JETGLORY DEVELOPMENT LTD v. SECRETARY FOR JUSTICE for and on behalf of THE DIRECTOR OF LANDS

HCMP 2098/2020

[2023] HKCFI 1701

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2098 OF 2020

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J U D G M E N T

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INTRODUCTION

1.  These proceedings concern the construction of the land grant documents governing five adjoining sub-sections of land in Wing Lung Street, Kowloon.

2.  The plaintiff is the registered owner of the sub-sections. It proposes to erect a composite multi-storey building straddling over the five sub-sections. By originating summons filed on 17 November 2020, it seeks a declaration from the court that the proposed development, or such similar forms of development, does not contravene the relevant land grant documents.

3.  For easy reference, a diagram illustrating the proposed development is reproduced at the end of this judgment.

4.  To put it broadly, the issues are (1) whether the relevant land grant documents impose any restriction that only “houses” can be built on the sub-sections, as opposed to other types of buildings, and (2) what counts as a “house” under those documents.

5.  The five sub-sections may conveniently be referred to by their street numbers, namely, Nos 11, 13, 15, 17 and 19 Wing Lung Street. Set out below are their respective lot numbers and land grant documents:

(1)  No 11 – NKIL 4321 governed by government lease dated 27 November 1968;

(2)  No 13 – Section A of NKIL 3752 governed by Conditions of Sale No 4920 dated 24 August 1953 (“the Conditions of Sale”);

(3)  No 15 – NKIL 4323 governed by government lease dated 25 July 1969;

(4)  No 17 – Remaining Portion of NKIL 3752 governed by the Conditions of Sale; and

(5)  No 19 – Section E of NKIL 3752 governed by the Conditions of Sale.

6.  In summary, two of the sub-sections (ie Nos 11 and 15) are governed by two separate government leases and three of the sub-sections (ie Nos 13, 17 and 19) are governed by the Conditions of Sale.

7.  Since 2010, the plaintiff has submitted various general building plans to the Building Authority in order to redevelop the sub-sections.

8.  By letter dated 14 July 2017, the Building Authority approved the plaintiff’s general building plans submitted on 15 June 2017. It further stated that the Lands Department would convey its comments directly to the plaintiff’s representative.

9.  By letter dated 2 August 2017, the Lands Department stated that the proposed development “does not accord with the type and characteristics of the house permitted under the ‘house’ restriction contained in the lease conditions” and that it “constitutes fundamental breach to the lease conditions”. The plaintiff’s submission of building plans was disapproved without scrutiny.

10.  By a subsequent letter, the Lands Department sought to rely on Practice Notes Issue No 3/2000 dated April 2000 and No 3/2000A dated 25 June 2014 to explain its disapproval. In these proceedings, the defendant opposes the originating summons but confirms that it would no longer rely on the Practice Notes to resist the declaratory relief.

11.  The plaintiff’s application is to be decided by applying the principles explained by the Court of Final Appeal in Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351.

THE LAND GRANTS

12.  The original (or mother) lot covering Nos 9 to 19 Wing Lung Street is NKIL 3752 held under the Conditions of Sale. The lot was subsequently sub-divided into Sections A, B, C, D, E and Remaining Portion. Section C (ie No 11) was later exchanged for NKIL No 4321 in 1968. Section B (ie No 15) was exchanged for NKIL No 4323 in 1969.

The Conditions of Sale governing Nos 13, 17 and 19

13.  For Nos 13, 17 and 19, no government leases were ever issued. The Conditions of Sale continue to apply to them. The following General Conditions (“GCs”) and Special Conditions (“SCs”) are presently relevant:

(1)  GC 10(a) – “The purchaser of the lot shall build and finish, fit for occupation, before the expiration of 18 calendar months from the day of the sale in a good, substantial and workmanlike manner, one or more good and permanent buildings upon some part of the lot with such materials as may be approved by the Director of Public Works, and in other respects in accordance with the provisions of all Ordinances, Byelaws and Regulations relating to buildings or Sanitation as shall or may at any time be in force in the Colony and shall expend thereon a sum of not less than $180,000 in rateable improvements and shall maintain all buildings now standing or hereafter erected on the lot in good and tenantable repair and condition throughout the tenancy and in such repair and condition deliver up the same at the expiration or sooner determination of the tenancy.” (underline added)

(2)  GC 11(a) – “When the conditions herein contained have been complied with to the satisfaction of the Director of Public Works and the Land Officer, the purchaser shall subject to approval of his title by the Land Officer be entitled to a Lease of the lot as described in the Particulars …”

(3)  GC 11(b) – “The purchaser shall take up the Crown Lease for the lot when called upon to do so by the Land Officer … In the event of more than one building being erected on the lot the purchaser will be required to take up a separate lease for the site of each separate building and shall pay the prescribed fees for every additional lease so required to be taken up.”

(4)  GC 11(c) – “Pending the issue of the Crown Lease the tenancy of the lot shall be deemed to be upon and subject to and such Crown Lease when issued shall be subject to and contain all exceptions, reservations, covenants, clauses and conditions as are usually inserted in the Crown Leases of similar lots in the Colony as varied modified or extended by the General and Special Conditions herein contained.”

(5)  GC 17 – “The foregoing General Conditions shall be read and construed as varied or modified by the Special Conditions hereinafter contained and the expression “these Conditions” whenever used shall mean and include the General & Special Conditions.”

(6)  SC (2) – “The lot shall not be used for industrial purposes and no factory building shall be erected thereon.”

(7)  SC (16) – “Not more than six houses shall be erected on the lot.”

14.  In respect of Nos 13, 17 and 19, the plaintiff’s application turns on the proper construction of GC 10(a) and SC (16).

The government leases governing Nos 11 and 15

15.  For Nos 11 and 15, government leases were issued in 1968 and 1969 respectively. Both leases contain the following restriction:

“… AND that the said Lessees will not use or allow to be used the said piece or parcel of ground or any part thereof or any building erected thereon or any part of such building for industrial purposes and will not erect or allow to be erected any factory building on the said piece or parcel of ground AND will not erect or allow to be erected more than one house on the said piece or parcel of ground …” (underline added)

16.  In respect of Nos 11 and 15, the plaintiff’s application turns on the proper construction of the underlined words in the extract.

PAST STRUCTURES

17.  When the Conditions of Sale was entered into in 1953, no structure was erected on Nos 9 to 19.

18.  According to the occupation permit dated 4 June 1954, “six Chinese houses” were erected at Nos 9 to 19.

19.  According to the general building plans with BOO Ref No 2/4597/53:

(1)  The six Chinese houses were each 5-storey high and were identical in design.

(2)  They adjoined each other and shared a common roof.

(3)  Each of the three pairs of houses shared a common front staircase and a common rear staircase.

(4)  The units on the ground floor were shops. The units on the other floors each had a balcony, kitchen and bathroom.

20.  Mr Law Man Chung, SC, appearing with Mr Justin Lam for the defendant, highlights the nature of the buildings in the vicinity at the time of the Conditions of Sale. According to information revealed in occupation permits issued before the date of the Conditions of Sale, the buildings in the vicinity were mostly low-rise Chinese houses. I should quickly note here that parties disagree on the relevance of the physical condition of the structures erected in the vicinity for construction purposes.

21.  The houses at Nos 13, 15, 17 and 19 had been demolished. The one on No 11 still stands at present.

THE PROPOSED DEVELOPMENT

22.  The proposed development has the following key features:

(1)  The portion on Nos 11, 13 and 15 is two storeys.

(2)  The portion on Nos 17 and 19 is 28 storeys.

(3)  G/F to 2/F are for shops and electrical/mechanical facilities. The latter comprises, for instance, a transformer room on 1/F at No 11. The same floor at No 15 houses a sprinkler pump room and a sprinkler water tank.

(4)  3/F is a clubhouse which consists of a gym room and library.

(5)  5/F to 28/F (on Nos 17 and 19 only) are the residential units.

23.  When determining whether the proposed development is in breach of the land grant documents, it is common ground between the parties that each sub-section must be assessed individually. In other words, that part of the proposed development appearing in each sub-section should be looked at on its own by reference to the land grant document applicable to the sub-section.

24.  The plaintiff contends that the proposed development is not in breach of the Conditions of Sale or the government leases.

25.  More specifically, in respect of Nos 11 and 15 which are governed by the government leases, the plaintiff’s contention is as follows:

(1)  It accepts that only a “house” can be built on each of the two sub-sections, applying Fully Profit.

(2)  The two-storey structures proposed to be built on the two sub-sections are each a “house” because their characteristics or type are comparable to those of the Chinese house which still stands at No 11 and the Chinese house which previously stood at No 15.

(3)  The proposed shops and electrical/mechanical facilities are not for industrial purposes and are thus in compliance with the lease terms.

(4)  The proposed development is a composite structure straddling the five sub-sections. In this regard, Ms Audrey Eu, SC, appearing with Mr Jonathan Lee for the plaintiff, submits that straddling is permitted under the government leases and that it is permissible to build only part of a house on each sub-section, applying the decision of the Court of Appeal in Fully Profit (which, she contends, was not disturbed by the Court of Final Appeal).

(5)  For each sub-section, the plaintiff emphasises that the restriction in the government lease is that “not more than one house” should be erected. Analysed properly, it is not a restriction “not to erect other than one house”. Hence, in the present case, the joinder or connection with the structure on the immediately adjoining sub-section does not violate the “not more than one house” restriction.

26.  In respect of Nos 13, 17 and 19 which are governed by the Conditions of Sale, the plaintiff’s contention is as follows:

(1)  There is no “house” restriction imposed by the Conditions of Sale.

(2)  The proper interpretation is that the lessee is allowed to build one or more “buildings” on each sub-section: GC 10(a). It is only in the event where the lessee chooses to build “houses”, not more than six “houses” can be erected: SC (16).

(3)  Here, the 28-storey residential tower proposed to be built on Nos 17 and 19 is therefore permitted, even though it is not a “house”.

THE ISSUES

27.  On the other hand, the defendant’s position is that the proposed development breaches the terms of the land grant documents for three reasons:

(1)  The two-storey portion on Nos 11 and 15 does not qualify as a “house” or part of a “house” under the government leases. It is therefore a breach of the “house” restriction. I shall refer to it as “the government leases ground”.

(2)  The Conditions of Sale only permit the construction of “houses”. The 28-storey residential tower to be built on Nos 17 and 19 is not a “house” and is therefore not permitted. I shall refer to it as “the Conditions of Sale ground”.

(3)  Alternatively, Nos 17 and 19 are governed by government leases deemed to be issued in 1984 which contain the same terms as the Conditions of Sale by operation of section 14 of the Conveyancing and Property Ordinance, Cap 219. Under the deemed leases, the lessee is only permitted to construct “houses” on the lots. The 28-storey residential tower would not qualify as a “house” and is therefore not permitted. I shall refer to it as “the deemed leases ground”.

28.  It is common ground that the defendant only needs to succeed on any one of the above grounds for the court to dismiss the plaintiff’s application.

LEGAL PRINCIPLES

29.  The general legal principles on contractual construction are not in dispute.

Contractual construction

30.  The overriding objective in contractual construction is to give effect to what a reasonable person would have understood the parties to mean, and this involves having regard not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve: Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296D-E.

31.  Interpretation is a unitary exercise. It is a truism that the starting point is the ordinary and natural meaning of the words of the contract, and of course in the vast majority of cases that is the ending point also. But in the more difficult cases it is not particularly helpful to refer to the “ordinary and natural meaning” of words because in such cases there can be much debate over exactly what is the ordinary or natural meaning of words; and in those cases the surer guide to interpretation is context: Fully Profit at para 15; Eminent Investments (Asia Pacific) Ltd v DIO Corp (2020) 23 HKCFAR 487, [2020] HKCFA 38 at paras 43-44.

32.  The reasonableness of the result of the proposed interpretation is a relevant factor in the interpretation exercise. It has been observed that the more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. However, the court must be alive to the possibility that one side may have agreed to something which with the benefit of hindsight may not have served his interest: Building Authority v Appeal Tribunal (Buildings) (ENM Holdings Ltd) (2018) 21 HKCFAR 194, [2018] HKCFA 20 at para 54.

33.  Lastly, where a contract contains general provisions and special provisions, the special provisions will be given greater weight than the general provisions where the facts to which the contract is to be applied fall within the scope of the specific provisions: Lewison on Interpretation of Contracts (7^th ed) at para 7.46.

The construction of land grant documents

34.  The above principles apply to the construction of land grant documents generally. In this area, Mr Law highlights the following in his submissions.

(1)  In River Trade Terminal Co Ltd v Secretary for Justice (2005) 8 HKCFAR 95, the Court of Final Appeal remarks, at para 34, that a government land grant falls to be construed as a commercial contract.

(2)  In the construction of a government lease, the court takes into account common sense and commercial sense: Building Authority v Appeal Tribunal (Buildings) (229/2016) [2017] 4 HKLRD 510 at para 43(2).

35.  I accept that these are general statements which I should bear in mind when construing the present land grant documents.

Fully Profit

36.  Fully Profit is a decision on the construction of the “house” restriction in government leases, which was crafted in substantially the same terms as the restriction appearing in the government leases for Nos 11 and 15. It is therefore an authority which directly applies to those two sub-sections.

37.  Furthermore, in arriving at its decision, the Court of Final Appeal discussed the provisions in the Conditions of Exchange in that case, which are substantially the same as GC 10(a) and SC (16) here, the latter being relevant to Nos 13, 17 and 19. I shall refer to those provisions as “the relevant conditions” below. Hence, while the discussion does not form part of the ratio of that case (which point I shall explain below), the discussion of the relevant conditions in the Conditions of Exchange provides authoritative guidance on how GC 10(a) and SC (16) should be construed here.

38.  The facts in Fully Profit are in some respects similar to the present case.

39.  The plaintiff there wished to redevelop five adjoining sub-sections into a 26-storey building straddling across those sub-sections. The difference between that proposed development and the one here is that the proposed building there was 26-storey high on all five sub-sections. Those sub-sections, together with other sub-sections of the original mother lot, were initially governed by the Conditions of Exchange of 1952, which contained the relevant conditions. 20 houses were then built. They were described as “Chinese type houses” in the occupation permits. They were identical in design, each having five storeys. In the 1960s, individual government leases were entered into in respect of each of the sub-sections. The government leases governing the five sub-sections in question each contained the “house” restriction substantially similar to that applicable to Nos 11 and 15.

40.  The Court of Final Appeal overturned the Court of Appeal’s decision (reported at [2012] 1 HKLRD 1003). It held that the Court of Appeal had erred in how it had treated the Conditions of Exchange. The Conditions were no longer applicable as it was replaced by the government leases. Nevertheless, when construing the “house” restriction in the government leases, the Court of Appeal took into account the terms of the Conditions of Exchange and the state of affairs envisaged under them and assumed that the factual circumstances remained the same when the government leases were later created: see para 20(3).

41.  The ratio in respect of the “house” restriction in the government leases is to be found in paras 17, 19, 20 and 21. There is no dispute between the parties what the ratio is, which can be shortly stated as follows:

(1)  As a matter of construction of the government leases, the only permitted redevelopment on the sub-sections is “houses”, and not any other type of “buildings”: para 20(2).

(2)  In context, the word “house” as used in the government leases must have reference to the characteristics of the houses which were actually standing at the time the government leases were entered into. The word must mean the type of house existing on the lot: para 17.

(3)  Construed in this way, it is clear that the 26-storey building which was proposed cannot be regarded as a “house”: paras 19 and 21.

42.  It is notable that in construing the “house” restriction in the government leases in question, the Court of Final Appeal approached the matter by examining the relevant conditions in the Conditions of Exchange side by side with the “house” restriction in the government leases. It is plain that the court was comparing, if not contrasting, the provisions appearing in the two land grant documents.

43.  In this construction exercise, Ma CJ made the following observations which apply to the construction of the relevant conditions in the Conditions of Exchange: paras 5 and 17.

(1)  The Conditions of Exchange use the terms “buildings” and “houses”. In their context, the terms cannot be used interchangeably. A house may be a type of building, but not all buildings must be houses. The two terms have different meanings.

(2)  Under General Condition 7(a), which is similar to GC 10(a) here, the lessee was able to build one or more buildings on the mother lots.

(3)  Under Special Conditions (3) and (6), which are similar to SC (2) and (16) here, the only restrictions on the buildings to be built were twofold. First, any building could not be used for industrial purposes. Second, if houses were built, no more than the specified number of houses could be built.

(4)  In other words, unlike the restriction in the government leases, the lessee could build buildings, provided that they are non-industrial. If the lessee chose to build buildings which are not houses, the restriction on the maximum number in Special Condition (6) would not apply. However, if the lessee chose to build houses, the restriction on number in that special condition would apply.

(5)  This is to be compared to, or contrasted with, the “house” restriction in the government leases. Only the word “house” is used there. The word “building” is not used. Ma CJ considered this to be a significant difference between the two land grant documents in the construction exercise.

44.  Ma CJ made the comparison or contrast in para 17, which is set out in full below:

“In context, it is clear that the meaning of the word “house” under the Government Leases must have reference to those characteristics of the houses which were actually standing at the time the Government Leases were entered into. In this respect, I agree with the learned Deputy Judge. Unlike in the case of the Conditions of Exchange when that document came into existence (when there were no buildings on the Mother Lots that could be described as houses), houses were actually standing on each of the individual, sub-divided Lots at the time the Government Leases were created. In the context of those Leases, the meaning of the word “house” must be taken to mean the type of house existing on the individual Lots. It is significant that the word “house” should be used, rather than the word “building”. In the Conditions of Exchange, as seen earlier, both words were used. They have different meanings. General Condition 7(a) allowed the lessee to build one or more “buildings” on the Mother Lots but if “houses” were to be built, then under Special Condition (6), this was limited to 20 houses (on the former Mother Lot No 3665) and eight houses (on the former Mother Lot 3666).” (underline added)

45.  The point made in the last sentence in the extract above in fact was made also in two other parts of the decision. First, para 5(2) read:

“5. I highlight some aspects of the Conditions of Exchange:

(1) …

(2) The only restrictions on the buildings to be built were two-fold: first, any building could not be used for industrial purposes, therefore no factory building could be built (Special Condition (3)); and secondly, in the event houses were built, no more than 20 houses could be built on Lot No 3665 and no more than eight houses could be built on Lot No 3666 (Special Condition (6)).” (underline added)

46.  The point was later repeated in para 20(2):

“Relevant to this discussion are the Conditions of Exchange. Under the Conditions, as we have seen, the lessee was entitled to build one or more buildings on the Mother Lots (provided that they were not for industrial use and were not factory buildings) and within this entitlement, to build houses. The lessee having chosen to build houses on the Mother Lot No 3664, it is in this context against which the restrictive covenants have to be viewed.” (underline added)

47.  In her written submissions, Ms Eu refers to the above observations, ie paras 5(2), 17 and 20(2) of the decision, as “remarks” and submits that they are relevant to the present case when it comes to the construction of the Conditions of Sale for Nos 13, 17 and 19. In her oral submissions, Ms Eu appears to argue that they in fact form part of the ratio of the decision. But even if that is not the case, the observations are still of highly persuasive authority.

48.  On the other hand, Mr Law submits that these observations of Ma CJ are obiter only and are not binding, and that it is for this court to undertake its own exercise of interpreting the Conditions of Sale.

49.  In principle, I agree with Mr Law that the observations on the Conditions of Exchange in Fully Profit do not form part of the ratio of that case, for the simple reason that the issue which arose for decision there was the construction of the government leases in question, not the Conditions of Exchange. That said, however, I consider that while they are not binding on me as a matter of stare decisis, these observations made by the Court of Final Appeal are authoritative guidance on the interpretation of similar documents, including the present Conditions of Sale, and such observations should generally be followed and should not be lightly departed from unless there is a very good reason for doing so.

DISCUSSION

50.  It is common ground that in order to determine whether the proposed development breaches the land grant documents, each sub-section must be assessed individually and by reference to the applicable land grant documents.

51.  In summary, I am of the view that the government leases ground put forward by the defendant in respect of Nos 11 and 15 is valid. That is to say, the two-storey portion proposed to be built on each of those two sub-sections does not qualify as a “house” or a part of a “house” under the respective government leases. It is therefore a breach of the “house” restriction.

52.  As this would definitively dispose of the originating summons, it is unnecessary for me to rule on the two remaining grounds of opposition. I shall state my views on them only briefly.

The government leases ground concerning Nos 11 and 15

53.  Nos 11 and 15 are subject to the two separate government leases, which were issued when two Chinese houses were already standing on the two sub-sections.

54.  It is common ground that the ratio of Fully Profit applies here and hence only “houses”, and not any other type of buildings, may be constructed on the two sub-sections. What divides the parties is the question whether the two-storey portions proposed to be built fall within the description of “houses”, as the term is used in the government leases. The plaintiff says that they do and the defendant says that they do not.

55.  In answering this question, my task is to have reference to the characteristics of the Chinese houses which were actually standing at the time when the government leases were entered into and ask myself whether the two-storey portions were of the same, similar or comparable type as the Chinese houses.

56.  The test is set out by Ma CJ in Fully Profit, at para 17:

“… the meaning of the word “house” under the Government Leases must have reference to those characteristics of the houses which were actually standing at the time the Government Leases were entered into … the meaning of the word “house” must be taken to mean the type of house existing on the individual Lots.” (underline added)

57.  The plaintiff contends that “reference” cannot mean absolute adherence as it would be unreasonable to interpret the “house” restriction as only allowing the lessee to build the exact same Chinese house as the original. Here, the characteristics and type of the two-storey portions are comparable to those of the Chinese houses when one considers the overall size, height, complexity and appearance of the two structures.

(1)  The number of storeys of the proposed portions is less than the Chinese houses. The overall building height of the former is also lower than the latter.

(2)  The building depth and width of the proposed portions are identical to those of the Chinese houses.

(3)  The floor area of the proposed portions is slightly larger but comparable to that of the Chinese houses.

(4)  The proposed portion is for non-industrial use, namely shops and electrical/mechanical facilities. Similarly, the Chinese houses were built for non-industrial use.

58.  Ms Eu highlights that for the above reasons, the proposed development here is clearly distinguishable from that in Fully Profit, which is a 26-storey building straddling across all five adjoining sub-sections.

59.  I agree with the plaintiff’s contention that the “house” restriction does not require it to build exactly the same type of Chinese houses on the sub-sections. That is not the test laid down in Fully Profit. I also accept that the comparison undertaken by Ms Eu by reference to the number of storeys, the building depth and width, the floor area and the non-industrial use of the proposed portions should relevantly form part of the construction exercise.

60.  However, the analysis does not, and should not, stop there.

61.  As Mr Law submits and I agree, the plaintiff’s contention fails to take into account the fact that the proposed development is a single composite structure and the two-storey portions form an integral part of that structure. In addition to the characteristics relied on by Ms Eu, this characteristic must be taken into account when one considers whether the two-storey portions are of the same, similar or comparable type as the original Chinese houses. As Mr Law further submits and I agree, the exercise cannot be undertaken in the abstract by reference merely to the dimensional aspect, but should be done with a concrete visualisation of what is actually proposed to be constructed.

62.  While the Chinese houses adjoined each other and shared a common roof, each house can fairly and reasonably be described as a separate structure. For each Chinese house, save for the shop on the ground floor, the other floors comprised residential flats. By contrast, in the proposed development, while the ground floor will also be occupied by shops, the rest of the two-storey portions would house electrical/mechanical facilities which are there to serve and support the 28-storey residential tower at Nos 17 and 19. The two-storey portions should properly be described as an integral part of a single composite structure in the form of the proposed development.

63.  To conclude, upon having regard to all the characteristics of the Chinese houses and those of the proposed two-storey portions, the two cannot reasonably be described as being the same, similar or comparable type of structure. Hence, the proposed portions cannot be said to be “houses”, as the term is used in the government leases. They are therefore in breach of the “house” restriction.

64.  For this reason, the originating summons should be dismissed.

65.  It is therefore not necessary to deal with the issue whether straddling is permitted under the government leases.

66.  Separately, for completeness, I should record here that in her oral submissions, Ms Eu confirms that it is not the plaintiff’s position that the proposed development as a whole is a “house” under the land grant documents. On that basis, the two-storey portions cannot possibly be described as “part of a house”. There is hence no room for the plaintiff to argue that the two-storey portions do not violate the “not more than one house” restriction – see its argument in para 25(5) above.

The Conditions of Sale ground concerning Nos 13, 17 and 19

67.  In light of my ruling above, I will only briefly discuss the Conditions of Sale ground which affects Nos 13, 17 and 19.

68.  The issue here is whether the Conditions of Sale permit the construction of “houses” only, and not any other type of buildings. The plaintiff does not seek to argue that the 28-storey residential tower proposed to be built on Nos 17 and 19 is a “house”. Its stance is instead that the Conditions of Sale allow it to erect “buildings” which are not “houses”. On the other hand, the defendant contends that the Conditions of Sale only permit the erection of “houses”.

69.  The material terms which call for construction here are GC 10(a) and SC (16).

70.  The plaintiff contends that GC 10(a) allows the lessee to build “one or more buildings”. The word “buildings” have a wider ambit than the word “houses”. A house may be a type of building, but not all buildings must be houses. The only restrictions on the “buildings to be built” under GC 10(a) are (1) prohibition against industrial use, as prescribed by SC (2); and (2) in the event that the lessee chooses to build houses, it can build no more than the number of houses set out in SC (16). In other words, if the lessee chooses to build non-industrial buildings which are not houses, there is no limit on the number of such buildings which can be built.

71.  For this contention, the plaintiff relies on the discussion of the relevant conditions in the Conditions of Exchange by Ma CJ in Fully Profit. See paras 43 to 46 above.

72.  On the other hand, the defendant’s process of construction is as follows:

(1)  GC 10(a) is a standard building covenant. It imposes an obligation on the lessee to complete the development within a specified period of time: Shun Shing Hing Investment Co Ltd v Attorney General [1983] HKLR 432 at 433-434. It does not bestow any right, let alone a general permission, for the lessee to construct any type of buildings on the land as it wishes. The condition is not concerned with the type of building which may be erected or its user. Such a building covenant forms part of the General Conditions as it is applicable to land grants in Hong Kong generally.

(2)  Rather, restrictions as to the type of building or user are contained in the Special Conditions. In the present case, they are contained in SC (2) and SC (16).

(3)  Hence, the plaintiff’s reliance on GC 10(a) is misplaced. Only SC (16) is relevant and under its terms, only houses can be built.

(4)  Alternatively, if, contrary to the above, GC 10(a) is regarded as granting the lessee the right to build any building, this is a situation where there is a conflict between the General Conditions and Special Conditions. In this instance, GC 17 applies. Applying that general condition and/or the general principles of contractual construction, GC 10(a) should be read subject to SC (16) and the latter restriction should prevail. The result is the same – only houses can be built, not any other type of buildings.

73.  In support of the construction in sub-para (4) above, the defendant says the following.

74.  It would be extremely surprising that while a limit is placed on the type and number of houses that can be built on the sub-section, yet there is no limitation in the event of a redevelopment either on the type or number of other buildings that can be erected. This is the reasoning which Ma CJ adopted when arriving at his construction of the “house” restriction in the government leases in Fully Profit: para 20(1). Mr Law argues that the same reasoning should apply to the Conditions of Sale here.

75.  As a matter of analysis, it is absurd and contrary to commercial sense that if a lessee chooses to build houses, then it is limited to six houses, but if it chooses to build any other type of buildings (eg swimming pools, hospitals or schools), it can do so with any restriction at all.

76.  The plaintiff’s construction is absurd for a number of reasons.

77.  First, if there were no restriction on the number of “non-house” buildings which can be built, it would give rise to issues of overcrowding. The intention underlying SC (16) and its purpose was clearly to control the density of the development. The plaintiff’s construction is absurd as it means that the government has given an unrestricted right to the lessee to build as many buildings as it wishes. It is true that there are other statutory mechanisms, eg, town planning controls, which may act as a check in this regard. However, it has been recognised that the government may control the density of land development by means of land grant documents and this ability is not displaced by the existence of the statutory regime on planning control: see the first instance decision in Fully Profit at [2011] 3 HKLRD 434 at para 46; Building Authority v Appeal Tribunal (Buildings) [2013] 1 HKLRD 101 at para 42. The plaintiff’s construction is contrary to the underlying purpose of SC (16) and leads to an absurd result.

78.  Secondly, the government could not have given an unrestricted right to the lessee to build whatever it wants without charging the proper premium. The government, as landlord, can charge developers a premium for the benefit of the permission they are giving them. A premium is charged at the time of an initial development. If later the terms of the grant are altered to the benefit of the developer, another premium is charged: Shun Shing Hing at 434A-B. When viewed against this background, the plaintiff’s construction is plainly absurd. One asks rhetorically, why would the government as landlord relinquish its rights to charge premium to allow the lessee to redevelop the land without any restriction on the type and number of buildings?

79.  Thirdly, the plaintiff’s construction is absurd when one takes into account the prevailing factual context in 1953. At that time, in the vicinity of the sub-sections in question, the buildings were mostly low-rise Chinese houses. This can be deduced from the occupation permits of those houses issued before the date of the Conditions of Sale. Bearing in mind the actual, physical condition of the structures in the vicinity, it is inconceivable that the government would have permitted the lessee to erect whatever building it wishes in the middle of an urban area, without any limitation as to its type.

80.  In my view, it is not correct to treat GC 10(a) as a pure building covenant and nothing else. No doubt it imposes an obligation on the lessee to build on the land. However, one cannot simply ignore that at the same time, the lessee derives a right from this general condition to erect buildings on the lot. I do not therefore agree with the defendant’s submission set out in paras 72(1) to (3) above.

81.  I do however find that there is considerable force in the argument that when GC 10(a) and SC (16) are properly read together, there is a restriction imposed on the lessee that only houses can be built, and not any other type of buildings.

82.  On the one hand, I consider that it is arguable that there is no conflict between GC 10(a) and SC (16) if one adopts the construction advocated by the plaintiff as set out in para 70 above. On the other hand, I consider that the two conditions should be construed together by operation of GC 17. Applying a purposive approach, the two conditions should be construed to give effect to the underlying intention and purpose of SC (16), which is to control the density of the development and to avoid overcrowding. With that underlying purpose in mind, the two conditions should properly be taken to mean that only houses can be built and the number is restricted by the maximum limit set out in SC (16). That is the submission made by the defendant on the Conditions of Sale (save for the conflict point). In my view, it is a forceful submission.

83.  Having said the above, however, it must be recognised that the defendant’s construction is contradictory to Ma CJ’s observations made in Fully Profit: see paras 43 to 46 above. As explained above, the observations are authoritative interpretation of terms which are substantially similar to GC 10(a) and SC (16) by the Court of Final Appeal. Mr Law submits that the court in that case did not have the benefit of full argument on the proper interpretation of the Conditions of Exchange and, further, there was no discussion of GC 17 in the decision.

84.  In my view, Ma CJ’s observations on the Conditions of Exchange are crafted in explicit and clear terms. It is notable that they are stated not only once in the decision, but three times: that is, paras 5(2), 17 and 20(2). Even though they do not form part of the ratio of the decision, they should be followed unless there is a very good reason for not doing so.

85.  On the whole, if it were necessary for me to rule on the interpretation of the Conditions of Sale relating to Nos 17 and 19, I would follow and apply the observations made in Fully Profit and hold that the plaintiff is entitled under GC 10(a) to build the 28-storey residential tower on Nos 17 and 19, which is not a house but is a building for non-industrial use.

86.  In the circumstances, I do not find it necessary to deal with the defendant’s argument relating to the buildings in the vicinity (para 79 above) and the premium argument (para 78 above).

The deemed leases ground concerning Nos 13, 17 and 19

87.  Under this alternative ground, the defendant highlights that when the leases were deemed to be granted in 1984, the Chinese houses were already standing on the sub-sections. In the circumstances, Fully Profit applies directly. Hence, under the terms of the deemed leases, only houses can be built, but not any other type of buildings.

88.  I have doubt as to whether Fully Profit directly applies to the deemed leases. There is no dispute that GC 10(a), which uses the word “building”, is preserved and forms part of the terms of the deemed leases. For this reason alone, the deemed leases would be different from the government leases in that case. It will be recalled that Ma CJ considered the absence of the word “building” in the government leases as significant: see paras 43(5) and 44 above. It is therefore not a given that the ratio of Fully Profit would simply apply here in its full force.

89.  As for the plaintiff, Ms Eu argues that the deemed leases ground does not add much to the Conditions of Sale ground. This is because given that GC 10(a) is preserved in the deemed leases, the defendant’s construction would rise and fall with its construction of the Conditions of Sale.

90.  I also have doubt about this proposition. This ignores altogether the fact that at the time the deemed leases were issued, the Chinese houses were already standing on the land. This arguably renders the factual matrix surrounding the deemed leases in 1984 (if that is in fact the relevant factual matrix) different from that surrounding the Conditions of Sale in 1953.

91.  At the hearing, Mr Law confirms that there does not appear to be any authority on the contractual interpretation of deemed leases which arose by operation of section 14 of the Conveyancing and Property Ordinance.

92.  It is unnecessary for me to rule on the deemed leases ground, in light of my ruling on the government leases ground. I would therefore refrain from attempting to resolve the above difficult issues (and other related legal issues) and expressing any further view on this ground.

CONCLUSION

93.  In conclusion, I dismiss the originating summons, as I agree with the defendant’s submission that those parts of the proposed development which are to be built on Nos 11 and 15 are not “houses” under the respective government leases and they are therefore in breach of the lease terms.

94.  I further make an order nisi that the defendant do have costs of the originating summons, including any reserved costs, to be taxed if not agreed, with certificate for two counsel.