since they are tenants in common of the same property and there are no dominant and servient tenements.  Their rights inter se must, therefore, be governed by the terms of the deed of mutual covenant rather than be based upon implied easements...” (citing Chiu Shu-choi v Merrilong Dyeing Works Ltd, infra).

[14]  [1990] 1 HKLR 385 at 389.

[15]  (1997-98) 1 HKCFAR 318 at 339.

[16]  (1999) 2 HKCFAR 279 at 297.

[17]  See Megarry & Wade The Law of Real Property (7th Ed. Sweet & Maxwell, 2008) §27-009; Gray’s Elements of Land Law (4^th Ed, OUP) 630-1, §8.47; and see, eg, London & Blenheim Ltd v Ladbroke Ltd [1994] 1 WLR 31, per Peter Gibson LJ at 36.

[18]  See Cowper v Fletcher (1865) 6 B & S 464; Leigh v Dickson (1884) 15 QBD 60; Napier v Williams [1911] 1 Ch 361; U-Needa Laundry Ltd v Hill [2000] 2 NZLR 308 and Chin Lan-hong v Cheung Poh-choo [2005] 3 HKLRD 811 (CA).

[19]  [1993] 1 HKLR 319 at 323-324.

[20]  Ibid at 324.

[21]  Jumbo King Ltd v Faithful Properties Ltd [1999] 3 HKLRD 231 at 243.

[22]  Ibid at 245-246.

[23]  Ibid at 253.

[24]  Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 290.

[25]  Ibid.

[26]  Ibid at 296.

[27]  (1999) 2 HKCFAR 279 at 286.

[28]  Ibid at 297.

[29]  The Law of Real Property (7th Ed. Sweet & Maxwell, 2008) §27-010.

[30]  Metropolitan Ry v Fowler [1892] 1 QB 165 at 171; Sovmots Investments Ltd v Secretary of State for the Environment [1979] AC 144 at 169.

[31]  (1879) 12 Ch D 31.

[32]  Ibid at 49.

[33]  [1930] 1 Ch 493 at 499.

[34]  [1915] AC 634 at 646-647.

[35]  Wheeldon v Burrows (1879) 12 Ch D 31 at 49.

[36]  [1979] AC 144.

[37]  Ibid at 168.

[38]  Ibid at 175.

[39]  [1990] 1 HKLR 385.

[40]  [1977] AC 239.

[41]  [1965] 1 QB 334 at 347.  See also B & Q plc v Liverpool and Lancashire Properties Ltd [2001] EGLR 92 at 96.

[42]  [1920] 1 Ch 201.

[43]  Aldin v Latimer Clark, Muirhead & Co [1894] 2 Ch. 437.

[44]  Johnston & Sons Ltd v Holland [1988] 1 EGLR 264 CA.

[45]  Platt v London Underground Ltd [2001] 2 EGLR 121.

[46]  (1888) 38 Ch. D. 295 at 313.

[47]  (1975) 30 P&CR 182 at 186.

[48]  Browne v Flower [1911] 1 Ch 219 at 225 per Parker J.

[49]  Cable v Bryant [1908] 1 Ch 259.

[50]  British Leyland Motor Corporation Ltd v Armstrong Patents Co Ltd [1986] AC 577. 

[51]  [2001] 2 EGLR 121 at 122.